Legal Updates

Commercial Law – Compulsory Winding Up – Settlement Agreement

The case of Re Zl Ltd [2006],  concerned the compulsory winding up of a company. The parties had engaged in litigation which had culminated in a settlement agreement. Pursuant to the terms of the settlement agreement, the applicant company (“the Company”) was obliged to pay the respondent EUR 500,000. This sum was to be paid by way of four equal instalments of EUR 125,000 on the 31st of December 2005, the 30th of June 2006, the 31st of December 2006, and the 30th of June 2007.

Following the conclusion of the settlement agreement, the respondent and the Company's director maintained a workable business relationship, and the respondent subsequently ordered further luxury goods from the Company. These orders were to be in exchange for some relief with regard to the sums due under the settlement agreement.

The goods ordered were as follows:

  • A new Ferrari 612 for EUR 250,000;
  • A watch for EUR 40,000;
  • A BMW M6 for EUR 125,000;
  • A special edition Ferrari Scaglietti for EUR 300, 000; and
  • A Mercedes SLK.

Thereafter, the respondent presented a winding up petition against the Company. The petition claimed the sum of EUR 375,000, which was the balance due under the settlement agreement. The Company submitted that no sums were due to be paid to the respondent, and it applied for an order restraining the respondent from proceeding further with the petition. The Company also requested that the proceedings be struck out.

The Company's case was that it had provided the respondent with goods, payment for which it was agreed had been set-off against the owed sum of EUR 500,000 under the settlement agreement.

The respondent contended the following:

  • The Ferrari 612 was to be supplied outside the settlement agreement on the basis that it was a gift;
  • The set-off was invalid because pursuant to clause 3.5 of the settlement agreement, amendments, modifications or cancellations to the settlement agreement were valid only if agreed in writing and signed by both parties;
  • The BMW and the watch were accepted by the respondent in lieu of the instalment payments; and
  • The Ferrari Scaglietti and the Mercedes SLK were subsequently cancelled by the respondent at a cost of EUR 40,000.

The application was allowed.

It was held that a winding up order would not be made if a company genuinely disputed a debt on substantial grounds. A creditor whose debt was disputed on those grounds would not be in a suitable legal position to present a winding up petition. In this case, it was held that it was impossible to say that the evidence was so overwhelming that the Company had failed to show a genuine dispute on substantial grounds without an examination of all the evidence at trial.

Therefore, a genuine dispute on substantial grounds in respect of the debt on which the petition had been based had been made out. It followed that the presentation of the petition should be restrained and the petition proceedings should be struck out.

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© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.

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