BUILT ENVIRONMENT JOURNAL

Insolvency

Adjudication is only a temporary remedy and may be challenged in subsequent legal proceedings

Author: Jonathan Hutt and Rebecca May

02 June 2019

Insolvency is all too prevalent in the construction industry and adjudication is vital to restore cash flow.

There is a right to adjudicate a dispute under a construction contract 'at any time'. Many construction contracts explicitly provide for this as does section 108 of the Housing Grants Construction and Regeneration Act 1996. Critically, this is a right that cannot be contracted out of.

However, an adjudication will only decide a single dispute and will not resolve other issues. Furthermore, adjudication is only a temporary remedy and may be challenged in subsequent legal proceedings.

An insolvency procedure can take one of the following forms among others.

  • Administration: the company may continue to trade, but is under the control of a licensed insolvency practitioner and action against it is prevented. The aim is to rescue the company as a going concern, achieve a better outcome for creditors than an immediate winding-up, or to realise assets to make a dividend distribution to secured or preferential creditors.
  • Liquidation: the company ordinarily ceases to trade, its assets are realised with proceeds distributed to creditors, and the company is ultimately dissolved.

A company in either of these situations may bring a claim, but insolvency set-off rules require the company and third parties to take account of mutual dealings to set off sums due against each other to come to a final position. Thus adjudication and the set-off rules clearly have different purposes.

The recent Court of Appeal cases Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale Electrical Ltd and Cannon Corporate Limited v Primus Build Limited [2019] EWCA Civ 27, which were heard together as they considered similar points of law, considered these issues.

Lonsdale successfully obtained an injunction to prevent an adjudication brought by Bresco, which was in liquidation from proceeding. Primus meanwhile obtained summary judgment to enforce its adjudication decision despite being in a company voluntary arrangement (CVA), which is an insolvency procedure with similar aims to administration.

Cannon Corporate reconfirms that the court will order summary judgment to enforce an adjudication decision obtained by a company in a CVA, or in administration more generally, because the purpose of such arrangements is to enable the company to return to trading as normal.

However, a company in administration is protected by Schedule B1, paragraph 43 of the Insolvency Act 1986. It can bring and enforce an adjudication, but cannot have one brought against it.

As set out above, liquidation aims to wrap up a company's relationships with creditors or debtors and ultimately dissolve it; underlying disputes can be determined through the courts or arbitration as these decisions are final.

So it follows that, were the parties to agree that adjudication is binding, the court would not grant an injunction preventing a party in liquidation from progressing an adjudication for a monetary award.

However, where adjudication is not binding it would be futile to allow it to proceed. This is because a summary judgment to enforce a decision for a monetary award cannot be obtained by a company that is in liquidation.

Such enforcement would be unjust because an adjudication decision is normally open to challenge, but the finality of liquidation would render this futile – or worth much less and not allow for set-off in the normal way.

But there are exceptions. For example, where a company's financial position is due either wholly or in significant part, to the defendant's failure to pay sums awarded by an adjudicator, the court will allow an adjudication to proceed as in Wimbledon v Vago [2005] EWHC 1086 (TCC).

Jonathan Hutt is a partner and Rebecca May an associate at Taylor Wessing j.hutt@taylorwessing.com r.may@taylorwessing.com

 

Related competencies include: Legal/regulatory compliance

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