Downing LLP v Sanguine Hospitality Ltd

A winding-up petition must be dismissed where the alleged debt is disputed on grounds that appear substantial. Where a contractual decision-maker is required to determine value, the court must first construe the contract and identify the decision required. Rationality review includes both the decision-making process and the outcome. A dispute may be substantial where the contractual mechanism provides no sufficiently clear valuation principles or machinery. Material amendments to the underlying transaction may also raise an arguable question whether the guarantee extends to the amended obligations or whether the original arrangement was replaced. An arguable estoppel may provide a further basis for resisting the petition.

Downing LLP appealed against the dismissal of its winding-up petition against Sanguine Hospitality Ltd. The petition relied on a corporate guarantee securing liabilities under financing arrangements originally entered into in 2013.

The first-instance judge held that the debt was disputed on substantial grounds. The dispute concerned Downing’s valuation of Sanguine’s interest in an LLP, the effect of later amendments and restatement of the financing arrangements, and an alleged estoppel arising from delay and assurances concerning repayment. The appeal also raised an alleged cross-claim.

1. Appeal dismissed. The first-instance judge had made an evaluative decision that the petition debt was disputed on grounds appearing substantial. There was no identifiable flaw in her approach.
2. The contractual provisions required Downing to determine the value of Sanguine’s interests in an LLP. Before applying any rationality standard, the court had to construe the guarantee and identify the decision which Downing was required to make. The wider commercial context was relevant.
3. Even if Downing’s power was limited only by public-law rationality, the review had two limbs. The court had to consider both whether the correct matters were taken into account and whether the outcome was one no reasonable decision-maker could reach. The absence of valuation principles or machinery made it impossible at the winding-up stage to assess reliably whether the valuation process was rational.
4. The valuation dispute was substantial. It raised issues including discounted or face values of loan assets, the market value of a minority interest, marketability, and possible adjustments to unaudited accounts. The court could not resolve those issues by guesswork or summary determination.
5. It was also arguable that the 2014 amendment and restatement either fell outside the scope of the guarantee or replaced the original facility, leaving no original obligation on which the guarantee could operate. The anti-discharge clause did not make that issue incapable of argument, particularly because the construction of the guarantee depended on its original factual matrix.
6. The alleged estoppel was an additional arguable basis for disputing the debt. The prolonged failure to demand payment, continued work on the project and available evidence of assurances were sufficient to raise factual issues unsuitable for summary resolution. The alleged cross-claim was not determined because the other grounds were sufficient.

• High Court (Chancery Division): ICC Judge Burton dismissed the winding-up petition and ordered Downing to pay costs on the indemnity basis.
• High Court (Chancery Appeals): the appeal was dismissed. The judge’s evaluative conclusion was upheld.