Shaw & Anor v MFP Foundations & Piling Ltd (Rev 1)

This is an appeal from a decision of District Judge Smith made on 30 June 2009, in which he refused to set aside statutory demands served by the respondent upon the appellants relating to a sum which an adjudicator appointed under the Housing Grants Construction and Regeneration Act 1996 (HGCRA) had awarded to them and the subject of a judgment in enforcement proceedings in the Technology and Construction Court (TCC). Although the District Judge refused permission to appeal, the appellants subsequently successfully obtained permission to appeal on 25 September 2009 on one ground, which was that:

In summary, what the appellants say is that although the District Judge, as they say rightly, decided that they were entitled in law to assert a genuine and substantial cross-claim which equalled or exceeded the amount claimed in the statutory demands, he erred in exercising his discretion not to set aside the statutory demands on the basis that because they could afford to pay that amount there was no risk of them being made bankrupt and thus being unable to pursue arbitration proceedings to have the adjudicator’s decision set aside.

The appellants were also given permission to rely on further evidence on appeal, namely the first arbitral award of Mr Anthony Bingham published on 31 July 2009.

On 16 October 2009 the respondent filed a respondent’s notice contending that

It will be apparent to those familiar with the scheme for construction adjudications established by Part II HGCRA that the cross-appeal raises the question as to whether or not a party to a relevant construction contract who has obtained an adjudicator's decision in his favour and also obtained a judgement in the TCC enforcing that decision is entitled to pursue the losing party to insolvency even where the losing party has a substantial cross-claim against the sum awarded by the adjudicator. The respondent says that the losing party should not be entitled to rely on such cross-claim; the appellants say that they should.

It is convenient to begin by setting out the relevant facts as they were put before the District Judge and as to which there was little or no substantial dispute so far as the hearing below and this appeal are concerned.

The appellants are the owners of a property known as East Lodge, Great Moreton Hall, Cheshire; the respondent is a building company. By a written contract dated 27 April 2007 made in the form of the Minor Works Contract issued by the Architects and Surveyors Institute, August 1990 edition, the respondent agreed to carry out building works to the East Lodge for a contract price of £168,253. The ‘Adviser’ appointed under the form of contract was a Mr Carter, the Architect instructed by the appellants. So far as the conditions of contract are concerned, I need refer only to clause 6, which provided for interim payments and a final (‘single’) payment upon ‘proper completion of the work and defects and when the contractor’s account is approved and certified by the Adviser’, and clause 10, which provided for disputes to be put to the Adviser in writing for his decision and if not resolved by that decision referred to arbitration. There was no contractual provision for adjudication, not surprisingly since the standard form used pre-dated the HGCRA.

Works were undertaken and the appellants made interim payments of £102,421. However by early 2008 the works were over running, the appellants were dissatisfied with progress and with the quality of some of the works, and interim certificates issued by the Adviser had not been honoured. In February 2008 the respondent left site in disputed circumstances, each party contending that the other had repudiated the contract and that they had accepted the other’s repudiation. The respondent submitted its final account valuation, which was disputed by the appellants.

On 27 August 2008 the respondent served a Notice of Adjudication on the appellants. Having referred to the contract, it stated:

I have set out the Notice of Adjudication at some length because its precise terms are relevant to a question canvassed during the course of the appeal in the light of the subsequent first arbitral award, namely the nature of the dispute referred to adjudication,

The appellants, upon advice, decided not to participate in the adjudication on the ground, subsequently held to be erroneous, that the adjudicator had no jurisdiction because the contract fell within the exception in section 106 HGCRA relating to construction contracts with residential occupiers. It appears that they were not advised to participate in the adjudication and thus to respond to the claim on the merits without prejudice to that jurisdictional objection, which undoubtedly would have been a course open to them. The adjudicator proceeded to decide the dispute and, by his decision dated 25 September 2008, decided that the respondent’s employment under the contract had been wrongly determined and that it was entitled to payment of damages in the sum of £80,954.55.

On 29 September 2008 Mr Wilson, the construction consultant then advising the appellants, wrote to the respondent's solicitors enclosing his evaluation of the respondent’s claim. This was a 25 page document which set out in some detail Mr Wilson's evaluation of the value of the works, taking into account matters such as architect’s instructions, other additional works, works the subject of provisional sums, the cost of completing incomplete works, and the cost of rectifying defective works. In summary, it valued the works at £113,619.45 which, having regard to payments already made, left a balance of £11,199.47 to pay. No payment was made by the appellants, not even the balance accepted due.

On 10 October 2008 the respondent brought proceedings in the Liverpool County Court, TCC list, to enforce the adjudicator's decision. The appellants sought to resist enforcement on the ground that the adjudicator had no jurisdiction, but that argument was rejected by the TCC Judge in Liverpool and again by Coulson J on appeal.

In the meantime, on 13 January 2009 the respondent issued and served statutory demands upon the appellants, claiming that they owed it the amount decided by the adjudicator they should pay, together with costs and judgment interest. A day earlier, on 12 January 2009, Mr Wilson on behalf of the appellants served notice of arbitration on the respondent, claiming ‘repayment of the sums due or paid in excess of the proper evaluation of the works as a result of the adjudicator's decision’. An arbitrator was appointed but the respondent took the point that the notice was premature because the appellants had not first submitted the dispute to the Adviser for his decision, as was required by the contract, and the arbitrator agreed. It appears that the appellants then sought to refer the dispute to the Adviser for his decision, but without success.

The appellants also applied to set aside the statutory demands, but this process was delayed due to various procedural mishaps which it is not necessary for me to detail and, in March 2009, the respondent issued bankruptcy petitions against the appellants. On 7 April 2009 the appellants put in witness statements in support of their application to set aside the statutory demands, referring to the history of events and setting out in some detail their case as to the termination of the contract, the defects and their valuation of what was properly due under the contract as per the Wilson evaluation, which they suggested established a cross-claim in the sum of £74,798.82. The hearing of their application to set aside the statutory demands was listed for 30 June 2009.

On 25 June 2009 the appellants paid the respondent a sum which their solicitor explained, in a subsequent witness statement, was intended to discharge the amount admitted due as per the Wilson evaluation, together with their liability for interest and costs. Some further payments were made in the days leading up to the hearing to ensure that all such undisputed sums were paid.

In the meantime, on 19 June 2009, the appellants served a second notice of arbitration, the dispute referred being the proper valuation of the final account, including eight specified issues, one being the dispute about the ‘termination of the contract’. Acting with commendable speed, Mr Bingham was appointed on 25 June 2009 and on 29 June 2009 gave directions with a view to making an initial decision about how the arbitration should proceed.

As is apparent from the transcript of the hearing with which I have been provided, two points were taken by the appellants in support of their application. The first, in respect of which the District Judge found against the appellants and in respect of which permission to appeal was refused, was an argument that the statutory demands were perplexing because of a change of name by the respondent and the failure of the statutory demands to make it clear who had issued the demands and on what basis. The second was that the appellants had paid all undisputed sums due to the respondent, and that there was a cross-claim which equalled or exceeded the amount claimed by the respondent. The appellants’ counsel referred to the Parke case (being an unreported decision of HHJ Boggis QC, sitting as a Judge of the Chancery Division in Birmingham on 2 August 2000) and submitted that this was authority for the proposition, contrary to the approach adopted by the TCC in relation to enforcing adjudicators’ decisions, that the bankruptcy court would not allow the winning party to bring insolvency proceedings against the losing party where there was a genuine cross-claim. In response, counsel for the respondent submitted first that, save in exceptional circumstances as to which there were none here, the existence of a genuine cross-claim could not prevent a party from bringing insolvency proceedings where he had the benefit of an adjudicator's decision and a judgement enforcing that decision. His second submission was that the court had a discretion whether or not to set aside a statutory demand, that here the evidence showed that the appellants were able to pay, but unwilling to do so, so that bringing insolvency proceedings would not prevent them from arbitrating the dispute already referred to adjudication, and that the court should not allow them to deliberately to disregard the previous judgment of the TCC in enforcement proceedings.

The District Judge proceeded to give an admirable ex tempore judgement. He considered the authorities referred to by the respondent’s counsel which confirmed the approach taken by the TCC, and then he considered the Parke case. He accepted that there appeared to be some tension between these decisions, but observed that there was a ‘qualitative difference between bankruptcy or other insolvency process and other mechanisms of enforcement, and that may well be that way in which the decisions can be reconciled’. He held that the decision in Parke, being a decision of a judge of the High Court directly applicable to the facts before him, was binding on him and, accordingly, he rejected the first submission by counsel for the respondent.

He then, however, went on to consider the second submission of counsel for the respondent. He recorded that it was not disputed that the appellants were able to pay the sums claimed by the respondent. He then held as follows:

On 31 July 2009 Mr Bingham published his first arbitral award. This dealt only with the issue as to whether the respondent or the appellants were entitled to treat the contract as wrongfully terminated by the other. Dealing only with a debate about whether or not the respondent was in breach in relation to the quality of the stonework windows and stonework surrounds to the patio doors, he answered that issue by deciding that it was in breach and that the appellants were entitled to treat the contract as terminated wrongly by the respondent.

I should also record that I was informed at the appeal hearing that Mr Bingham has gone on to hear the remaining matters in dispute and has advised the parties that he has signed his award on the substantive issues which may be taken up on payment of his fees. There is, however, a dispute between the parties as to the payment of his fees, which has resulted in an unfortunate situation where the award is not yet available. This is particularly unfortunate because, although there is a dispute as to the effect of the first arbitral award, it is common ground that this award on the substantive issues will be a final determination of the dispute decided on by the adjudicator and thus, pursuant to section 108(3) HGCRA and paragraph 23(2) of the Scheme for Construction Contracts, will effectively supersede the adjudicator's decision. It follows that this award is likely to be determinative of the respondent's ability to proceed with the bankruptcy petitions, irrespective of the decision on this appeal. Nonetheless, it appears that there will be costs and, possibly, other consequences arising out of this appeal which will have to be determined regardless, so that it is common ground that I must determine this appeal on the basis of what is currently before me.

It is common ground that this appeal is against the decision by the District Judge of a matter in respect of which he had a discretion, and that it is not a rehearing. As set out by Lord Woolf in AEI Rediffusion Music Ltd v. Phonographic Performance Ltd [1999] 1 WLR 1507 at 1523:

The central focus of the appellants’ appeal, summarised in paragraphs 30 and 31 of the skeleton argument which accompanied their appeal notice, was that it is wrong and contrary to established law that the court should refuse to set aside a statutory demand simply because the debtor appears to have the means to pay. They placed particular reliance upon a decision of the Court of Appeal, given on 17 June 2009, and to which District Judge Smith was not referred, in the case of Remblance v Octagon Assets Ltd [2009] EWCA Civ 581.

In Remblance the facts were that the creditor had served a statutory demand upon the debtor as guarantor for rent due from his company, which it had covenanted to pay ‘without deduction or set off’. The debtor’s company had a counterclaim for damages for breach of covenant of quiet enjoyment, which it was pursuing in the county court. It was common ground that if the creditor had served a statutory demand upon the company, it would have been able successfully to apply to set it aside on the ground that, pursuant to rule 6.5(4)(a) of the Insolvency Rules 1986, it appeared to have a counterclaim equalling or exceeding the amount of the debt specified in the statutory demand. Equally, however, it was common ground that the appellant as guarantor was unable to set up that counterclaim, with the result that he could not bring himself within that sub-rule. He argued, however, that he was entitled to bring himself within the residual ground provided for by sub-rule 6.5(4(d), where the court is entitled to set aside the statutory demand if it is satisfied, on other grounds (i.e. on grounds other than those appearing in sub rules (a)-(c) inclusive), that the demand ought to be set aside. The District Judge had agreed, but her decision had been overturned on appeal by the High Court judge. He had held that he would have acceded to the appellant’s argument that it was unfair to allow the creditor to proceed to bankruptcy against the appellant as guarantor when it could not have proceeded to wind up against the company as principal debtor, save for one point, which was that the appellant could pay the amount claimed, so that there was no risk that he would be made bankrupt in respect of that amount. Dyson and Ward LJJ allowed the appeal; Mummery LJ would have dismissed the appeal.

Dyson LJ said in paragraphs 44 and 45 of his judgment:

Accordingly, in paragraph 48, Dyson LJ concluded that the judge was wrong to consider that the fact that the appellant had the means to pay the debt was an important factor which militated against setting aside the statutory demand. He added:

In this case, it is clear from the argument and from the decision of District Judge Smith to which I have already referred that the decisive or principal reason which he gave for exercising his discretion not to set aside the statutory demand was that he was satisfied that the appellants were able to pay the sums due, so that there was no real risk that they would be prevented by bankruptcy from pursuing the arbitration to overturn the adjudicator's decision. In my judgment, it follows from the decision in Remblance that it was wrong as a matter of law for the District Judge to have regarded this as a decisive or a principal reason for refusing to set aside the statutory demands. Of course in fairness to District Judge Smith, he can scarcely be criticised for approaching the matter in the way that he did when he was not referred to Remblance, which had only recently been decided.

It appears from paragraph 30 of his judgement that the only other point taken into account by the District Judge was that he thought that the only consequence of setting aside the statutory demand would be that the respondent would be able to enforce the judgement obtained from the TCC by other means, and that this was not a step which the court should on the facts of this case require the respondent to have to take. However, it is clear from his decision that this was a supplementary rather than a decisive or principal reason for his decision. Furthermore, it is not immediately apparent why it would be wrong to set aside the statutory demands, so as to prevent the respondent from using bankruptcy as a means of enforcement, simply because the respondent would be entitled to seek to enforce the judgment in other ways. If the respondent here was able to enforce its judgment against the appellants by, for example, obtaining a third party debt order against funds standing to their credit in their bank account, then that is something they would be perfectly entitled to do. It does not seem to me that their ability to do so could be relevant to the exercise of the discretion whether or not to allow the respondent to seek to bankrupt them instead or as well. The point, as Ward LJ observed in Remblance, is that bankruptcy is a draconian step, especially when compared to other means of enforcement and, as Dyson LJ observed in paragraph 50 of the judgement, ‘the question whether execution of a judgement should be stayed is distinct from the question of whether a statutory demand should be set aside’.

In his submissions before me on appeal Mr Bradley for the respondent submitted that this case could be distinguished from Remblance, because the statutory demand was based on an adjudicator's decision which had already been the subject of an enforcement judgment which the court had refused to stay and where the policy of Parliament, as shown in the HGCRA, is to require adjudicator's decisions to be paid pending final determination of the dispute regardless of any cross-claim.

It does not seem to me, however, that these arguments can prevail so far as seeking to justify the decision on the basis that the District Judge did in this case. It is apparent that the District Judge did not purport to decide the case on the basis that these factors, taken together with the appellants' ability to pay, justified him in exercising its discretion against setting aside the statutory demands. To the contrary his decision was that, following the approach in Parke, a debtor was entitled to rely on cross-claims even in cases where the statutory demand was founded upon an adjudicator's decision, treated as the equivalent of a judgement.

In my judgement, therefore, the District Judge did err in a material respect, so that the appeal should be allowed on this basis, and accordingly it is necessary for this appeal court to exercise the discretion afresh. I must, therefore, to go on to consider the respondent’s cross-appeal and in the light of my conclusions about that to consider whether or not the statutory demands should be set aside.

Before the District Judge Mr Bradley submitted that as a matter of principle the court should never exercise its discretion under rule 6.5(4) to set aside a statutory demand where the creditor has a judgment in its favour enforcing an adjudicator's decision. In his skeleton argument produced for this appeal, adopted in his oral submissions before me, Mr Bradley’s submission was more nuanced, and was as follows:

Mr Bradley submitted that insofar as the decision in Parke is inconsistent with that approach then it is wrong. He referred me to, and relied upon, the subsequent decision of Ferris J. in the case of Guardi Shoes Ltd v Datum Contracts 28 October 2002 (unrep). In oral argument he also submitted that the requirements for relying on a cross-claim as stated by the Court of Appeal in Seawind Tankers Corporation v Bayoil SA [1999] 1 Lloyds Rep 211 (namely that a cross claim had to have substance, be in an amount exceeding the amount of the debt, and also one which the company had been unable to litigate) were not satisfied in this case, because the appellants had been able to raise the arguments which they now advance before the adjudicator, but had chosen not to do so.

Mr Bradley also submitted that the first arbitral award of Mr Bingham did not, on proper analysis, finally determine the dispute referred to and decided by the adjudicator and, thus, was irrelevant.

Mrs Shaw, by contrast, submitted that there was no reason to treat the case of a statutory demand founded on a judgment enforcing an adjudicator's award as any different from any other case where the debtor could show a genuine cross-claim and, thus, that the approach in Parke should be followed. She submitted that there was in law no requirement that the cross-claim had to be one which the debtor had been unable to litigate and, moreover, that even if there was in this case the District Judge had accepted that from January 2009 onwards the appellants had indeed been endeavouring to have the dispute referred to the adjudicator finally determined by arbitration. She submitted that the first arbitral award of Mr Bingham did, properly analysed, finally determine the dispute referred to the adjudicator and, on proper analysis, removed the essential foundation of the claim referred to the adjudicator and accepted by him, namely that the respondent was entitled to damages as a result of the appellants' wrongful repudiation of the contract.

I should begin by setting out Part 6.5(4) of the Insolvency Rules, which provides that on the hearing of an application to set aside a statutory demand:

Next I should refer to the Bayoil case, which was a company winding up case as opposed to a bankruptcy case. The facts were that the petitioner was a ship-owner which chartered a ship to the company. It made a claim for freight but the company asserted a counterclaim for damages for breach of the charter. Both claim and counterclaim were referred to arbitration. The arbitrators, acting in accordance with the well established common-law rule that freight must be paid free of all deductions, made a summary interim award in favour of the petitioner for its claim for freight, leaving the counterclaim to be arbitrated in the normal way. The petitioner then proceeded to seek to wind up the company and at first instance the judge, who accepted that the counterclaim was genuine and serious and, moreover, was one which it had been unable to arbitrate to a conclusion, nonetheless held that his jurisdiction was at large, and that he should exercise it in favour of making a winding up order. The Court of Appeal held that the discretion in such a case ought to be exercised in favour of the company in the absence of special circumstances. Nourse LJ also rejected the petitioner’s submission that the ‘finality and unappealability of the interim award’ was a special circumstance.

As has already been noted, Nourse LJ also held that it was a requirement in such a case that the cross claim had to be one which the company had been unable to litigate. However Mrs Shaw was able to refer me to a more recent decision of the Court of Appeal in the case of Dennis Rye Ltd v Bolsover District Council [2009] EWCA Civ 372 in which Mummery LJ, in a judgement with which Elias LJ agreed, referred to Bayoil and to two subsequent first instance decisions in the Companies Court and said this:

Mrs Shaw also pointed out that neither rule 6.5(4) nor paragraph 12.4 of the Practice Direction - Insolvency Proceedings make any reference to there being any requirement that the debtor had been unable to litigate the counterclaim, set off or cross demand.

In my judgment, it is apparent from the decision in the Dennis Rye case that even in corporate insolvency cases it is no longer a requirement that the company has been unable to litigate its counterclaim, set off or cross demand; that is something which may be a relevant circumstance in a particular case, but it is not decisive. Furthermore, I accept Mrs Shaw's submission that the law applicable to companies winding up is not necessarily applicable to personal insolvency, where the Insolvency Act 1986 and the Insolvency Rules of 1986 introduced a new code.

The approach which the TCC takes to the enforcement of adjudicators’ decisions is also not in dispute. It was succinctly summarised by Coulson J in his decision on appeal in this case, reported as [2009] EWHC 493 (TCC) as follows:

Turning next to the decision in Parke, the facts were that the creditor had obtained an adjudicator's decision against the debtor, Mr Parke, in relation to its final account claim, in circumstances where it appears that Mr Parke had received little or no notice of the adjudication. By the time the application to set aside the statutory demand was heard by the District Judge Mr Parke had already commenced proceedings in the TCC arguing that the true final account showed a balance payable in his favour, but for some reason the District Judge was not made aware of this fact. On appeal the Judge considered that this factor justified him in looking at the matter afresh, and he held that although the adjudication did create a debt which failed to be treated in the same way as a judgement or order, nonetheless Mr Parke had a valid cross claim. In response to an argument that to allow Mr Parke to rely on the cross claim would be contrary to the scheme of the 1996 Act, the Judge said that:

It appears clear, therefore, that in the Parke case the Judge was not prepared to accept the argument that the approach taken by the TCC to enforcement proceedings should also be applied to bankruptcy proceedings.

Turning then to Guardi, the facts in that case were that the company sought an injunction restraining the petitioner from advertising its winding up petition. The petition had been presented some 11 months after the works the subject of the claim were completed, in circumstances where the company had failed to serve a withholding notice as required under the HGCRA against the petitioner’s claim for payment, with the result that the petitioner obtained an adjudicator's decision in its favour, and subsequently a consent judgment in the TCC enforcing that decision. Furthermore, the company made various payments to the petitioner under the judgement. It was not until after presentation of the petition that the company first produced evidence of a counterclaim for defective work. In those circumstances, whilst Ferris J not surprisingly was unconvinced by the counterclaim, nonetheless he was prepared to accept that it was ‘not obviously without substance’. He held that it was only appropriate to restrain advertisement if the court was satisfied either that the debt asserted was disputed to the knowledge of the petitioner on substantial grounds and in good faith, or if the court could be certain that the petition was bound to be dismissed. He decided that he was satisfied on neither point, saying that ‘the whole situation is very unconvincing and to my mind smacks of an attempt to drag together sufficient grounds to get the advertisement of the petition restrained’.

He went on to refer to Bayoil and the two subsequent first instance decisions referred to in Dennis Rye and held that that the circumstances surrounding the supposed inability to litigate were of crucial importance. He observed that in the case before him the claim and alleged cross claim were closely connected, and held that in those circumstances the company's failure to serve the appropriate withholding notice, which if it had been served would have put payment into suspense until both claim and counterclaim were adjudicated upon, meant that the company had only itself to blame.

In my judgment there is no inconsistency between the decisions in Parke and in Guardi. It seems to me that in the Guardi case Ferris J was not purporting to hold that a creditor under an adjudicator's decision, with or without a TCC judgement enforcing that decision, was entitled to pursue insolvency proceedings against the debtor even where there was a genuine counterclaim, which the debtor had been unable to litigate. There is nothing in his judgment which suggests to me that he was intending to do anything other than to decide the case in front of him on its own particular facts. It seems to me that in that case he was concentrating his focus on the particular circumstances which, in his judgment, did not make it unjust for the petitioner to pursue insolvency proceedings, specifically the unconvincing nature of the company's counterclaim, its failure to serve a withholding notice and its failure to take any steps to refer the dispute to final determination in the considerable period of time from practical completion.

Furthermore, and by the same token, it does not seem to me that in the Parke case HHJ Boggis QC was purporting to hold that there was a rule which would prevent a creditor from pursuing insolvency proceedings in any such case. In my judgment he was also focusing on the particular circumstances of the case and concluding that the existence of proceedings on foot by the date of the hearing before the District Judge to assert what he was satisfied was a genuine and substantial cross claim made it unjust for the creditor to be permitted to pursue bankruptcy proceedings against Mr Parke.

It follows, in my judgment, that there is no authority, binding or persuasive, which supports either of the extreme propositions contended for by the respective parties in this case. In my judgment the bankruptcy court, when faced with an application to set aside a statutory demand in such cases, will have regard to all relevant circumstances, and will not be circumscribed in the exercise of its discretion in the manner contended for by either party.

So far as the respondent’s position is concerned, 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 judgement 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. Although the respondent places considerable emphasis on the policy behind the 1996 Act, i.e. the pay now litigate later philosophy, there is nothing in my judgment either in the Act or the Scheme which indicates that it was intended that this should displace the position as applied to personal insolvency by rule 6.5(4) of the Insolvency Rules or, for that matter, to corporate insolvency by case law. The structure of the 1996 Act is to require the contract to provide that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings or by arbitration (s.108(3) HGCRA), so that the obligation to pay the amount decided due by the adjudicator is a contractual one. That, it seems to me, is not fundamentally different from the common law rule in relation to payment of freight without deduction, which does not override the normal position in insolvency (see Bayoil), nor from the contractual ‘pay now, sue later’ clause unsuccessfully relied upon by Lloyds in Garrow v The Society of Lloyds [1999] BPIR 668. Moreover it appears that the ‘pay-as-you-go’ ethos of the Civil Procedure Rules did not prevent a debtor from relying on a cross claim in response to a statutory demand founded on a costs order: Popely v Popely [2004] BPIR 778. In both of the latter cases the decisions to that effect by the judge at first instance were upheld by the Court of Appeal.

Whilst I recognise that Mr Bradley's revised formulation of the appropriate test on appeal does give more weight to the individual circumstances of the case, and thus requires the court to be vigilant to prevent abuse of the insolvency procedure from causing injustice to the debtor by preventing him from litigating his claim, I am still not prepared to accept that the court should start from the presumption that a debtor is not entitled to rely on a substantial and genuine cross claim save where it would be oppressive to prevent him from so doing.

So far as the appellants' argument is concerned, for the reasons which I have given I am satisfied that the decision in Parke is not one which purports to lay down any general principle. It seems to me that cases involving the enforcement of adjudicator's decisions should be approached in the same way as any other case, that is by having regard to all relevant circumstances. I can well see that in some cases, such as in the Guardi case, the failure to serve a withholding notice as is 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.

In this case, it appears to me to be clear on the evidence that the appellants' cross claim is one which is both genuine and substantial, and that it equals or exceeds the amount of the statutory demand. That is not surprising, since it is the subject of an extremely detailed and comprehensive evaluation by Mr Wilson, as I have already observed.

Although in paragraph 11.6 of his written submissions on appeal Mr Bradley suggested that even on the appellants’ own case they were still indebted to the respondent in a sum greater than £750, he did not pursue that in oral submissions, nor was it pursued before the District Judge. Indeed it appears inconsistent with the evidence of the appellants put before the District Judge, which was in terms that they had paid everything which they did not dispute, and it appears from the items referred to in this subparagraph that Mr Bradley is seeking to include sums not referred to in the statutory demands, which is not permissible.

At one stage in argument I did raise the question as to whether or not the appellants' case was on true analysis a cross claim, as opposed to a combination of defence and cross claim. In many final account claims it is likely that the grounds for challenging the claim are a combination of arguments about either the extent or valuation of the work done, or the entitlement to payment for extra works (both of which would appear to be simple matters of defence), and complaints about defects and or delays (which could be matters of abatement, set off, cross claim or counterclaim). The point may be significant where the creditor has obtained a judgment enforcing the adjudicator's decision because under paragraph 12.3 of the Insolvency Practice Direction it is provided that:

This may raise an interesting issue as to the correct approach where the grounds for setting aside the statutory demand could be said to raise a genuine dispute about the merit of the claim allowed by the adjudicator as well as counterclaims, set offs or cross demands. However, it is not one which I have to deal with, because it is quite apparent that the argument before the District Judge proceeded on the undisputed basis that the Wilson evaluation provided a cross claim which, if established, would equal or exceed the claim, and Mr Bradley did not seek to submit to the contrary on appeal. It may be that paragraph 12.3 is only intended to apply to the case of judgments in cases where the debtor has had the opportunity (even if he has not taken it) of setting out the grounds for disputing the debt the subject of the statutory demand. In an enforcement action in the TCC, of course, the debtor is not permitted to defend by arguing that the adjudicator’s decision was wrong on the merits, so that the rationale behind paragraph 12.3 should not apply. A similar but connected argument would be that an enforcement judgment in the TCC is only intended to give temporary finality to the adjudicator’s award, so that again it should not be regarded in the same way as a judgment in ordinary proceedings which, subject to subsequent setting aside or appeal, is final and conclusive for all purposes.

Mr Bradley did, however, submit that it was a relevant factor that the appellants chose not to participate in the adjudication, where they could have set up the matters raised in the Wilson evaluation. I accept that it is a relevant factor, but it does not seem to me that it has any great weight in this case. Firstly it is quite apparent that the reason that they chose not to participate in the adjudication was not because they did not believe that their case on the merits lacked substance; instead it was because of advice (subsequently proved to be incorrect) that the adjudicator lacked jurisdiction. Secondly, the whole essence of adjudication is that it provides a speedy but temporary determination; as has been said on many occasions, it is implicit in the scheme that mistakes will be made and a wrong decision may be arrived at. Parliament must be intended to have contemplated that the injustice which might be caused by an unsuccessful party having to pay up under a wrong decision would be ameliorated by the opportunity to overturn the decision by subsequent litigation or arbitration. It follows, in my judgment, that where a statutory demand is founded on an adjudicator's decision, if the debtor can show that he has a substantial cross claim, the insolvency regime does not contemplate that he should be shut out from raising those matters in opposition to bankruptcy proceedings simply because he could have, or even unsuccessfully did, also raise those matters before the adjudicator.

The respondent has not sought to suggest that the appellants failed to take prompt steps to litigate or arbitrate the adjudicator's decision after it was promulgated. As is apparent from the chronology, and as the District Judge found, the appellants attempted to bring arbitral proceedings in January 2009, but were frustrated by the respondent’s reliance on the contractual dispute resolution clause. This is not intended as a criticism of the respondent, who was perfectly entitled to take this point, but it does explain the reason for the delay in commencing the arbitration proceedings in June 2009. Furthermore, the respondent has not sought to criticise the delay between receipt of the adjudicator's decision in late September 2008 and the initial attempt to arbitrate in January 2009. It is apparent from the procedural chronology that over this period the appellants had already submitted the Wilson evaluation to the respondent and were awaiting its response, and were also engaged in responding to the respondent’s commencement of enforcement proceedings in the TCC.

In any event, by the time that the application to set aside the statutory demands came on before District Judge Smith, the appellants had commenced arbitration to seek to have the adjudicator's decision finally determined.

Mr Bradley submits that it is a relevant factor that the adjudicator's decision has been the subject of a TCC judgement to enforce it, which itself has been the subject of an unsuccessful appeal to Coulson J. He also submits that it is a relevant factor that the TCC has rejected the appellants’ application for a stay of enforcement. In my judgment these factors are of little or no weight in this case. It does not seem to me that the existence of a judgment enforcing the adjudicator's decision materially affects the position where there is a genuine and substantial cross claim; not least because, as Coulson J explained in that part of his decision on appeal to which I have already referred, the grounds for opposing enforcement in such circumstances are so circumscribed and, in particular, do not permit reliance on a cross claim. By the same token, the fact that the TCC has rejected the application for a stay is not surprising, given the extremely limited circumstances in which the TCC would ever allow a stay in an adjudication enforcement case.

Mr Bradley submits that the appellants' ability to pay is a relevant factor. For the reasons given by the majority of the Court of Appeal in the Remblance case, it does not seem to me that this is a factor of any great weight. It is quite apparent, in my judgment, that the appellants assert a cross claim on substantial grounds, and take the view that because they are not truly indebted for this amount they should not have to pay it. Indeed it is also apparent, regardless of whether or not this is justified, that one reason for their unwillingness to pay is their concern that they will be unable to recover that money if - as they expect - they are successful in the arbitration. That is tied in, in this case, with the fact that there has undoubtedly been a rather curious state of affairs whereby those who control the respondent have engaged in a number of corporate name changes and other procedures which, rightly or wrongly, have understandably given the appellants cause for concern.

Accordingly, and even before any question of the subsequent first arbitral award falls to be considered, if I had been exercising my discretion on the 30 June 2009 I would unhesitatingly have exercised my discretion under rule 6.5(4) in favour of granting the application to set aside the statutory demands.

I am reinforced in my decision when I come to consider the first arbitral award. It is quite apparent, in my judgment, that the dispute which was referred to the adjudicator was the respondent’s claim for damages for what they contended was the appellants’ repudiatory breach of contract. Although Mr Bradley has valiantly attempted to argue that what, in substance, was referred to the adjudicator was the respondent's final account claim, either as an alternative to the breach of contract claim or as in effect the only claim made, I am unable to accept that submission. It is quite clear from the evidence that it would have been open to the respondent to advance a claim based, for example, upon non-payment of earlier certificates or, it would appear, on the Adviser’s certification of its final account claim. However, it is quite plain to me that this is not what it did; the wording of the Notice of Adjudication is quite clear. Although I accept that the claim for ‘damages of £86,713.24’ is qualified by the addition of the words ‘or such other sum as the adjudicator shall decide being the unpaid value of the works completed by the referring party at the date of the responding party's breach of contract’, it is apparent in my judgment that this was not intended to set up a separate final account claim, independent of the claim for damages for breach of contract. It is simply a way of saying that the claim for damages is made by reference to the unpaid value of the works as at that date, and that the respondent is inviting the adjudicator either to award the sum which they contend represents that value, or such other sum as he may decide represents that value.

In so finding, I am conscious that one should not seek to construe a notice of adjudication as if it was a statute or a carefully drafted contractual provision, but nonetheless it seems to me that its meaning is clear. Moreover, although I am also conscious that it is the notice of adjudication, read in its proper factual matrix, which identifies the dispute referred to the adjudicator, nonetheless when I refer to the subsequent Referral Notice and indeed the adjudicator's decision, they fortify me in my conclusion that what was intended to be referred was the claim for damages, and that is what the adjudicator decided.

It follows, in my judgment, that since the arbitrator in his first arbitral award decided that the appellants were not in repudiatory breach of contract, and instead it was the respondent who was in repudiatory breach of contract, that is a final determination by the arbitrator that the respondent does not have a claim for damages for repudiatory breach of contract by the appellants. It follows, in my judgment, that as from the date of publication of the first arbitral award, the decision of the adjudicator was no longer binding. I appreciate, of course, that this the respondent may still establish his entitlement to a final account claim in his favour when the substantive arbitral award is released; however that is an entirely separate matter and an entirely separate claim.

It also follows, in my judgment, that from 31 July 2009 the adjudicator's decision was no longer binding upon the appellants. It would appear to follow that the appellants would be entitled to apply to have the enforcement judgment set aside, although I did not hear argument on that point. Nonetheless, it seems to me that it could not possibly be right for the statutory demands not to be set aside in those circumstances. Although Mr Bradley submitted that this was not a point taken by the appellants on this appeal, and whilst it is true that it is not raised in terms in the appeal notice, it is quite apparent from the skeleton argument subsequently served in support of the appeal, together with the application for permission to rely upon this evidence, that the appellants were seeking to rely upon the first interim award on that basis, as they said in paragraph 19 of the skeleton, that this has overturned the adjudicator's decision.

For all of those reasons, therefore, I would allow the appeal and set aside the statutory demands.