This is an interesting outcome in a Winding Up Petition; it was highlighted in the case of Tanfield (as executor of the Estate of Paul Watkins and another company) v Meadowbrook Montessori Ltd that the company had a strongly arguable case that the lease did not dispense with the need for a formal demand at common law, and the purported forfeiture for non-payment of rent was unlawful due to the lack of a formal demand
Material Facts
The Respondent company (Meadowbrook Montessori Ltd) ran a private school under a lease from the Petitioners.
In 2019, the Respondent's sole director agreed to purchase the company's shares, allegedly for £134,257.75, which the Petitioners claimed was disguised as "rent arrears" for tax purposes.
The Petitioners served a statutory demand and later presented a winding up petition against the Respondent for alleged rent arrears of over £167,000.
After the first hearing of the petition, the Petitioners purportedly forfeited the lease by re-entering the premises without prior notice, causing the school to close.
The Respondent argued that the re-entry was unlawful for lack of proper demand for rent under common law.
The Respondent claimed damages for the unlawful forfeiture, including lost school fees and rental value of the premises.
The Respondent submitted that relief from sanctions should be granted as it had been unable to access funds to instruct solicitors due to the winding up petition.
The Respondent argued that the bulk of the petition debt was disputed as it represented the alleged purchase price for the shares, disguised as rent arrears for tax purposes.
The Respondent claimed it had a strongly arguable cross-claim for unlawful forfeiture of the lease, exceeding the petition debt, entitling it to damages.
The Petitioners opposed relief from sanctions, arguing the breach was serious and no good reason was given. They submitted the debt was largely undisputed rent arrears and the cross-claim was not strongly arguable.
Key Legal Findings
The court granted relief from sanctions to the Respondent company and dismissed the winding up petition. The court found that the Respondent had demonstrated a bona fide dispute on substantial grounds regarding the bulk of the petition debt and had raised a strongly arguable cross-claim for unlawful forfeiture exceeding the value of the petition debt.
The Law
Principles governing relief from sanctions under CPR 3.9 and Denton v TH White Ltd [2014] EWCA Civ 906. In Denton, the Court clarified the proper approach to granting relief from sanctions under CPR 3.9, setting out a three-stage test:
1) assess the seriousness or significance of the breach;
2) consider why the breach occurred; and
3) evaluate all the circumstances, giving particular weight to the need for litigation to be conducted efficiently and the need to enforce compliance.
Factors (a) and (b) in CPR 3.9(1) are of particular importance and should be given particular weight at the third stage, but need not be treated as paramount. These are:- (a) The need for litigation to be conducted efficiently and at proportionate cost. (b) The need to enforce compliance with rules, practice directions, and orders.
Rules on dismissing winding up petitions for disputed debts or cross-claims, as set out in Re a Company (No 0012209 of 1991) [1992] BCLC 865 the court addressed the issue of costs in the context of a clear abuse of process. Specifically, it was held that the court may make an order for the immediate assessment of costs where a director has caused statutory demands to be issued against a company, necessitating the company to apply for an injunction to restrain the presentation of a winding-up petition.
Common law rules on formal demand for rent prior to forfeiture. These require that a demand must be made by the landlord or their authorised agent on the last day before the right of forfeiture would arise. This demand must be made at a convenient time before and at sunset, at the premises (or another specified place in the lease), and for the exact sum payable for the last period
Principles on damages for unlawful forfeiture, including loss of the claimant's interest in the land and potential exemplary damages, from cases such as Bocardo SA v Star Energy UK Onshore Ltd [2010] UKSC 35 and Rookes v Barnard [1964] AC 1129. In the case of Bocardo the Supreme Court held that the drilling of oil wells diagonally into the claimant’s land constituted an actionable trespass. However, the damages awarded were nominal, based on compulsory purchase principles rather than the benefit accrued to the trespasser. Exemplary damages, which are punitive rather than compensatory, can be awarded in exceptional circumstances which was established in Rookes setting out three categories where exemplary damages may be awarded: (1) oppressive, arbitrary, or unconstitutional actions by government servants; (2) where the defendant's conduct was calculated to make a profit exceeding the compensation payable to the claimant; and (3) where a statute expressly authorises such damages
The Ruling and Court Rationale
The court granted relief from sanctions to the Respondent company and dismissed the winding up petition. The court found that the Respondent had demonstrated a bona fide dispute on substantial grounds regarding the bulk of the petition debt and had raised a strongly arguable cross-claim for unlawful forfeiture exceeding the value of the petition debt.
PW-LA are able to advise on the procedural requirements to satisfy on drafting and serving winding-up petitions. If you have received a petition and are not sure of the procedure or if you have grounds to succeed on dismissing the petition, we can advise you on best strategies.
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