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

On 27 April 2024, the Adjudicator, Barrie Green, issued his decision in an adjudication between the parties. His decision required the Defendant to pay the Claimant £94,921.10 plus interest and costs. At the date of the Particulars of Claim, which was 3 June 2024, the total sum due pursuant to the award was £117,641.28.

On 28 April 2024, and after that time, the Claimant demanded payment of the award.

In a letter dated 8 May 2024 from its solicitors, the Claimant required the Defendant to confirm that payment would be made, failing which the Claimant would commence enforcement proceedings and would be entitled to recover its costs on an indemnity basis.

Later that day, the Defendant’s solicitors responded as follows:

“DE1 is concerned to note the recent deterioration in CCP's finances shown at Companies House, in that the last filed accounts show that CCP had total available shareholders’ funds of £239,111 as at 31 March 2022 but -£369,470 as at 31 March 2023. Should DE1 make payment in satisfaction of the Adjudicator’s award it is therefore seriously concerned that it would not be able to recover those monies should it successfully seek adjudication as outlined above under either the SFS contract [ie the contract that was the subject of the Adjudication] or the dry lining contract [ie a different contract between the parties].

So that we may take instructions upon both the further adjudications referred to above and also your client’s request that payment be made in satisfaction of the Adjudicator’s award, please confirm by return your client’s current financial position, including in particular whether (and on what basis) it says it would be able to repay the amount of the award should our client succeed in either of the adjudications referred to.”

The Claimant’s response later that day was to state that the letter’s contents “display a fundamental misunderstanding of the law concerning enforcement of adjudicators’ decisions” but did not explain why.

On 9 May 2024, the Defendant’s solicitors wrote to the Claimants’ solicitors stating that they did not understand that comment, since there had been no explanation of it. They sent a copy of the judgment of Pepperall J in WRB (NI) Ltd v Henry Construction Projects Ltd [2003] EWHC 278 (TCC), and pointed to paragraph 21 of the judgment, in which Pepperall J had cited the dicta of HHJ Coulson QC (as he then was) in Wimbledon Construction Company 2000 Limited v Derek Vago [2005] EWHC 1086 (TCC) to the effect that, if there is no dispute on the evidence that the Claimant is insolvent, a stay will usually be granted.

On 13 May 2024, the Claimant’s solicitors responded as follows:

“CCPL is not obliged to provide the financial information which you have requested prior to commencing enforcement proceedings. See Farrelly (M&E) Building Services Ltd v Byrne Brothers (Formwork) Ltd[2013 EWHC 1186 (TCC).

CCPL is not obliged to provide any financial information prior to enforcement proceedings to enable DE1 to assess where the CCPL is insolvent.

The onus rests with DE1 to demonstrate in support of any application for a stay of enforcement that CCPL is insolvent; it is not for CCPL to establish otherwise prior to enforcement proceedings.

That said your suggestion that CCPL is insolvent is misguided.

The shareholders funds are just one of a number of metrics by which to measure CCPL’s financial performance.

CCPL continues to trade profitably and has a full order book.

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.

If necessary, and in response to any application for a stay of enforcement, CCPL's accountant can, and will, provide a written explanation of the treatment of the shareholders’ funds in CCPL’s accounts …..

We are not prepared to debate matters further with you. Service of enforcement proceedings will now be effected on you without further delay.”

That letter did not explain what was meant by “continues to trade profitably and has a full order book” Nor did it explain what was meant by “the treatment of the shareholders’ funds in CCPL’s accounts”.

Mr Eyre submitted that the Defendant had not actually asked for specific financial information or evidence, such as management accounts, but had asked only for confirmation of the Claimant’s financial position, which this letter provided. I disagree. Any reasonable Claimant or solicitor would understand exactly what the Defendant was asking for, which was up to date financial information or some explanation why, in the light of the filed accounts showing balance sheet insolvency and a deterioration of more than £600,000 in the balance sheet over the year, the Claimant might contend it was likely to be able to repay the judgment sum if ordered to do so. Indeed, the request included: “in particular whether (and on what basis) it says it would be able to repay the amount of the award should our client succeed in either of the adjudications referred to.” The Defendant was clearly seeking evidence to satisfy its concerns, not merely a bald statement that its concerns as to solvency were “misguided” without any explanation as to why they were misguided.

In any event, the letter did not provide confirmation of the financial position, but only assertions that the suggestion that the Claimant was insolvent was misguided, that it was trading profitably with a full order book, and that the accountant could provide more information if an application for a stay was made.

On 14 May 2024, the Defendant’s solicitors responded as follows:

“Whilst your client may not be obliged to provide the financial information we seek, it will clearly be required to do so in response to our client’s stay of execution application”.

On 15 May 2024, the Claimant’s solicitors responded that the Claimant had no choice but to prepare the proceedings for issue.

The proceedings were issued on 5 June 2024.

On 8 July 2024, the Defendant served its evidence in response, including a witness statement from Tajinder Uhbi. In that witness statement, Mr Uhbi explained why he believes that the Defendant is likely to succeed in its claim to recover the award following a true value adjudication. I will not set out those reasons here. In addition, he explained the Defendant’s concerns that there is a serious risk that the Claimant would be unable to repay those monies when the time comes for it to do so. He referred to the recent deterioration in the Claimant’s finances shown at Companies House as follows:

“Their last filed accounts showed that CCP had total available shareholders’ funds of £239,111 as at 31 March 2022 but a deficit in shareholders’ funds of £369,470 as at 31 March 2023. I am told by those advising me that CCP's latest accounts therefore show that it is insolvent on a balance sheet basis. Also, the Claimant’s latest accounts show that its total assets are less than its current liabilities by £261,137, which I understand may suggest possible problems in the Claimant paying its debts as they fall due. Should DE1 make payment in satisfaction of the Adjudicator’s award it is therefore seriously concerned that it would not be able to recover those monies should it successfully seek an adjudication as outlined above under either the SFS Contract or the Dry Lining Contract. Thus while DE1 accepts that the Claimant is entitled to judgment on its enforcement claim, D1 accordingly applies for a stay of execution.

In contrast to its latest accounts, at the time the parties entered into the SFS contract, the latest filed accounts for the Claimant showed that its total assets exceeded its then current liabilities by £109,048. However, DE1 accepts that those accounts showed available shareholders’ funds of -£1,962. DE1 was not aware of those accounts, which were filed on 11 November 2020, 14 days before it entered into the SFS contract, at the time it entered into that contract…… Had DE1 been aware of the Claimant's 2020 accounts it would have been reassured by the fact that this was a very small deficit in shareholders’ funds and that it was not consistent with the substantial shareholders’ funds shown in the Claimant’s previous accounts for several years previously.”

“It will be deeply frustrating if, having refused to provide details of its finances prior to issuing these proceedings, it turns out that CCP is able to provide information which demonstrates that it is now solvent. If that information is provided I do not understand why it could not have been provided before the costs of this claim were incurred.”

“The Claimant’s failure to provide DE1 with comfort that it will be able to repay any payment of the award made by DE1, despite DE1 making clear that those concerns were the reason why the Award had not been paid, has served to heighten the concerns that DE1 has as to the Claimant’s insolvency.”

Mr Uhbi exhibited the statutory accounts filed at Companies House to his witness statement. The filed accounts for the period ending 31 March 2023 showed total shareholders’ funds of -£369,470, and net current liabilities of £261,137. Amounts falling due to creditors within one year amounted to £922,741. The notes to the accounts show, of that sum, £573,402 was due to “other creditors” ie creditors other than banks, trade creditors and Social Security and other taxes. They do not disclose who the “other creditors” are.

On 15 July 2024, the Defendant issued proceedings against the Claimant seeking a declaration as to the true liabilities of the parties. The amount claimed is stated to be nil. Mr Eyre criticises those proceedings as difficult to understand and states that the claim could never support an application for a stay of enforcement because it contains no claim for a payment of money. He argues that the Defendant could not have established it had a claim against the Claimant of the kind that is required to justify a stay of enforcement in these proceedings as a result of that fact. It is convenient to deal with that point here.

Since the Defendant was resisting payment of the award by seeking a stay of enforcement of the judgment to which it conceded the Claimant was entitled and since the Defendant had not paid the award, I do not find it surprising that it did not plead an entitlement to payment of any sum in the proceedings seeking determination of the sums due. To be entitled to claim repayment, it would first have to make the payment. I infer that the Defendant, if it had failed in its application for a stay and was ordered to pay the judgment, would have amended its claim to include a claim for repayment of the amount it was ordered to pay. I therefore do not consider the failure to claim a specific sum weakens the Defendant’s case on the issue before me.

On 15 July 2024, in accordance with the Court's directions, the Claimant filed its evidence in reply. It served witness statements from Alan Henry, a quantity surveyor employed by the Claimant and William Kerr, the Claimant’s external accountant.

In brief summary, Mr Henry gave evidence of the Claimant’s cash flow for the next 6 months (the likely income, costs and profit) and the value of the order book. In addition, there was evidence from Mr Kerr with regard to the Claimant’s trading history and the treatment of a Director's loan in the accounts. Mr Kerr’s evidence was that three companies had gone into liquidation between 2019 and 2023 owing over £2m to the Claimant, which adversely affected the Claimant’s cash reserves. His evidence was that Mr Gordon Rath, the owner and a Director of the Claimant, stopped taking significant sums from the Claimant and provided a loan of £541,288 to enable the Claimant to trade through the period of loss of profit caused by the insolvencies and resultant bad debts. He states:

“The loan remains outstanding to Mr Gordon Rath and will only be repaid when CCP is able to do so without putting into question CCP’s ability to meet all its liabilities as they fall due”.

He does not state how he knows that is the case. As I have said, Mr Rath did not give evidence as to his intention. I infer that Mr Kerr had the assurance of Mr Rath in order to enable him to make that statement, but that is not set out in his witness statement.

Mr Kerr also states:

“The Management Accounts are prepared on a different basis to the Statutory Accounts filed at Companies House. The Director and Shareholder Mr Gordon Roth has provided long term support in the form of a loan to the value of £541,248, this loan was made several years ago and whilst technically repayable on demand is not going to be repaid until CCP is able. The loan is of a longer-term capital nature, hence for Management Accounts the amount is shown as “Shareholders’ Loans” in the Capital and Reserves section of the balance sheet. The statutory accounts show this amount as a Liability within “Creditors”. The Management Accounts in all other respects are prepared as per the Statutory Accounts.

Mr Kerr also exhibits management accounts for the year ended 31 March 2024 to his witness statement. Those accounts contain the balance sheet for years ending 31 March 2023 and 2024. Those management accounts treat the sum of £541,448 described as “shareholder loans” as part of the capital and reserves both in 2023 and 2024. I infer that the figure of £573,402 for “other creditors” in the statutory accounts must include the Director’s loan shown in the management accounts in the Capital and Reserves section. As I understand it, Mr Kerr, for the Claimant’s internal accounting purposes, has treated the shareholders’ loan of £541,248 as capital in the management accounts, notwithstanding that it is, as he describes it in his witness statement as “technically repayable on demand”.

Mr Kerr’s witness statement contained information that was not possible to discern from the statutory accounts. It exhibited management accounts showing a different treatment of the shareholder’s loan. It also contained assurances that Mr Rath has provided long term support, that his loan will not be repaid until the Claimant is able to do so without jeopardising its ability to pay its debts as they fall due and that the loan is of a longer term capital nature. The statutory accounts only showed the loan as part of a figure for “other creditors” repayable within a year, as Mr Kerr acknowledges it technically is.

The Claimant’s evidence therefore is that what appears in the statutory accounts as a liability, because it is a loan that is “technically” payable on demand, is being treated by the Claimant and its accountant as long term support of a capital nature to enable the Claimant to pay its debts as they fall due.

On 17 July 2024, the Defendant’s solicitors wrote to the Claimant’s solicitors in the following terms:

“We have now reviewed your client’s witness evidence which now includes the financial information we had previously requested by letter dated 8th May 2024 and by e-mail dated 9th May 2024 prior to the issue of proceedings.

The only information we had available at that time indicated that your client was insolvent and we had sought information to alleviate our client’s concerns that your client would be unable to satisfy any subsequent awards made in our client's favour. Our 8th and 9th May 2024 correspondence explained this and our client’s requests were perfectly reasonable in the circumstances. For reasons we still do not understand (and you have not explained) you refused to provide any more up-to-date information as to the Claimant’s finances in response to our correspondence and instead the Claimant issued enforcement proceedings…. We do not understand why your client could not, or chose not, to provide that information earlier. For the avoidance of doubt nothing has changed since our requests of 8th and 9th May 2024, except that significant costs have been incurred in the interim.

Our client's position is that had the financial information been provided at the outset of this case it would have been satisfied as to your client’s financial status and would have settled the sums outstanding at that time. Enforcement proceedings would not have been necessary.

In the light of the evidence now served we are instructed that our client will no longer seek a stay of enforcement of the adjudicators award….. However we do not see why our client should pay your client’s costs incurred as a result of its refusal to provide earlier the information it has belatedly provided. In the circumstances our client proposes that the order the court should make on your client's claim is as follows:

1 Our(sic) will pay the Adjudicator’s award in the sum of £94,921.12 plus VAT of £4,706.06, interest the sum of £7,593.69 and further interest at £20.80 per day from 8^th March to today amounting to £2,724.80 = total £109,9459.68 (sic)

2 our client will pay the Adjudicator’s fees in the sum of £8,550 including VAT.

3 Each party shall pay their own costs of the proceedings.

We invite you now to agree to the above offer in the hope that some of the costs of this unnecessary litigation may be avoided.”

That offer was not accepted and I am asked to determine the question of costs.