Indigo Projects London Ltd v Razin & Anor [2019] EWHC 1205 (TCC)

Background

The defendants engaged Indigo Projects London to construct a four-storey house for the sum of £2,350,000. Disputes then arose between the parties concerning the standard of the work done and delays in completion. The defendants alleged that the construction work had been badly done, and that it led to defects in the house. In addition, they also argued that they were entitled to liquidated damages for delay as Indigo failed to reach practical completion at the specified date.

As a result of these disagreements the defendants disagreed with Indigo’s valuation of the work done when Indigo issued an interim payment notice for £202,036.05. However, the defendants failed to issue a Pay Less Notice in accordance with the contract, and so the sum became due on the final date of payment.

The full sum demanded was not paid. Instead the defendants paid £30,000 on account. Indigo then referred the dispute to adjudication. It was decided by the adjudicator that the Defendants were obliged to pay £177,662.72, being the full sum with interest, less the £30,000 paid on account.

The issue that arose in the present case was that Indigo, having applied for summary judgment to enforce the adjudication award, subsequently entered into a CVA. The defendants resist the application on the basis that the enforcement of the award would undermine the proper operation of the CVA. Alternatively, if the application was granted, then a stay of execution was sought on the basis that the CVA put Indigo into a position where it would be unable to repay the judgment sum in the event the defendants succeeded.

Effect of the CVA on enforcement

The argument of the defendants was that it was an express term of the CVA that the supervisors had to take into account both the sums claimed and counter-claimed between Indigo and its creditors as part of the exercise in determining the balance of the mutual dealings between the parties.

The problem was that the defendants counter-claims had not yet been determined. Entering judgment for the adjudication sum would result in the CVA supervisors distributing that sum amongst the general body of creditors as the defendant’s cross-claims were not in a position to be properly considered. This would undermine the express terms of the CVA. Further, the result could be considerably unfair as the defendants would only receive a small proportion from the CVA as general creditors if it later transpired that Indigo was unable to repay the judgment sum or balance.

The argument of the claimant, on the other hand, was that the adjudication award should be enforced first since it pre-dated the CVA. The CVA would not be undermined because an account could be taken once the payment had been received.

Decision

Sir Anthony Edwards-Stuart dismissed the application for summary judgment to enforce the adjudication award.

In doing so, he rejected the claimant’s submission that the adjudication award could be enforced first because it pre-dated the CVA. This was because the effect of the adjudicator’s award on the accounting process of the CVA was different depending on whether it had been paid prior to the CVA or afterwards.

Had the adjudication sum been paid prior to the CVA coming into operation, then the supervisors would have had to take it into account in determining the final balance due between Indigo and the defendants. In this instance there would have been no difference between the adjudication sum and any previous payment on account. The counter-claims that the defendant had against Indigo would have effectively been determined.

Here, however, the payment of the adjudication award would occur after the CVA came into operation. According to the paragraph 26 of the CVA proposal, this payment would go into a fund for the benefit of the general creditors rather than being taken into account to determine the balance of the mutual dealings between the parties.

In those circumstances, as the judge rightfully recognised, “to order the defendants to pay…the sum determined by the adjudicator would…distort the process of accounting that is required under the CVA because the money would not be applied for the sole benefit of the Defendants but instead for the benefits of the creditors generally.”

Second, Indigo Projects was also to be distinguished from previous authority in Cannon v Primus, which the claimant had relied on. In that earlier case, a stay of enforcement was refused by the Court of Appeal, which had also made it clear that the mere fact that a company was in a CVA was not a reason to refuse enforcement.

However, a key difference between Cannon v Primus and Indigo Projects was the nature of what the adjudicator decided. In Cannon v Primus, the adjudicator determined both claims and cross-claims between the parties because the dispute concerned a claim for damages.

In contrast, what was determined Indigo Projects was no more than the order for the payment of the sum stipulated in the Payment Notice. This was not a claim for damages, but a debt claim or a claim for an agreed sum. There was no valuation by the adjudicator that took into account the cross-claims against Indigo.

In other words, the balance was still to be determined in Indigo Projects, whereas in Cannon v Primus, accounting exercise was effectively already done. The fundamental problem in Indigo Projects, is that the CVA supervisor would be required to direct the adjudication sum to the benefit of creditors pro-rata without having had the chance to determine the balance by including the counter-claims against Indigo. It followed that to enforce the adjudication award would not only disrupting the accounting process but would produce an inequitable result for the defendant as they would be deprived of the possibility of repayment of the judgment sum.

Comment

As cited by the judge, the reasoning in the present case to not enforce the adjudication award was comparable to that used in Bouygues v Dahl-Jensen [2010] All ER (Comm) 1041. In both cases, payment of the adjudication award after the commencement of the particular insolvency arrangement would deprive the defendant of any security against the claimant’s insolvency because the sum would be distributed pro-rata to the general creditors and the defendant would be deprived of security for its cross-claim.

The result in this case is also an application of limb (d) of Wimbledon v Vago, where the risk that the judgment sum would not be able to be repaid was held to constitute special circumstances justifying the granting of a stay.

The main implication of this case is that it highlights the importance for companies in a CVA to determine the claims and counter-claims against it. Enforcement of an adjudication award where the determination of the counter-claims remain outstanding will ‘distort the process of accounting that is required,’ and in those circumstances it is likely the court will not enforce the adjudication award.

The best method for mitigating the risk of non-enforcement would be for the company in the CVA to refer both its claim and the counter-claims against it to adjudication. This ensures that the adjudication process determines the balance between the parties and does so in a way that is compatible with the accounting process under a CVA.