(UK) ‘Substitution First, Standing Later’ – The Risk of Supporting Creditors
by: Rachael Markham of Squire Patton Boggs (US) LLP  -   Restructuring GlobalView
Thursday, November 9, 2023

The case of Liberty Commodities Ltd v Citibank NA London & Ors [2023] EWHC 2020 (Ch) provides a helpful reminder of the principles that the court will adopt when dealing with a winding up petition – particularly where there are supporting creditors.

Even when the company and petitioning creditor have reached agreement in respect of the petition debt and wish to withdraw, they can only do that if there are no supporting creditors.  Further if a supporting creditor is then substituted as the petitioner, not only does this extend the life of the petition, but it can also impact the original petitioner if ultimately the company is wound up. In that case, it is likely that the original petitioner will have to repay any monies received in satisfaction of the original petition debt (s127 Insolvency Act 1986 applies).

This decision therefore brings into sharper focus the need for companies to address the threat of a winding up petition as soon as it is received. More so given that creditors are becoming aware of winding up petitions at a much earlier stage and often before they are advertised. See our Insight for further detail.

Background  

In a summary of the facts, Citibank brought a winding up petition against Liberty Commodities Ltd (“LCL“). Before its advertisement, an agreement was reached between the parties and Citibank sought to withdraw the petition at the hearing. However, two supporting creditors (the “Supporting Creditors“) sought an order of substitution. LCL opposed this on the basis that the debts of the Supporting Creditors were disputed. Notwithstanding this, the judge affirmed that the approach of the court is “Substitution First, Standing Later”. In other words, the court will make an order for substitution and determine whether the debt is genuinely dispute at a later point.

The reason for this approach is helpfully explained by ICCJ Briggs in his judgment:

“The courts of England & Wales rarely have the required evidence and is rarely provided with sufficient time to decide standing when an application for substitution is made. Most often an application for substitution is made orally in a busy winding up court where 200 or more petitions maybe heard in a morning followed by recission applications and petitions to wind up partnerships. There is no time to hear a challenge to standing and, more often than not, the parties have not attempted to file and serve evidence.

As he goes on to say, a “pragmatic approach is adopted”.

Dealing with winding up petitions

ICCJ Briggs make a number of further helpful observations in the judgment about the approach that the court will take to winding up petitions:

  • If a petitioner fails to advertise or attend the hearing of a petition, the court will dismiss the petition for failure to prosecute.
  • When faced with an application for substitution, a debtor company should protest at the time the application is made even if it is not ready to provide full submissions as to why the substituting party has no standing to prosecute the petition; but be able to provide cogent reasoning why standing is disputed. Examples of this may be where the debt is unenforceable, has been satisfied, where it is contested or where there is a genuine cross-claim that equals or exceeds the debt claim.
  • If the debtor company fails to object, the court will not be alert to a challenge. One outcome of the failure is that no directions will be given to determine a dispute. The failure to object at the substitution hearing will inevitably delay proceedings and extend the time the debtor company is subjected to the rigours of the winding up procedure, but the debtor company will not be excluded from raising a challenge to standing following substitution at the hearing of winding up.
  • Whilst it is not therefore necessarily fatal that the debtor company does not object at the point of a substitution application, it is however a risk, in light of the suggestion in Re Invicta Works Ltd [1894] WN 94 that it is possible that a winding up order may be made at the same time as substitution, without an adjournment. That said, ICCJ Briggs does note that the common approach would be to order substitution, amendment of the petition, re-service and re-verification.

The decision not only provides clarity to the approach the court will take to winding up petitions, but also, as noted, brings into sharper focus the impact that supporting creditors can have – something to be aware of given that creditors can be alerted almost immediately to the fact that a petition has been presented.

 

Jess Bradley also contributed to this article. 

 

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