Practical Law

This post examines the legal and practical implications of enforcing adjudicator’s decisions against parties threatening insolvency.

The TCC recently considered the applicable principles in Bernhards Sports Surfaces Ltd v Astrosoccer4u Ltd. Judgment has been given and it is in the process of being reported.

Bernhards Sports Surfaces Ltd v Astrosoccer4u Ltd

The claimant (Bernhards Sports Surfaces Ltd) obtained an adjudicator’s decision against the defendant (Astrosoccer4u Ltd) for payment of a notified sum against which no pay less notice had been issued.

The defendant refused to pay, so the claimant commenced proceedings in the TCC to enforce the decision. Shortly afterwards, the defendant conceded to the claimant, through their respective directors, that the claims for the adjudication sums were owed and undisputed. The defendant alleged a counterclaim. Then:

• 21 days before the enforcement hearing, the defendant’s solicitors issued an ultimatum to the claimant’s solicitors to mediate, failing which the defendant would enter insolvency prior to the enforcement hearing. Further correspondence ensued from the defendant’s solicitors.
• 18 days before the enforcement hearing, the defendant issued in draft a notice of intention to appoint an administrator (NOI).
• 7 days before the enforcement hearing, the defendant issued and filed a NOI with the Companies Court.

The NOI put an interim moratorium on the enforcement proceedings pursuant to paragraphs 44(4) and 44(5) of Schedule B1 of the Insolvency Act 1986. As a result, that moratorium would continue until the administrator’s appointment took effect or for ten business days beginning with the date on which the NOI was filed.

Because of the moratorium, the claimant required the court’s permission (under rule 43(6)(b) of the Insolvency Act 1986) to continue the enforcement proceedings. The claimant applied for this to be heard concurrently with the enforcement application.

Shortly prior to the hearing, the defendant entered into a number of transactions regarding the structure, assets and interests of the defendant company. These included a:

• Legal mortgage entered into with a related company, ultimately owned and controlled by the same directors as the defendant. A legal mortgage would ordinarily be entered into to procure lending to allow the company to continue trading and maintain its solvent status. Yet, the next day the defendant filed the NOI. The implication was that the defendant had received no financial benefit from the transaction, and had sought to secure preferential interests in the defendant’s assets with the related company.
• Change in the controlling interests and controlling parties of the defendant.
• Change in the defendant’s registered address.

The application for permission to continue

At the time of the hearing, the defendant had not filed the NOI with Companies House. The NOI contained no board minutes of the decision to file it. Also, the defendant was still trading through its website, without reference to any alleged insolvency or NOI.

In deciding whether to grant the application for permission to continue, the court considered the relevant principles in Re Atlantic Computer Systems plc, which were considered by Coulson J in South Coast Construction Ltd v Iverson Road Ltd. In summary:

• It is for the party seeking permission to continue the proceedings to prove the case for doing so.
• The statutory moratorium is intended to assist the company, under management of the administrator, to achieve the purpose for which the administration order was made.
• The court must carry out a balancing exercise between the claimant’s legitimate interests and the legitimate interests of other creditors. Great weight is normally given to proprietary interests.
• It will normally be sufficient for permission to be granted if significant loss would be caused to the claimant by a refusal. For this purpose, loss comprises any kind of financial loss (direct or indirect), including loss by reason of delay, and may extend to loss that is not financial.
• If substantially greater loss would be caused to others by the grant of permission, or loss that is out of all proportion to the benefit which it would confer on the claimant, that may outweigh the loss to the claimant of a refusal to grant permission.

The court is astute to preventing a debtor from “playing fast and loose” with the claimant and the court, and of potential abuse of process by a debtor. The circumstances of the NOI and the parties’ conduct are relevant.

The nature and status of adjudicators’ decisions is also relevant. Enforcement proceedings are an advanced stage of the adjudication process. Ordinarily, they are concerned with considering the enforceability of an adjudicator’s decision that is otherwise binding under the construction contract and/or pursuant to statute.

In Bernhards, the court was satisfied that the service of the NOI was without merit and was simply an attempt to avoid payment of the adjudicator’s decision. Consequently, it granted the application for permission to continue.

Adjudication enforcement hearing

Having granted permission to continue with the enforcement proceedings, the court also granted summary judgment to enforce the adjudicator’s decision because no pay less notice had been issued against the notified sum.

Practical tips

If a defendant threatens insolvency, the claimant needs to consider quickly and effectively whether and on what grounds it can successfully obtain summary judgment of an adjudicator’s decision in its favour.

Despite the presence of the statutory moratorium, the burden is on the party seeking to continue with the proceedings (usually the claimant) to persuade the court to do so. The nature, scope and content of the evidence will be important as to whether the application succeeds.

There are a number of legal, procedural and tactical principles involved when parties threaten insolvency. These include:

• Considering the procedural and legislative provisions that apply upon actual or threatened insolvency. Is there a statutory moratorium? What is the impact on the claim(s)?
• Considering whether there have been any admissions of the matters in issue? Is the claimed sum in fact undisputed?
• Obtaining up-to-date evidence of solvency. Is the defendant actually insolvent?
• Obtaining up-to-date evidence of the debtor’s recent transactions and dispositions. Is the defendant seeking to dissipate its assets? What is the purpose of the dispositions?
• Considering the wider position of the defendant, its directors and related companies. Is the defendant’s conduct and position consistent with a plea of insolvency?
• Considering the conduct of the parties. Is the defendant seeking to abuse the court’s process? What about the claimant’s conduct?
• Considering carefully communications in the lead-up to enforcement. Are the communications subject to without prejudice (or other) privilege? If so, do any of the exceptions to privilege apply, in particular (for WP privilege) unambiguous impropriety ?
• The endgame. What routes against the defendant, its directors and/or others does the claimant actually have to enforce the adjudicator’s decision? What are the practical prospects of doing so?

Whether there are proper grounds successfully to continue with proceedings against a party subject to an insolvency moratorium will depend on the facts. Each case is different. Seek specialist advice.

Look out for the judgment when it is reported.

Tom appeared for the claimant in successfully obtaining permission to continue with the proceedings and enforcing the adjudicator’s decision in the claimant’s favour.