Case in focus: Insolvency

The case

In the matter of Victory House General Partner Ltd, Re A Company [2018] EWHC 1143 (Ch) 
Before Mr Justice Morgan
In the Chancery Division
Judgment delivered 18 April 2018

The facts

During 2015 Victory House engaged RGB P&C Ltd to construct a hotel in Leicester Square, central London. The works were delayed and in March 2017 the parties entered into a memorandum of understanding (MOU). In July 2017 RGB issued interim application for payment no. 30, seeking a payment of £819,363.46 including VAT in addition to the £8.5m that it had already been paid. Victory House assumed that the MOU terms applied and declined to issue either a payment notice or a payless notice. RGB commenced adjudication. 

In a decision dated 7 November 2017 the first adjudicator found that RGB’s July application was not precluded by the terms of the MOU and therefore decided that the £819,363.46 was payable in the absence of any valid payment notice or payless notice. On 16 November RGB issued a winding-up petition against Victory House for non-payment of the sum awarded.

RGB also commenced a second adjudication in respect of interim application for payment no. 31, which claimed a gross valuation of £11.7m for work done up to 1 September 2017.

Victory House issued a Part 8 application contending that the first decision was invalid for breach of natural justice but on 26 January 2018 the Technology and Construction Court (TCC) rejected this application and gave judgment in favour of RGB for £819,363.46 plus interest and costs. (See Victory House General Partner Ltd vs RGB P&C Ltd [2018] EWHC 102 (TCC), reported in Case in Focus on 23 February 2018.) 

The decision in the second adjudication was issued on 7 February 2018. The second adjudicator decided that the correct gross valuation of RGB’s work under interim application for payment no. 31 was just over £7m. This meant RGB had been overpaid by some £1.5m, but the second adjudicator did not have jurisdiction to order RGB to repay this amount to Victory House.

Victory House issued an application to strike out RGB’s winding-up petition and this application came before the court on 18 April 2018. Victory House contended that the decision in the second adjudication gave rise to a cross-claim that justified its failure to pay and therefore made winding up inappropriate. 

The issue

Should the court order that Victory House be wound up? 

The decision

The judge confirmed the position that the unpaid sum of £819,363.46 comprised a judgment debt that had not been stayed, could not be characterised as disputed and could not be subject to a set-off.

The judge noted that following Mr Justice Coulson’s judgment in Grove Developments Ltd vs S&T (UK) Ltd [2018] EWHC 123 (TCC) the second adjudicator’s decision entitled Victory House to claim a refund. He therefore agreed that if Victory House was required to pay the judgment debt, that would create a cause of action in restitution for repayment of the same sum. 

The judge then considered whether or not these circumstances were such as to enable Victory House to avoid payment of a judgment debt that was not disputed and was otherwise immediately enforceable. 

Applying the legal test established by the Court of Appeal in Re Bayoil SA [1999] 1 WLR, the judge concluded that where the second adjudication had given rise to a bona fide cross-claim on substantial grounds and where RGB had already been paid a significant sum that included a large overpayment, then in the absence of any special circumstances it would not be appropriate to order that Victory House be wound up. 

Commentary

While the courts frequently stress that insolvency processes should not be used as an aid to claim recovery in this case Victory House was on the wrong end of a TCC judgment that it could not dispute and/or extinguish by the application of a set-off. 

However, with the benefit of Mr Justice Coulson’s recent judgment in Grove Developments, Victory House could satisfy the test in Bayoil by relying upon the second adjudication decision as having established a substantive cross-claim. 

The judge commented that it might seem odd that having deliberately failed to comply with a judgment against it, Victory House should be entitled to escape the consequences. However, he considered that the Court of Appeal had come to a similar conclusion in Bayoil and that, overall, dismissing RGB’s petition would be a more just outcome. This suggests that the judge was influenced by the amount that RGB had already been paid and the significant disparity between this amount and what the second adjudicator thought was the correct gross valuation.