A recent case throws open a number of issues when adjudication comes up against insolvency and financial factors.
- The case details
- Failure to pay
- Winding-up petition not an automatic defence
- Comments on responsibility
The interplay between adjudication and insolvency has produced a number of interesting decisions in the courts.
One such decision has recently been made in Alexander & Law Ltd v Coveside (21BPR) Ltd  EWHC 3949.
In that case, a question arose as to whether the existence of a winding-up petition provided a defence to a claim for summary judgement to enforce an adjudication decision.
Mr Justice Coulson held that it did not, but, on the facts of the case, having granted judgment, he stayed execution of it.
The case details
Alexander & Law (A&L) was engaged by Coveside to carry out works. The contract was signed in May 2011. By March 2013, A&L was in financial difficulties and on 25 March 2013 its contract was terminated.
There were issues between the parties relating to non-payment of certified sums, defects, delays and the validity of termination.
In June, A&L commenced and completed two separate adjudications: one for the retention monies – this failed due to termination of the contract – and one for wrongful termination – this was successful and A&L was awarded circa £200,000.
Failure to pay
Coveside failed to pay and A&L issued enforcement proceedings. Also in June 2013, a winding-up petition was presented against A&L by a third party.
The petition was supported by other companies, including Coveside.
“The judge held that courts will not consider whether a claimant is ‘actually insolvent’ on a summary judgement application”
During the enforcement proceedings, Coveside argued that the existence of the winding-up petition was an absolute defence to summary judgement, that A&L was unable to pay its debts as they fell due and that it was likely to be wound-up.
Alternatively, Coveside sought a stay of execution pending outcome of the winding-up hearing.
A&L argued that existence of a winding-up petition does not establish insolvency and therefore should not be a defence to a summary judgement application. It also said the court should not pre-empt the decision the companies court might make on the petition.
Winding-up petition not an automatic defence
The judge agreed with A&L and approved and expanded reasoning found in a previous unreported case on this point (Harwood Construction ltd v Lantrode Ltd – 24 November 2000).
He held that the existence of a winding-up petition is not an automatic defence and courts will not consider whether a claimant is ‘actually insolvent’ on a summary judgement application.
“It seems odd that non-payment by Coveside was considered to have nothing to do with payments on different projects”
In deciding whether to stay execution, the judge applied the principles laid down in Wimbledon Construction Company 2000 v Derek Vago  BLR 374, namely whether A&L would be able to repay any sums paid when repayment fell due and whether A&L’s poor financial position was due wholly or significantly due to Coveside’s failure to pay.
He concluded that there was a high risk that A&L would be unable to repay the money. This was because A&L had disputed and undisputed debts to creditors supporting the petition, it stopped trading in March 2013 and there was a large bank overdraft (larger than the amount awarded by the adjudicator).
When looking at A&L’s poor financial position, the judge took into account the timing of the non-payment and concluded that its effect was “modest” because at the time when the monies fell due, A&L had already ceased trading, debts to others had already arisen and some of the debts related to different projects.
Comments on responsibility
Although the judge stayed execution, his comments on responsibility for A&L’s poor financial position are interesting.
It is difficult to see how a failure to pay £200,000 in March did not affect A&L’s financial position; the amount could have covered some of the debts and perhaps could have prevented a winding-up petition being issued.
Further, it seems odd that non-payment by Coveside was considered to have nothing to do with payments on different projects: it is common for contractors to juggle their cashflow and use monies paid on one project to pay debts on another.
However, had a different decision been reached it may have opened the door to a new tactic being deployed in future to avoid paying up on adjudication decision.
Kasia Dickson is a legal assistant Thomas Eggar