The case of Re A Company [2024] EWHC 2656 (Ch) is a recent and significant judgment in the field of insolvency law, addressing key issues related to winding-up petitions, creditor disputes, and the court’s discretion in insolvency proceedings.

For insolvency practitioners, this case is particularly important as it reaffirms the principles governing winding-up petitions, particularly in situations where the debtor company disputes the underlying debt.

Litigation finance, funding arrangements and insurance allow insolvency practitioners to pursue claims on behalf of their clients whilst reducing financial risks. At Annecto Legal, we assist IPs, Liquidators, Trustees and their solicitors in securing Assignment, litigation funding and insurance for insolvency disputes.

Background

The applicant, a UK property developer (the Debtor), faced the threat of a winding-up petition from its sister company (the Creditor) due to non-payment of a £7 million debt. In response, the Debtor sought an injunction to prevent the Creditor from presenting the petition.

While the Debtor did not dispute the debt’s existence, it argued that an injunction was justified on the grounds of a substantial cross-claim against the Creditor, equal to or exceeding the amount owed.

The cross-claim arose from fire safety remediation work carried out on residential tower blocks originally constructed by the Creditor. The Debtor asserted that it had claims against the Creditor under both the Defective Premises Act 1972 (the 1972 Act) and the Civil Liability (Contribution) Act 1978.

Restraining a winding-up petition based on the existence of a cross-claim.

The Judge examined the legal test for granting an injunction to restrain the presentation of a winding-up petition based on a cross-claim, as established in Re LDX International Group LLP [2018] EWHC 275 (Ch), [2018] 2 WLUK 466. That decision clarified that the court may grant such an injunction if it is satisfied that there is a “genuine and serious” cross-claim (or one “of substance,” with both terms being used interchangeably) of sufficient value to reduce the undisputed debt below £750.

The Creditor put forward three arguments to challenge the Debtor’s assertion that this threshold had been met:

1. The alleged cross-claim was too vague and ambiguous to be properly pleaded, making it insufficient to be considered “genuine and serious.” The Creditor contended that the cross-claim had been presented in overly broad and speculative terms.
2. The deficiencies in the cladding systems were not the result of defective workmanship but rather design flaws. Since the Debtor had not alleged that the Creditor was responsible for the design, the claim lacked merit. Additionally, the Debtor had not produced the relevant contracts or identified any specific contractual obligations owed by the Creditor to support its claim.
3. Even if a valid cross-claim existed, its value did not exceed the £7 million debt, meaning it would not be sufficient to justify restraining the petition.

Furthermore, the Creditor argued that the court should draw adverse inferences from the timing of the cross-claim, as it had not been raised or litigated until after the Creditor’s liquidators demanded payment of the debt.

The judgement

ICC Judge Burton granted the injunction, concluding that the Debtor had a credible and substantial cross-claim against the Creditor worth at least £44 million. He emphasised that the cross-claim’s lack of full detail or supporting evidence at this stage did not prevent it from being considered “genuine and serious.”

While the Judge acknowledged the limited detail and evidence presented, noting that the absence of documentary proof was “particularly challenging” and that the Debtor’s evidence was “thin” at best, he reaffirmed that the threshold for restraining a winding-up petition based on a cross-claim is low. He stressed that if there is any doubt about the cross-claim, the court should adopt a cautious approach.

The Judge rejected the argument that a party seeking an injunction must be able to “formally plead its asserted cross-claim,” stating that such a requirement would impose an unnecessary and previously unrecognised burden. He clarified that the cross-claim need not be fully developed at this stage, provided it has the potential to be properly pleaded in due course.

Additionally, the Judge dismissed the notion that an applicant must anticipate and preemptively refute all possible defences to the cross-claim. Instead, it is for the respondent to demonstrate that its defence is so clear and definitive that the court cannot regard the applicant’s cross-claim as genuine or serious. In this context, he noted that the Creditor had also failed to provide key contractual documents and correspondence, which were equally available to both parties.

Considering all factors, the Judge concluded that the Debtor had “met the minimum evidential threshold to determine that the Debt is subject to a genuine and substantial dispute.” Despite the claim being unquantified, he found that the available evidence suggested a strong likelihood that the cross-claim’s value exceeded the Debt.

Why is this case important for insolvency practitioners?

The decision in Re A Company [2024] EWHC 2656 (Ch) is significant for insolvency practitioners as it reinforces key principles regarding the use of winding-up petitions and the role of cross-claims in restraining such petitions.

The ruling confirms that a debtor does not need to produce fully developed pleadings or extensive documentary evidence at the injunction stage. A cross-claim only needs to be “genuine and serious” and of sufficient value to reduce the debt below £750. This means insolvency practitioners advising debtors should consider whether a credible cross-claim exists, even if it has not yet been fully quantified.

The court emphasised that where there is doubt about a cross-claim’s validity, it should proceed with caution before allowing a winding-up petition. This reinforces the principle that insolvency proceedings should not be used as a tool for debt collection, particularly when a genuine dispute exists. Practitioners representing creditors must ensure their claims are well-founded and be prepared to counter potential cross-claims effectively.

Insolvency litigation funding options

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Insolvency practitioners involved in insolvency litigation can make use of the following methods:

After-the-event (ATE) legal insurance – ATE insurance is generally used to protect from adverse costs risks & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award.

The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.

Third party litigation funding – In some cases, third party litigation funders may be willing to provide funding for a claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.

Assignment of litigation – Some types of disputes can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE and CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger claim disputes.

Given the options available to insolvency practitioners, it makes sense to engage with professionals who understand the different retainer, funding and insurance options in the market, and when to utilise them.

How can Annecto Legal assist?

When handling insolvency matters, insolvency practitioners are obligated to explore all options available in such cases. At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners who are involved in dealing with insolvency and cross-claim matters. If you are in the process of bringing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.