Alexander & Law Ltd v Coveside (21BPR) Ltd

INTRODUCTION

This is an application by the claimant, Alexander & Law Limited (“A&L”) for summary judgment to enforce an adjudication decision dated 14 August 2013. The application is resisted by the defendant, Coveside (21BPR) Limited (“Coveside”), who alternatively seek a stay of execution of any judgment that may be ordered. At root, the disputes between the parties concern the relevance, or otherwise, of the ongoing winding-up proceedings against A&L which remain to be decided.

The documents for these applications filled four lever-arch files. There were a total of nine witness statements, including two served the day before the hearing. The hearing has itself been adjourned twice because of the late service of evidence. Although listed for three hours, the hearing actually took almost twice that long, and this judgment had to be reserved. Whilst none of that should be taken as a criticism of counsel, who were clear and concise throughout, I consider that it is unsatisfactory that such a wealth of material was before the court on what were, essentially, relatively straightforward applications.

BACKGROUND

A&L have carried out business as a building contractor for about 20 years. They were engaged by Coveside, a special purpose vehicle, to carry out extensive works at their development at 21, Buckingham Palace Road. The contract was dated 17 May 2011 and, on 22 February 2012, was varied to include works at neighbouring properties.

It appears that, by March 2013 at the latest, A&L were in financial difficulties. On 25 March 2013, Coveside terminated their contract. A&L ceased trading not later than that date, and possibly before. There are issues between the parties as to non-payment of certified sums, defects, delays, and the validity (or otherwise) of the termination. As we shall see, the relevant adjudication concerned only a very limited part of these disputes.

A&L did not apply for an administration order. Instead, in May 2013, a sister company was set up, called A&L Construction Limited. Whilst Mr Snape, a Director of both companies who has served four witness statements in these proceedings, says that this new company has been set up to do different work, it is difficult to avoid the obvious inference that A&L Construction Limited has been created with an eye on them taking over the business hitherto carried out by A&L, but without any of their significant debts.

On 26 June 2013, a Winding-Up Petition was presented in relation to A&L. The petition was presented by Profixed Interiors Limited in relation to a debt of £36,219.17 which did not arise out of, or in connection with, the work at the property. The Petition was supported by eight further companies, including Coveside. Coveside put the debt to them at £471,000, which gives an indication of the size and the range of the wider disputes between the parties.

The other supporting creditors included:

Unhappily the winding-up proceedings remain unresolved; indeed, the final hearing in those proceedings has been adjourned at least twice. One reason for the delay was the need for a validation order to permit A&L, whose bank accounts have otherwise been frozen, to pay or to be paid monies owing. Another reason is that A&L have apparently told the Registrar that, once these summary judgment proceedings have been resolved in their favour; there will money to pay off these creditors, such that the Petition will be refused. It would seem that, as a result of the delays, Profixed are now keen to withdraw the Petition. The inference from all the evidence is that Mr Snape has persuaded them that it is better to wait and see what happens to this application than to try and wind up A&L and risk getting nothing.

At the same time as the ongoing winding-up proceedings, A&L have commenced and completed two separate adjudications. The first, which was a claim for retention monies, failed as a consequence of the termination of the contract. The second, referred to Mr Robert Sliwinski on 26 June 2013, claimed that the termination was wrongful and that, as a result, considerable sums were owing to A&L. Mr Sliwinski produced a lengthy decision, running to 71 pages, on 14 August 2013. He concluded that Coveside’s termination was invalid. However, it is plain that he was far from comfortable with that conclusion, saying at paragraph 126:

“Having found that the termination was invalid I feel that it was necessary to say that this was not an easy decision to make and had the evidence supported Coveside’s views as set out in the Architect’s letters, I would have accepted that the notice of termination was valid. Unfortunately for Coveside when the available evidence is looked at many of the views expressed by the Architect are incorrect and needed to have been explored in far more detail. In order that termination can be effective, good evidence of the reasons/events relied on will need to be provided. Coveside were unable to satisfy me that the various letters and notices relied on were based on evidence as opposed to opinions and which in many cases were unsupported. This is not to say that the views expressed were not genuinely held and I level no criticism of Coveside or their design team by these comments. I do accept that the pressure of trying to get a project completed can and does lead to difficulties between the parties and occasionally entrenched views which it is very difficult to step away from.”

In consequence of his conclusions as to the termination, Mr Sliwinski concluded that certain sums were due to A&L in the total amount of £197,690.70 plus interest of £4,230.04. It is right to note that the bulk of this money arose out of the March 2013 certificate which had not been paid, and the rest was made up of unpaid retentions, although the adjudicator was properly aware of the jurisdictional difficulties that might operate if he attempted to address the decision in the first adjudication. Thus these retention monies were not those that were the subject of that first adjudication.

Adjustments are required to the figures to reflect the fact that Coveside paid the fees of both adjudicators. It would appear that, following considerable debate, the parties are agreed that the relevant sums that are the subject of the summary judgment application are:

SUMMARY JUDGMENT: GENERAL

The Usual Principles of Enforcement

The general approach of the courts to the enforcement of adjudicators’ decisions was set out in the two early judgments of Dyson J (as he then was) in Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] BLR 93 and Bouygues (UK) Ltd v Dahl-Jenson (UK) Ltd [2000] BLR 49. He reiterated that, in general terms, adjudicator’s decisions will be enforced by the court, provided that the adjudicator had the jurisdiction to reach the conclusion that he did. In the subsequent decision in the Court of Appeal in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2006] BLR 15, Chadwick LJ said that:

“…the objective which underlies the Act and the statutory scheme [for adjudication] requires the courts to respect and enforce the adjudicator’s decision unless it is plain that the question in which he is decided was not the question referred to him or the manner in which he has gone about his task is obviously unfair. It should be only in rare circumstances that the court will interfere with the decision of an adjudicator.”

It can sometimes be argued that if, as here, an adjudicator has to deal with a complex issue of fact and law, such as termination/repudiation, and plainly has reservations about his own decision, that may be a relevant factor to be taken into account by the court on enforcement. Although Mr Bowling did not argue the point orally, there was a faint suggestion of it in his skeleton argument.

For the avoidance of doubt, there can be no such ‘near miss’ theory. Once an adjudicator has decided the dispute, then, whatever his possible reservations might be as to the outcome, that is the end of the matter. Provided he had jurisdiction to reach the decision he did, and provided that he did not go about it unfairly, his decision will be enforced. Any lessening of that principle would give rise to numerous arguments about whether an adjudicator’s frank assessment of the parties’ respective cases should be a factor in favour of the party resisting enforcement. Moreover, given that, ever since Macob, errors of fact and law are not considered to be reasons to prevent enforcement then, a fortiori, a decision which contains no such errors, but which might, because of the difficulty of the issues, ultimately be wrong, must be enforced.

An Impecunious Claimant

Different principles may apply to a claimant who is seeking to enforce the decision of an adjudicator but who is, in one way or another, insolvent. Indeed, in the Court of Appeal in Bouygues [2000] BLR 522, Chadwick LJ noted that, under Rule 4.90 of the Insolvency Rules, it was not appropriate to enter judgment in favour an insolvent claimant company.

The current position as to impecunious claimants (or claimants who are alleged to be impecunious) is fully dealt with in the judgment of Edwards-Stuart J in Straw Realisations (No. 1) Ltd v Shaftsbury House (Developments) [2011] BLR 47. Having analysed the cases in some detail, he summarised the position as follows:

“89.

(1)…

(2)

If, at the date of the hearing of the application to enforce an adjudicator's decision, the successful party is in liquidation, then the adjudicator's decision will not be enforced by way of summary judgment: see Bouygues v Dahl Jensen and Melville Dundas. The same result follows if a party is the subject of the appointment of administrative receivers: see Melville Dundas.

(3)

For the same reasons, I consider that if a party is in administration and a notice of distribution has been given, an adjudicator's decision will not be enforced.

(4)

If a party is in administration, but no notice of distribution has been given, an adjudicator's decision which has not become final will not be enforced by way of summary judgment. In my view, this follows from the decision in Melville Dundas as well as being consistent with the reasoning in Integrated Building Services v PIHL.

(5)

If the circumstances are as in paragraph (4) above but the adjudicator's decision has, by agreement of the parties or operation of the contract, become final, the decision may be enforced by way of summary judgment (subject to the imposition of a stay). I reach this conclusion because I do not consider that the reasoning of the majority in Melville Dundas extends to this situation.

(6)

There is no rule of English law that the fact that a party is on the verge of insolvency ("vergens ad inopiam") triggers the operation of bankruptcy set-off: see Melville Dundas, per Lord Hope at paragraph 33. However, the law in Scotland appears to be different on this point (perhaps because the Scottish courts do not enjoy the power to grant a stay in such circumstances).

(7)

If a party is insolvent in a real sense, or its financial circumstances are such that if an adjudicator's decision is complied with the paying party is unlikely to recover its money, or at least a substantial part of it, the court may grant summary judgment but stay the enforcement of that judgment.

90.

In relation to point (7) above, the factors affecting the discretion of the court when considering whether or not to grant a stay where it appears that the successful party would be unable to repay an award if it was subsequently held to be wrong are clearly set out in the judgments of Coulson J in Wimbledon Construction Ltd v Derek Vago [2005] BLR 374, Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC) and Pilon Ltd v Breyer [2010] BLR 452 - the last two involving a Company or Creditor's Voluntary Arrangement. Broadly speaking, Coulson J said that where a party is in insolvent liquidation or there is no dispute on the evidence that it is insolvent (or unlikely to be able to repay the sum awarded by the adjudicator), a stay of execution will usually be granted unless either that party's financial situation was the same or similar to its financial situation at the time when the relevant contract was made or its insolvency is due, either wholly or in significant part, to the other party's failure to pay the sums awarded by the adjudicator (this is just a broad summary in my own words for convenience: where the point arises reference should be made to Coulson J's judgments).”

Edwards-Stuart J does not deal with the precise situation which applies here, namely where there is a winding-up petition but no order has yet been made in those proceedings. Counsel’s researches identified just one case on that point, the unreported decision of HHJ Seymour QC in Harwood Construction Ltd v Lantrode Ltd, on 24 November 2000. In that case there was a hearing on the winding-up petition some two weeks after the application to enforce the adjudicator’s decision. Judge Seymour was unable to say whether or not the winding-up petition would fail or succeed, so he entered judgment on behalf of the claimant, but granted a stay until after the winding-up petition had been dealt with. If the winding-up order was made then the stay would continue but if the petition was dismissed then the stay would also come to an end.

SUMMARY JUDGMENT: ANALYSIS

Mr Bowling’s principal submission was that A&L were insolvent within the meaning of Section 123 of the Insolvency Act 1986 both because of the existence of an unsatisfied judgment in favour of South East Carpentry, and because the evidence demonstrated that they were unable to pay their debts as they fell due.

He advanced three arguments to make good his case that A&L were unable to pay their debts as they fell due. First, he said that the list of supporting creditors whose debts were undisputed amounted to £193, 838.28, which was more than the amount of any summary judgment (excluding VAT) to be paid by Coveside. Secondly, he pointed to the fact that there were other creditors (Zenith, Stack and Contour) whose disputed debts amounted to another £90,000 odd. Although those debts were disputed, he pointed out that the court knew nothing about those disputes and should take them into account in concluding that A&L could not pay their debts. Thirdly, he pointed to the fact that A&L had an overdraft of £260,000 and that the reality was that any money recovered from Coveside would go to reduce that overdraft and not pay off the creditors at all.

Accordingly, Mr Bowling submitted that A&L were likely to be wound-up next month at the adjourned hearing. He said that the problem with that is that, pursuant to Section 129(2) of the Insolvency Act, the insolvency would then relate back to the presentation of the petition on 22 June which predated the adjudication and this enforcement application. Because of the relation back, he said, my comments in Hart v Fiddler [2007] BLR 30, about not giving judgment in favour of companies that were already insolvent, was relevant.

In my view, the fundamental difficulty with this proposition is that it requires me to reach a decision, in advance of the hearing of the Winding-Up Petition, as to whether or not that Petition will be successful. That is unsatisfactory for a number of reasons. First, it runs the risk that this court will pre-empt the decision of the Registrar. Secondly, it assumes that both Profixed and the supporting creditors will maintain their claims, and in these amounts, against A&L. There is no guarantee of that. Indeed, on the contrary, I note that Profixed have indicated that they no longer wish to pursue the petition (doubtless because Mr Snape has told them that they have a better chance of recovering money if they support A&L in this present application instead) and South Eastern Carpentry have apparently agreed a reduction in the amount due to about £105,000 (although I note that this is only said to be an agreement in principle and there is no agreement on the critical point as to the timing of any payments made).

Thirdly, picking up a point made by Ms Hitching, I would be concerned if defending parties thought that the existence of a Winding-Up Petition against the claimant might provide them with another way of avoiding paying up on an adjudicator’s decision. Although I think she was probably exaggerating when she said that Mr Bowling’s approach could lead to a large number of tactical Winding-Up Petitions, I think she was right to say that the two proceedings ought to be kept very separate. That was, of course, precisely the approach adopted by Judge Seymour QC in Harwood v Lantrode. Although I do have a view, dealt with in the next section of this judgment, as to A&L’s ability to pay its debts, I consider that issue solely in the context of a stay of execution. I am not reaching any conclusion as to the likely outcome of the Petition next month.

In all of those circumstances, therefore, it seems to me that the existence of a Winding-Up Petition, which may or may not be successful, should not be a reason not to enter judgment to enforce the adjudicator’s decision. I therefore grant summary judgment in the sum of £180,111.39 plus interest at £695.60 and VAT at £35,176.27, a total of £215,983.26.

A STAY OF EXECUTION

The Law

The principles relating to the grant of a stay of execution, in the context of enforcement of adjudicator’s decisions, were summarised in my judgment in Wimbledon Construction Company 2000 Ltd v Derek Vago [2005] BLR 374. At paragraph 26 I said this:

“In a number of the authorities which I have cited above the point has been made that each case must turn on its own facts. Whilst I respectfully agree with that, it does seem to me that there are a number of clear principles which should always govern the exercise of the court's discretion when it is considering a stay of execution in adjudication enforcement proceedings. Those principles can be set out as follows:

(a)

Adjudication (whether pursuant to the 1996 Act or the consequential amendments to the standard forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.

(b)

In consequence, adjudicators' decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money.

(c)

In an application to stay the execution of summary judgment arising out of an Adjudicator's decision, the Court must exercise its discretion under Order 47 with considerations (a) and (b) firmly in mind (see AWG).

(d)

The probable inability of the claimant to repay the judgment sum (awarded by the Adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances within the meaning of Order 47 rule 1(1)(a) rendering it appropriate to grant a stay (see Herschell).

(e)

If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues and Rainford House).

(f)

Even if the evidence of the claimant's present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:

(i)

the claimant's financial position is the same or similar to its financial position at the time that the relevant contract was made (see Herschell); or

(ii)

The claimant's financial position is due, either wholly, or in significant part, to the defendant's failure to pay those sums which were awarded by the adjudicator (see Absolute Rentals).”

In the present case, Coveside have large claims against A&L which, if proved, would more than extinguish the amount of the judgment sum. That is the reason why they seek a stay. Furthermore, there is no issue about A&L’s financial position at the time that the contract was entered into. Thus there are only two main issues for me to decide on the stay application: is there a high risk of an inability to repay at the time when any repayment would be due to be made? And, if so, is A&L’s poor financial position due wholly or in significant part to Coveside’s failure to pay the sums found due by the adjudicator?

The Inability to Repay

There was a dispute as to the likely date for repayment. Ms Hitching suggested that the various issues between the parties would not be resolved until the end of November 2015. During the course of argument I made plain that I did not accept that. In the TCC, most cases are brought to trial within a year or so of the commencement of proceedings. Accordingly, in my view, the relevant date is the end of November 2014.

For the reasons noted below, I have concluded that there is a very high risk that A&L would not be able to repay this money to Coveside in November 2014. Indeed, I am in no real doubt that, if there was no stay in these proceedings, Coveside would never see any part of this money again. My reasons for that view are set out in greater detail below.

First, there are the undisputed debts owed to the list of creditors supporting the petition. These figures broadly equate to the judgment sum: indeed, they are about £10,000 more than the judgment sum, net of VAT. Thus, one possibility might be that, if the judgment were not stayed, these creditors would largely be paid off. But that would be that: there would be no reinvestment for the future.

Secondly, there are the disputed creditors whose claims amount to another £90,000. Of course I cannot express a view as to the likely outcome of those disputes. But given that the relevant creditors, such as Zenith and Contour, have supported the petition, it must be reasonable to assume that some part of the sums claimed are likely to be owed by A&L to these creditors. If the judgment sum has been swallowed meeting the undisputed debts, there would be nothing to pay the disputed debts if they were resolved against A&L.

Thirdly, there is the simple truth that it is only those creditors who are supporting the winding-up petition about which anything is known. Whilst it is right to say that A&L do not have to provide the court with information relating to all debtors, I accept Mr Bowling’s submission that, in these sorts of cases, there is what he called an ‘asymmetry of evidence’. Coveside only know what is in the public domain. It is a not unreasonable inference, given the sheer number of creditors, that there may be others. If there are, on the figures, there is simply no money to pay them.

Fourthly, there is the fact of the bank overdraft. That is presently in the sum of £260,000. All of the correspondence with the bank (including the email produced during the hearing) makes plain that, if there was no stay, the judgment sum would be paid into the bank account to reduce the overdraft. It would not of course, pay off the overdraft altogether. What sums were then paid out of the bank account to the other creditors, would plainly depend on the detail of any agreement with the bank. But there is no such agreement in place. So whilst Ms Hitching was right to say that the bank are continuing to support A&L, that can be no comfort to any of A&L’s creditors (which on this basis would include Coveside in the amount of the judgment sum). If the bank chose simply to cut their losses and not extend any further overdraft facilities to A&L once the judgment sum had been banked, no creditor would recover anything.

I accept at once that there has been some general discussion between A&L and the bank about the possibility of an invoice discount arrangement. As I understand it, what that means is that, when A&L send out an invoice for £100, the bank ‘buy’ that invoice for, say, £60 and then, to the extent that they recover more from the debtor, that excess is used to reduce the overdraft. But that brings me on to the fifth reason why, in my view, the evidence suggests that A&L would not be in a position to repay the judgment sum.

As I have said, A&L stopped trading no later than March 2013. They did not take an alternative option (such as applying for an administration order) which might have allowed them to continue to trade their way out of their financial difficulties. In consequence, any invoice discount scheme with the bank requires A&L to be sending out invoices to third parties, and that could only happen if A&L were trading. But A&L are not trading, and there is no cogent evidence that they could promptly start to trade profitably again. There is no evidence of any future orders or work booked; no evidence of anything other than this being a company which now no longer trades.

There is no evidence that A&L have a viable trading future. Whilst their accountants, Barnes Roffe, have produced a number of reports in this case, some of which purport to deal with the position for the future, it is clear, on a proper analysis of those reports, that the relevant information comes not from the accountants themselves, but from information provided to them by Mr Snape. Their cash-flow analysis is actually no such thing. All Barnes Roffe appear to have done, is to accept Mr Snape’s general assurance that trading would be at the same level as before, and then plugged into their calculations turnover figures from previous years. In view of the financial difficulties in which A&L now find themselves, and the absence of any trading over the last 9 months, such a bland assumption is unhelpful. As I have said, there is no hard evidence that A&L could ever start to trade again profitably (Footnote: ¹).

Sixthly, there is the existence of A&L Construction (referred to in paragraph 5 above). I have already said that the inference must be that this is a company set up with at least the possibility of trading in A&L’s place, but without any of the debt. As a matter of commonsense, given that Mr Snape has gone to the time and trouble and expense of setting up a new company with a very similar name, it is reasonable to conclude that this may be the vehicle that he sees for any future construction work. If he has to choose between a debt-ridden company and one with a very similar name without that debt, he will inevitably choose to contract through the latter.

For these reasons, I am in no doubt that A&L would not be in a position to repay the judgment sum in November 2014.

Is Coveside’s Failure To Pay The Cause (Either Wholly or in Significant Part) of A&L’s Financial Difficulty?

It is important to stress that, in undertaking this task, the court focuses on the nature and timing of the non-paying party’s default, as found by the adjudicator. In this case, there are many claims and cross-claims which have never been the subject of adjudication. Those claims and cross-claims are therefore irrelevant for this purpose. In that regard, both parties were agreed, and relied on paragraph 54 of my judgment in Pilon Ltd v Breyer Group PLC [2010] BLR 452.

In my view, Coveside are not a significant cause of A&L’s financial position, let alone the sole cause. I have concluded that any contribution that they may have made is very modest. Again, there are a number of reasons for that.

The first and main reason for this conclusion is based on the timing. In the present case, in accordance with the adjudicator’s decision, the sums that were certified and not paid arose out of a certificate due for payment in late March. As already noted, A&L have not traded since. Thus Mr Bowling’s simple point on this issue is irrefutable: the debts of the various creditors noted in the Winding-Up Petition, whether disputed or accepted, were all created before Coveside’s failure to pay on the last certificate. To put the point another way, the failure to pay the £181,000 odd (excluding VAT) towards the end of March 2013 did not cause A&L’s financial problems, because A&L were not trading at that point. Their existing debts cannot therefore be said to arise out of Coveside’s failure to pay.

Secondly, I have already noted that the Zenith and Profixed debts, which come to around £110,000, related to work carried out on entirely different sites. Given that the judgment sum would be swallowed up with paying South Eastern Carpentry and the other debtors on this project, there is no way in which the £110,000 odd owing on other projects, to other sub-contractors, could be anything to do with Coveside.

Thirdly, the principal undisputed sum owed by A&L (£126,500 odd) is to South Eastern Carpentry. That sum has been due for some time pursuant to an adjudicator’s decision. There is no evidence that the failure to pay this sum was anything to do with Coveside.

Fourthly, I note that the recent Barnes Roffe letter of 2 December 2013 suggests that, it is only the fact that A&L’s parent company are not seeking the full return of the dividends owed to them, that is allowing A&L to continue to exist; as Mr Bowling put it, A&L are ‘only as solvent as their parent company allows them to be’. That again is nothing to do with Coveside.

For these reasons, therefore, I have concluded that, whilst Coveside’s non-payment of the certified sums might have had some minor impact on the figures overall, it was not critical. To put the point another way, Coveside neither caused nor significantly contributed to the fact that A&L are not in a position to repay the judgment sum if the judgement were not stayed.

Other Matters

Finally, I should address A&L’s case on other matters. In accordance with Sir Lindsay Parkinson v Triplan [1973] 1 QB 609, it can sometimes be relevant to look at the parties’ general conduct before granting a stay. In particular, Ms Hitching had a number of complaints about Coveside’s conduct of these and the winding-up proceedings.

I do not accept those criticisms. There was no relevant non-payment by Coveside until about March 2013, just prior to termination and A&L’s cessation of trading. Coveside have undoubtedly fought these proceedings hard, but so too have A&L. Both parties have served late material; both parties have sought to have the last word; both parties have sought to use the winding-up proceedings for their own purposes. That is all a reflection of the fact that the outcome of this application is so important to them both.

It is suggested that, if Coveside do not pay this money now, they never will because they are an SPV and the properties have largely been sold. But there is simply no evidence that Coveside would not be good for the money in a year’s time. In any event, I am not persuaded that their financial position is relevant for present purposes. If Coveside’s financial position were to become an issue in the future, A&L could seek a freezing order.

SUMMARY

For the reasons set out in Sections 3 and 4 above, I grant summary judgment to A&L in the sum of £215,983.26.

For the reasons set out in Section 5 above, I stay the execution of that judgment until after the resolution of all the disputes between the parties.

I have not dealt with any consequential matters, such as costs. If those matters cannot be agreed they will have to be the subject of a further hearing.