Datum Contracts had refurbished Guardi's shop. There were some snagging items after completion. Datum offered to return and attend to them at its own expense. Guardi replied that the defects were substantial and that it was not prepared to have Datum back. Faced with Guardi's refusal to make any further payment, Datum referred the dispute to adjudication.
The contract required Guardi to serve notice of a cross-claim against any payments, but it failed to do this. The adjudicator decided that Datum was entitled to be paid the balance of what was due under the contract.
Guardi did not honour the decision, and Datum took the matter to court. Judgment was given for £108,000. Guardi offered to pay this off by instalments and some payments were made. However, these dried up and Datum served a statutory demand for the balance of £78,000. Guardi's solicitors in the meantime had been making noises about its claim for defects, but no effective steps were taken to bring the defects dispute to adjudication.
In September 2002, Datum presented a winding-up petition. The immediate issue before the court was whether advertisement of the petition should be restrained by an injunction. Although some payment towards the £78,000 had been made, about £69,000 was still outstanding. Guardi's case, however, was that it had a cross-claim for the defects.
The judge said the principles to be applied were well-established. The advertisement would not be restrained unless the court was satisfied that the petition was an abuse (because the petitioner knew that the debt was disputed in good faith on substantial grounds) or the court could see with certainty that the petition was bound to be dismissed. Neither applied in this case.
The court can stay or dismiss the petition if satisfied that the debtor has a genuine and serious cross-claim
The judge found Guardi's position on its cross-claim weak. Not only had it failed to serve the required notice but there was considerable doubt about the strength of its case. The advertisement was therefore allowed to proceed.
What about the determination of a winding-up petition itself in such a situation? The court in Guardi vs Datum did not have to deal with this but made reference to some recent cases. The leading authority is Re Bayoil (1999). There, the issue was whether a winding-up petition should be dismissed on the grounds that the debtor company had a cross-claim.
The court held that where a winding-up petition was based on an undisputed debt but the debtor company had a genuine and serious cross-claim exceeding the amount of the petitioner's debt, which it had been unable to litigate, the court would exercise its discretion to stay or dismiss the petition, in the absence of special circumstances.
Recent cases have followed this principle, save for the requirement that the debtor company must have been unable to litigate its cross-claim. In Re Debtor vs Johnson (unreported) and in Montgomery vs Wanda Modes (2002) Mr Justice Rimer and Mr Justice Park both doubted the validity of this requirement. Bayoil and subsequent cases make it clear that even if the petitioner has a judgment in its favour, the court can stay or dismiss the petition if satisfied that the debtor company has a genuine and serious cross-claim greater than the judgment debt.
Tim Elliott QC is a barrister specialising in construction at Keating Chambers.