Quarry Prods Ltd v Austin Intl Inc.

• Jurisdiction: Cayman Islands
• Judge: (Sanderson, J.)
• Judgment Date: 05 July 2000
• Court: Grand Court (Cayman Islands)
• Date: 05 July 2000

Grand Court

(Sanderson, J.)

QUARRY PRODUCTS LIMITED

and

AUSTIN INTERNATIONAL INCORPORATED

R.H. Jones and T.W.G. Lowe for the plaintiff;

A.J. Walters for the defendant.

Cases cited:

(1) Banco Economico S.A. v. Allied Leasing & Fin. Corp., 1998 CILR 292; on appeal, 2000 CILR 118, applied.

(2) Bayoil S.A., In re, [1999] 1 W.L.R. 147; [1998] T.L.R. 606; [1999] 1 BCLC 62, applied.

(3) British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd., [1980] Q.B. 137; [1979] 2 All E.R. 1063, applied.

(4) CITV-33, In re, 1992–93 CILR 332.

(5) Company (No. 0012209 of 1991), In re a, [1992] 1 W.L.R. 351; [1992] 2 All E.R. 797, dicta of Hoffmann J. applied.

(6) Company (No. 0013734 of 1991), Re a, [1992] 2 Lloyd”s Rep. 415; [1993] BCLC 59.

(7) Company (No. 006273 of 1992), Re a, [1993] BCLC 131; [1992] BCC 794, applied.

(8) FSA Business Software Ltd., Re, [1990] BCLC 825; [1990] BCC 465.

(9) Gold Hill Mines, In reELR(1883), 23 Ch. D. 210; 49 L.T. 66.

(10) Greenacre Publ. Group v. Manson GroupUNK, [2000] BCC 11; sub nom. In re Greenacre Publ. Group, [1998] T.L.R. 811.[1998] T.L.R. 811.

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

(12) McDonald”s Restaurants Ltd. v. Urbandivide Co. Ltd., [1994] 1 BCLC 306, applied.

(13) Mann v. Goldstein, [1968] 1 W.L.R. 1091; [1968] 2 All E.R. 769, considered.

(14) Portman Provncl. Cinemas Ltd., In re, [1999] 1 W.L.R. 157n; (1964), 108 Sol. Jo. 581, dicta of Harman, L.J. applied.

(15) Stonegate Secs. Ltd. v. Gregory, [1980] Ch. 576; [1980] 1 All E.R. 241.

Companies-compulsory winding up-grounds for winding up-inability to pay debts-court to stay petition pending resolution of bona fide and substantial dispute or genuine and serious cross-claim, unless exceptional circumstances-may examine evidence to decide whether dispute or cross-claim has reasonable prospect of success

The defendant petitioned for the winding up of the plaintiff company.

The defendant supplied the plaintiff with explosives for use in its rock blasting operations. Following the delivery of a particular shipment from the defendant, the plaintiff alleged that it noticed a deterioration in the performance of the explosives, which then had to be remedied at extra cost. It alleged that the change in performance was pointed out to the supplier, but that it was not until another shipment of explosives was delivered by the defendant, this time from a different source, but with normal results, that the causal connection was made. The defendant denied that it had been notified of any change in performance of its product.

The plaintiff then ceased payment of invoices submitted by the defendant, complained verbally to the defendant about the performance of the previous shipment, and refused to make payment until the problem had been resolved. The defendant issued a statutory demand and the plaintiff issued a written reply, stating that at least part of the debt was disputed. It obtained a specialist report which stated that the second shipment displayed properties of greater absorption and explosion velocity than the first, but the defendant”s report said that both samples were above the minimum industry standard, and that detonations using non-explosive-grade material (as the plaintiff alleged) would have either failed completely or been accompanied by heavy fumes.

The plaintiff applied for the defendant”s winding-up petition to be set aside. It submitted that (a) it was not indebted to the defendant for the amount billed for the defective shipment, as the defendant had failed to honour its contract to supply explosive-grade material; (b) furthermore, its own cross-claim for damages (exceeding the value of the other invoiced goods) in respect of the expenses of remedial action was so closely connected with the invoices that it was entitled to an equitable set-off; (c) the petition should be set aside on the ground that the defendant had no locus standi to petition as a creditor, since a cross-claim equated to a dispute on bona fide and substantial grounds as to the debt; and (d)

alternatively, the petition should be struck out because the cross-claim exceeded the amount of the debt.

The defendant submitted in reply that (a) the court was entitled to examine the evidence to ascertain whether the debt was disputed on substantial grounds; and (b) in this case the debt was not bona fide in dispute, since there was no doubt that payment was due in respect of the invoices submitted, and on the evidence, there was no serious and genuine cross-claim justifying staying or setting aside the petition.

Held, staying the petition:

(1) The court had a discretion to stay the defendant”s petition if the plaintiff showed that the debt alleged in it was disputed on bona fide and substantial grounds or that it had a genuine and serious cross-claim exceeding the amount of the debt. When a cross-claim arose from a transaction closely connected with that giving rise to the debt (as in this case) the company could claim an equitable set-off, equivalent in effect to a dispute. The court would allow the petition to proceed only in exceptional circumstances if such a dispute or cross-claim were shown. It was entitled to examine the evidence to assess whether the company”s defence or counterclaim had a real prospect of success (page 269, line 26 – page 270, line 26; page 271, lines 11–38; page 273, lines 18–43).

(2) The court had doubts about the cross-claim by the plaintiff, since the alleged defect in the product supplied should have been immediately apparent and there was no evidence of written complaints to the defendant. Furthermore, neither of the expert reports stated that the product was of non-explosive grade. However, it could not at this stage conclude that the claim had no reasonable prospect of success, and there was a chance that a trial judge would find in favour of the plaintiff. Accordingly, the winding-up petition would be stayed pending resolution of the cross-claim (page 275, line 13 – page 276, line 24).

SANDERSON, J.: This is an application by Quarry Products Ltd. to
strike out the winding-up petition filed by Austin International Inc. on
20	March 21st, 2000. Extensive affidavit material, authorities and written
submissions were filed on behalf of both parties. Many issues of law and
facts were raised.
Austin International Inc. (‘Austin’) sold and delivered various
products to Quarry Products Ltd. (‘the company’) between December
25	1998 and July 1999. It is undisputed that the company did not pay for
products billed in the amount of US$325,886.65 and so Austin made a
statutory demand and then filed a winding-up petition.
The company claims that it is not indebted to Austin because Austin
failed to provide ammonium nitrate (‘A.N.’) which was of explosive
30	grade. The company has now refused to pay two invoices of
US$33,568.44 for what it alleges was non-explosive-grade A.N. The
company has also refused to pay invoices of US$292,318.21 for other
products, which were not defective in any way, on the basis that the
company claims that it has either a set-off or alternatively a cross-claim
35	for damages, arising from Austin”s alleged failure to provide explosive-
grade A.N. over the period of December 1998 to July 1999. The company
calculates or estimates that its damages exceed the amount claimed by
Austin.
The company”s main submission is that the petition should be set aside
40	because the debt is disputed on substantial grounds. It concedes that it is
for the company to demonstrate that the petition is disputed on substantial
grounds and submits that it will only fail to do so if the court is unable to
conclude that the dispute was put forward in good faith by the company
or that it has no reasonable prospect of success. It submits that if the
45	company has a genuine cross-claim it is just as if it were a disputed debt.

In support of these propositions the company relies upon the following
authorities: In re Gold Hill Mines (9); Mann v. Goldstein (13) ([1968] 1
W.L.R. at 1098–1099); Stonegate Secs. Ltd. v. Gregory (15) ([1980] Ch.
at 580); Re a Company (No. 0013734 of 1991) (6); In re Bayoil S.A. (2)
5	([1999] 1 W.L.R. at 150); In re a Company (No. 0012209 of 1991) (5);
and In re Portman Provncl. Cinemas Ltd. (14) ([1999] 1 W.L.R. at 159).
Mr. Walters, for Austin, agreed that only in exceptional circumstances
should the court hear argument about disputed debts, but that it was
proper for a judge to examine the evidence to consider whether or not
10	there was a bona fide dispute on substantial grounds. He also submitted
that where there exists an undisputed debt and cross-claim, the court has a
discretion whether to dismiss the petition or make a winding-up order. He
said that except in special circumstances a winding-up order will not be
made where there is a serious, genuine cross-claim or one of substance
15	which the company has been unable to litigate.
He relied upon the following authorities: French, Applications to Wind
up Companies, at 206–234 (1993); Banco Economico S.A. v. Allied
Leasing & Fin. Corp. (1) (1998 CILR at 303); In re CITV-33 (4)
(1992–93 CILR at 336); In re Bayoil S.A. (2); Greenacre Publ. Group v.
20	Manson Group (10); In re L.H.F. Wools Ltd. (11); Re FSA Business
Software Ltd. (8); and Re a Company (No. 006273 of 1992) (7).
The company advances two alternative positions. It first says that the
petitioner does not have locus standi to file the petition because it is a
disputed debt and relies upon Mann v. Goldstein (12) in which Ungoed-
25	Thomas, J. stated ([1968] 1 W.L.R. at 1098–1099):
‘. . . I would prefer to rest the jurisdiction

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