2020-05-12
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Winding-up after enforcement of adjudicator's decision

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Posted by Stuart Thwaites on 27 February 2019

Stuart Thwaites Legal Director

You have won an adjudication. You have been to court and enforced the decision and have a court order. So can you issue a winding-up petition rather than sending in the bailiffs?

This article looks at the scenario where the claiming party has been to adjudication, won, and the courts have enforced the decision and given judgment. But still the monies have not been paid. Does that mean it is now safe to issue a winding up petition to try and obtain payment?

Unfortunately, in this scenario the winding up route is high risk if there is a genuine cross claim that equals or exceeds the sum owed under the judgment.

Shaw v MFP Foundations & Piling Limited

This can be seen in a couple of cases. The first of these was Mr and Mrs Shaw v MFP Foundations & Piling Limited[1]. MFP commenced an adjudication against Mr and Mrs Shaw (“the Shaws”) for monies owed. MFP won. The Shaws did not pay, so MFP enforced the decision through the courts in the usual way. and got judgment against the Shaws. But still they did not pay. So MFP issued a statutory demand against each of them and then bankruptcy petitions.

The Shaws applied to court to have the statutory demands/petitions set aside. But initially this was refused by a district judge. So they appealed.

The Shaws said they had paid all undisputed sums due to MFP, and they had a cross-claim which equalled or exceeded the amounts being claimed by MFP. 

One of the reasons the district judge who initially heard the application to set aside the statutory demands refused to do so was because he was of the view that the Shaws could pay, but were simply refusing to do so. Therefore paying the amount of the adjudicator’s decision would not prevent them from pursuing the dispute through arbitration. 

On appeal, the judge found that the district judge was wrong to take into account the ability of the Shaws to pay, in light of a recent development in the law.

The appeal judge considered the Shaws’ cross claim, in order to decide whether or not the statutory demands should be set aside. 

MFP had argued that adjudication was different to other claim scenarios, and the intention of Parliament was that an adjudicator’s decision should be enforced. It was all about “pay now, litigate later.”

The judge reviewed the relevant case law.  He found that where there is an adjudicator’s decision, even if it has already been enforced by a court order through the usual TCC enforcement process, the insolvency court still has a discretion as to whether or not to allow it to be pursued by winding-up/bankruptcy proceedings.

The judge said that there was a “clear difference between enforcing an adjudicator’s decision in the TCC …. and seeking to use that decision and/or the enforcement judgment itself to found bankruptcy proceedings, even though there was a genuine and substantial cross-claim which the debtor is either actively pursuing or, for genuine reasons, has been unable to pursue thus far”. 

Put simply, the Construction Act legislation does not “trump” the insolvency legislation.  So in principle, a party can raise a cross-claim against an adjudicator’s decision under winding up/bankruptcy proceedings. But that is subject to the important caveat that it has to convince the court that it is a genuine cross-claim, and not simply an argument put up to try and avoid bankruptcy/winding-up. 

As the judge noted in the Shaw case, “….the failure to serve a withholding notice as required by Section 111 of the 1996 Act, if coupled with a failure to commence arbitration or litigation within a short compass of the adjudicator’s decision, and an asserted cross-claim not supported by convincing evidence, would justify a court in refusing to set aside a statutory demand”. To that we would add a failure to serve a cross adjudication in those circumstances to determine the true some due, in light of recent case law.

In the Shaws’ case, the judge found that the cross-claim was “genuine and substantial”, and set aside the statutory demands.  The result would have been that MFP would have paid the Shaws’ costs, which would have been substantial.

Victory House General Partner Limited v Re A Company

The second case where this issue came before the courts was the much more recent case of In the Matter of Victory House General Partner Limited v Re A Company[2]

This case, from 2018, concerned a winding-up petition that had been issued against Victory House General Partner Limited (“Victory”) for non-payment of an adjudicator’s decision against them, which had already been enforced through the TCC in the usual way. So there was judgment against Victory. But Victory did not pay. 

Rather than sending in the High Court Sheriff to seize Victory’s goods, or other such action, the creditor company chose to issue a winding-up petition.  In response, Victory issued an injunction application to have the petition struck out and in order to prevent the advertisement of the winding-up petition.

The judge made clear that because the decision of the adjudicator had been made the subject of a court order it was a judgment debt and so could not be regarded as a disputed debt. So it could be enforced immediately.  This meant that Victory could not set off against the judgment debt.  So far so good for the creditor company. 

But Victory said it had a genuine cross-claim (not set off) which exceeded the judgmnt debt.  It relied on an earlier 1999 Court of Appeal case (Re Bayoil[3]), as the basis of its contention that the winding-up petition should be struck out. The court had held in Bayoil, “The ability of a petitioning creditor to levy execution [via a court order/judgement] against the company does not entitle him to have it wound-up”.

The judge looked at the cross claim in the Victory case, and found that it was “a bone fide cross-claim on substantial grounds.”  As a result, the court dismissed the winding-up petition.

As in the above Shaw case, this would have resulted in the creditor company paying Victory’s costs.

Based on these judgments, it seems clear that the insolvency courts do not regard adjudicator’s decisions, even when they have been enforced by a court order, as being a different category of debt to other commercial debts. It will, however, always be a question of fact as to whether the court is persuaded that the cross-claim is genuine and substantial (and it must equal or exceed the judgment debt), as opposed to a sham argument set up to try and avoid the insolvency process. 

In some ways, the court’s approach to these situations could be seen as “chipping away” at the adjudication process, in that the award of an adjudicator is of little benefit if it cannot be used to obtain the monies which the adjudicator has decided should be paid.  The position is even more difficult where a court order has not already been obtained. This is because without an order, the sum owed under an adjudicator’s decision can be disputed under the insolvency rules. The message from these cases is that very careful consideration needs to be given as to whether to use the insolvency process to obtain payment relating to an adjudicator’s decision.

 [1] [2010] EWHC 9 (Ch) 

[2] [2018] EWHC 1143 (Ch)

[3] [1999] WLR 147

About the author

Stuart Thwaites

Legal Director

Stuart specialises in construction and engineering work in relation to resolving disputes and in the drafting and negotiation of contractual documentation.

Stuart Thwaites

Stuart specialises in construction and engineering work in relation to resolving disputes and in the drafting and negotiation of contractual documentation.

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