Marchands Associates LLP & Anor v Thompson Partnership LLP

A winding-up petition is demurrable where the petition debt is disputed in good faith and on substantial grounds. Separately, where the company or LLP has a genuine and serious cross-claim which overtops the petition debt, the Companies Court should ordinarily dismiss or stay the petition, absent special circumstances. This remains so where the debt is founded on a cheque, bill of exchange or judgment. A contractual account-resolution mechanism does not, without more, authorise insolvency proceedings as a means of securing payment or commercial pressure. The serious consequences of winding up justify a different approach from ordinary debt enforcement.

The Thompson Partnership LLP appealed from Lloyd J’s order of 16 January 2004. That order dismissed its application to restrain advertisement of Marchands’ winding-up petition and required it to pay 80% of the petitioner’s costs. The petition followed the stoppage of a £14,000 postdated cheque issued under a retirement agreement. The Partnership contended that the Completion Accounts were defective and that it had a genuine cross-claim, including sums allegedly due from a former partner, exceeding the cheque debt. The petition was subsequently dismissed and the debt paid, leaving costs as the practical issue on appeal. The central question was whether the petition should have been restrained or dismissed where the debt and/or an overtopping cross-claim were genuinely disputed.

1. Appeal allowed. Lord Justice Peter Gibson delivered the leading judgment. Lord Justice Waller and Lord Justice May agreed. The court was slow to interfere with a judge’s assessment of disputed debt and cross-claim issues, but Lloyd J’s conclusion was surprising on the facts found.
2. The Companies Court practice restated in Re Bayoil SA [1999] 1 WLR 147 comprises two categories. First, a petition is demurrable where the petition debt is disputed in good faith and on substantial grounds, because creditor standing cannot generally be established through a winding-up hearing. Secondly, where there is a genuine and serious cross-claim which overtops the petition debt, the court’s discretion is narrowed. In the absence of special circumstances, the petition should be dismissed or stayed. This principle applies even where the petition debt is undisputed, founded on a judgment, or based on a cheque or other bill of exchange.
3. It was sufficient to proceed on the footing that the postdated cheques were payable when presented. The Partnership nevertheless had a genuine and serious cross-claim, set out in the objection notice, including a substantial claim on overdrawn accounts. The cross-claim exceeded the petition debt and was not challenged. The Partnership had been unable to litigate it. The court noted, following Popely v Popely [2004] EWCA Civ 463, that it was open to question whether inability to litigate was an essential condition.
4. The clause 6 mechanism for resolving disputes about the Completion Accounts did not give Marchands a right to present a winding-up petition in circumstances where ordinary practice required dismissal or a stay. It was not a special or exceptional circumstance justifying a different result. The agreement made no provision for winding up the Partnership.
5. Lord Justice May emphasised that cheques are ordinarily honoured on presentation and that summary judgment and ordinary execution may be available. A winding-up petition should not be used as a substitute for orthodox execution or as illegitimate commercial pressure where the basis for a winding-up order is unsustainable.
6. The respondents were ordered to pay the appellants’ costs of the hearing below, the petition and the appeal up to 7 May 2004. There was no order as to costs thereafter.

1. Court of Appeal (Civil Division): [2004] EWCA Civ 878. Allowed the appeal and made costs orders in favour of the Partnership.
2. High Court, Chancery Division (Lloyd J): On 16 January 2004 dismissed the Partnership’s application to restrain advertisement of the winding-up petition, ordered payment of 80% of the petitioner’s costs and refused permission to appeal. Permission was later granted by Arden LJ on renewal.