Insolvencies and adjudication: what happens with CVAs?

As insolvencies rise, Paul Scott and Olivia Jenkins discuss the likelihood of courts enforcing adjudicators’ decisions in favour of insolvent companies
Image: Dreamstime
Image: Dreamstime

The past 12 months has seen an increasing reliance on adjudication due to the inevitable rise in cashflow insolvencies in construction.

Theoretically, any adjudicator’s decision – including one which is summarily enforced by the court – could be reversed upon final determination of the parties’ dispute, with an order for the enforced award to be repaid by the previously successful party.

Problems arise where an insolvent company succeeds in an adjudication (and enforcement), but the unsuccessful party either wants the dispute finally determined in subsequent litigation or arbitration, or enforcement of any cross-claims it has against the insolvent company.

Will the proceeds of the adjudication (and enforcement) still be available if the other party is insolvent? This was considered by the Supreme Court in Bresco Electrical Services (in liquidation) v Michael J Lonsdale (‘Bresco’).

Among other things, it was confirmed that:

  • Insolvent companies can refer disputes to adjudication;

The courts may not enforce an adjudicator’s decision in favour of an insolvent company where there remains a ‘real risk’ that doing so will deprive the other party of its right to have recourse to the insolvent company’s claim as security for any existing cross-claims; and

  • Liquidators may be able to offer appropriate security for such cross-claims.
    Precisely what security might be capable of sufficiently mitigating risk and enabling adjudicators’ decisions to be enforced in favour of companies in liquidation has been explored at length in the past 18 months, including: Bresco; Meadowside Building Developments (in liquidation) v 12-18 Hill Street Management Company; and John Doyle v Erith.

Guidance from the courts in those cases indicates that appropriate security is limited to the following:

  • An actual (not merely ‘intended’) third party guarantee;
  • An after-the-event insurance policy with no material exclusions; and
  • An undertaking from liquidators that any enforced award will be ring-fenced pending conclusion of the solvent party’s cross-claims or any final determination of the dispute.

But what happens where a party to the adjudication is insolvent, but not in liquidation? Will an insolvent company not in liquidation be subject to the same burden of proving security, and be capable of enforcing an adjudicator’s decision in its favour?

“Problems arise where an insolvent company succeeds in an adjudication (and enforcement) but the unsuccessful party wants the dispute finally determined in subsequent litigation or arbitration”

The courts’ approach to this was observed last month, in Phelan Construction v Elliots Construction (‘Phelan’), when an adjudicator’s decision was enforced in favour of an insolvent company notwithstanding the other party’s existing and seemingly undisputed cross-claim for payable retention.

The insolvent company in Phelan was the subject of a company voluntary arrangement (CVA) – an alternative insolvency procedure under which it continued trading. The court concluded that the insolvent company was more likely than not to be able to repay any enforced award, if later required.

In Phelan, the existence of an undisputed claim for retention was such that the court felt compelled to order a temporary stay of execution of enforcement of part of the adjudicator’s decision (totalling the value of the cross-claim for retention) pending the outcome of that claim.

What the court did not do is subject the insolvent company to the same burden of evidencing security as it had done in previous judgments involving companies in liquidation, lending weight to the possibility that the court’s approach to enforcement in favour of insolvent companies post-Bresco will be determined largely by reference to the specific insolvency procedure that the company is subject to.

Paul Scott is a partner and Olivia Jenkins is a solicitor at Trowers & Hamlins.

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