[COURT OF APPEAL]

In Re BAYOIL S.A.

Insolvency - Winding up - Cross-claim - Company having genuine and serious counterclaim in excess of petition debt - Company unable to litigate counterclaim - Whether discretion to dismiss petition - Whether order to wind up company properly made - Insolvency Act 1986 (c. 45), s. 125(1)

In 1996 the company chartered a tanker from the petitioner to carry a cargo of oil from Iraq to the United States Gulf. In August 1997, following arbitration of a dispute between the parties in which the petitioner claimed freight and diversion expenses and the company counterclaimed for damages for breach of the charterparty, an interim final award was made in the petitioner's favour in respect of freight charges. No stay of the award was sought by the company. In October 1997 the petitioner served on the company a statutory demand requiring payment pursuant to the award. In November 1997, no payment having been made by the company, the petitioner presented a petition to the Companies Court seeking an order that the company be wound up. The company did not dispute the debt but sought to have the petition dismissed or stayed on the ground that it had a genuine and serious counterclaim, which it had been unable to litigate, in an amount that exceeded the amount of the petitioner's debt. The judge accepted the company's contention as to the status of its counterclaim but held that in the circumstances he ought to exercise his discretion under section 125(1) of the Insolvency Act 1986¹ by making the winding up order.

On appeal by the company:-

Held, allowing the appeal, that where a winding up petition was based on an undisputed debt but the company had a genuine and serious cross-claim, which it had been unable to litigate, exceeding the amount of the petitioner's debt the court would, in the absence of special circumstances, exercise its discretion by dismissing or staying the petition; and that, accordingly, in the circumstances, the judge should have either dismissed or stayed the petition (see post, pp. 150D-E, 154B-D, 155D-G,156H-157B).

In re Portman Provincial Cinemas Ltd. (Note) [1999] 1 W.L.R. 157, C.A. and In re L.H.F. Wools Ltd. [1970] Ch. 27, C.A. applied.

Decision of Judge Roger Cooke sitting as a judge of the Chancery Division reversed.

The following cases are referred to in the judgments:

Aries Tanker Corporation v. Total Transport Ltd. [1977] 1 W.L.R. 185; [1977] 1 All E.R. 398, H.L.(E.)

Company (No. 006273 of 1992), In re A [1993] B.C.L.C. 131

F.S.A. Business Software Ltd., In re [1990] B.C.L.C. 825

Malayan Plant (Pte.) Ltd. v. Moscow Narodny Bank Ltd. [1980] M.L.J. 53, P.C.

Mann v. Goldstein [1968] 1 W.L.R. 1091; [1968] 2 All E.R. 769

Portman Provincial Cinemas Ltd., In re (Note) [1999] 1 W.L.R. 157; (1964) 108 S.J. 581, C.A.

Stonegate Securities Ltd. v. Gregory [1980] Ch. 576; [1980] 3 W.L.R. 168; [1980] 1 All E.R. 241, C.A.

¹ Insolvency Act 1986, s. 125(1): see post, p. 155H.

Ward v. James [1966] 1 Q.B. 273; [1965] 2 W.L.R. 455; [1965] 1 All E.R. 563, C.A.

Welsh Brick Industries Ltd., In re [1946] 2 All E.R. 197, C.A.

Wools (L.H.F.) Ltd., In re [1970] Ch. 27; [1969] 3 W.L.R. 100; [1969] 3 All E.R. 882, C.A.

The following additional cases were cited in argument:

Anglian Sales Ltd. v. South Pacific Manufacturing Co. Ltd. [1984] 2 N.Z.L.R. 249

Company (No. 00359 of 1987), In re A [1988] Ch. 210; [1987] 3 W.L.R. 339; [1987] 3 All E.R. 137

Glenbawn Park Pty. Ltd., In re (1977) 2 A.C.L.R. 288

Hadmor Productions Ltd. v. Hamilton [1983] 1 A.C. 191; [1982] 2 W.L.R. 322; [1982] 1 All E.R. 1042, H.L.(E.)

Ng Tai Tuan v. Chng Gim Huat Pte. Ltd. [1991] 1 M.L.J. 338

Wilsons (N.Z.) Portland Cement Ltd. v. Gatx-Fuller Australasia Pty. Ltd. (No. 2) [1985] 2 N.Z.L.R. 33

No additional cases were cited in the skeleton arguments.

APPEAL from Judge Roger Cooke sitting as a judge of the Chancery Division.

The petitioner, Seawind Tankers Corporation, presented a petition on 4 November 1997 seeking the winding up of the company, Bayoil S.A., for the non-payment of an interim final award in respect of freight and diversion expenses in the sum of U.S.$1,182,948 plus £6,005 costs made on 15 August 1997 in the petitioner's favour in arbitration arising out of the charter by the company in 1996 of the petitioner's tanker Leonidas, which broke down during the course of the charter. On 2 February 1998 the judge made a winding up order.

By a notice of appeal dated 11 February 1998 the company appealed on the grounds that (1) the judge was wrong to hold that he had a general discretion whether or not to grant a winding up order which was to be exercised by weighing the interests of the parties one against the other; (2) the judge should have held that where there was a genuine cross-claim with substance in it, the petition ought to be rejected; (3) in exercising his discretion as he did, the judge erred or otherwise misdirected himself in that (a) he placed inadequate weight on the fact that the cross-claim was genuine and bona fide and was in a substantial amount which exceeded the petitioner's claim by a wide margin, and had been advanced and pursued by the company from an early stage; (b) in consequence, he placed inadequate weight on the fact that, if the cross-claim succeeded, the petitioner would turn out to be the company's debtor, instead of the other way around; (c) he held that the case was distinguishable from In re L.H.F. Wools Ltd. [1970] Ch. 27 on the basis that in that case the respondent had no assets, whereas in the present case assets existed and, if a winding up was not ordered, there was a distinct risk that there would ultimately be less for the petitioner, and did not hold that, in view of the fact that the preparatory steps in the arbitration had reached a stage where a hearing would be possible in the relatively near future, the delay inherent in dismissing or staying the petition would occasion no prejudice to the petitioner; (d) he attached undue weight to the security held by the company and did not hold that such security was res inter alios acta which did not affect the position referred to in (b) above; (e) having held, correctly, that the petition had been vigorously resisted by the company on

grounds of principle, he placed weight on the absence of evidence that the award could be paid and that the opposition to the petition was a matter of principle; (f) he did not hold that, irrespective of the company's ability or inability to pay the award, the factors referred to in (a) to (c) above outweighed any factors in favour of a winding up, and did not hold that the prejudice to the company from a winding up was substantially greater than the prejudice, if any, to the petitioner from a refusal of a winding up or a stay; and (4) accordingly in all the circumstances he erred or otherwise misdirected himself in not refusing or alternatively in not staying the petition pending the determination of the cross-claim.

The facts are stated in the judgment of Nourse L.J.

Michael Tselentis for the company.

Jonathan Russen for the petitioner.

31 July. The following judgments were read.

NOURSE L.J. This appeal raises a question on the practice of the Companies Court. How ought it to deal with a winding up petition when the petitioner's debt is undisputed but the company has a genuine and serious cross-claim, which it has been unable to litigate, in an amount exceeding the amount of the petitioner's debt? In order to answer that question it is necessary to give close consideration to the decisions of this court in In re Portman Provincial Cinemas Ltd. (Note) [1999] 1 W.L.R. 157 and In re L.H.F. Wools Ltd. [1970] Ch. 27.

Bayoil S.A. ("the company") is a Swiss company and as such an unregistered company within the meaning of section 220(1) of the Insolvency Act 1986. It has assets and a place of business in England. By section 221(1) it may be wound up under the Act. By a voyage charterparty dated 13 December 1996 the company chartered from Seawind Tankers Corporation ("Seawind"), a Liberian company, a tanker called the Leonidas for the purpose of carrying a cargo of light crude oil from Al-Bakr in Iraq to the United States Gulf with an E.T.A. of 8 February 1997. The ship sailed from Al-Bakr on 19 December, but on 25 December its starboard engine failed and had to be shut down, with the result that it thereafter proceeded at a significantly reduced speed. The company was informed of this on 27 December, with a new E.T.A. in the United States Gulf of 3 March. Subsequently, pursuant to an agreed variation of the charterparty, the company gave directions for lightening and discharge in South Africa, where the ship was arrested at Saldanha Bay. By a letter dated 13 March 1997 Seawind's P. and I. club, in consideration for the ship's release, granted the company security for its claims in a sum not exceeding U.S.$5,910,609 plus interest and costs.

Pursuant to a clause in the charterparty, the dispute was submitted to arbitration in London, Seawind claiming freight and diversion expenses and the company counterclaiming damages for breach of the charterparty, in particular for misrepresentations and breaches of warranty as to the condition of the ship, the absence of recent breakdowns and its maintainable speed. On 15 August 1997 an interim final award was made in Seawind's favour in respect of freight and the costs of obtaining the award. The award was made in accordance with the well established rule that freight must be paid free of all deductions of whatsoever nature: see

Aries Tanker Corporation v. Total Transport Ltd. [1977] 1 W.L.R. 185. No stay of the award was sought or granted. Conversely, the arbitrators declined to make an interim award in respect of diversion expenses, which are not governed by any such rule.

On 13 October 1997 Seawind served on the company a statutory demand in the prescribed form requiring payment, pursuant to the award, of the sums of U.S.$1,198,721.02 and £6,078.16 in respect of freight and costs respectively together with interest. No part of either sum having been paid, on 4 November 1997 Seawind presented a petition to the Companies Court seeking an order that the company be wound up.

The petition came on for an effective hearing before Judge Roger Cooke, sitting as a judge of the Chancery Division, on 2 February 1998. The company did not dispute the debt on which the petition was based, but contended that it ought to be stayed or dismissed on the ground that it had a genuine and serious counterclaim, which it had been unable to litigate, in an amount (U.S.$5,931,524) exceeding the amount of the petitioner's debt. The judge, while accepting the company's contention as to the status of its counterclaim, held that he had a discretion which was at large and that it ought, in the circumstances of the case, to be exercised by granting the order sought. The company now appeals to this court.

The question is whether the judge was right to hold that his discretion was at large or whether its exercise was governed by authority which requires the petition, except in special circumstances, either to be dismissed outright or to be stayed until after the cross-claim has been determined. In order to answer that question it is necessary to refer first to the practice of the Companies Court to dismiss a petition where the petition debt is disputed in good faith and on substantial grounds. That practice, it appears, has been established since the end of the last century. It was explained by Buckley L.J. in Stonegate Securities Ltd. v. Gregory [1980] Ch. 576, 580, where, having adopted a passage in the judgment of Ungoed-Thomas J. in Mann v. Goldstein [1968] 1 W.L.R. 1091, 1098-1099, he said:

"In my opinion a petition founded on a debt which is disputed in good faith and on substantial grounds is demurrable for the reason that the petitioner is not a creditor of the company within the meaning of section 224(1) [of the Companies Act 1948] at all, and the question whether he is or is not a creditor of the company is not appropriate for adjudication in winding up proceedings."

So the dismissal of the petition in such a case is not, at any rate initially, a matter for the discretion of the court. It is founded on the petitioner's inability to establish the locus standi to present a petition under what is now section 124(1) of the Insolvency Act 1986. The case of an undisputed debt with a genuine and serious cross-claim is different, in that the dismissal or staying of the petition can only be a matter for the discretion of the court, albeit that its exercise may have been narrowed by authority. By way of shorthand, I will refer to the two categories of case as disputed debt and cross-claim cases respectively.

Against that background I come to In re Portman Provincial Cinemas Ltd. [1999] 1 W.L.R. 157. In that case the petition was based on an undisputed debt of £40,831 owing in respect of principal, interest and costs secured by a mortgage. In May 1963 the creditor ("Baldwins") demanded payment from the company of that sum. In July 1963 the company issued a writ against Baldwins claiming damages for breach of an oral agreement alleged to have been made in or about November 1955. After the pleadings

in the action were closed, but before it could be tried, Baldwins presented its petition. Plowman J. dismissed it. On Baldwins' appeal to this court, Lord Denning M.R. thought that the company's cross-claim had no substance at all. He would have allowed the appeal. Harmon and Russell L.JJ., on the other hand, thought that it could not be said that there was no substance in the cross-claim and accordingly dismissed the appeal.

The importance of the case lies in the observations of Lord Denning M.R. and Harmon L.J. as to the test to be applied. At the beginning of his judgment, Lord Denning M.R. said, at pp. 157-158:

"[The company] says they have a cross-claim which overtops the amount due to Baldwins. The question is whether the debt of Portmans is a 'disputed' debt. It would be, I think, if there was real substance in the cross-claim."

Having stated the facts, he said, at p. 159:

"As I understand the law on the matter, it is this. If this is a genuine cross-claim with substance in it, then let it be tried out in the Queen's Bench Division: this petition must be rejected. But if there is no substance in the cross-claim, then let the court do justice to the petitioners in this case and not give heed to so insubstantial a cross-claim. We were referred to In re Welsh Brick Industries Ltd. [1946] 2 All E.R. 197, where, even though the defendant company had put in affidavits and got leave to defend under R.S.C., Ord. 14 (thus showing there was a triable issue), nevertheless the court looked into the matter even so; and held there was no substance in the defence and therefore it was not a ground for refusing a winding up order."

Harmon L.J. said, at p. 161:

"Now the fact that there is a cross-claim of that sort, not being a realised claim, is no answer in law to the petitioners' claim under the Companies Act 1948 and it quite clearly appears from the case cited by Lord Denning M.R., In re Welsh Brick Industries Ltd., that it is not a bar to a claim, but of course it is a matter for the discretion of the judge. The judge here rejected the petition on the modern practice. You do not now, as you used to do, stand over the petition to see if the action will succeed or no. If you find the action making the cross-claim is on foot and it is a serious action, you reject the petition. The question is whether the judge rightly exercised his discretion."

He ended his judgment thus, at p. 161: "I think the judge was right to say that the matter ought to go to trial, and therefore according to the modern practice the petition should be dismissed, and I would so hold." Russell L.J agreed with Harmon L.J. that the appeal should be dismissed. He did not make an independent statement of the test to be applied and must be taken to have agreed with that propounded by the other members of the court.

It will be observed that Harmon L.J. twice referred to "the modern practice," and that he did so in reference to a cross-claim case. While recognising that it was a matter for the discretion of the judge, he accepted the practice to be that the petition should be dismissed, except no doubt in special circumstances. Lord Denning M.R.'s observations were to the same effect, with the immaterial difference that he referred to "the law" and not to the modern practice.

Both Lord Denning M.R. and Harmon L.J. cited the decision of this court in In re Welsh Brick Industries Ltd. [1946] 2 All E.R. 197, a disputed debt case where a winding up order had been made by the county court judge. Notwithstanding that the company had been given unconditional leave to defend the petitioner's action in the King's Bench Division for recovery of the debt, it was held that the winding up court was not precluded from going into the merits of the dispute for itself and the order made below was affirmed. In delivering the leading judgment, Lord Greene M.R. said, at p. 198, that the relevant law and practice was stated with sufficient accuracy in Buckley on the Companies Acts, 11th ed. (1930), pp. 356-357:

"A winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed and under circumstances may be stigmatised as a scandalous abuse of the process of the court. Some years ago petitions founded on disputed debt were directed to stand over till the debt was established by action. If, however, there was no reason to believe that the debt, if established, would not be paid, the petition was dismissed. The modern practice has been to dismiss such petitions. But, of course, if the debt is not disputed on some substantial ground, the court may decide it on the petition and make the order."

Except for the substitution of the words "At one time" for "Some years ago," that passage has been reproduced in virtually identical terms in every subsequent edition of Buckley. It now appears in the 14th edition (1981), at p. 523. It seems clear that "the modern practice" is cited only in relation to disputed debt cases.

The 13th edition (1957) of Buckley, the edition which was current when In re Portman Provincial Cinemas Ltd. [1999] 1 W.L.R. 157 and In re L.H.F. Wools Ltd. [1970] Ch. 27 were decided, made no reference to any practice, ancient or modern, in relation to cross-claim cases. From the terms in which Lord Denning M.R. and Harmon L.J., in particular the latter, expressed themselves in In re Portman Provincial Cinemas Ltd. it seems that they assumed, perhaps wrongly, that the practice that had been adopted in disputed debt cases had also been adopted in cross-claim cases. Be that as it may, the actual decision in that case is clear authority for the proposition that the petition ought to be dismissed in cross-claim cases, except in special circumstances.

Mr. Tselentis, for the company, has submitted that that was how In re Portman Provincial Cinemas Ltd. was viewed by this court in In re L.H.F. Wools Ltd. [1970] Ch. 27, another cross-claim case. There a Belgian bank sued the company on a dishonoured bill of exchange and the company raised a counterclaim which, though not a cause of action known to English law, was a good cause of action under Belgian law. At the trial of the action the company abandoned its counterclaim and submitted to judgment for the amount of the bill and interest, the judge refusing to grant a stay of execution. The bank presented a petition to wind up the company, which had by then ceased trading and, apart from its cause of action against the bank under Belgian law, had no assets. On the hearing of the petition the company sought to have it adjourned or dismissed but Plowman J. made a winding up order. The company's appeal to this court

was allowed, the order discharged and the petition stood over with liberty to restore on two days' notice.

Plowman J. had found that the company's cross-claim against the bank was a genuine and serious cross-claim which exceeded the amount of the petition debt. The leading judgment in this court was delivered by Harmon L.J. He said, at p. 36:

"This is the kind of case which is always troublesome and depends in the ultimate resort on the discretionary views of the judge who tries it and, therefore, one has to find, if this court is going to upset what he decided, that he exercised his judgment on some wrong principle . . . The company appeals on the ground that according to modern practice if there is a genuine cross-claim, it is just as if there was a disputed debt; and, as everybody knows, a disputed debt is never good subject matter for a petition."

Having said that the main support for that proposition was In re Portman Provincial Cinemas Ltd. [1999] 1 W.L.R. 157 and having referred to the difference of view on the facts, Harmon L.J. said that all the members of the court had agreed on what the law was. Then he quoted the second passage I have read from the judgment of Lord Denning M.R. and continued at p. 36:

"I used much the same language myself, and so did Russell L.J. The majority decided in that case that, shadowy as the cross-claim was and improbable as the events said to support it seemed to be, there was just enough to make the principle work, namely, that it was right to have the matter tried out before the axe fell."

Pausing at that point, I think it clear that Harmon L.J. was there accepting that there was by then a similar practice in both disputed debt and cross-claim cases. However, he then proceeded to consider the judge's exercise of discretion in much greater detail than the practice might have required. If you were to read the later part of his judgment in isolation, you might well conclude that he regarded the judge's discretion as having been at large. That has enabled Mr. Russen, for Seawind, to argue that the discretion has not in reality been narrowed to the extent for which Mr. Tselentis contends. Mr. Russen seeks further support for that view from the brief judgment of Danckwerts L.J., at pp. 40-41. He also relies on the judgment of Edmund Davies L.J., who, having quoted from the judgment of Lord Denning M.R. in Ward v. James [1966] 1 Q.B. 273, 293-294, said [1970] Ch. 27, 42:

"Adopting that principle, and speaking entirely for myself, I am a little nervous, accordingly, about any decision which appears to lay down almost as a statement or proposition of law that that discretion has to be exercised in any particular direction. For my part, I would, therefore, desire to reserve for further consideration the obiter dictum of Lord Denning M.R. in In re Portman Provincial Cinemas Ltd. [1999] 1 W.L.R. 157, 159 to this effect: 'As I understand the law on the matter, it is this. If this is a genuine cross-claim with substance in it, then let it be tried out in the Queen's Bench Division: this petition must be rejected.'"--the emphasis is Edmund Davies L.J.'s--"If by those words he was in effect saying that the discretion of a judge in those circumstances must inevitably and invariably be exercised by rejecting the petition out of hand, it is an expression of opinion which

I would respectfully desire to leave for further consideration when the question arises in a direct form in a future case."

There is no reported decision since In re L.H.F. Wools Ltd. [1970] Ch. 27 in which the practice in cross-claim cases has been considered by this court. The headnote in that case, in paragraph (2) of the holding, at p. 28, reads:

"That the judge had erred in the exercise of his discretion because he had given insufficient weight to (a) the modern practice that where a company had a genuine and serious cross-claim against the petitioning creditor which it had not reasonably been able to litigate, the petition should usually be dismissed or stayed . . ."

Mr. Russen has submitted that that is an incorrect statement of that part of the decision. I disagree. The correct view is that the practice in cross-claim cases was established by the actual decision in In re Portman Provincial Cinemas Ltd. [1999] 1 W.L.R. 157. In In re L.H.F. Wools Ltd. [1970] Ch. 27 Harmon L.J., with whose judgment Danckwerts L.J. agreed, recognised and affirmed its existence. So too did Edmund Davies L.J., his only reservation being that there was still a residual discretion in the court and that the petition ought not to be rejected out of hand. The reservation was clearly correct. It is met by the exception for special circumstances. The detailed consideration of the exercise of the judge's discretion can be explained by the court's decision to interfere with it in that case. The difficulty has, I think, been caused because a transcript of the judgments in In re Portman Provincial Cinemas Ltd. has not been available to the court in subsequent cases. It is only with that assistance that the judgments in In re L.H.F. Wools Ltd. can be put in context.

Reference must be made to two recent decisions at first instance in cross-claim cases. In In re F.S.A. Business Software Ltd. [1990] B.C.L.C. 825, 831 Warner J., having expressed the view that the principle evinced by In re Portman Provincial Cinemas Ltd. [1999] 1 W.L.R. 157 and In re L.H.F. Wools Ltd. [1970] Ch. 27 was reasonably clear, said:

"Where on the hearing of a winding up petition the court finds that the petitioner's claim against the respondent company is made out but that there is pending in another court a counterclaim by the company, the court has a discretion whether to dismiss the petition or make a winding up order. In both In re Portman Provincial Cinemas Ltd. and In re L.H.F. Wools Ltd. the Court of Appeal held that a winding up order should not be made but in both of those cases the circumstances were different from those in the present case and the law as evinced by those decisions is certainly not that the existence of a counterclaim means that prima facie the petition should be dismissed."

Those observations were adopted and applied by Millett J. in In re A Company (No. 006273 of 1992) [1993] B.C.L.C. 131.

It is clear that neither Warner J. nor Millett J. had before him a transcript of the judgments in In re Portman Provincial Cinemas Ltd. So I do not think that weight can be given to their views on this question. On the other side, we have been referred to dicta in Commonwealth decisions which give support to the existence of the practice in cross-claim cases. Thus in the Privy Council case of Malayan Plant (Pte.) Ltd. v. Moscow Narodny Bank Ltd. [1980] M.L.J. 53 (a disputed debt case) Lord Edmund-Davies, in delivering the judgment of the Board, said at p. 55:

"There is no distinction in principle between a cross-claim of substance (such as in the Wools case) and a serious dispute regarding the

indebtedness imputed against a company, which has long been held to constitute a proper ground on which to reject a winding up petition."

In the present case Judge Roger Cooke, recognising the inadequacy of the report of In re Portman Provincial Cinemas Ltd. in the Solicitors' Journal (108 S.J. 581), suggested to counsel that it might be useful to try to get hold of a transcript of the judgments in that case. The attempts of counsel to do so were unsuccessful. So he also had to consider In re L.H.F. Wools Ltd. [1970] Ch. 27 without that assistance. In the cir- cumstances it is not surprising that he adopted the approach of Warner J. in In re F.S.A. Business Software Ltd. [1990] B.C.L.C. 825. However, for the reasons stated, that approach was incorrect. Having held that the company had a genuine and serious counterclaim in the arbitration, which it had been unable to litigate, in an amount exceeding the amount of Seawind's debt, the judge ought to have asked himself whether there were special circumstances which made it inappropriate for the petition to be dismissed or stayed.

Mr. Russen has submitted that the matters relied on by the judge in exercising his discretion did in any event amount to special circumstances. Shortly stated, those matters were the finality and unappealability of the interim award, the security for the company's counterclaim granted by Seawind's P. and I. club, the judge's concern as to the potential commercial insolvency of the company and the fact that there was no real evidence that the award could be paid.

In my judgment those matters do not amount to special circumstances. Indeed, with the exception of the security for the company's counterclaim, they are likely to be found in many cross-claim cases. Mr. Russen has also relied on the fact that no stay of the interim award was sought or granted. That adds nothing to his other points. The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up. Moreover, an order that a company be wound up, unlike a bankruptcy order, is often a death knell. Nor can it be certain that a liquidator, even with security behind him, will prosecute the company's claims with the diligence and efficiency of its directors. These, I believe, are considerations which go to justify the practice in cross-claim cases. I emphasise that the cross-claim must be genuine and serious or, if you prefer, one of substance; that it must be one which the company has been unable to litigate; and that it must be in an amount exceeding the amount of the petitioner's debt. All those requirements are satisfied in this case.

I would allow the appeal and discharge the winding up order. Whether the petition should be dismissed or stayed will be a question for discussion with counsel after judgment.

WARD L.J. I agree with all that Nourse L.J. has said and I am tempted to say no more. In deference, however, to the fact that we are departing from the judgment of an experienced company judge, in deference also to the excellent arguments and submissions from Mr. Tselentis and Mr. Russen and in view of the confusion which has arisen in the Companies Court, I will hesitantly explain why I come to the same conclusions.

First, section 125 of the Insolvency Act 1986 dealing with "Powers of court on hearing of petition" gives the court a wide discretion. Section 125(1) provides:

"On hearing a winding up petition the court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make an interim order, or any other order that it thinks fit . . ."

Like every wide discretion, this one conferred by the Act must be exercised judicially. It is not unusual, indeed it is salutary and proper, for the court, especially this court, on occasions to give guidance to the judges as to how judicially they will ordinarily be expected to proceed. Consistency of approach leading to certainty in the litigation process is a virtue. Such guidance must not and cannot fetter the discretion. That was the concern of Edmund Davies L.J. in the passage already cited by Nourse L.J. from his judgment in In re L.H.F. Wools Ltd. [1970] Ch. 27, 42:

". . . I am a little nervous, accordingly, about any decision which appears to lay down almost as a statement or proposition of law that that discretion has to be exercised in any particular direction."

The guidance which may be given serves therefore to establish the principle by which the discretion is generally to be exercised, recognising, however, that the rule is always subject to the exception that, in order not to fetter the discretion, special circumstances, which the judge should explain if his exercise of discretion is to be upheld on appeal, will always justify a departure from the rule.

Secondly, I am satisfied that, when subjecting In re Portman Provincial Cinemas Ltd. [1999] 1 W.L.R. 157 and In re L.H.F. Wools Ltd. [1970] Ch. 27 to close analysis, such as Nourse L.J. has subjected them to, there is authority of this court, from which we should not depart, that the practice is not to allow the winding up where there is a genuine cross-claim except in special circumstances.

Thirdly, were the matter before me de novo, I would arrive at the same conclusion. The practice in the disputed debt case is well established. I appreciate that in that case the petition is dismissed because the petitioner cannot properly claim to be a creditor. That said, there seems to me to be little practical difference between the disputed debt and a cross-claim which does not constitute a set-off properly so called. In this regard I am fortified by the opinion of Lord Edmund-Davies in Malayan Plant (Pte.) Ltd. v. Moscow Narodny Bank Ltd. [1980] M.L.J. 53, 55:

"There is no distinction in principle between a cross-claim of substance (such as in the Wools case) and a serious dispute regarding the indebtedness imputed against a company, which has long been held to constitute a proper ground on which to reject a winding up petition."

Fourthly, a winding up order is a draconian order. If wrongly made, the company has little commercial prospect of reviving itself and recovering its former position. If there is any doubt about the claim or the cross-claim, that seems to me to require that the court should proceed cautiously.

Very similar considerations inform the court's approach to the granting of a stay of execution, where the court does not lightly deprive the successful litigant of the fruits of his judgment, but will do so where an appeal would otherwise be rendered nugatory. I appreciate that this analogy cannot be taken too far. Winding up is not a form of execution, and stays may not be granted on a judgment for a dishonoured cheque, which is treated as cash, just as freight has a similar unique characterisation. None the less, the principles underlying that approach seem to me to be of relevance when dealing with a company winding up.

For those reasons I come to the conclusion, as Nourse L.J. has done, that there is a practice that the company should not be wound up where there is a serious and genuine cross-claim save in special circumstances. For the reasons he has given, and with which I so entirely agree that no

more need be said, I have come to the conclusion that the judge wrongly approached this case and erred in principle. Exercising the discretion we now have, I agree with Nourse L.J. that, in the result, the winding up order should not be made, and I too await the further submissions of counsel.

To that extent, I would allow the appeal.

MANTELL L.J. For the reasons given by Nourse L.J. I would allow the appeal and discharge the winding up order.

Solicitors: Stockler Charity; Holman Fenwick & Willan.

H.D.