Background
LM1 and Seacroft settled earlier County Court proceedings under an agreement requiring Seacroft to pay LM1 £30,000, a £20,000 costs contribution, and LM1’s costs of its counterclaim as assessed or agreed, less that contribution. LM1’s first bill claimed the costs of the entire action. After Seacroft successfully invoked the Medway Oil principle, the bill was struck out, LM1 was permitted to submit a bill limited to costs attributable to the counterclaim, and LM1 was ordered to pay Seacroft’s costs of the assessment proceedings.
Seacroft treated the struck-out bill as effectively assessed at zero and demanded repayment of the £20,000 contribution. When LM1 did not pay, Seacroft served a statutory demand. LM1 applied to restrain presentation of a winding-up petition, maintaining that it remained entitled to recover counterclaim costs and was preparing a revised bill. After LM1 eventually served a redrawn bill claiming £46,755.35, Seacroft accepted that the alleged debt was substantially disputed, leaving only the costs of LM1’s injunction application for determination.
The Court’s Holding
The High Court recorded that LM1 succeeded in preventing Seacroft from presenting a winding-up petition based on the statutory demand or underlying claim. The revised bill established a substantial dispute sufficient to prevent use of the insolvency process to pursue the alleged £20,000 debt.
Nevertheless, the court departed from the usual rule that the unsuccessful party pays the successful party’s costs and made no order for costs. Seacroft had reasonably considered the recoverable counterclaim costs likely to be minimal because the counterclaim largely mirrored the main claim. LM1, meanwhile, had wrongly claimed all costs in its original bill and then failed to pursue its revised assessment with urgency or transparency, serving the new bill only on the final day of a court-imposed deadline.
Key Takeaways
- A winding-up petition may not be used to determine a debt genuinely disputed on substantial grounds or to pressure a company to pay rather than litigate.
- Success in restraining a petition does not automatically entitle the applicant to costs; the court may depart from the usual rule after considering the parties’ conduct and the circumstances as a whole.
- A party relying on an unresolved costs entitlement should provide timely, meaningful information about its revised claim, particularly after an earlier bill has been struck out.
Why It Matters
The decision separates the merits of insolvency relief from the allocation of litigation costs. Although evidence of a substantial dispute can defeat a threatened winding-up petition, delay and lack of transparency in substantiating that dispute may deprive the successful applicant of its costs.
It also illustrates the practical consequences of Medway Oil where a party is entitled only to costs specifically attributable to a counterclaim, especially when the claim and counterclaim substantially overlap.