In company winding up petition proceedings, where the petitioner (original or substituted) does not/cannot pursue the petition, such that one of the circumstances listed in r.7.17(1) of the Insolvency (England & Wales) Rules 2016 (the '2016 Rules') exists[1], anyone claiming to be a creditor of the company/respondent and wishing to prosecute the winding up petition, can apply to the Companies Court to be substituted as the petitioner on the petition.

Where the substitution applicant/would-be substituted petitioner ('Substitution Applicant') claims to be a creditor (for more than £750) of the company/respondent, but the existence/validity of the claimed debt is not conceded by the company/respondent, there may be a question that arises, as to whether the Substitution Applicant's standing, as a creditor, needs to be established by determination, before the Substitution Applicant can be substituted as petitioner to the petition, or whether the substitution can occur, with the issue of whether the (now) substituted petitioner has standing, being left for a subsequent hearing.

The proper order for the Companies Court to adopt, when dealing with substitution and standing, came up for consideration in Liberty Commodities Ltd v Citibank NA London White Oak Finance Europe (Non-Levered) Ltd [2023] EWHC 2020 (Ch) ('Liberty'), before Chief ICC Judge Briggs.

Summary

In summary, Chief ICC Judge Briggs in Liberty reaffirmed the (at least 100 year old) practice of dealing with petitioner substitution and standing of substitution applicant: 'Substitution First, Standing Later'. In other words, the practice is for the Companies Court to determine the Substitution Application first, before the Companies Court determines (if in issue) whether or not the former Substitution Applicant/then substituted petitioner has standing to pursue the petition (i.e. whether or not the (then) substituted petitioner's status as a net creditor of the company/respondent, for more than £750, has been established to the requisite level of substantiality).

When a Substitution Applicant applies for substitution, the company/respondent should, at this point, object/protest that the Substitution Applicant is not a net creditor of the company/respondent, even if the company/respondent is not ready to provide full submissions on the issue. 'The debtor company should be able, however, to provide cogent reasoning why standing is disputed.' (paragraph 46). Where the company/respondent:

(1) objects/protests at this point (i.e. when the substitution application is first made), the Companies Court will order substitution (assuming there is/are no rival substitution application(s) - see below), and give directions for the filing of evidence on standing, in preparation for an adjourned hearing[2a];

(2) fails to object/protest at this point:

(a) this failure does not bar the company/respondent disputing the (former) Substitution Applicant/(now) Substituted Petitioner's standing later. Making this clear, in Liberty, Chief ICC Judge Briggs said that '...the debtor company will not be excluded from raising a challenge to standing following substitution at the hearing of winding up.' (paragraph 47); but

(b) the company/respondent will likely suffer the inconvenience of winding up petition proceedings for longer: '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' (paragraph 47).

Facts

In Liberty, Citibank NA London Branch ('Citibank') presented a petition against (so far as relevant) a company/respondent Liberty Commodities Limited ('LCL'). Subsequently, an agreement was reached between LCL/Citibank, and Citibank sought to withdraw the petition (paragraph 6), but two (alleged) creditors of LCL had given notice of intention to support the petition:

(a) White Oak Commercial Finance Europe (Non-Levered) Limited ('White Oak') - a notice of intention first in time and in respect to an (alleged) debt of c.USD190m; and

(b) NPS (40GP) Limited ('NPS)' - notice of intention second in time and in respect of an (alleged) debt of c.£6.5m (paragraph 8).

Citibank then asked for the Companies Court to dismiss the petition against LCL with no order as to costs (paragraph 9). White Oak, NPS and LCL submitted a signed draft consent order, providing for: (1) the application for dismissal be adjourned to be listed for 2 days; and (2) directing the filing of evidence (paragraph 10).

The Companies Court decided to consider the matter at a hearing, whereat the above took the following positions:

'...Petitioner invited the court to dismiss the petition against LCL, White Oak and NPS asked the court to make immediate orders for substitution, and LCL asked the court to agree the consent order directing a timetable to determine if LCL could raise a genuine and substantial dispute in respect of the debts claimed by White Oak and NPS.' (paragraph 15).

Both White Oak and NPS made applications for substitution:

(1) In White Oak's written substitution application, White Oak explained '...the basis for the debt said to be due and owing from LCL in its substitution application' (paragraph 16). Just prior to the hearing, LCL wrote a letter which purported to provide grounds for a dispute (paragraph 19). Chief ICC Judge Briggs concluded, paragraph 19, that the complexity of the respective arguments (oral modification of contract; set off; foreign law; no valid assignment), meant the Companies Court could not determine White Oak's standing at the hearing;

(2) In NPS's oral substitution application, NPS explained LCL failed to pay NPS rent (and other linked monies) on a lease. LCL disputed some of the debt, but it did not dispute a minimum of £1.3m was due and owing (paragraph 24).

Court deal with Subtitution Applications, or Standing, first?

The issue then arose whether the Companies Court could determine the two substitution applications (i.e. acceding to one of the substitution applications), before the Companies Court determined any dispute the company/respondent LCL raised about either Substitute Applicant's standing:

(1) Chief ICC Judge Briggs said that '...the usual court practice was to make an order for substitution and then give directions for the determination of any dispute the debtor company raises. Substitution first and deciding a dispute about standing later' - a practice he labelled: 'Substitution First, Standing Later' (paragraph 26); whereas

(2) LCL argued that, while there is a practice of 'Substitution First, Standing Later', this should, in essence, be abandoned, as  '...as a matter of principle the court should not make an order for substitution before determining whether a party has standing to prosecute the petition' (paragraph 27) - arguing[2b] that, to use the language of Rule 7.17(2)) of the 2016 Rules, substitution is granted to a creditor who must have a right to present a petition and must wish to prosecute the existing petition (with amended contents). Chief ICC Judge Briggs labelled this approach (i.e. standing is decided before substitution), as 'Standing First, Substitution Later' (paragraph 27).

Determination

Under the heading 'Determination' Chief ICC Judge Briggs:

(1) quoted r.7.17 of the 2016 Rules:

'(1) This rule applies where the petitioner

(a) is subsequently found not to have been entitled to present the petition;

(b) fails to give notice of the petition in accordance with rule 7.10;

(c) consents to withdraw the petition, or to allow it to be dismissed, consents to an adjournment, or fails to appear in support of the petition when it is called on in court on the day originally fixed for the hearing, or on a day to which it is adjourned; or

(d) appears, but does not apply for an order in the terms requested in the petition.

(2) The court may, on such terms as it thinks just, substitute as petitioner

(a) a creditor or contributory who in its opinion would have a right to present a petition and who wishes to prosecute it...'

(2) noted, at paragraph 31:

'A policy emerges from a reading of Rule 7.17(1) (b)-(c) and Rule 7.17(2) that a petitioner must prosecute a petition following presentation. This policy is enforced by the judges sitting in the Companies List. I give two examples. First, it is not uncommon for a petitioner to fail to advertise by the first hearing. The practice of the court is to dismiss a petition for failure to prosecute unless there is good reason. Secondly, a petitioner may fail to attend the hearing of a petition. Similarly, the petition will be dismissed for failure to prosecute.'

(3) considered some (moderately) instructive commonwealth authorities and a book extract[3] which, it seems, indicated that the right approach is 'Standing First, Substitution Later';

(4) noting that The Bermudan Companies (Winding-Up) Rules 1982, relating to substitution in Bermuda, is not dissimilar to English equivalent (paragraph 38), and that in Gerova Financial Group Limited [2012] SC (Bda) 18 Com (19 March 2012) the Bermuda Supreme Court had adopted the 'Substitution First, Standing Later' practice/approach (paragraph 40) - in that the Bermuda Supreme Court had held that it had the power to: (1) grant substitution provisionally, '...pending a subsequent determination of any standing controversy which cannot conveniently be determined on the hearing of the substitution application.' (paragraph 40); and (2) extending time for making the requisite determination about standing, to a further hearing ('...the court will decide the issue of standing when it has the necessary evidence and is provided with sufficient time to hear submissions and make a decision' (paragraph 43)). As to this approach, Chief ICC Judge Briggs in Liberty said 'The approach taken by the Bermudan Supreme Court was, in my view, principled and pragmatic.' (paragraph 43)

(5) then set out the position in England, at paragraphs 44 to 47:

'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 [sic] 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. A pragmatic approach is adopted.

Consider the position where the original petitioning creditor informs the court (by words or conduct within the meaning of Rule 7.17) that it does not wish to prosecute the petition. Where there is no supporting creditor able and willing to be substituted, the petition should be dismissed as there is no basis for a class remedy. Where a dispute arises as to whether a supporting creditor has standing and the original petitioning creditor fails to prosecute the petition, the Standing First, Substitution Later approach will promote the policy to prosecute the petition. The pragmatic approach balances the competing policy that an applicant must have standing and the need to prosecute the petition. Substitution First, Standing Later is the practice adopted where the parties have failed to obtain an appropriate listing and/or failed to file and serve the necessary evidence.

...a debtor company should protest at the time the application for substitution 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. The debtor company should be able, however, to provide cogent reasoning why standing is disputed. The grounds for a dispute as to standing will vary from case to case. Common examples are a challenge to the debt on the ground it is unenforceable or has been satisfied, or where it is contended that there is a genuine crossclaim that equals or exceeds the debt claimed.

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.' [bold added]

(6) stated that Companies Court's settled practice is 'accurately explained' (paragraph 50) in the following quotations from publications:

(a) Practice and Procedure of the Companies Court (1997), General Editors Alan Boyle QC and Philip Marshall (9.68), where the authors write:

'In the vast majority of cases, a supporting creditor or contributory will make his application for an order for substitution orally in open court on the hearing or adjourned hearing of the petition when it becomes clear that the present petitioner does not appear or is not pursuing his petition, has failed to advertise the petition or seeks an adjournment. No formal application need be issued. Where more than one supporting creditor appears and seeks substitution, the court will usually substitute as petitioner the creditor claiming the largest undisputed debt. Where there is only one supporting creditor and the petitioner does not pursue the petition, the court will not refuse substitution merely because the company contends that the alleged debt of the applicant for substitution is disputed: in such cases, the court will usually order substitution and give directions for the filing of evidence.'

(b) Westlaw (Practical Law UK Practice Note 0-618-3418), where the (unnamed) author writes:

'If the debtor company objects to the creditor being substituted as petitioning creditor, it should make those arguments when the court hears the substitution application, rather than after substitution at the adjourned hearing of the actual petition. Arguments about whether the debtor company has a valid dispute about the debt claimed by the substituted creditor, should be dealt with at the adjourned hearing of the winding-up petition and not at the hearing of the application for substitution.'

(7) stated that post substitution hearing, adjourned hearing, the Companies Court will determine standing, and may, if standing is established, make the winding up order sought, there and then[4].

Multiple Substitution Applications

Where the Companies Court has one application for substitution, the Companies Court will make an order for substitution and give directions for evidence and direct an adjourned hearing. Where there are multiple applications for substitution, the Companies Court has a discretion as to which application to grant. Where more than one Substitute Applicant claims to have undisputed debt, it is usual practice for the Companies Court to substituted in, as the substituted petitioner, the Substitute Applicant claiming the largest undisputed debt. Chief ICC Judge Briggs said, at paragraph 50 of Liberty, that the following as an accurate description of settled practice in the Companies Court:

'Where more than one supporting creditor appears and seeks substitution, the court will usually substitute as petitioner the creditor claiming the largest undisputed debt.'

On the facts in Liberty, NPS's application for substitution was successful. Comparing the two substitution applications: (1) LCL had raised a dispute about the debt White Oak relied upon, but (2) 'LCL are unable to raise a cogent or prima facie argument to support a dispute in respect of the debt claimed by NPS.' (paragraph 54). Chief ICC Judge Briggs in Liberty reasoned, at paragraph 54:

'Exercising my discretion, and having in mind the policy that a petition needs to be prosecuted, I shall order substitution in favour of NPS...'

SIMON HILL © 2023*

BARRISTER

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole, or the Copyright holder. No attempt has been made to provide an exhaustive review/account of the law in this area. *Copyright is owned by Barrister Search Limited.