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Don’t wind me up

In Victory House General Partner Ltd, Re A company, Morgan J dismissed a petition to wind up Victory House, the employer under a building contract with RGB P&C Ltd, following its failure to pay a sum due to RGB pursuant to an adjudicator’s decision.

The case is the most recent of a number of authorities that make clear that it will only be in relatively rare circumstances that the presentation of a winding up petition will represent the most appropriate way to enforce an adjudicator’s decision.

The legal background

By section 122(1)(f) of the Insolvency Act 1986, a company may be wound up by the court if it is “unable to pay its debts”. By section 123(1)(a) of the Act, a company will be deemed unable to pay its debts if a debt is not paid for three weeks following a creditor presenting a statutory demand.

The court will dismiss a winding up petition if the debt is bona fide disputed on substantial grounds: see, for example, Mann v Goldstein [1968] WLR 1091. Further, it was held by the Court of Appeal in Re Bayoil SA that, even where the debt is undisputed, the petition will be dismissed if the debtor has “a genuine and serious cross-claim” exceeding the amount of the debt, unless there are special circumstances which would make that course inappropriate.

A number of decided cases in both the Chancery division and TCC have made clear that the use of a winding up petition as a means of enforcement of an adjudicator’s decision will only rarely be appropriate where a cross-claim is asserted. For example, in Parke v The Fenton Gretton Partnership [2001] CILL 1712, HHJ Boggis QC rejected a submission to the effect that the scheme of the Construction Act 1996 (and in particular the “pay now, argue later” philosophy underpinning it) in itself constituted “special circumstances” telling against the dismissal of a winding up petition:

“I do not accept the scheme of the 1996 Act is that an adjudication can be pursued to bankruptcy no matter the underlying state of account. The court would be required to close its eyes to the overall position, which in the context of bankruptcy is in my judgment wrong in principle.”

Some years later, in Shaw v MFP Foundations & Piling Ltd, HHJ Stephen Davies, sitting as a judge of the High Court, said:

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

For its part, an early indication of the attitude of the TCC can be found in the judgment of Coulson J (as he then was) in Harlow & Milner Ltd v Teasdale:

“It is important that all parties to adjudication realise that, save in exceptional circumstances, the most efficient way of enforcing the adjudicator’s decision is by enforcement proceedings in the TCC. Other ways of enforcing such decisions (such as, for instance, bankruptcy proceedings) are something of a blunt instrument and raise potential issues which have little or nothing to do with the decision which is at the heart of any enforcement application. Ordinarily, therefore, the issue of a statutory demand will not be the appropriate means of enforcing an adjudicator’s decision.”

The facts of Victory House

RGB was appointed by Victory House as the building contractor under a design and build contract concerning the development and conversion of an office building at Victory House, Leicester Square, London. A dispute arose concerning RGB’s interim application for payment 30 (IA 30). The dispute was referred to adjudication, and the adjudicator decided that Victory House was liable to pay the sum RGB had applied for. RGB applied to enforce the decision and obtained judgment. Victory House did not pay the judgment sum, but did make a substantial on-account payment.

RGB then made a further application for payment, which led to a second adjudication concerning the value of its work to date (including the work covered by the previous application). The adjudicator concluded that the value of RGB’s work was less than the value of the payments Victory House had already made (including the sum paid on account), and that the sum due on that application was therefore nil. While the adjudicator did not say so expressly, it was implicit in his decision that a sum was due to be paid by RGB to Victory House.

Against that background, RGB presented a petition to wind up Victory House on the ground of its non-payment of the judgment sum. Victory House applied to strike it out.

The decision in Victory House

Applying the test set out in Re Bayoil SA, Morgan J dismissed the petition, holding that:

  • Victory House had what he described as a bona fide “nascent cross-claim” on substantial grounds, in the sense that if Victory House paid RGB the judgment sum, Victory House would, as a result of the second adjudicator’s decision, immediately accrue a restitutionary right to be repaid. (In making this finding, Morgan J relied on Coulson J’s judgment in Grove Developments Ltd v S&T (UK) Ltd at paragraph 133 and following.)
  • There were no special circumstances taking this case outside the general rule. On the contrary, in circumstances where RGB had:

    “… already received a substantial sum… in excess of the correct interim payment under the terms of the contract… it would be quite wrong of the court to bring about the winding up of the employer … for its failure to pay a yet further sum.”

Morgan J concluded his judgment in the following terms:

“It may appear to be a strong thing to say that the employer, having failed to comply with a judgment against it, should nonetheless escape the consequences involved in a winding-up, but it seems to me that this is the very thing which was considered to be appropriate in the Bayoil case and, on the facts of this case, I also consider that it is a more just result than the alternative contended for by the petitioner.”

Discussion

Two points of interest arise from this decision.

Firstly, what Morgan J described as Victory House’s “nascent cross-claim” did not, on analysis, amount to what would ordinarily be thought of as a claim.

In substance, the “claim” amounted to the benefit of an adjudicator’s decision as to the true value of RGB’s work, which could potentially (but had not at the date of the presentation of the petition) generate a right to repayment. It was not a free-standing right capable of being claimed against RGB independently of the debt of the kind asserted by the debtor in Bayoil. (Indeed, it might be argued that the concept of a future right to be repaid a sum that has not yet been paid is circular, and better characterised as a defence to a claim for payment, rather than as a claim or cross-claim).

Therefore, the decision in Victory House can be said to broaden the scope of what constitutes a “cross-claim” for the purposes of the test in Bayoil, and to that extent represents new law.

Second, Victory House confirms that the presentation of a winding up petition will rarely be an appropriate mechanism by which to enforce an adjudicator’s decision where a cross-claim is or may be asserted. This is the position not only, as in Harlow & Milner Ltd v Teasdale, where a statutory demand was issued in preference to the use of the TCC enforcement procedure, but also where (as in Victory House) the decision has been enforced in the TCC and a money judgment obtained.

The principled justification for the courts’ stance on this issue has not yet been fully articulated in the case law. However, it can convincingly be argued that the “all or nothing” nature of winding up proceedings has the potential to subvert the “pay now, argue later” policy underpinning the Construction Act 1996, in the sense that being wound up is likely to deprive the company of its right to “argue later”. As Nourse LJ said in Re Bayoil SA:

“… an order that a company be wound up… is often a death knell.”

This point cannot be made about other modes of enforcing a money judgment that do not involve insolvency proceedings (such as writs and warrants of control, third party debt orders, charging orders and so on), each of which is apt to obtain payment without (necessarily) threatening the continued existence of the debtor company.

It should also be borne in mind that the insolvency regime has a number of important practical disadvantages for the creditor when compared with these other modes of enforcement, including that:

  • The enforcing party will be one of possibly very many unsecured creditors with a claim on the debtor’s assets. There is no guarantee that the amount of the debt will be recovered: on the contrary, the amount recovered will often be only a tiny fraction of what was owed.
  • There is often significant delay (that may be measured in months or years) between a debtor entering into liquidation and the making of any payment to the creditors by the liquidator.

Parties seeking to obtain payment pursuant to an adjudicator’s decision (whether before or after obtaining a money judgment in the TCC) would therefore be well-advised to give careful consideration to the full range of enforcement options before choosing to make use of the winding up procedure.

 

Keating Chambers Harry Smith

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