Insolvent claimants and adjudication – A court of appeal update

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Peter Vinden, chief executive of The Vinden Partnership, takes a look at the Court of Appeal’s decision on insolvent claimants and adjudication

On 24 January 2019 the Court of Appeal handed down an important judgement covering two appeals arising from judgements made in the Technology and Construction Court Division of the High Court (“TCC”). The cases concerned are Bresco Electrical Services Limited (in liquidation) -and- Michael J Lonsdale (Electrical) Limited and Cannon Corporate Limited -and- Primus Build Limited. The appeals were heard together because both cases concern the interplay and tension between adjudication law on the one hand and insolvency law on the other. The Court of Appeal decided that guidance was needed in this area of law.

In the first case (“Bresco”) a liquidator was seeking to set aside an injunction granted by the TCC to restrain him from adjudicating a payment dispute and in the second case (“Cannon”) an Employer was seeking to set aside a judgement of the TCC granting enforcement of an Adjudicator’s Decision to a claimant company which was the subject of a Creditors Voluntary Arrangement (“CVA”).

Before diving into the law created by the Court of Appeal decision, it is important to understand the difference between a company that is in liquidation and one which has an approved CVA in place. Whilst liquidation undoubtedly spells the end for a company, a CVA is a procedure under which a company escapes the inevitable fate of either administration or liquidation by entering into a legally binding arrangement with its creditors to pay either a lesser sum than is owed and/or pay what is owed over a longer period than would otherwise apply. Thus, if an insolvent company agrees a CVA with its creditors, it moves from being in an insolvent state to one where, provided the terms of the CVA are complied with, it is, in effect, solvent.

The distinction between liquidation and CVAs is important when the Courts are considering whether to enforce an Adjudicator’s Decision where the claimant is said to be insolvent.  As we all know, Adjudicator’s Decisions provide temporary, albeit binding, solutions to payment and other forms of dispute. A company that is insolvent would not be able to repay an Adjudicator’s award if it was latterly ordered by a court or arbitral tribunal to repay part or all of the decision. Thus, other than in the case of Bouygues (UK) Limited v Dahl-Jensen (UK) Limited [2000] EWCA Civ 507; [2000] BLR 522, to my knowledge, there are no reported cases where a claimant that is in liquidation has ever managed to succeed in enforcing payment of an Adjudicator’s Decision.

In Bouyges v Dahl-Jensen the adjudicator had made a mistake in the calculation of the sum due, but the TCC enforced the decision because the error had been made within the adjudicator’s jurisdiction. The Court of Appeal upheld that conclusion, although one of the Appeal Court judges raised (for the first time) an issue as to the application of the Rules supporting the 1986 Insolvency Act and the rules relating to the mutual dealing of debts, which, if had been argued, would have brought about a very different outcome. I would suggest that a similar case brought before the Court now would not result in enforcement.

By contrast, there are, however, a number of cases where claimants who have had a CVA in place have succeeded in persuading a Court to enforce payment of an Adjudicator’s Decision. This is particularly true where it can be shown that the CVA has been brought about by the behaviour of a reluctant debtor such as in Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC).

So, what does the judgement of the Court of Appeal tell us about cases that are brought by claimants who are in liquidation or are the subject of a CVA?

Liquidation

Firstly, whilst a party in liquidation could commence an adjudication and an Adjudicator would have the necessary jurisdiction to hear the dispute, it was highly unlikely that any Decision so produced was ever likely to be enforced. Secondly, and in such circumstances, a Court could well be disposed to grant an injunction on application to stop such an adjudication in its tracks in order to prevent the unnecessary waste of costs on both sides. This what the Court of Appeal judgment says on this point

“……I am in no doubt that the adjudication process on the one hand, and the insolvency regime on the other, are incompatible. It would only be in exceptional circumstances that a company in insolvent liquidation (and facing a cross-claim) could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution. Thus, in the ordinary case, even though the adjudicator may technically have the necessary jurisdiction, it is not a jurisdiction which can lead to a meaningful result.

“…..In my view, the solution to the incompatibility issue is the one that was adopted in the present case: the grant of an injunction to restrain the further continuation of the adjudication. Twintec (paragraph 13 above) is authority for the proposition that the court will grant such an injunction if the court concludes that the nascent adjudication is a futile exercise.

“…Accordingly, for these reasons, Lonsdale were entitled to an injunction to prevent the continuation of the adjudication.”

Not good news for potential claimants in liquidation.

CVAs

Claimants that are the subject of a CVA, particularly where they are able to show that the behaviour of the debtor has contributed to the claimant’s financial state, are likely to be successful in applications made to enforce an Adjudicator’s Decision in such circumstances.

Quoting directly from the original TCC judgement

“On any view if Primus was to make all or most of its recovery it will emerge solvent with all debtors paid and something left over, and that was the basis for having the CVA to enable it to do so.”

And now quoting directly from the Court of Appeal Decision

“This is therefore a very different case to the straightforward situation where the claiming company is in insolvent liquidation and the liquidator is engaged in the process of recovering what he can in order to make a distribution to creditors. Here, not only was the CVA designed to allow Primus to trade out of its difficulties but, on the judge’s findings, if the CVA was allowed to run its proposed course, Primus would avoid liquidation altogether.

“……. Furthermore, in the earlier case of Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC), I found in principle that:

12. There is, so far as I can tell, no authority dealing with the position of a claimant who is the subject of a CVA and who seeks to avoid a stay of execution. Ms. McCafferty was also unable to identify any such authority. However, it seems to me that, applying the principles that I have already noted:

(a) The fact that a claimant is the subject of a CVA will be a relevant factor for the court to take into account when deciding whether or not to grant a stay under RSC Order 47.

(b) However, the mere fact of the CVA will not of itself mean that the court should automatically infer that the claimant would be unable to repay any sums paid out in accordance with the judgment, such that a stay of execution should be ordered.

(c) The circumstances of both the CVA and the claimant’s current trading position will be relevant to any consideration of a stay of execution.

(d) Also of relevance will be the point noted in paragraph 26(f)(ii) of the judgment in Wimbledon (which was also one of the live issues in Michael John Construction Ltd. v. Golledge & Others) [2006] EWHC 71 (TCC)), namely whether or not the claimant’s financial position and/or the CVA is due, either wholly or in significant part, to the defendant’s failure to pay the sums awarded by the adjudicator.

“Secondly, I consider that, having resolved the CVA issue at the summary judgment stage, it could not arise again in respect of the stay, or if it could, the same answer was appropriate. The CVA was not a reason to refuse the stay: indeed, a stay would have run the risk of preventing the successful conclusion of the CVA. Again, that was the position in Mead:

In summary, therefore, I find that:

(a) Mead’s financial troubles have been directly caused by Dartmoor’s failure to pay the sums found by the adjudicator to be due. Mead were too small a business to be able to withstand losses of the magnitude created by Dartmoor.

(b) The CVA was the result of Dartmoor’s failure to pay the sums due.

(c) It is evident that the supervisor of the CVA believes that Mead are a viable ongoing concern and who can trade their way out of their difficulties.

(d) Mead are currently trading successfully, and there is no reason to believe that they would not be in a position to pay back any part of the judgment sum if, in a subsequent arbitration, the arbitrator concluded that they had been overpaid.

“In those circumstances, the argument about the stay of execution in the present case turned on the application of the principle at paragraph 26(f)(ii) from the summary in Wimbledon v Vago. A court will exercise its discretion against a stay if it concludes that the party seeking the stay is responsible, either wholly or in substantial part, for the claimant’s financial difficulties. In the present case, that was the conclusion reached. That was the view of O’Farrell J in this case on the unsuccessful application for security for costs. And on the application before Judge Waksman QC, he analysed the figures in detail and reached precisely the same conclusion (see paragraph 81 above).

“Accordingly, it was plainly open to the judge in the present case to exercise his discretion against granting a stay of execution. In my view, on the facts of this case, having decided that he could enter summary judgment in favour of Primus, the refusal of the stay was almost inevitable. Had it remained live, the appeal against the refusal to grant the stay would also have been refused.”

The Court of Appeal refused to allow Cannon’s appeal, which was no doubt a relief for Primus and other Claimants subject to CVAs up and down the land.

So where does all this leave us? I would suggest that any claim made by a party in liquidation is pretty much doomed to fail. A party faced with a claim from a party which is in liquidation is likely to succeed in obtaining injunctive relief to prevent the adjudication from proceeding. Even if an injunction is refused, the prospects of a Claimant successfully enforcing an Adjudicator’s Decision are so remote as to question whether such an action would ever be a worthwhile exercise.

By way of contrast, claimants in adjudication that have an approved CVA in force are far more likely to be successful in enforcing an Adjudicator’s award in their favour, particularly when a claimant is able to show that the Responding Party’s conduct has contributed to the need for the Claimant to propose the CVA in the first place.

 

Peter Vinden

Chief executive

The Vinden Partnership

pvinden@vinden.co.uk

www.vinden.co.uk

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