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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Sykes & Son Ltd v Teamforce Labour Ltd [2012] EWHC 1005 (Ch) (18 April 2012) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2012/1005.html Cite as: [2013] Bus LR 106, [2012] EWHC 1005 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN THE MATTER OF SYKES & SON LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986

		Royal Courts of Justice Strand. London, WC2A 2LL
		18 April 2012

RICHARD SNOWDEN QC :

1. I gave a reserved judgment in this matter on 3 April 2012, dismissing the winding up petition presented by Teamforce Labour Limited against Sykes & Son Limited: [2012] EWHC 883 (Ch). I shall use the same abbreviations herein as in that judgment.
2. For reasons which I explained, I took the view that when the Petition was presented, the Petitioner had a relatively small undisputed debt which was not subject to a serious cross-claim. It therefore had locus standi to present the Petition. The undisputed debt was paid shortly after the Petition was presented, and the much larger part of the debt claimed in the Petition was subject to a dispute which it was not appropriate to resolve in the Companies Court.
3. I now have to deal with the costs of the Petition and of the Application by the Company to restrain advertisement and to strike out.

The Arguments

4. For the Company, Miss Meech did not seriously contest the proposition that by reason of the fact that there was an undisputed debt due at the date upon which the Petition was presented, the Company ought to pay the costs of the presentation and service of the Petition itself. On the Company's case as to when the labour hire invoices were payable, that debt was paid on 8 December 2011, two days after presentation of the Petition and before the Application was launched. Even on the Petitioner's case as to when the labour hire invoices fell due for payment, the undisputed debt was paid on 14 December 2011.
5. Apart from those costs, however, Miss Meech submitted that the general rule under CPR 44.3 that costs follow the event should be applied and that all of the costs of the Application and in relation to the Petition after 8 December 2011 should be paid by the Petitioner on the basis that the Petition has been dismissed. Miss Meech supported that submission by reference to two authorities which she suggested set out the practice of the Companies Court in relation to costs where a petition has been dismissed on the basis that the company has raised a genuine and substantial dispute.
6. The first of those authorities, Re Fernforest Limited [1990] BCLC 693, was a pre- CPR decision of Warner J. Though the details in the report are brief, it would seem that the company in question had indicated in correspondence before the petition was presented that the petition debt was disputed; though as Warner J observed, the grounds were not set out in any very convincing manner. A petition was presented and an application was made to restrain advertisement. Evidence was exchanged which led to the petitioner agreeing to the petition being dismissed on the basis that there was a dispute which could not be determined in the winding up proceedings. The petitioner commenced a writ action to recover its alleged debt, and contended that since the real basis on which the company disputed the debt only became clear in the company's evidence in reply, the costs of the petition should be costs in the action.
7. Warner J held,

"In my view as a matter of general approach to this type of case a claimant against a company who chooses to take the short cut of a statutory demand followed by a winding-up petition instead of the procedure of first issuing a writ to establish his claim, does so at his own risk that the claim will be disputed and that the petition will be dismissed or will have to be abandoned. It is no part of the duty of a person against whom a claim is made to formulate in detail, before proceedings are taken against him to enforce the claim, what his defence to those proceedings may be. Instructing solicitors to do that can be costly and the costs of doing it if as a result proceedings do not eventuate will be irrecoverable. That is a consideration which to my mind is material. Another material consideration is that experience in this court shows that if in every case of the withdrawal or dismissal of a winding-up petition the court is to go into the whole history of the case to assess whose conduct at which stage was reasonable and whose unreasonable, an enormous amount of the court's time and consequent costs will be spent on disputes of this kind. I think the principle should be adhered to that, unless there be exceptional circumstances, a petitioner whose petition fails on the ground that the debt is bona fide disputed on substantial grounds should pay the costs of that failure."

8. Warner J concluded that if he adopted the course urged by the petitioner,

"...I would really be saying that someone who has a claim against a company can always try first to enforce that claim by serving a statutory demand and presenting a petition; if he succeeds he will be paid or the company will go into liquidation; if he fails the costs of the winding-up proceedings will simply be added to the costs of the writ action that he will then have to bring to establish his claim. It seems to me that that cannot be a proper view of the winding-up procedure."

9. Re Fernforest was referred to with approval by Blackburne J in GlaxoSmithKline Export Limited v UK (Aid) Limited [2004] BPIR 528. Blackburne J had heard and dismissed the winding up petition on the basis that the company had advanced a dispute of substance as to the petition debt. His judgment on the petition is reported as Re UK (Aid) Limited [2003] 2 BCLC 351. The gist of his decision is encapsulated in the following passage:

"74. Although GSK advances a very powerful case against the company based upon the unpaid invoices, especially given the company's failure to respond in any substantive way to GSK's demands for payment until after being served with a statutory demand; I entertain sufficient doubts about the matter to causes me to feel unable to say with confidence that there is no substance to the disputes which the company has raised. To reject the company's claim that the prices agreed were not those appearing from the face of the invoices involves not just a rejection of Mr Mitchell's repeated and detailed assertions that, for reasons, he says, concerned with Mr Jones's wish to increase GSK's turnover in its dealings with the company in eastern Europe, the parties had agreed to make retrospective (downward) adjustments to the higher levels at which the goods were being invoiced to the company to reflect the various discounts, rebates and other terms which they had agreed, but also a conclusion that the documents to which Mr Mitchell refers, admittedly all of them internal to the company, evidencing what he says were the terms actually agreed (notably the typed note of the meeting on 3 October 2000) are false, ie that they have been produced with a view to presenting a false account of the company's dealings with GSK. That is not a conclusion that I feel I should reach on what is, after all, a summary proceeding where there has been no cross- examination of either Mr Jones or Mr Mitchell unless it is perfectly plain that that is what has happened or, as Mr Lopian endeavoured to persuade me, because those documents and Mr Mitchell's assertions cannot stand in the face of subsequent documents or conduct on the part of the company. Although I entertain doubts about the genuineness of some of those documents and about the accuracy of some at least of Mr Mitchell's assertions, I cannot say simply from a reading of a series of witness statements and from an examination of the invoices and other documents, that they are to be dismissed as either false or, if genuine, that they have been overtaken by subsequent events."

10. The petitioner then sought an order that the costs should be reserved either to, or to await the outcome of, a summary judgment application in a separate action that the petitioner indicated that it was intending to commence. The argument for the petitioner was recorded by Blackburne J in his judgment at [2004] BPIR 528 as follows:

"[2] The basis for such an order is that, as Mr. Lopian put it, my decision was as close to the line as it could get in the sense that I was strongly minded to make a winding-up order but felt unable on the basis of various assertions set out in the judgment to go that far. He submits that in the light of that, and in the light particularly of the fact that claims by Mr. Mitchell based upon documents which he produced may, when this matter is investigated, be disbelieved and, indeed, that some of these documents may be found to be wanting in one respect or another, fairness would suggest that his client's narrow failure in these proceedings should not carry with it the ordinary consequence where a petition is dismissed. That is that the petitioner should bear the successful respondent company's costs."

11. Blackburne J rejected that argument. He said,

"[6] ....In my experience, very often where there is a contested winding up petition, there is an issue of credibility: one side is telling the truth and the other side is probably telling lies. It is only when the matter comes to trial and its is possible for the witnesses in the case to be cross-examined that the court is in a position to say where the truth lies and in particular who is telling the truth and who is not. That is in my experience fairly common in the case of contested winding-up proceedings. But it is a risk the petitioner runs when without the benefit of judgment he launches winding-up proceedings, there are assertions which are irreconcilable and it is likely that one side is telling the truth and the other is not.

[7] In this case, although at the end of the day it may be when the matter comes to trial that the court will disbelieve him, Mr. Mitchell's stance on behalf of the company was set out at length by Bates, Wells & Braithwaite on behalf of the company in their letter of 17 October. Thus before these proceedings were launched, the petitioner was aware of the matters upon which the company would be relying. No doubt believing that there was no substance to those various contentions, it nevertheless launched these proceedings. As Mr. Arnold submitted, and as I accept, that is a high risk strategy. It failed."

12. Blackburne J concluded his judgment by referring to the decision in Re Fernforest and holding that the considerations which had been outlined by Warner J were applicable to the case with which he was concerned, notwithstanding the more flexible procedures under the Civil Procedure Rules. He therefore ordered the petitioner to pay the company's costs.
13. Miss Meech stressed the similarities between these two authorities and the instant case. She submitted that, taken together, they showed that the general rule should apply even if the company only raised the substance of its defence very late in evidence in reply (Re Fernforest): and even if the court's decision to dismiss the petition had been significantly influenced by the production of documents about which the court had some doubt and which might later turn out to be false (Re UK (Aid) Limited).
14. Miss Meech also submitted that the Company had in fact raised the dispute over the Petition debt prior to the presentation of the Petition. She relied in that respect upon the two phone conversations said by the Company to have taken place between Mr. Holland and Mr. McCarthy on 12 and 19 October 2011 and the letter from the Company dated 17 November 2011 in answer to the Petitioner's solicitors' letter demanding payment of the Final Account and labour hire charges.
15. In response, Mr. Nersessian submitted that under CPR 44.3 (4) and (5), the court should have regard to the manner in which the parties had behaved prior to the presentation of a winding-up petition just as it might do so in relation to a claim form. He submitted that Warner J's remarks in Re Fernforest that a person faced with a claim against him did not have a duty to "formulate in detail" his defence prior to proceedings should not be taken to mean that it was irrelevant what response a respondent company had provided prior to the presentation of a winding up petition.
16. Mr. Nersessian also sought to distinguish Re UK (Aid) Limited on the basis that Blackburne J's observations were made in a case in which the grounds for the dispute raised by the company had been clearly identified prior to the presentation of the petition, which he said was not the position in the instant case.
17. Developing that theme, Mr. Nersessian emphasized that the Petitioner had not rushed into the Petition, but had acted entirely reasonably and given the Company every opportunity to put its case. He submitted that after sending its Final Account on 5 October 2011, the Petitioner had not received any notice of a dispute from the Company. He submitted that the Company's evidence in relation to the alleged telephone calls on 12 and 19 October 2011 was suspect for the reasons set out in paragraph 63 of my earlier judgment. He also submitted that far from containing any detailed or even accurate rebuttal of the Petitioner's claim, the Company's letter of 17 November 2011 had wrongly denied that the Company had ever received the Final Account; and that even then the Petitioner had given the Company further time to respond before presenting the Petition.
18. Mr. Nersessian also stressed that after the Petition had been presented, at no time prior to the service of evidence in reply had the Company made any reference to the manner in which it alleged that Mr. Holland had been valuing the Petitioner's additional items and providing the resultant figures to Mr. McCarthy for inclusion into the Applications. He observed that the Company's evidence in support of its application for an injunction - the relevant paragraph of which was set out in paragraph 33 of my judgment - did not make clear that the Company was contending that the only sums due were those communicated by Mr. Holland to Mr. McCarthy for inclusion in Applications Nos. 1-8, and that, crucially, there was never any suggestion that Mr. Holland was routinely preparing his own manuscript valuations. Mr. Nersessian finally submitted that even when those Valuations were eventually exhibited to the Company's evidence in reply, they were referred to in a misleading manner: see paragraphs 47-50 of my earlier judgment.
19. In summary, Mr. Nersessian submitted that if the Company had made its case known and produced the manuscript valuations in a satisfactory manner at an earlier time, then although the Petitioner would still not have accepted the validity of the Company's arguments, at least it could have taken a view that there was a dispute that could not be resolved in winding-up proceedings.
20. Mr. Nersessian submitted that the appropriate course in these circumstances was for me to depart from the general rule under CPR 44.3 and to order that the Company should pay the Petitioner's costs to reflect the very late production of the Company's defence. His fall-back position was that each side should bear their own costs.
21. Mr. Nersessian's third (and least favoured) alternative submission was that the combination of factors made this case genuinely exceptional, and that consistent with the decisions in Re Fernforest and Re UK (Aid) Limited I could adjourn a decision on the costs of the Application (and any costs of the Petition after 8 December 2011) to await the outcome of proceedings which he told me that the Petitioner was intending to issue in the next 28 days, either in the form of arbitration proceedings or a Part 7 Claim. He suggested that I could give the parties liberty to apply for the determination of such costs in light of the outcome of such dispute. Mr. Nersessian submitted that this approach was not wholly without precedent, and he drew attention to a note in paragraph 3087 of the 1997 Current Law Year Book to the effect that a similar course had been followed in Re a Company (No. 0012209 of 19971 an unreported decision of Neuberger J on 3 July 1997.

Discussion

22. There is no doubt that the general rule in CPR 44.3, that the losing party should pay the costs of the successful party in litigation applies with added force in the context of winding up petitions. It is well-known that the presentation of a winding up petition can put heavy pressure to pay upon a respondent company, and the Companies Court always has been assiduous to discourage the use of a winding up petition as a short cut instead of issuing a claim form to establish liability in the normal way. I also accept Warner J's observation that the court should do nothing to encourage any belief that a person who thinks that he has a claim against a company can first try his luck in the Companies Court on the basis that if he fails, the costs of that exercise will simply be added to the costs of a subsequent Part 7 claim. There is therefore considerable merit in adhering to the principle that save in exceptional circumstances, a petitioner whose petition fails on the basis that the debt is genuinely disputed on substantial grounds should pay the costs of that failure.
23. However, in considering whether there are exceptional circumstances to justify a departure from the general rule, I think that the court is entitled to take into account the communications between the parties prior to the presentation of the petition. In Re Fernforest there had plainly been an attempt, albeit apparently not very convincing, by the company to set out the grounds upon which it disputed the debt, and I think that Mr. Nersessian was right when he observed that Warner J's comments were addressed to the more limited question of whether a company facing a claim is under a duty to instruct lawyers to prepare a detailed defence prior to a claim being issued. Likewise, in Re UK (Aid) Limited. Blackburne J's conclusion that the petitioner had adopted a high risk strategy that had failed, was made against the background (which appears plainly from the report at [2003] 2 BCLC 351), that the company's stance had been set out at length by its solicitors in correspondence prior to the petition being presented.
24. I also consider that Blackburne J's comments at paragraph 7 of the judgment in UK (Aid) Limited, to the effect that a petitioner who launches winding up proceedings without the benefit of a judgment runs the risk that there may be irreconcilable assertions where it is likely that one side is telling the truth, and the other is not, must be read in context. A petitioner who, as in that case, is aware of the basis upon which the company is disputing the debt, but takes the view that the court can conclude that there is no substance in the company's case, indeed takes the risk that the court will conclude that it cannot resolve the dispute without disclosure or cross-examination; and the fact that it may later turn out that witnesses on behalf of the company were lying or had produced false documents to support their stated case will not prevent the court from holding that the petitioner must pay the consequences of choosing an inappropriate procedure.
25. But I do not think that Blackburne J can have meant that a petitioner who presents a winding-up petition must necessarily be taken to have assumed the risk that the company may, after presentation of the petition, raise a false defence supported by fabricated documents. The law turns its face against the use of fabricated documents in litigation, and I cannot see how the policy of the Companies Court in discouraging the misuse of winding up petitions would be advanced by rewarding companies which resort to lying to avoid paying their debts, and penalizing petitioners who are belatedly met by false defences that they could not have evaluated prior to presenting their petition.
26. Turning to the facts of the instant case, I accept Mr. Nersessian's submissions to the effect that notwithstanding that the Petitioner gave it every reasonable opportunity to do so, the Company did not set out the basis for its dispute in relation to the Final Account in any, or any meaningful way, prior to the presentation of the Petition.
27. Quite apart from the total lack of any objection to the priced Variation Sheets and the various Contract Summaries that Mr. McCarthy had delivered, the Company's letter of 17 November 2011 flatly stated,

"We have not received a final account of £351,885.34. All that has been received is various information and costings that are currently being discussed".

The denial of receipt of the Final Account was untrue and I cannot see how the statement that information and costings were currently being discussed is consistent with the assertion, subsequently made, that the only sums that were due were those which had already been paid in response to Application Nos. 1-8, and that Mr. Holland had twice told Mr. McCarthy on 12 and 19 October 2011 that no more monies would be forthcoming.

28. I also do not think that the position that was ultimately taken in the Company's evidence in reply as to the allegedly determinative nature of the figures given by Mr. Holland to Mr. McCarthy to form the basis for the Applications Nos. 1-8 was explained, clearly or at all, in the Company's evidence in support of its application for an injunction. That is especially so given that Applications Nos. 1-8 were each stated to be for a payment "on account".
29. It was only when the evidence in reply was served, that there was any proper exposition of the Company's case to the effect that the Applications Nos. 1-8 were the sole basis for payment of the Petitioner. It was also only then that the important manuscript Valuations said to have been prepared contemporaneously by Mr. Holland were produced and they were exhibited together with a further document which it transpired was not contemporaneous.
30. As I made clear in my earlier judgment, it was the production of Mr. Holland's manuscript Valuations that tipped this Application against the Petitioner. Without those documents, there was, as I indicated, very considerable force in the points made by Mr. Nersessian that the Company's case was not at all easy to reconcile with the undisputed documents and the remainder of the evidence.
31. Whilst having full regard to the principles set out in Re Fernforest and Re UK (Aid) Limited which I have discussed above, I do regard the combination of these circumstances in which the Company did not give any meaningful account of its defence prior to the Petition, and only belatedly produced documents which might, if authentic, be capable of supporting its case, as wholly exceptional and as justifying a departure from the general rule as to costs which I have considered above.
32. The difficulty is in deciding what order to make at this stage to ensure that justice is ultimately done between the parties.
33. It may, for example, transpire that the inadequacies in the Company's response to the Petitioner were no more than the product of inattention by Mr. Holland and an innocent failure by the Company to put its case forward properly until evidence in reply; that Mr. Holland's manuscript Valuations were authentic and did form the basis for the Applications; and that the Petitioner in fact knew or should have known all along that his figures in the Valuation Sheets, the Contract Summaries and the Final Account were not definitive and were due to be the subject of some process of final measurement, reconciliation or negotiation. In that event, it would seem to be wrong if I had previously departed from the general rule and had not ordered the Petitioner to pay the Company's costs in whole or in substantial part.
34. On the other side of the coin, if it were to transpire that the manuscript Valuations were not contemporaneous, but were fabricated in a deliberate attempt to raise a false defence, then I cannot see on what possible basis justice would have been served if, as a consequence of production of those documents, I had already ordered the Petitioner to pay the Company's costs.
35. Because I cannot resolve the crucial factual issues now, it therefore seems to me that I have a choice. I can either adopt a necessarily rough and ready approach and make no order as to costs, which at least balances the risk of injustice to each side and reflects the inadequacies of the Company's response to the Petitioner's claim and the unsatisfactory manner in which it adduced certain important parts of its evidence. Or I can adjourn the question of costs to await the outcome of proceedings to resolve the dispute, which is a variant of the course which was rejected in Re Fernforest and UK (Aid) Limited, but adopted by Neuberger J in Re a Company (No. 0012209 of 1997).
36. Miss Meech submitted that I should make a decision now, and that adjourning the question of costs with liberty to apply for them to be determined at a later date was impracticable and undesirable because it would mean that another judge of the Companies Court would have to spend time acquainting him or herself with the facts and then making a decision. Whilst I accept that deferring a decision is usually not ideal, I do not think that these concerns carry much weight.
37. Although I have not been asked to consider any estimates, the costs incurred by the parties to date must be significant, and the incremental costs of a short further hearing ought not to be large by comparison. Moreover, if it is thought appropriate to save time and costs that the matter should come back to me, then inquiries can be made in due course through the listing office as to whether I am available. If that is not possible, I have now provided two full judgments explaining in some detail the basis of my decisions, which I hope will be off some assistance to another judge.
38. Adjourning the question of costs would avoid the objections voiced by Warner J that the costs of an unsuccessful petition should not simply be added to the costs of future proceedings in another court or before an arbitrator, and that the two sets of proceedings need to be dealt with separately. It would also leave open for decision whether, even if the Petitioner succeeds, in whole or in part in obtaining a judgment or arbitral award against the Company, the Petitioner should nevertheless pay the costs of these proceedings.
39. For these reasons, whilst making a decision now would be expedient, in my judgment, given the exceptional circumstances of this case, the most appropriate course to ensure that justice is achieved between the parties is to adjourn the issue of costs to await the outcome of proceedings in which there can be disclosure and cross- examination and (in particular) the issue of the authenticity of the manuscript Valuations can be addressed.

Disposal

40. I shall make an order that the Company pays the Petitioner's costs of the Petition until 8 December 2011.
41. I shall adjourn generally the determination of the costs of the Application and of the Petition after 8 December 2011. I shall give permission to either side to apply to a Judge of the Companies Court for the determination of such costs on 14 days' notice in writing to the other side. Such notice can be given in the event that the Petitioner does not institute proceedings (whether by claim form or arbitration notice) in relation to the unsatisfied debt claimed in the Petition by Friday 4 May 2012; or, if such proceedings are commenced, after they have been finally determined or compromised.