Shaw & Anor v MFP Foundations & Piling Ltd (Rev 1)

When a statutory demand is founded on an adjudicator’s decision or an enforcement judgment, the bankruptcy court must consider all relevant circumstances. The statutory policy of paying an adjudicator’s award pending final determination does not displace the insolvency jurisdiction.

A genuine and substantial cross-claim which equals or exceeds the demand may justify setting it aside. The debtor’s ability to pay is ordinarily of little weight and cannot be the sole or principal reason for refusing relief. The debtor’s failure to raise the claim in the adjudication may be relevant, but is not decisive. Bankruptcy is a distinct and more draconian form of enforcement.

The appellants appealed against a District Judge’s refusal to set aside statutory demands served by the respondent. The demands were based on an adjudicator’s award and a judgment of the Technology and Construction Court enforcing that award.

The appellants asserted a genuine and substantial cross-claim concerning the final account and defects. The District Judge accepted that the cross-claim could be relied upon but refused relief because the appellants could pay and could therefore pursue arbitration without the risk of bankruptcy. The appeal concerned the proper exercise of that discretion and the effect of the subsequent arbitral determination.

1. Appeal allowed. The District Judge had erred in principle by treating the appellants’ ability to pay as the decisive or principal reason for refusing to set aside the statutory demands. The appellate court therefore exercised the discretion afresh.
2. Under rule 6.5(4) of the Insolvency Rules 1986, the court must consider all relevant circumstances. There is no general rule that a debtor cannot rely on a genuine and substantial cross-claim merely because the demand is founded on an adjudicator’s decision or an enforcement judgment. Nor is there a presumption that such a claim can be relied upon only where bankruptcy would stifle the debtor’s final litigation.
3. The cross-claim was genuine and substantial and equalled or exceeded the demands. The appellants’ failure to participate in the adjudication was relevant, but carried little weight because it resulted from an erroneous jurisdictional advice and adjudication is intended to provide only temporary finality. Their attempts to commence arbitration, the nature of the evidence, and the concern about recovering payment were also relevant.
4. The pay-now-litigate-later policy under the Housing Grants, Construction and Regeneration Act 1996 governs enforcement of adjudicators’ decisions, but does not displace the separate bankruptcy jurisdiction. Enforcement in the TCC and bankruptcy are materially different processes, and bankruptcy is a draconian remedy.
5. The first arbitral award finally determined that the appellants were not in repudiatory breach. Since that was the basis of the adjudicator’s damages award, the adjudicator’s decision ceased to bind the parties from publication of the award. In any event, the statutory demands had to be set aside. The demands were set aside.

• High Court (Chancery Division): appeal allowed against the District Judge’s refusal to set aside the statutory demands.
• District Judge: refused to set aside the demands on 30 June 2009, although he accepted that the appellants could rely on a genuine cross-claim.