The recent judgment in City Gardens Ltd v DOK82 Ltd [2023] EWHC 1149 (Ch) serves as a useful reminder of the extent of, and principles governing, the English court’s jurisdiction to wind up a company on the basis of inability to pay its debts.
Background
City Gardens Limited (C), and DOK82 Ltd (D), had entered into a “memorandum of understanding” (MoU) in relation to a significant debt owed by D to C.
The MoU recorded that D owed the sum of approximately £120,000 to C, and set out terms for the repayment of the debt by a longstop date of 31 December 2021. The MoU contained an exclusive jurisdiction clause stating that it was to be governed by and construed in accordance with Hong Kong law and subject to the exclusive jurisdiction of the Hong Kong courts.
D failed to repay the debt by the longstop date. In February 2022 C issued a creditor petition pursuant to section 124(1) of the Insolvency Act 1986 (IA86) seeking D’s winding up by the court, on the grounds that D was unable to pay its debts.
Conditions for a winding up order to be made
The relevant conditions to be met for a winding up order to be made by the court in this case were summarised by the judge as follows:
- A company may be wound up by the court if it is unable to pay its debts (section 122(1)(f) IA86.
- The threshold of indebtedness required for the making of a winding up order was £10,000 in this case, due to temporary COVID-19 insolvency measures in force at the relevant time (in normal circumstances the threshold is £750).
- A company is deemed unable to pay its debts if (among other reasons) it is proved to the satisfaction of the court that it is unable to pay its debts as they fall due (section 123(1)(e) IA86).
However...
- A company will not be deemed unable to pay its debts where the debt on which the petition is based is genuinely disputed on substantial grounds – i.e. there must be a real prospect of success in disputing the debt (the summary judgment test).
First instance decision
D sought to defend the petition on several grounds, including that:
- The MoU was governed by the laws of Hong Kong, and there was no evidence before the court of the effect of such laws. Due to the lack of evidence as to Hong Kong law, the court was unable to determine what sums (if any) were due under the MoU.
- D had a cross-claim against C, the effect of which would significantly reduce the balance allegedly due under the MoU.
The district judge at first instance found that the existence of the exclusive jurisdiction clause prevented the court from determining whether the debt was properly due under the terms of the MoU. This was a matter for the court of Hong Kong. Being subject to Hong Kong law, the purported debt was not within the remit of the English court.
C appealed the decision. Among other things, C contended that the judge as first instance had made an error of law with regards to the effect of the exclusive jurisdiction clause. In fact (on the basis of the Court of Appeal authority referred to below), it was argued the existence of an exclusive jurisdiction clause in favour of a foreign jurisdiction was irrelevant to the English court’s determination of whether a debt was disputed on substantial grounds.
Decision on appeal
The appeal was successful. With regards to the effect of the exclusive jurisdiction clause, the court was bound by the decision of the Court of Appeal in BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997. In considering the exercise of its power to wind up under section 122(1)(f) IA86, the court must determine whether the alleged debt is disputed in good faith on substantial grounds. This is a judgment of the domestic court, even where the alleged debt is based upon a contract which has an exclusive jurisdiction clause in favour of a different jurisdiction.
The judge also considered the question of whether the English court could make a decision as to the existence (or not) of a debt governed by Hong Kong law. The court affirmed that where no evidence is presented as to the application of foreign law, there is a presumption that it will be the same as English law. Here, no evidence had been presented by D to show that the proper interpretation of the contract would differ under Hong Kong law. As the respondent had failed to show that different legal principles applied, the court must apply English law.
Having decided on these two issues, the Judge went on to determine that no genuine dispute on substantial grounds had been shown in relation to the debt. Although there was evidence of a genuine cross claim, this itself was not shown to be of sufficient amount to reduce the petition debt below the relevant threshold of £10,000. The Judge allowed the appeal, and made a winding up order in relation to D.
David Steinberg, restructuring and insolvency partner comments:
"This decision is good news for any creditor whose claim against its recalcitrant debtor arises under a contract governed by foreign law. On appeal the High Court determined that the district judge had erred in law in holding that the mere existence of a Hong Kong governing law clause in the contract in question prevented her from forming a view on whether the debt was due and payable, for the purpose of exercising the court’s jurisdiction to wind up the debtor. The High Court re-affirmed the previously settled view that a debtor who wishes to assert that the debt which is the subject of the winding-up petition is disputed on genuine grounds must provide evidence to substantiate that dispute – not hide behind the foreign law jurisdiction clause by arguing that under the applicable foreign law there might in theory be a defence to the claim".
Helen Martin