Island Ophthalmology Ltd

• Jurisdiction: Bermuda
• Judge: Chief Justice Hargun
• Judgment Date: 03 March 2023
• Docket Number: 2022: No. 337
• Court: Supreme Court (Bermuda)

In the Matter of Island Ophthalmology Ltd

And in the Matter of the Companies Act 1981

[2023] SC (Bda) 17 Civ.

Before:

The Hon. Chief Justice Hargun

2022: No. 337

In The Supreme Court of Bermuba

COMMERCIAL COURT COMPANIES (WINDING UP)

Application to wind up the company based upon a failure to comply with a statutory demand; whether the debt is bona fide disputed on substantial grounds; whether the company has bona fides cross claims against the petitioner which exceed the statutory demand; whether the petition is filed for an improper purpose

Representation:

Mr Rhys Williams of Conyers Dill & Pearman Limited for the Petitioner

Mr John Hindess of Wakefield Quin for the Company

Introduction

1 By Petition dated 2 November 2022 Dr Jacob Smith (“the Petitioner”) seeks an order that Island Ophthalmology Ltd (“the Company”) be wound up by the Court under the provisions of the Companies Act 1981 (“the Act”) and that Mr Edward Willmott and Mr John Johnston be appointed as the joint provisional liquidators of the Company.

2 The factual ground upon which the Petition is presented is that on 7 October 2022, the Petitioner caused a Statutory Demand to be served on the Company at its registered office pursuant to section 162 (a) of the Act, seeking payment of the outstanding sum of $130,000 said to be owed by the Company to the Petitioner and that the Company has failed to pay all or part of the Statutory Demand within the 21 day period set out therein or at all. It is said by the Petitioner that the Company remains indebted to the Petitioner in the sum of $130,000. In the premises, it is said by the Petitioner, that the Company is deemed unable to pay its debts pursuant to section 162 (a) of the Act and should therefore be wound up.

3 The Company opposes the making of the winding up order on three grounds. Firstly, that the debt which forms the basis of the Statutory Demand is in fact disputed by the Company bona fides and on substantial grounds. Secondly, that the Company has bona fide cross claims against the Petitioner which exceed the debt claimed in the Statutory Demand. Thirdly, the Petition should be dismissed on the basis that it was filed for an improper purpose.

4 It is to be noted at the outset that at times the case on behalf of the Company was presented as though it was a shareholders' dispute between Dr Smith and Ms Faries, who both each own 40% of the shares in the Company. However, it is to be borne in mind that the Petition is against the Company based upon the fact that it is the Company which owes the debt to the Petitioner. Indeed, Ms Faries has not commenced any shareholder action against Dr Smith and has not entered an appearance in these winding up proceedings seeking to oppose the making of the winding up order.

The Background

5 The background to this matter is uncontroversial, save for one issue. The Petitioner is an ophthalmologist, having earned a degree in medicine from Cambridge University and trained in ophthalmology at Moorfields Eye Hospital in London. Ms Jennifer Faries is a certified orthoptist. In or about September 2019, the Petitioner and Ms Faries agreed to establish a new ophthalmology business together. They decided to establish and carry on that business by incorporating a limited liability company under the Act. The Company was incorporated on 9 July 2020 and the shares in the Company were allotted as to 40% to the Petitioner; as to 40% to Ms Faries and the remaining 20% to Dr Gordon Campbell. A resolution of the Provisional Directors passed on 20 July 2020 records that the shares allotted to the Petitioner, Ms Faries and Dr Campbell were issued “as fully paid”. It appears that the Petitioner, Ms Faries and Dr Campbell became the directors of the Company and Ms Faries also assumed the office of the Chief Executive Officer of the Company.

6 On 4 March 2021, after the issuance of the shares, the Petitioner and Ms Faries signed a one-page agreement to which the Company is not a party and it provided as follows:

“The shareholders agreement for Island Ophthalmology 4 March 2021, as agreed between Jennifer Faries (Jenny) and Jacob Smith (Jacob)

Financial arrangements

Payments to Jenny and Jake

Jake will earn a salary, in compensation for the role of chief ophthalmologist and surgical doctor, of 33% of Jake's billings.

Jenny will earn a salary, in compensation for the role of orthoptist and practice manager, of 11% of Jake's billings.

Profit following payment of the above disbursements to Jenny and Jake and operating expenses (including staff payroll and rent) will be split 50:50 between Jenny and Jake.

Capital

Jenny and Jake will each contribute $300,000 to start-up costs of business.

It is agreed that, following the first six months of operation, $15,000 per month will be set aside for further capital expenditure. This may be disbursed by mutual agreement.

As practice expands, further capital disbursements and expenditure will be 50:50 between the two parties.

…

Final profit share

On sale of the company or departure from the business, Jenny and Jake will each be owed 50% of the book value of all assets less liabilities.”

7 It is not in dispute that in furtherance of this agreement the Petitioner made a payment to the Company on 24 August 2021 in the sum of $140,000. The issue for the Court to determine is the proper characterisation of that payment. The Petitioner contends that the payment constituted “loan capital” and as such the Petitioner retained the right to demand repayment of that “loan capital” upon giving reasonable notice to the Company. The Company contends that the payment was in the nature of “equity capital” and as such the Petitioner has no right to demand repayment of that sum from the Company.

Bona fide dispute on substantial grounds

8 There is no material difference between the parties in relation to the relevant law on what constitutes a bona fides dispute on substantial grounds in this context. Mr Williams, for the Petitioner, referred the court to the judgment of Hildyard J in Colicolor Limited v Camtrex Limited [2015] EWHC 3202 where the learned judge summarises the current legal position:

• “32. The Court will restrain a company from presenting a winding-up petition if the company disputes, on substantial grounds, the existence of the debt on which the petition is based. In such circumstances, the would-be petitioner's claim to be, and standing as, a creditor is in issue. The Companies Court has repeatedly made clear that where the standing of the petitioner, and thus its right to invoke what is a class remedy on behalf of all creditors, is in doubt, it is the Court's settled practice to dismiss the petition. That practice is the consequence of both the fact that there is in such circumstances a threshold issue as to standing, and the nature of the Companies Court's procedure on such petitions, which involves no pleadings or disclosure, where no oral evidence is ordinarily permitted, and which is ill-equipped to deal with the resolution of disputes of fact.

• 33. The Court will also restrain a company from presenting a winding-up petition in circumstances where there is a genuine and substantial cross-claim such that the petition is bound to fail and is an abuse of process: see e.g. Re Pan Interiors [2005] EWHC 3241 (Ch) at [34] – [37]. If the cross-claim amounts to a set-off the same issue as to the standing of the would-be petitioner arises as in the case where liability is entirely denied. Even if not qualifying as a set-off, a genuine and substantial crossclaim exceeding the would-be petitioner's claim will also result in the petition being dismissed in accordance with the same settled practice, save in exceptional circumstances (as a discretionary matter). That is also because, if the cross-claim is established, the would-be petitioner will have no sufficient interest either in itself having a winding up ordered, or to invoke the class remedy which such an order represents.

• 34. Further, it is an abuse of process to present a winding-up petition against a company as a means of putting pressure on it to pay a debt where there is a bona fide dispute as to whether that money is owed: Re a Company (No 0012209 of 1991) [1992] BCLC 865.

• 35. However, the practice that the Companies Court will not usually permit a petition to proceed if it relates to a disputed debt does not mean that the mere assertion in good faith of a dispute or cross-claim in excess of any undisputed amount will suffice to warrant the matter proceeding by way of ordinary litigation. The Court must be persuaded that there is substance in the dispute and in the Company's refusal to pay: a “cloud of objections” contrived to justify factual inquiry and suggest that in all fairness cross-examination is necessary will not do.

• 36. As stated by ChadwickJ (as he then was) in Re a Company (No 6685 of 1996) [1997] BCC 830 at 838:

  “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.”

9 Mr Hindess, for the Company, referred the Court to its judgment in Titan Petrochemicals Limited [2021] (Hargun CJ) at [27]–[30] as setting out the appropriate approach in cases such as this:

• 27. In the ordinary case the Court accepts that the general rule is that if it is satisfied that the debt is bona fide disputed on substantial grounds then, in the absence of exceptional circumstances, the Court would ordinarily dismiss the petition. In Stonegate Securities v Gresory [1980] Ch. 576. Buckley LJ so held at 579C to 580C:

  “Where a creditor...