HT-2024-BHM-000012 - [2024] EWHC 2800 (TCC)

The general principles of adjudication enforcement are not in issue between the parties and I shall not rehearse them here.

Nor do I understand there to be any difference between the parties as to the circumstances in which the court may stay enforcement of a judgment enforcing an adjudication award in circumstances where the Claimant is insolvent. In very brief summary, the onus is on the Defendant to prove that it is likely that the Claimant will be unable to repay the judgment at the time it may be required to do so and that the Claimant’s financial position has deteriorated since the contract was awarded for reasons that are not wholly or in significant part due to the Defendant’s failure to pay the sums that were the subject of the award.

It is not suggested that the Claimant’s financial position has not deteriorated since the contract was made. Mr Kerr accepted in his evidence that, before the Claimant entered into the contract, it was in a financially stronger position than it is now.

Despite the assertion by the Claimant’s solicitors in correspondence that “the reduction in shareholders’ funds was a direct result of DE1's refusal to pay sums due to CCPL under both the SFS and dry lining contracts” the point was not pursued. In any event, there was no evidence that the substantial negative balance on the balance sheet as at 31 March 2023 was caused by the Defendant’s failure to pay the debt that was the subject of the award in April 2024, being a debt of £94,921.10. Mr Kerr’s evidence was that it was the result of the insolvency of three companies who failed to pay over £2m between 2019 and 2023.

Where the parties disagree is whether the Claimant was under any obligation to provide the financial information on which it now relies before the Defendant had applied to stay enforcement if it wished to avoid any risk as to costs.

Mr Eyre submits that it has been settled law for more than a decade that the Claimant is under no obligation to provide financial information to assist a Defendant in its decision as to whether an application for a stay ought to be made. He submits that the Claimant is entitled to provide no information, wait to see what evidence in support of its application the Defendant serves, and respond to that evidence, and that it is at no risk as to costs for taking such an approach. He submits that the Defendant must take the costs risk of making an application for a stay and, if the Defendant fails in its application due to evidence being available at the hearing that was not available to it before it made its application, it must bear the costs of the application. He submits that the provisions of the CPR and the Overriding Objective do not override the clear law derived from the authorities in relation to applications to stay the enforcement of judgments in adjudication enforcements proceedings.

Mr Malam submits that the overriding objective requires the Claimant to provide in advance the evidence on which it will need to rely to oppose the application for a stay in appropriate circumstances, in the interest of saving costs. He argues that the authorities make plain that, generally, if a Claimant is insolvent, a stay will be granted, and that, once it is clear that the Defendant will discharge its burden of satisfying the court of the Claimant’s insolvency, the Claimant should disclose information on which it may rely if it wishes to avoid costs risk. He concedes that the Claimant is not obliged to disclose information, in the sense that it cannot be compelled to do so, but submits that the usual principles of compliance with the Overriding Objective apply so that, if it fails to disclose its case in time to avoid costs that would otherwise be avoided, it is at risk that the court may not exercise its discretion on costs in the Claimant’s favour. It was therefore appropriate for the Defendant to ask for further information and incumbent on the Claimant to assist by providing the information on which it intended to rely in advance, to avoid wasted costs and court time.

In support of his position, Mr Eyre relies on the following authorities and the particular extracts from them referred to below.

In Farrelly (M&E) Building Services Ltd v Byrne Brothers (Formwork) ltd [2013] EWCA 1186, Ramsay J said:

“…there is no general obligation on a party when seeking enforcement to disclose to the other party confidential information of its financial and business position so that the other party can consider whether there are grounds for applying for a stay of any judgment. If there were such an obligation it would mean that parties could gain the benefit of that confidential information which in the competitive construction industry would have serious consequences in relation to the ability of contractors and subcontractors when tendering or dealing with disputes.”

In BN Rendering Ltd v Everwarm Ltd [2018] EWHC 2356 (TCC), O’Farrell J said that

“the evidential burden lies with the party applying for the stay and the burden is high….. The party seeking the stay is not entitled to embark on a fishing expedition and demand access to confidential commercial information from the respondent.”

He relies also on similar statements in Brosely London Ltd v Prime Asset Management [2020] EWHC 944 (TCC) and WRW Construction Ltd v Datblygau Davies Developments Ltd [2020] EWJC 1965 (TCC), and Toppan Holdings Ltd v Simply Construct (UK) LLP [2012] EWHC 2110 (TCC).

Mr Eyre submits that the effect of those authorities is that it is settled law that there is no obligation to provide financial information to the Defendant in order to inform its decision as to whether an application for a stay ought to be made, so that a Claimant should not be criticised or penalised in costs if it fails to do so. He accepts that an exception to that rule is where an insolvent Claimant offers a guarantee, when it might be required to provide evidence as to the financial standing of the proposed guarantor, such as was the case in FG Skerritt Ltd v Caledonian Building Systems Ltd [2013] EWHC 1898 (TCC), but argues no such exception applies in this case.

I do not agree that the principles to be derived from the authorities are as absolute as Mr Eyre submits. I agree with Mr Malam’s submission that the dicta in the authorities must be read in context. I read the authorities as establishing that there is no general obligation to provide financial information, particularly confidential financial information. That is not the same as saying that a Claimant can always refuse to answer a reasonable request for information without any risk to itself as to costs, no matter what the circumstances of the case.

None of the authorities to which I was referred relate to the situation where a Claimant’s most recent filed accounts show that it is seriously insolvent, so that the Defendant would be able to rely on them to discharge its burden of proof that the Claimant was insolvent. In Farrelly, Ramsay J found that there was, on the evidence, no basis on which the Claimant’s solvency could be challenged. Ramsay J made clear that the Defendant cannot reverse the burden of proof by requiring the Claimant to disclose confidential information to prove that it is not insolvent.

In this case, the Claimant’s own filed accounts show serious balance sheet insolvency with a shortfall of shareholders’ funds of over £369,000, and with its net assets having deteriorated by more than £600,000 since the previous year’s accounts, which also showed a significant deterioration from its previous filed accounts.

Although the Claimant’s solicitors suggested in correspondence that the Claimant was not insolvent and Mr Eyre stated in his submissions that it was not accepted by the Claimant that it was insolvent, I do not understand how the Claimant could maintain that position in the light of the shortfall of assets over liabilities shown in the filed accounts for the year ended 31 March 2023. On the basis of those accounts, the Claimant was plainly insolvent on a balance sheet basis. Whilst Mr Kerr’s evidence is that, in the light of the support form Mr Rath, the Claimant is not insolvent, he does not give evidence that the filed accounts do not show insolvency, only that the management accounts are prepared on a different basis. I read his evidence as accepting that, without the support of Mr Rath, the Claimant would not be able to pay its debts as they fell due. The Claimant clearly appeared to be insolvent at the time of the Defendant’s application. It is a moot point whether it remains so now, given Mr Rath’s loan to the company in its support is, as Mr Kerr acknowledges, “technically” repayable on demand.

Mr Eyre submitted that the Defendant’s capitulation was inevitable from before the proceedings were issued, that its application for a stay was hopeless. He argues that, had the Claimant adduced no evidence, the Defendant would not have satisfied the court that, when the time came to pay the judgment (which he submitted would be in about 2 years’ time) the Claimant could not have paid £100,000, because the Claimant was trading profitably.

The Defendant relies on the dicta of HBJ Peter Coulson QC, as he then was, in Wimbledon Construction Company 2000 Limited v Derek Vago [2005] EWHC 1086 (TCC)

“26 (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…”

I agree with Mr Malam that, without more information, the application for a stay appeared likely to succeed. If the Claimant had filed no evidence in opposition to the Defendant’s application, it is highly likely that I would have ordered a stay. The only evidence of the likelihood of the Claimant being able to repay the judgment would have been the statutory accounts. The only evidence of the Claimant’s profitability in future would have been the bald assertion in its solicitors’ letter that it was trading profitably and that its order books were full. That is not evidence. Nor does it give any indication of the level of profit that might be generated over the period, or the likelihood of the Claimant being able to continue to trade notwithstanding its insolvency. I consider I would be likely to have found that the Claimant was seriously insolvent on a balance sheet basis, showing a net shortfall of £369,470. That is a significant sum of money in absolute terms and also as a proportion of the Claimant’s assets, which were £463,605. In addition, the statutory accounts showed its assets were declining.

Therefore, the facts in the case before me are very different from the sort of fishing expeditions with which the authorities suggest Claimants are not obliged to cooperate. It is not a case where an apparently solvent Claimant is being asked to provide evidence to reassure a Defendant that its financial position has not worsened since it statutory accounts were filed. This is a case in which the Claimant was obviously insolvent according to its most recently filed statutory accounts, so the Defendant was clearly able to discharge its burden of proof.

Whilst there was no obligation requiring the Claimant to disclose information, in the sense of any compulsion, I do not consider that the authorities mean that it is never appropriate for a Defendant to expect a Claimant to disclose information that might explain that, despite its statutory accounts, that it is not insolvent or that for some other reason it can be expected to meet a claim for repayment of the judgment debt when ordered to repay it.

CPR 1.3 requires the parties to help the court to further the Overriding Objective. The Overriding Objective includes saving expense and allotting an appropriate share of the court’s resources. The court, and parties to litigation, expect parties to behave reasonably and avoid unnecessary costs and unnecessary hearings.

It must have been obvious to the Claimant that, faced with its statutory filed accounts and no further information, the Defendant would not be able to understand that the Claimant was treating a very substantial debt shown in “other creditors” due to be paid within 12 months as long term support that would not be repaid until the Claimant was able to pay its debts as they fell due. Nor could it be expected to understand that the Claimant had suffered bad debts of around £2m between 2019 and 2023 and that it expected to trade profitably out of its current difficulties. Indeed, its solicitors not only made no reference to those facts, but stated that “The reduction in shareholders’ funds was a direct result of DE1's refusal to pay sums due to CCPL under both the SFS and dry lining contracts” an assertion that was not borne out by the Claimant’s own evidence.

The Defendant did all it could to ascertain the position from the Claimant before incurring the costs of making an application for a stay. It asked for any information on which the Claimant would rely in opposition to any application that might render such an application unnecessary. The Claimant’s intransigence in refusing to cooperate is not consistent with the court’s expectations of the way litigation should be conducted.

Mr Eyre submitted that the Claimant is not obliged to provide the information, as it is confidential. I do not consider the authorities are consistent with an incontrovertible rule that a Claimant who chooses not to disclose confidential financial information in response to an application for stay is at no risk as to costs from its failure to do so, no matter what the circumstances. It would clearly be obliged to disclose the information in response to the application for a stay if it intended to oppose it, the Defendant having satisfied the burden of showing the Claimant was insolvent on the available information. The effect of Mr Eyre’s submissions would be that a Defendant facing an enforcement claim from an apparently insolvent Claimant, and which reasonably wishes to check whether there is any information not available to it that would suggest that the Claimant is no longer insolvent or can otherwise be expected to repay the judgment when ordered to do so, cannot protect itself in costs. It would be obliged to issue the application and then be subjected to an adverse costs order because it did not have information available to the Claimant that would have allayed its costs.

There is also some irony in the fact that, by refusing to disclose the confidential information to a party with which it is in ligation, with a legitimate reason for receiving it, the Claimant has instead chosen to disclose it in witness evidence referred to in open court and in this judgment, making it more widely public. Its argument that the need for confidentiality trumps the Overriding Objective is difficult to understand in those circumstances.

I consider that, faced with the latest financial information available to it, being the statutory accounts, which clearly showed the Claimant was insolvent, the Defendant reasonably requested the Claimant to provide any information that it may wish to rely on to explain why it would be able to repay the award should it be ordered to do so. It rightly pointed out that, given the Claimant’s apparent insolvency, it expected to succeed on an application for a stay. It referred the Claimant to the relevant authorities in support of its position. It invited the Claimant to provide information as to why that was wrong. The Defendant was not on a fishing expedition trying to establish whether an apparently solvent company might be unable to repay the award in due course. It knew that the Claimant was insolvent and it expected to succeed in an application for a stay, absent any information that only the Claimant could provide.

The Claimant’s conduct, in refusing to provide the information when requested but instead insisting that it need do so only after it had incurred the costs of its enforcement application and after the Defendant had incurred the costs of its application for a stay and court time had been taken up in listing the applications for hearing, was contrary to the principles of the Overriding Objective and the way the TCC expects parties to conduct litigation.

Mr Eyre argues that, even if I am minded not to award the costs of the application for a stay of enforcement to the Claimant, I should nonetheless award the costs of the enforcement claim, since there was no defence to it. I disagree. The Defendant made clear at all times that the only basis on which it challenged the claim was that it sought a stay of enforcement. Had the information contained in the Claimant’s evidence been provided when it was first requested, the Defendant would have paid the award and there would have been no need for the proceedings to be issued at all. In fairness, the Defendant does not seek its own costs of the applications but seeks no order for costs.

Mr Eyre also argues that not all the costs of the application to enforce should be disallowed. The request for information was first made on 8 May 2014. The parties entered into protracted correspondence. The Claimant’s solicitors indicated on 15 May 2024 that they had no choice but to prepare the proceedings for issue, which suggests that they had not already done so. The proceedings were issued on 5 June 2024. I am not persuaded that any substantial part of the Claimant’s costs of the proceedings were incurred before the Defendant had asked for the information that I have found the Claimant should have provided if it wanted to avoid any costs risk.

I consider the appropriate order to be no order for costs on either application. I will make no order for costs.