In re Bayoil SA (Seawind Tankers Corpn v Bayoil SA)

A winding-up petition founded on an undisputed debt should ordinarily be dismissed or stayed where the company has a genuine and serious cross-claim, has been unable to litigate it, and the claim exceeds the petition debt. The court retains its statutory discretion, but it must exercise it judicially. Special circumstances may justify departure from the ordinary practice and should be identified by the judge.

The finality of an award for the petition debt, the creditor's ability to enforce it, security for the cross-claim, and concern about the company's insolvency will not ordinarily amount to special circumstances. Winding up is not a means of execution and may irreversibly destroy the company before its substantial claim is determined.

Seawind Tankers Corporation obtained an interim final arbitral award for freight and costs against Bayoil SA. It served a statutory demand and presented a winding-up petition when the award remained unpaid.

Bayoil accepted the petition debt but relied on a substantially larger arbitration counterclaim for alleged breaches of the voyage charterparty. Seawind's insurers had provided security for that claim. His Honour Judge Roger Cooke held that the counterclaim was genuine and serious, but treated his discretion as unrestricted and made a winding-up order.

The appeal concerned whether, absent special circumstances, a winding-up petition should be dismissed or stayed where an undisputed petition debt is exceeded by a genuine and serious cross-claim which the company has been unable to litigate.

1. The appeal was allowed unanimously. Lord Justice Nourse gave the leading judgment. Lord Justice Ward agreed with it and gave additional reasons. Lord Justice Mantell agreed with Lord Justice Nourse. The winding-up order was discharged and the petition dismissed.
2. In a cross-claim case, the court has a discretion under section 125(1) of the Insolvency Act 1986. That discretion is not at large. The Court of Appeal's decisions in Re Portman Provincial Cinemas Ltd (1964) 108 Sol Jo 581 and Re L H F Wools Ltd [1970] Ch 27 established and affirmed the ordinary practice: a petition should not result in winding up where the company has a genuine and serious unlitigated cross-claim exceeding the petition debt, unless special circumstances make that course inappropriate.
3. Lord Justice Ward stressed that statutory discretion must be exercised judicially. Appellate guidance promotes consistency but cannot fetter the discretion. Special circumstances remain an exception, and a judge departing from the ordinary practice should explain them.
4. A cross-claim case differs from a petition debt disputed in good faith on substantial grounds. In the latter case, the petitioner cannot establish creditor status for the purpose of section 124(1). In the former, the creditor's debt is established, but the court must exercise its winding-up discretion in accordance with the applicable practice.
5. The judge had applied an incorrect approach. Finality and enforceability of the interim award, security for the counterclaim, possible commercial insolvency, and the absence of evidence that the award could be paid did not amount to special circumstances. Those matters were common features of cross-claim cases. The court should not use winding up as a form of execution where it may prevent effective pursuit of a substantial claim.

• Court of Appeal (Civil Division): Allowed Bayoil's appeal, discharged the winding-up order and dismissed the petition: [1998] EWCA Civ 1364.
• High Court of Justice, Chancery Division: His Honour Judge Roger Cooke made a winding-up order after holding that the company's cross-claim was genuine and serious but treating the discretion as unrestricted.