Coulson J’s recent decision in South Coast Construction Limited v Iverson Road Limited[1] provides clear guidance in respect of the interplay between the Insolvency Act 1986 and the enforcement of Adjudicator’s Decisions.

Facts

On 21 November 2016, an Adjudicator found in favour of South Coast Construction Limited (“SCC”) in adjudication proceedings commenced against Iverson Road Limited (“IRL”) for the payment of sums due pursuant to a contract incorporating the JCT Intermediate Building Contract. The Adjudicator decided that IRL was to pay SCC the sum of £861,235. IRL failed to pay this sum to SCC within the time limit imposed by the contract.

SCC made a part 24 application for summary judgment to enforce the decision of the Adjudicator. Directions were set for the exchange of documentation and submission of skeleton arguments. Two days before the date of the hearing, and having failed to lodge its skeleton argument, IRL sent a peremptory letter to the court enclosing a notice of intention to appoint an administrator dated 4 January 2017. The letter noted that the moratorium under the Insolvency Rules ran for 10 clear business days and therefore did not expire until the end of 18 January 2017 (the date of the hearing).

SCC therefore made a second application for the court’s permission to proceed with the enforcement hearing, pursuant to Rule 43(6)(b) of Schedule B1 of the Insolvency Act 1986.

Analysis and Decision

Pursuant to part 44 of Schedule B to the Insolvency Act 1986, one of the effects of issuing a notice of intention to enter into administration is that a statutory moratorium on the commencement or continuation of court proceedings against the company is created.

Proceedings can then only be commenced or continued either with the consent of the administrator or with the permission of the court. The principles as to how and when the court should exercise its discretion to grant permission to start or continue proceedings are dealt with in a number of authorities but can be grouped together under three sub-headings: general, the state of proceedings and conduct.

Coulson J referred to Nicholls LJ’s decision in In Re Atlantic Computer Systems PLC[2] and in particular that:

  • It is for the party seeking leave to make out its own case for leave to be given;
  • The prohibition under section 11(3)(c) and (d) is intended to assist the company in administration achieve the purpose for which the administration order was made;
  • The court must balance the legitimate interests of the lessor and the interest of the other creditors of the company;
  • Great importance should be given to the proprietary interests of the lessor; and
  • It will normally be a sufficient ground for the grant of lease if significant loss would be caused to the lessor by refusal, so long as no greater loss would be suffered by another party.

Another relevant factor is the state of proceedings. To address this issue, Coulson J referred to the decision in Ronelp Marine Limited v STX Offshore and Shipbuilding Co Limited[3]¸where Norris J stated that it was a “factor of significant weight” that the proceedings in that case were already “reasonably well advanced” when the application was made. Essentially, the nearer the outcome of proceedings, the greater weight is to be attached to that factor.

Finally, considerations of conduct were important. Coulson J referred to two decisions in X-fab Semiconductor Foundaries AG v Plessy Semiconductors Limited[4] and Re Cornercare Limited[5] respectively. Three issues should be taken into consideration: namely, whether the company had been placed into administration in a timely manner and whether the notice of intention had been notified to the receiving party and, whether there was any abuse of process.

In the current case, Coulson J took a dim view of the actions of IRL in failing to advise both SCC and the court of the existence of the notice of intention that had been issued until two days before the enforcement hearing. He also noted that he could see no evidence that the purpose of the moratorium, namely to provide assistance to any administrators, would be jeopardised if the court granted permission to continue the proceedings. In applying the decision in the Atlantic Computer Systems case, he determined that the relevant balancing exercise allowed SCC to continue with the enforcement application.

In his view, SCC had acted properly throughout and had, at considerable expense, obtained a lengthy Adjudicator’s Decision which was almost entirely in its favour on the merits of the dispute with IRL. In contrast, IRL had, in his view, behaved in a way which “should not be rewarded by the court”. Coulson J took a particularly dim view of IRL’s actions in:

  • Issuing serial notices of intention which contained no evidence about the underlying financial position of the company;
  • Issuing notices of intention without informing SCC, even after they were issued after the Adjudication Decision in SCC’s favour; and
  • Engaging in court proceedings all the way through to one clear day before the hearing itself without notifying the claimant or the court of the notice of intention or the moratorium that was in place.

IRL was accused of playing a “deliberate double game” and as such, Coulson J would have allowed SCC’s application to continue with the enforcement hearing.

Lessons

The case provided helpful guidance which should be considered when advising distressed companies in the construction sector:

  1. Weight will be given to an Adjudicator’s decision even where the paying party is in a difficult financial situation – the purpose of the HGCRA 2009 is to aid the speedy resolution of disputes for the benefit of both parties in the construction sector and the courts will be inclined to uphold and allow the enforcement of these decisions unless there are very good reasons not to do so;
  2. The courts can and will allow legal proceedings to continue during a statutory moratorium – the interests of a creditor against the interests of other creditors will be balanced by the court; and
  3. The courts will take a dim view of underhand tactics and conduct exploited by distressed companies.

This blog post was written by Holly Howarth. For further information, please contact:

Holly Howarth, solicitor, Construction

T: 0161 836 7882

E: Holly.Howarth@gateleyplc.com 

[1] [2017] EWHC 61 (TCC)

[2] [1992] CH 505

[3] [2016] EWHC 2228 Ch

[4] [2014] EWHC 3190

[5] [2010] EWHC 893 (Ch)


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.