Parties wishing to resist the enforcement of an adjudication decision on the grounds of insolvency usually need to show that the claiming party will not be in a position to repay the amount of the decision if required to do so in later court or arbitration proceedings. Two recent cases in the TCC have, however, shown that different considerations can apply in the less typical circumstances of a members’ voluntary liquidation and a creditors voluntary arrangement.
Maguire & Co v Mar City Developments
In Maguire & Co v Mar City Developments an adjudicator ordered payment to Maguire. Mar City sought a stay of the enforcement process due to Maguire’s pending proposal for a members’ voluntary liquidation (“MVL”). Mr Maguire was planning on retiring and winding up his business by putting it into a MVL.
Under an MVL, all creditors of the company are paid in full once the directors make a statutory declaration of solvency. Maguire’s accountants had prepared a financial report indicating it was solvent. However, MCD argued that the report was flawed and that Maguire would not be able to repay the amount awarded by the adjudicator if the decision was enforced but subsequently reversed on final determination.
The onus was said to be on MCD to prove Maguire would be unable to repay the amount of the adjudication decision. The court said that it should start from the proposition that the conclusion in Maguire’s accountant’s report that Maguire was solvent should be accepted unless there was anything on its face which indicated it may be incorrect (which the court did not find).
The court therefore granted summary judgment for the full amount owed to Maguire. However, it also granted a partial stay in relation to just under half of the amount owed, as Maguire had not actually entered into an MVL and other creditors or expenses could appear that were not already taken into account in the report. Accordingly, in noting the unusual circumstances, the court took a cautious approach that recognised that there was a risk of later insolvency.
Westshield Limited v Mr David and Mrs Lisa Whitehouse
In Westshield Limited v Whitehouse, Westshield entered into a company voluntary arrangement (“CVA”) while carrying out construction works at the Whitehouse’s residence, which involved the appointment of Supervisors to administer its terms. As well as other standard provisions, the CVA documentation stated that before the CVA was approved any mutual credits, mutual debts or other mutual dealings between Westshield, and any person claiming to be a creditor of Westshield, would be taken into account by the Supervisor and the sums due from one party would be set off against the sums due from the other.
A dispute arose over what was owed between the parties. An adjudicator ordered that Mr and Mrs Whitehouse should pay Westshield for work done. After the adjudication, Mr and Mrs Whitehouse made a counter-claim for defective work to the Supervisor by way of a creditor claim form, effectively launching their claim as a creditor under the CVA.
The court dismissed an application by Westshield for enforcement of the adjudicator’s decision. It held that Mr and Mrs Whitehouse had advanced a counterclaim in Westshield’s CVA (albeit late in the day), which was liable to be set-off against the debt owed to Westshield by Mr and Mrs Whitehouse (i.e. under the adjudication decision). Mr and Mrs Whitehouse were considered to be creditors and therefore the adjudicator’s decision would not be enforced, as it was for the Supervisors to consider set-off under the terms of the CVA.
The courts will generally strive to enforce adjudication decisions. Parties seeking to avoid enforcement on insolvency grounds will usually need to prove that the claimant will not be able to repay the amount awarded by the adjudicator if required to do so in subsequent court or arbitration proceedings. These two cases show, however, that in certain special circumstances something less may suffice:
- The court may stay enforcement proceedings until the conclusion of an MVL or other insolvency process if there is a risk of not being able to be repay the amount that the adjudicator ordered should be paid.
- Where CVAs are concerned, specific arrangements as to set-off made in the CVA documentation are likely to take precedence over the enforcement of an adjudication decision.
References: Maguire & Co v Mar City Developments  EWHC 3503 (TCC); Westshield Ltd v Whitehouse & Anor  3576 EWHC (TCC)