China Town Development Company Ltd v Liverpool City Council

Insolvency proceedings are inappropriate where a company shows that the alleged debt is genuinely disputed on substantial grounds. The threshold is low, and the Companies Court should not conduct a detailed trial of the underlying dispute. A serious and genuine cross-claim exceeding the alleged debt may also justify restraint of a winding-up petition.

Where the dispute concerns contractual construction, the court applies the ordinary principles of construction, considering the language, contract as a whole, relevant background and commercial consequences. At the interim insolvency stage, it need only decide whether the dispute is substantial and arguable. A statutory demand founded on an arguably incorrect allocation of contractual consideration is defective.

China Town Development Company Ltd applied for an injunction restraining Liverpool City Council from presenting or advertising a winding-up petition based on a statutory demand for £950,000 plus interest.

The parties had agreed a development arrangement involving Phase 1 and Phase 2 leases. The Company contended that the contractual premium was apportioned as £500,000 for Phase 1 and £2 million for Phase 2, and that the outstanding sums were payable in connection with completion of the Phase 2 lease. The Council contended that the whole £2.5 million was payable under the Phase 1 lease and that contractual conditions for Phase 2 had not been satisfied.

The central issues were whether the alleged debt was genuinely disputed on substantial grounds and whether the Council was entitled to rely on the statutory demand while refusing to complete the Phase 2 lease.

1. Disposition. The application was granted. The Council was restrained from presenting a winding-up petition in respect of the sums claimed in the statutory demand of 14 July 2017.
2. Where an alleged debt is genuinely disputed on substantial grounds, the Companies Court will restrain presentation of a winding-up petition. It is not the function of that court to try the underlying dispute or conduct a long and detailed examination of the parties’ cases. The threshold is not high and may be met even where a defence might be regarded as shadowy on a summary judgment application. This reflected the approach in Tallington Lakes Ltd v Ancasta Boat Sales Ltd [2012] EWCA Civ 1712 and Tallington Lakes Ltd v South Kesteven District Council [2012] EWCA Civ 443.
3. The Company’s construction that the Phase 1 premium was £500,000, rather than the whole £2.5 million, was properly arguable. The contractual allocation between the two phases, the payment machinery, the parties’ contemporaneous emails and the commercial context all supported a genuine dispute.
4. The alternative rectification case was also properly arguable. The evidence arguably established a continuing common intention, an outward expression of accord, continuation of that intention when the lease was executed, and a mistake causing the document not to reflect it, applying the criteria stated in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71.
5. It was also sufficiently arguable that the Possession Condition and Funding Condition did not have to be satisfied afresh for Phase 2. The points of construction were not straightforward and offered respectable arguments on both sides. Insolvency proceedings were therefore not the appropriate vehicle for resolving them.
6. If the Council considered that the Company could not pay, it could seek payment into escrow or into court pending determination of the Part 7 proceedings. The parties were invited to agree the form of order, failing which rival versions could be submitted.

Not stated in the judgment.