In a judgment that is destined to become the leading case on the topic, Coulson J has restated the law on the relationship between adjudication enforcement and insolvency, and held that the existence of a winding up petition is not a defence to summary judgment.
Alexander & Law v Coveside (21BPR) Ltd
The issue arose in this way.
A&L had traded successfully for twenty years as a building contractor. In May 2011, it entered into a contract with Coveside, a property developer incorporated, as its names suggests, for the specific purpose of developing 21 Buckingham Palace Road.
Coveside terminated the contract in March 2013. By that stage, A&L contended that Coveside had wrongfully withheld monies under a number of claims and that its cashflow had been affected to such an extent that it was unable to continue trading.
In June 2013, A&L referred to adjudication the question of the validity of the termination and the withholding of some monies. The adjudicator decided that the termination was a wrongful repudiatory breach of contract, which had been accepted by A&L. He further decided that Coveside should pay a sum of £200,000 odd for an amount certified but not paid, retention monies and interest.
The winding up petition
Coveside failed to make payment in accordance with the adjudicator’s decision. A&L therefore issued proceedings seeking to enforce that decision by way of summary judgment. By that stage, a third party has issued a winding up petition against A&L, supported by a number of apparent creditors including Coveside. Although many of the debts (including Coveside’s) were disputed, on its face the petition was valid. Coveside argued that the existence of the winding up petition was an absolute defence to summary judgment.
A&L argued that the court should maintain a clear line as to what matters constitute a defence to summary judgment and what matters go to a cross application for a stay. It argued that the existence of a winding up petition:
- Should not be a defence to summary judgment. Only actual insolvency should be a defence to summary judgment.
- Does not of itself establish insolvency. That will be a matter for the court hearing the petition.
- Does not enable a defendant to invite the court to consider whether, on the facts, the claimant was insolvent. The court should not pre-empt the Companies Court’s decision by forming its own view on the likely outcome of the petition. To do so would bypass the Wimbledon v Vago test (actual insolvency would be a defence, not the first stage of a test seeking to hold the balance between the parties). If summary judgment could be resisted, it would be irrelevant whether the defendant had caused the insolvency.
This was the first case since the short, unreported decision of HHJ Seymour QC in Harwood Construction Ltd v Lantrode Ltd (24 November 2000) that the TCC was invited to rule on the point.
Coulson J’s judgment
In a careful judgment, Coulson J agreed with A&L. Approving and expanding on the reasoning in Harwood, he held that:
- The existence of a winding up petition is not an automatic defence to an application for summary judgment.
- A court will not consider whether a claimant is “actually insolvent” on a summary judgment application.
- Issues of insolvency are properly considered on a cross-application for a stay of enforcement under the checks and balances set out in Wimbledon v Vago.
This decision is to be welcomed. Had the court held otherwise it would have introduced a further element of uncertainty into the adjudication regime. Were the existence of a winding up petition an automatic defence to a summary judgment application, it would provide a new tactical route for defendants resisting payment. If the petition allowed defendants to invite the court to consider “actual solvency”, it would undermine the balance achieved in the Wimbledon v Vago test, thereby increasing cost and uncertainty.
Insolvent companies and Wimbledon v Vago
This case highlights a difficulty that insolvent companies seeking to enforce an adjudicator’s decision may face under the Wimbledon v Vago test.
A&L contended that it had ceased trading due to the financial impact of Coveside’s failure to pay sums due. However, the adjudication was only in respect of some of those non-payments. The disputes as to the other non-payments remained to be determined. Some of those disputes were for vastly greater amounts.
A&L was therefore unable to satisfy Coulson J that its financial predicament was caused wholly or in significant part by the non-payment of monies that were the subject of the adjudicator’s decision. Coulson J held that this was vital (following his own decision in Pilon Ltd v Breyer Group) and granted a stay.
In the present case, Coulson J held that the evidence did not clearly establish that A&L’s financial difficulties were solely due to this contract. However, what if they were? Unless all the claims for non-payment had been the subject of the adjudicator’s decision, the answer would have been the same. The insolvency could not be proved to be caused wholly or in significant part by non-payment of the claims adjudicated upon.
This decision highlights serious practical difficulties for companies alleging a number of non-payments or breaches. What can a company in that situation do?
- It may not be able to include all claims within one adjudication as not all may be considered part of one dispute. Will it have to choose which dispute to adjudicate first, depending on its value?
- Can it, in any event, safely commence a series of adjudications as the response to seeking enforcement of each decision would be that the financial position has not been caused by that breach alone?
- Will a company raising one claim for non-payment find itself faced with multiple tactical disputes in order to prevent any decision in respect of one being enforced?
These are issues that the court will clearly need to revisit if the adjudication regime is to provide claiming parties with the cash flow that they need.
Isabel appeared for A&L in the enforcement proceedings.