In the case of Liberty Commodities Ltd v Citibank, the petitioning creditor, Citibank, sought dismissal of the winding-up petition, having reached an agreement with Liberty.
Two creditors who had previously supported Citibank’s petition, White Oak and NPS, sought substitution.
Rule 7.17 of the Insolvency (England & Wales) Rules 2016 states that a petitioner can be substituted under the following circumstances:
- The petitioner is found to not have been entitled to present the petition
- The petitioner fails to give notice of the petition under R7.10
- The petitioner consents to withdraw the petition, or allows 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 the day of the adjournment
- The petitioner appears, but does not apply for an order in the terms requested in the petition
In this case, the company, LCL, argued that the debts of the supporters, White Oak and NPS, were disputed, and that the court needed to determine whether the supporters had standing to prosecute in accordance with R7.17(2) IR 2016, which says that the court may substitute as petitioner a creditor or contributory who in its opinion would have a right to present a petition and who wishes to prosecute it.
The judge in this case confirmed that “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.”
According to the judge in this case, ICC Judge Briggs, a busy winding-up court rarely has the required evidence, or sufficient time, to decide standing when an application for substitution is made. The court will therefore usually order substitution and give directions for the filing of evidence.
This pragmatic approach balances the competing policies of the need for an applicant to have standing, and the need for the winding-up petition to be prosecuted.
The court also provided additional helpful commentary on various current practices of the winding-up court.
- The practice of the court is to dismiss a winding-up petition for failure to prosecute, ie, a failure to advertise by the first hearing without good reason or a failure to attend
- Where more than one supporting creditor appears and seeks substitution, the court will usually substitute as petitioner the creditor claiming the largest undisputed debt
- When substitution is ordered, the court will usually require the substituted creditor to amend, re-verify, and re-serve the petition and adjourn the hearing of the petition to a later date
- There is authority suggesting that the court may order substitution and winding-up without an adjournment but that is “an unlikely outcome in modern practice”. The court will usually adjourn for the papers to be put in order as above
- A debtor company should raise any dispute in relation to standing at the time an application for substitution is made, but a failure to do so will not preclude the company from raising a challenge at the hearing of the petition albeit it will “inevitably delay proceedings and extend the time the debtor company is subjected to the rigours of the winding up procedure”
