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This article outlines a recent judgment where the Irish High Court refused to restrain the presentation of a winding up petition. The judgment is a helpful restating of the legal principles and also confirms that the existence of an arbitration clause will not, of itself, block the presentation of a winding-up petition. Businesses (and debtors in particular) should be aware that there remains a high bar to obtaining an injunction to restrain a winding up petition in Ireland and only in exceptional cases where there is a “bona fide and substantial” dispute.
Factual background
As with any set of proceedings the facts are unique and often complex. In brief summary, San Leon Energy (“San Leon”) entered into an agreement with Brightwaters Energy (“Brightwaters”) pursuant to which San Leon undertook to discharge US$16.6 million in debts owed to Brightwaters by a subsidiary of San Leon.
Before signing the agreement, San Leon indicated to Brightwaters that it expected to secure third-party financing from Tri Ri Asset Management (TRAM), which would enable it to make the payment. However, TRAM ultimately failed or refused to provide the funds, leaving San Leon unable to pay.
Brightwaters presented a winding-up petition to the Court seeking a winding-up order against San Leon in respect of the debt referenced above. San Leon then applied for an injunction seeking to prevent the presentation of the petition. San Leon argued, amongst other things (including the existence of an arbitration clause) that it was clearly understood and intended by both parties that its payment obligation was contingent on the finance being secured from TRAM.
Brightwaters disputed this on the basis that while the agreement referred to San Leon's expectation of finance, it did not state that payment was conditional on the finance actually being received and it also raised concerns about San Leon's solvency, pointing to:
- its failure to file annual returns for three consecutive years, and
- the suspension of its London AIM listing.
San Leon did not directly refute the allegation that it was insolvent.
The legal position
The Court reaffirmed the settled Irish position that the Court has a discretion to restrain a winding-up petition only where the debt is disputed in good faith and on substantial grounds.
That discretion must be exercised “with great caution”. A company seeking to restrain a petition must establish at least a prima facie case that there is a dispute as to the existence or amount of the debt owed. In many cases, this will be established by evidence that:
- the petition is bound to fail, or
- there is a suitable alternative remedy.
Importantly, the Court is not concerned with whether the company has a plausible excuse for non-payment, but whether there is a real dispute as to the existence or amount of the debt.
Key issues considered by the Court
1. Does an arbitration clause block a winding-up petition?
San Leon argued that the existence of an arbitration clause in the agreement with Brightwaters meant that any dispute about the debt was subject to arbitration before insolvency proceedings could be pursued.
The High Court rejected this argument, noting the Privy Council's decision in Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16. That case confirmed that arbitration clauses do not prevent winding-up petitions unless there is a genuine and substantial dispute as to the existence of a debt.
2. Could a term be implied making payment conditional on funding?
San Leon argued that the Court should imply a term into the agreement making payment conditional on receipt of third-party finance. The Court rejected this argument citing Flynn v Breccia [2017] IECA 74, noting that a term cannot be implied which contradicts the express wording of the contract.
The Court rejected attempts to rely on commercial context, later correspondence, or assumptions about funding to rewrite the deal after the fact.
3. Did the doctrine of frustration apply?
The doctrine of frustration relieves a party of its contractual obligations where an unforeseeable event renders the performance of the contract substantially impossible. On the facts of this case, the Court rejected the plaintiff's claim that the doctrine of frustration applied, stating that “many transactions fail because a paying party has funding problems”.
Key Takeaways
- There is a high bar to obtaining an injunction to restrain a winding up petition in Ireland; the Court will interfere only in exceptional cases where there is a “bona fide and substantial” dispute.
- If it is known or reasonably anticipated that the ability of a company to perform its contractual obligations may be influenced by extraneous events (such as third-party finance), the contract should account for this in explicit terms.
- The existence of an arbitration clause is not a broad shield against insolvency proceedings.
If it is known or reasonably anticipated that the ability of a company to perform its contractual obligations may be influenced by extraneous events (such as third-party finance), the contract should account for this in explicit terms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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