Neutral Citation Number: [2012] EWCA Civ 1712

Case No: A2/2011/0876
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
(HIS HONOUR JUDGE PELLING QC)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 20th December 2012
Before :

LORD JUSTICE THORPE
LORD JUSTICE PATTEN
and
MR JUSTICE DAVID RICHARDS
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Between :

	(1) TALLINGTON LAKES LIMITED
(2) NEIL MORGAN
	
Appellants	
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ANCASTA INTERNATIONAL BOAT SALES LIMITED	
Respondent	

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(Transcript of the Handed Down Judgment of
WordWave International Limited
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Mr Neil Morgan appeared in person and on behalf of the First Appellant 
Mr Matthew Smith (instructed by Payne Hicks Beach) for the Respondent

Hearing date : 29 November 2012
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Judgment

Mr Justice David Richards : 
1.	This is an application for permission to appeal against an order striking out a winding-up petition, with the appeal to follow immediately if permission is given. The court heard full argument on the issues which arise if permission to appeal is given.
2.	The petition was presented on 17 September 2010 by Tallington Lakes Limited (Tallington), claiming to be a creditor of Ancasta International Boat Sales Limited (the company) for sums totalling £103,129.79. The company disputed that it owed any sum to Tallington and applied on 8 October 2010 to strike out the petition. A substantial volume of evidence was filed by both parties and the application was heard by HHJ Pelling QC (sitting as Judge of the High Court in the Chancery Division) on 24 March 2011. For the reasons set out in his judgment on 25 March 2011, the Judge held that Tallington’s claim to be a creditor was genuinely disputed on substantial grounds and accordingly he ordered the petition to be struck out.
3.	Tallington was represented before the Judge, as it was before this court, by its controlling director, Neil Morgan. Mr Morgan applied to the Judge to be joined himself as a co-petitioner. This was not opposed by the company and the Judge acceded to the application. Mr Morgan did not claim to be a creditor in respect of any sums other than those already claimed in the petition and it would appear that his application to be joined was intended to forestall any argument that the debt, if any, was due to him, not the company. It does not appear that any such argument was pursued by the company before the Judge, nor was it advanced in this court.
4.	There was no dispute before the Judge, nor has there been in this court, on the applicable legal principle. It can be shortly stated. If the company can demonstrate that the alleged debt on which the petition is founded is genuinely disputed on substantial grounds, the court will strike out the petition.  There are rare exceptions to this principle, none of which is relevant to this case.
5.	This principle is essentially a statement of general practice.  A petitioner must establish its standing to present a winding-up petition.  Those with standing are defined for present purposes by section 124 of the Insolvency Act 1986 and include any creditor or creditors.  Where the company disputes any liability to a person petitioning as a creditor, it is taking issue with the petitioner’s standing to present the petition.  It would in theory be open to the court dealing with the winding-up petition to try that issue itself, as in effect a preliminary issue.  For at least three sound reasons, that is not the practice of the court.  First, it is not the function of the Companies Court to try disputed debt claims.  Its function, so far as winding-up petitions are concerned, is to decide whether the case is suitable for the class remedy of a winding-up order and, if so, to administer, principally through the Official Receiver or liquidator, the winding up.  The determination of debt claims is a proper function of the county courts or, in appropriate cases, an action in the High Court.  Secondly, the threat of winding-up proceedings could otherwise be used as improper pressure on a company to pay a disputed debt.  Thirdly, the inevitable delay in determining the issue is unacceptably damaging to the company, whose freedom to carry on business may be severely curtailed by the existence of a pending winding-up petition.  It is for this reason that the earlier practice of staying a winding-up petition while the issue of liability was determined in separate proceedings was abandoned in favour of striking it out.
6.	Tallington’s claims arise in relation to a new sailing yacht purchased in April 2007 from the company at a price of £305,456. The yacht was built in France by Beneteau, a well-known French yacht-builder, and various items of equipment were supplied and installed in France by the company’s sub-contractors. The yacht was delivered to Mr Morgan at Port Grimaud in the South of France on 31 May 2007.
7.	The purchase of the yacht was made pursuant to a written contract dated 4 April 2007 (the sale agreement), which incorporated the company’s standard terms and conditions.
8.	Tallington’s claims relate to alleged defects with the yacht and its equipment. The Judge summarised the position in paragraph 5 of his judgment:
“….. it is alleged by Mr Morgan that it quickly became apparent that the yacht suffered from a number of defects, none of which were serious in themselves but each of which consumed time and money to put right and, at least potentially, made the yacht unusable for a time. There are a significant number of e-mails recording the complaints made, which included amongst other things an alleged defect to the bow thruster; defects in the air conditioning system; defects concerning the electrical instrumentation on the yacht and defective installation of the yacht’s rig (that is, her mast and standing rigging). There were also alleged defects concerning a battery charger which required, so it is alleged, the replacement of the battery charger and also of a number of substantial marine batteries which had been damaged as a result of the defects in the original battery charger”.
9.	Mr Morgan notified the company of the alleged defects in emails from July to October 2007. He caused repairs to be made and spent, he says, a good deal of his own time dealing with the defects. 
10.	The sum claimed by Tallington was just under £10,000 in October 2007. There was a gap of five months in the correspondence from December 2007 to May 2008, when £30,476 was claimed. By September 2008, the claim had increased to £79,902. There was no further correspondence until 30 June 2010 when the same sum was claimed, rising to over £103,000 in September 2010 when the petition was presented.
11.	There were threats of legal proceedings against the company from an early stage. In an email dated 10 September 2007, Mr Morgan, on behalf of Tallington, threatened “to issue proceedings in the County Court against you for the recovery of the costs incurred and the work undertaken in dealing with the many faults present on the boat”, in the absence of satisfactory proposals dealing with the claim. In November 2007, Mr Morgan said that the particulars of claim were being drafted and in June 2008 he said that if the matter was not very shortly settled he would ask his solicitors immediately to prepare particulars of claim. In June 2010, Mr Morgan resumed his correspondence after a 21 months pause with a short email, reasserting the claim for £79,000 and stating:
“I think that it is about time that you refunded my money now.
What would you prefer? A claim in the High Court or a winding-up petition issued in the Companies Court?
I think I lean towards the latter. I attach an example of one that I recently issued against AXA insurance. Suffice to say they paid up jolly quickly”.
12.	The sums alleged to be due from the company fall into the following broad categories:
Description	Amount £	
Cost of repairs and replacement of defective items	32,763	
Loss of charter hire	47,727	
Mr Morgan’s time (at £50 ph)	7,825	
Solicitors’ advice	2,942	
Interest	11,871	
The details are set out in a four page schedule annexed to the petition.
13.	The claim for interest is, of course, contingent on establishing other heads of claim. The claims for loss of charter hire, Mr Morgan’s time and the solicitors’ advice separately raise issues of fact and law, but they too are at best claims for consequential loss, dependent on establishing liability for some or all of the alleged defects.
14.	As recorded in paragraph 15 of the judgment, the grounds for the company’s case that the claims were genuinely disputed on substantial grounds were, first, that it was entitled to rely on its standard terms and conditions which had the effect of excluding liability in the circumstances of the case and, secondly, that in any event the claims were disputed. The company accepted that in order to rely on its standard terms and conditions, it would have to establish that, for the purposes of the Unfair Contracts Terms Act 1977 (UCTA), Tallington did not deal with the company as a consumer.
15.	As recorded in paragraph 16 of the judgment, Tallington’s position was, first, that the argument that it was not a consumer was not advanced either genuinely or on substantial grounds and, secondly, that the individual defences to the claim were not maintainable because liability had been admitted in correspondence.
16.	The Judge dealt with the issue whether Tallington was a consumer in paragraphs 19-20, having referred to evidence on the issue in paragraph 4. He concluded that it was genuinely and substantially arguable that Tallington did not deal with the company as a consumer.
17.	In paragraphs 21 and 24, the Judge dealt with the issue whether liability had been admitted or agreed and he concluded there were, at the very least, substantial grounds for saying that no admission or agreement had been made.
18.	On this application for permission to appeal, Tallington challenges these conclusions but also submits that, even if the standard terms and conditions applied, there is no genuine dispute on substantial grounds as regards its claims. The Judge did not identify this as an area of argument in paragraphs 15 and 16 of his judgment, but it appears from paragraphs 22, 23 and 25, read as a whole, that he had it in mind and addressed it. At the hearing before this court, counsel for the company accepted that it was open to Tallington to challenge the order below by reference to this submission.
19.	I will take each of these issues in turn.
20.	Whether Tallington purchased the boat as a consumer depends on the application of section 12(1) UCTA which provides:
“(1)  A party to a contract “deals as consumer” in relation to another party if— 
(a)  he neither makes the contract in the course of a business nor holds himself out as doing so; and 
(b)  the other party does make the contract in the course of a business; and 
(c)  in the case of a contract governed by the law of sale of goods or hire-purchase, or by section 7 of this Act, the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.”
The principal issue arises under paragraph (a): did Tallington make the contract to purchase the boat in the course of a business? A company as well as an individual may be a consumer for these purposes, as sub-sections 12(1A) and 12(2) make clear.
21.	Tallington relied before the Judge on Mr Morgan’s evidence that, although the boat was purchased by Tallington, a commercial company, it was in fact purchased for the private leisure use of himself and his family. He said that this was always known to the company and in support he relied on an email dated 12 September 2007 from the company to himself. In the course of this lengthy email, which was principally concerned with a number of the alleged defects, it was stated that “You are using the boat more as a family rather than a race boat”. This was said in relation an alleged defect causing snagging of the Genoa sheets on changing tack.
22.	The Judge stated  his reasons for concluding that the company had raised a genuine dispute on substantial grounds on this matter in paragraph 20 of his judgment:
“In the end, my reason for reaching that conclusion rests on the claim for lost charter income that is made by the Petitioners.  A trading company, Tallington Lakes Limited, purchased the yacht.  Mr Morgan told me, in terms, that the yacht formed part of the assets of Tallington Lakes Limited.  The income derived from chartering the vessel, at least arguably, is or should be treated as part of the revenues of Tallington Lakes Limited and should be taken into account for tax purposes, on that basis.  I am fortified in the view that I have arrived at in relation to this issue by reason of the information given to me by Mr Morgan concerning the status of the yacht as an asset of the Company and also by the terms of the claim for lost charter income.  It is entirely clear that the sums claimed to be earned from chartering are not de minimis (see the schedule to the petition at A/1/12).  Whilst it may be that Mr Morgan and/or Tallington Lakes Limited will succeed in persuading a judge at trial, in the context of a civil claim, that there is nothing in the point concerning the Company’s reliance upon its standard terms and conditions because, upon a true analysis and when all the evidence has been heard, there is no proper basis for concluding that the Company purchased this yacht otherwise than as a consumer, that is not something that can be resolved in winding-up proceedings of this sort and it is certainly not possible for me to conclude that the Company has no prospect in succeeding in relation to this issue.”
23.	In challenging that conclusion, Tallington relies on the same matters as before the Judge and also on a witness statement dated 3 July 2012 made by the company’s solicitors in the costs assessment proceedings. In paragraph 25 of the statement, he says:
“…….. one of the issues in the proceedings was whether Tallington Lakes Limited could properly be regarded as a consumer which Mr Morgan considered to be of relevance as regards the enforceability of the Claimant’s Terms of Business. Despite the boat having been purchased in the name of his company it was clearly for the personal use of Mr Morgan and his family as a result of which he should have been declaring this as benefit in kind for the purpose of his own tax return ….. ”
It was only shortly before the hearing in this court that Tallington adduced this witness statement in support of its case. Counsel for the company, on instructions, told the court that the point being made in the witness statement, although perhaps not well expressed, was that it was Tallington’s case that the boat was purchased for the personal use of Mr Morgan and his family and, in order to investigate that claim, costs were incurred in ascertaining how Mr Morgan had treated the purchase of the yacht for tax purposes. That is a plausible explanation and it would not be right on this appeal to treat the witness statement as an acceptance of Tallington’s case.
24.	In my judgment, the Judge was right to conclude that there was a genuine dispute on substantial grounds as to whether Tallington had purchased the boat as a consumer. The amount claimed by way of alleged loss of charter hire is significant and is arguably consistent with a purchase of the boat in the course of a business. Mr Morgan said that it was no more than “occasional day tripping for the purposes of raising funds to defray transport expenses for the boat” but the level of the claimed loss is such as clearly to raise a triable issue. The claim for lost charter hire having been made, it does not assist Tallington to say that no chartering in fact took place.  The reference to family, not race, use in the email dated 12 September 2007 does not assist in answering the different question whether the boat was purchased for commercial or personal purposes.
25.	The further issue then arises under section 55(4) UCTA whether it can be shown that it would not be fair and reasonable to allow reliance on the relevant terms and conditions.  This is not an issue which can be decided at this stage.  Mr Morgan relied on observations of Lawton J in Rasbora Ltd v JCL Marine Ltd [1977] 1 Lloyd’s LR 645.  These briefly-expressed observations were not grounds for the decision and, in any event, both the contractual terms and the circumstances were markedly different.
26.	The second issue identified by the Judge was whether the company had admitted or agreed liability for some or all of the defects in the course of email correspondence in 2007. Tallington relied in particular on emails from the company dated 12 September 2007 and 19 October 2007. The first of these emails is addressing a number of the issues raised by Tallington. The Judge dealt in detail with this email, setting out the body of it in paragraph 7 and analysing it and Tallington’s response in paragraph 21. He concluded that when the email was read as a whole, it was clear that it constituted an offer to pay certain sums in respect of some but not all of the relevant items, but Tallington’s reply showed that it was not regarded as satisfactory. I agree with the Judge’s conclusions that it is clearly well arguable that no concluded agreement was reached at that stage concerning compensation to be paid for defects existing on the yacht and that it cannot be read as an admission of liability.
27.	There is a significant dispute concerning the email dated 19 October 2007. The company asserts that the version put in evidence by Mr Morgan has been doctored by the removal of the words “without prejudice and subject to contract” appearing at the start of the email. Mr Morgan’s evidence is that those words were never included in the email sent to him. The Judge concluded that it was obvious that he could not resolve that issue on the application to strike out the petition. It was not a dispute suitable for determination in these proceedings but would have to be resolved at a trial. He was in my judgment clearly right about that. Moreover, it is at the very least strongly arguable that by reference to the last paragraph of the email, it contained an offer which was subsequently rejected by Tallington and Mr Morgan.
28.	A substantial part of Mr Morgan’s oral submissions in this court was directed to showing that there could be no real dispute as to the defects claims even if the company’s standard terms and conditions applied.
29.	The standard terms and conditions include condition 8 headed “Warranty”. By condition 8.2 the company warrants that, subject to the other provisions of the conditions, the boat shall be of satisfactory quality within the meaning of the Sales of Goods Act 1979, upon delivery and for a period of 12 months from the time of delivery. The rest of condition 8 contains limitations on the warranty and conditions to which the warranty is subject. Condition 8.1 provides:
“The Vendor shall endeavour to transfer to the Purchaser the benefit of any manufacturers warranty or guarantee (‘Manufacturer Warranty’) given to the Vendor in respect of the Boat, and the Purchaser shall in such case (and it is a condition of any liability of the Vendor under the Contract that it does) use its reasonable commercial endeavours to enforce the terms of the Manufacturer Warranty against the Manufacturer prior to seeking any redress against the Vendor”. 
Condition 8.3 provides that the vendor is not liable for breach of warranty unless the purchaser gives written notice of the defect to the company within 14 days of the time when the purchaser discovers or ought to have discovered the defect and the company is given a reasonable opportunity of examining the boat. Condition 8.4 provides that the company shall not be liable for breach of warranty in a number of specified circumstances, of which the most relevant is that “the Purchaser or any third-party alters, repairs or replaces the Boat or any part of it without the prior written consent of the Vendor” (condition 8.4.5). Condition 8.5 confers on the company the right, at its sole option, to make good by repair or replacement any defects in the boat arising from faulty design, materials or workmanship, and condition 8.9 provides that, if the company does so, it has no further liability for a breach of warranty. Condition 9 provides that the company shall not be liable for any pure economic loss, loss of profit or loss of business, whether direct, indirect or consequential.
30.	The Judge addressed two of the alleged defects in paragraph 22 and 23 of his judgment, dealing with the boat’s bow thruster and its electronic instruments. At paragraph 25 he said: 
“As will be apparent from what I have said so far, I have not addressed every one of the many defects which are alleged in the yacht, or the various heads of claim for consequential loss which are relied upon.  To do so would unnecessarily increase the length of this judgment.  I have concentrated instead on those points that Mr Morgan said were his strongest.  I have read, however, the material in relation to all the others and I am entirely satisfied that similar points can be made in relation to each head of loss that has been made in relation to, respectively, the wind instruments and the bow thruster issue.  Indeed, in many of them there are other points that make the Company’s position, if anything, stronger.”
31.	Mr Morgan took this court through the correspondence in 2007 relating to the various alleged defects. An example which well illustrates the dispute between the parties relates to the defects alleged by Mr Morgan with the air conditioning units on the boat, an item on which he laid some stress in his submissions. 
32.	The air conditioning units had been supplied by a company called Fischer Panda. On 12 July 2007, Mr Morgan sent two emails to the company raising complaints as regards the air conditioning units and saying that an air conditioning specialist had attended and would replace two of the pumps. This action would avoid any liability of the company for breach of warranty in relation to the air conditioning units under condition 8.4.5. The company replied on 13 July 2007, making clear that Fischer Panda would have to approve the costs and any changes made. On 2 August Mr Morgan informed the company that two pumps had been replaced by an air conditioning contractor called Skipcool. He had paid the invoices for this work totalling €1,327 together with commission of €199 to a local yacht repairer, and demanded repayment. 
33.	There was subsequent correspondence involving Mr Morgan, the company and Fischer Panda. On 12 September 2007 the company reminded Mr Morgan of the need to obtain quotations for works before they were carried out. On 15 October 2007, the company told Mr Morgan in an email that it had not authorised the costs of replacement, that it had no photographic or other evidence of the defects and, most importantly, Tallington had used an unauthorised contractor without the consent of Fischer Panda or the company, thereby breaching condition 8.4.5. In November 2007, Fischer Panda took the position that the use of an authorised contractor rendered its warranty also void. 
34.	Mr Morgan submitted that the company’s email of 12 September 2007 constituted written consent to the repairs and replacement of the units by Skipcool, or that there was at least implicit consent because there was no objection to the use of Skipcool. Mr Morgan relies on the lack of response to emails which he sent on 17 July and 2 August 2008. Regrettably, Mr Morgan had engaged in threatening and highly abusive telephone calls to the company on 17 July 2007, to which the company had taken entirely reasonable exception.
35.	In my judgment, it is clear that, if the terms and conditions applied, there is a substantial dispute as regards the claims for defects in the air conditioning units on the grounds that such liability, if any, as the company might have for the alleged defects ceased by reason of the breach of conditions 8.4.5 and, as it may well be, condition 8.1.
36.	Like the Judge, I am satisfied that all the claims made by Tallington are genuinely disputed on substantial grounds, if the terms and conditions apply.  The same may also be the case if the terms and conditions do not apply, although it has not been necessary to examine this.
37.	The Judge was therefore right to strike out the petition.
38.	This is a case which should have never been the subject of a winding-up petition. Mr Morgan’s submission that a dispute was raised by the company only after presentation of the petition is not borne out by the facts. The basis and nature of the dispute is clear from the correspondence in 2007.
39.	There was an extensive volume of evidence before the court at first instance. The Companies Court is not the right court in which to engage in a detailed examination of claim and counterclaim. Mr Morgan relied on passages in the judgment of Chadwick J in Re a Company No.00685 of 1996 [1997] BCC 830. After reviewing a number of decisions of the Court of Appeal, Chadwick J continued at page 835: 
“In my view those authorities, and in particular the authorities of the Court of Appeal to which I have referred, make it clear that the general rule under which this court refuses to entertain a petition founded on a disputed debt applies only where the dispute is a genuine dispute founded on substantial grounds; and does not preclude this court from determining – or entitle this court to decline to determine – the question whether or not there are substantial grounds for dispute.  Indeed, in the passage from the judgment of Oliver LJ to which I have just referred, he pointed out that the court necessarily has to take a view whether on the evidence there really is substance in the dispute which is raised by the alleged debtor.”
The judgment of Oliver LJ to which reference is made is in Re Claybridge Shipping Company SA [1981] Com LR 107 (fully reported at [1997] 1 BCLC 572). 
40.	At page 836, Chadwick J said:
“I accept that any court, and particularly the Companies Court, should not seek to resolve issues of fact without cross-examination where there is credible affidavit evidence on each side.  But I do not accept that the court is bound to hold that there is a need for a trial in circumstances in which, on a full understanding of the documents, the evidence asserted in the affidavits on one side is simply incredible.”
41.	The practical issue is the extent to which the court must go in determining whether there is a genuine dispute on substantial grounds. The court must, as Oliver LJ put it, take a view whether, on the evidence, there really is substance in the dispute.  It appears from Chadwick J’s judgment that the facts before him were straightforward. It is not, however, practical or appropriate to conduct a long and elaborate hearing, examining in minute detail the case made on each side. Such a course will involve both delay in getting the issue ready for hearing and a potentially lengthy hearing. In this case, the evidence went through several rounds over a period of some six months. This time would have been better spent in getting a Part 7 claim under way. A lengthy hearing is likely to result in a wasteful duplication of court time. Petitioning creditors must take a realistic view of whether the company is likely to establish a genuine and substantial dispute. Where, as here, the petitioner insists on proceeding, the court is fully justified in taking the course sensibly adopted by the Judge in this case of concentrating on those points which the petitioner said were his strongest.
42.	It is very unfortunate that Tallington did not follow its first thoughts, expressed as long ago as September 2007, of bringing its claim in county court proceedings. If it had done so, its claim could have been determined in the proper forum long ago. If it had obtained judgment for any amount and the company failed to pay, it would have been justified in presenting a winding-up petition. Instead, the parties are no further forward now than they were five years ago.
43.	Having received full written and oral submissions on the merits of an appeal, the appropriate course in this case is to give permission to appeal but to dismiss the appeal.
Lord Justice Patten :
44.	I agree.
Lord Justice Thorpe :
45.	I also agree.