UK High Court reviews whether a company can be wound up for failure to comply with adjudication award

In a judgment only recently published via the Building Law Reports,  the High Court has ruled that a winding up procedure applicable to companies should not be used where there is a triable issue as to the validity of an adjudicator's decision relied on as evidence of a company being unable to pay its debts: Towsey v. Highgrove [2012] EWHC 2644 (Chancery Division).

 Michael Mendelblat, a professional support lawyer in our London contentious construction team, reviews this case.

Background

The claimants had an adjudicator's decision in their favour which had not been paid.  Rather than proceed through the Technology and Construction Court (TCC) for enforcement, they issued a winding up petition seeking to wind up the defendant company on the ground that it was unable to pay its debts as and when they fell due.  The defendant opposed the petition on the basis that the process was not the appropriate forum for resolution regarding the disputed debt.  There was an issue between the parties as to the adjudicator's jurisdiction although the adjudicator had made a non-binding decision that he had jurisdiction to decide the dispute.

The Insolvency Practice Direction provides that, where a debt is based on a judgment, the court will not at the petition stage enquire into the validity of the debt. Where a debtor disputes any other debt, the court will normally set aside the underlying statutory demand if, in its opinion, there is a genuine triable issue on the evidence.

Decision

The court held that it had a discretionary power to wind up a company but would not generally do so where the debt was disputed on bona fide or substantial grounds.  In the absence of a decision by the adjudicator, there would be no question of winding up the company as it had identified adequate grounds to dispute the debt.  The decision did not equate to a judgment even though it was temporarily binding.  The TCC can and indeed had in the past refused to enforce decisions where the adjudicator had no jurisdiction to make his decision and this issue was clearly in dispute between the parties.  Effectively the High Court Chancery Division applied the filter that would otherwise be applied by the TCC,  and must be satisfied that it would be  just and equitable that the company should be wound up.  The court decided that there was no judgment debt and that there was a triable issue as to whether the decision could be enforced. On this basis, it would not be appropriate to wind up the company.  The petition was therefore refused.

Comment

It is not clear why the claimant did not seek to enforce the judgment through the TCC since if they had been successful then the winding up petition would surely also have been successful.  Effectively they tried to sidestep the TCC filter for adjudicators' decisions. This was, as the court commented, a "high risk" strategy.