Bankruptcy will not always follow the failure to pay an adjudicator’s award even if, as a recent case shows, the debtor has the means to do so
? A statutory demand may be set aside, even where the debtor has the means to pay ? A genuine cross-claim justifies the court in setting aside such a demand |
Where two parties are in dispute over money, for one to establish a valid legal claim against the other is a good thing. However, this is only the start – getting the other party to hand over the money is a separate issue, and one that may prove to be far more difficult.
As far as the construction industry is concerned, Part II of the Housing Grants, Construction and Regeneration Act 1996 entitles contracting parties to submit disputes to a cheap and speedy process of adjudication. The thinking behind this statutory provision is that an adjudicator’s decision (made without the detailed investigations and enquiries that litigation or arbitration would entail) is temporarily binding on the parties. It may subsequently be overturned by a judge or arbitrator but, unless and until that happens, the rule is: “Pay now, litigate later.”
Separate from the principle of adjudication, a potentially devastating weapon for creditors lurks within the rules of insolvency. Where a debt of more than £750 is outstanding (a modest threshold, given the potential consequences), the creditor may serve a statutory demand for the sum owing and, if it is not paid within three weeks, start proceedings to render the debtor bankrupt. This will surely concentrate a debtor’s mind.
How not to settle disputes
The interrelation of these procedures came under judicial scrutiny in Shaw v MFP Foundations & Piling Ltd [2010] EWHC 9 (Ch); [2010] 11 EG 122 (see p122). This concerned a contract by which the respondent building contractor undertook to carry out works to the appellants’ property costing around £168,000. After much of the work had been carried out and the appellants had paid £102,000, the project ended in tears.
The contractor left the site in acrimonious circumstances, with each party claiming that the other had repudiated the contract.
A few months later, the contractor served a notice of adjudication on the appellants, in which it sought substantial damages for repudiatory breach of contract.
The appellants refused to participate in the adjudication, arguing that they were “residential occupiers” and thus outside the scope of the 1996 Act, an argument that in subsequent legal proceedings was held to be erroneous. The adjudicator thus proceeded in the appellants’ absence and determined that they were liable to pay some £80,000 as damages to the contractor. A subsequent action in the Technology and
Claims and cross-claims
In the meantime, a consultant advising the appellants produced an evaluation of the contractor’s claim, together with a valuation of the works that had been completed. This latter figure was around £113,000, which meant that the appellants had underpaid by some £11,000. They paid this sum six months later, together with interest and costs, in an attempt to show that they had paid in full everything that was not in dispute. At the same time, the appellants started arbitration proceedings in order to ascertain the proper valuation of the final account. (The arbitrator, acting with commendable speed, produced an interim award and held that the contractor had wrongfully repudiated the contract he also dealt with the other disputed matters, but because the parties were disputing the payment of the arbitrator’s fees, this part of the award was not made available to them.)
The contractor had not been idle during this period. It had served statutory demands on the appellants for the amount that the adjudicator had decided was owing to it, following these with bankruptcy petitions.
The appellants applied to have the statutory demands set aside on the ground that they had a genuine and substantial cross-claim against the contractor that would exceed the amount owing. The district judge held that, in principle, such a cross-claim could act as a bar to insolvency proceedings (notwithstanding the “pay now” philosophy of the 1996 Act). However, he held that the question as to whether to set aside statutory demands was one for judicial discretion and that where, as here, the appellants could afford to pay the amount in question (so that the bankruptcy proceedings would not prevent them from pursuing any legitimate claims they might have at arbitration), the discretion should be exercised in favour of the creditor.
HH Judge Stephen
Having examined the discretion to set aside a statutory demand given by Part 6.5(4) of the Insolvency Rules (and considered previous cases in which those rules had been interpreted), he concluded as follows:
“in my judgment there is a clear difference between enforcing an adjudicator’s decision in the Technology and Construction Court, which itself will provide the platform for the usual panoply of enforcement proceedings, and seeking to use that decision and/or the enforcement judgment itself to found bankruptcy proceedings even where there is a genuine and substantial cross-claim that 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, that is, the pay-now litigate-later philosophy, there is nothing, in my judgment, either in the Act or in the scheme that indicates that it was intended that this should displace the position as applied to personal insolvency by r 6.5(4) of the Insolvency Rules or, for that matter, to corporate insolvency by case law.”
In effect, therefore, everything in cases such as this will turn on the judge’s view as to the genuineness of the cross-claim. If the debtor has manifestly failed to pursue a cross-claim before the adjudicator or at arbitration, only to raise it when faced with a statutory demand, that may cast doubt on its genuineness or strength.
Mistakes happen
However, where the debtor’s evidence convinces the court that it has a substantial cross-claim, the insolvency regime does not contemplate that it should be prevented from raising those matters in opposition to bankruptcy proceedings merely because it could have, or even unsuccessfully did, also raise those matters before the adjudicator.
The essence of adjudication is that it provides a speedy temporary determination in which mistakes may be made, and a bankruptcy court will therefore be aware that the adjudicator’s decision may, on close examination, turn out to be incorrect.
John Murdoch, professor emeritus, Reading University
