William Hare Ltd v Shepherd Construction Ltd
| Jurisdiction | England & Wales |
| Judge | MR. JUSTICE COULSON |
| Judgment Date | 25 June 2009 |
| Neutral Citation | [2009] EWHC 1603 (TCC) |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Date | 25 June 2009 |
| Docket Number | Case No: HT-09–202 |
[2009] EWHC 1603 (TCC)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
St. Dunstan's House
133–137 Fetter Lane
London EC4A 1HD
MR. Justice Coulson
Case No: HT-09–202
HT-09–247
MR. SEAN BRANNIGAN QC (instructed by Messrs. Addleshaw Goddard) for the Claimant, Hare
MR. ALEXANDER NISSEN QC (instructed by Messrs. Gosschalks) for the Claimant, Reynolds
MR. STEPHEN FURST QC and MS KIRSTA LEE (instructed by Messrs. Wragge & Co.) for the Defendant
MR. JUSTICE COULSON:
INTRODUCTION
This claim under CPR Part 8 arises out of a type of contractual provision which has been a relatively rare sight in the construction industry for the last 15 years – the “pay when paid” clause. Such clauses were effectively outlawed by section 113(1) of the Housing Grants (Construction and Regeneration) Act 1996, unless it could be shown that the third party employer was insolvent. This provision, and the contract forms drafted to comply with it, have given rise to very few reported cases but now, as the UK construction industry faces severe economic difficulties, this part of the Act is back under the spotlight.
The dispute in the present case is simply summarised. The claimant sub-contractor (whom I shall call “ Hare”) was engaged in December 2008 by the defendant main contractor (whom I shall call “Shepherd”), to fabricate and erect steelwork at a large development at Trinity Walk in Wakefield. The employer was Trinity Walk Wakefield Limited (whom I shall call “Trinity”). There was an express term of the sub-contract, clause 32, which was in similar terms to section 113 of the 1996 Act and which defined the employer's insolvency by reference to four alternate situations: an administration order made by the court; the appointment of an administrative receiver; insolvent liquidation; and the making of a winding-up order by the court.
Hare have legitimate claims against Shepherd for £569,601.75 plus VAT (Valuation 5), and £427,081.60 plus VAT (Valuation 6). In respect of each valuation, however, Shepherd have issued a withholding notice relying on clause 32. The dispute which now arises stems from the fact that Trinity did not become insolvent by reference to any of the four events specifically identified in clause 32. Their administration was achieved through a different route and was made possible by the amendments to the Insolvency Act 1986 introduced by the Enterprise Act 2002. These amendments allow for what have been referred to as self-certifying administrations. Although the sub-contract was made many years after the amendments to the relevant legislation came into force, clause 32.2 made no reference to them.
Accordingly, on behalf of Hare, Mr. Brannigan submits that, because none of the four insolvency events identified in clause 32.2 have occurred, Trinity is not insolvent within the meaning of the clause and the withholding notices are therefore invalid. In this he was supported by Mr. Nissen, who acts for CJ Reynolds, another sub-contractor on the same project, who is allegedly in the same position as Hare. On behalf of Shepherd, Mr. Furst maintained that it would be absurd for the sub-contract to be construed as ignoring the subsequent amendments to the legislation, and that all routes to administration under the Insolvency Act 1986, as amended, were covered by the words of clause 32.2.
Before embarking on the detail of this Judgment, I should add a further word of explanation about the position of CJ Reynolds. At the outset of the hearing last week, following argument, I made it plain that this Judgment would be binding on Hare and Shepherd only, and that Reynolds' own claim for declarations was not being decided. This was because Reynolds' Part 8 claim was only issued shortly before the hearing, and neither Mr. Furst nor I have had sufficient time to absorb whether or not the factual circumstances surrounding the Reynolds' sub-contract were the same or similar to those surrounding the Hare sub-contract. That said, I invited Mr. Nissen to make submissions on the point of construction so as to ensure that all the relevant arguments of principle had been addressed before I reached my conclusions.
THE PRE 2002 LEGISLATION
Section 113 of the Housing Grants (Construction and Regeneration) Act 1996 was in these terms:
“(1) A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent.
(2) For the purposes of this section a company becomes insolvent—
(a) on the making of an administration order against it under Part II of the [1986 c. 45.] Insolvency Act 1986,
(b) on the appointment of an administrative receiver or a receiver or manager of its property under Chapter I of Part III of that Act, or the appointment of a receiver under Chapter II of that Part,
(c) on the passing of a resolution for voluntary winding-up without a declaration of solvency under section 89 of that Act, or
(d) on the making of a winding-up order under Part IV or V of that Act.”
In summary, whilst this provision outlawed pay when paid clauses, which caused so much difficulty in the late 1980s/early 1990s, there was one clear exception: when the ultimate employer had become insolvent. Insolvency was defined by reference to what were the four principal ways in which a company might become insolvent including at (a) “the making of an administration order against it under Part II of the Insolvency Act 1986”.
Part II of the Insolvency Act 1986 was entitled “Administration Orders”. Section 8 read as follows:
“(1) Subject to this section, if the court –
(a) is satisfied that a company is or is likely to become unable to pay its debts (within the meaning given to that expression by section 123 of this Act), and
(b) considers that the making of an order under this section would be likely to achieve one or more of the purposes mentioned below,
the court may make an administration order in relation to the company.
(2) An administration order is an order directing that, during the period for which the order is in force, the affairs, business and property of the company shall be managed by a person ('the administrator') appointed for the purpose by the court.”
Sections 9 to 27 of Part II deal in detail with the effect of an administration order, the powers of administrators and the like. Part III of the Insolvency Act was concerned with receivership. Parts IV and V were concerned with winding-up orders.
The process of administration under Part II was widely perceived as being rather cumbersome and potentially expensive because of the need, amongst other things, for an independent report. The Practice Note of 17 th January 1994, issued by the Chancery Division, commented as follows:
“Administration Orders under Part II of the Insolvency Act 1986 are intended primarily to facilitate the rescue and rehabilitation of insolvent but potentially viable businesses. It is of the greatest importance that this aim should not be frustrated by expense and that the costs of obtaining an administration order should not operate as a disincentive or put the process out of the reach of smaller companies.
Rule 2.2 of the Insolvency Rules provides that an application for an administration order may be supported by a report by an independent person to the effect that the appointment of an administrator for the company is expedient. It is the experience of the court that the contents of the Rule 2.2 Report are sometimes unnecessarily elaborate and detailed. Because a report of this character is thought to be necessary, a preliminary investigation will often have been unduly protracted and extensive and, hence, expensive.”
It was this prevailing view that led to the significant amendments to Part II introduced by the Enterprise Act 2002.
The explanatory notes to the Act gave details of how and why the changes had come about:
“640. Changes to the existing corporate insolvency regime focus on restricting the use of administrative receivership and streamlining administration. The White Paper 'Productivity and Enterprise: Insolvency—A Second Chance' recognised that the administration procedure introduced by the Insolvency Act 1986 was seen as an important tool in providing companies in financial difficulties with a breathing space in which to put a rescue plan to creditors. However, it also recognised that the procedure could be improved …
641. The existing provisions contained in Part II of the Insolvency Act 1986 allow the court to make an administration order in respect of a company that is in financial difficulties. Broadly speaking, the effect of such an order is to afford the company protection from its creditors whilst attempts are made to save the company or achieve a better result for creditors than would be achieved in a winding-up. However, in practice, in many cases where a company gets into financial difficulties, this will lead to the appointment of an administrative receiver by those providing financial support for the company (typically the company's bank), since they usually will have taken a floating charge over all the company's assets. …
643. The sections will alter the above provisions in the following way. First, the appointment of administrative receivers will be restricted to certain exceptions … and the Act seeks to provide that administrators will in future be appointed in situations that would have been dealt with through administrative receivership. Second,...
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