The interaction between adjudication and insolvency

30 October, 2017

Two recent cases have highlighted the interaction between adjudication and insolvency. In each case the party seeking to enforce the adjudicator’s decision was met with a threat by the paying party to invoke insolvency procedures to stymie enforcement.

Rossair Limited v Primus Build Limited

Primus was the main contractor in a project to construct a hotel. Rossair was a specialist sub-contractor. The adjudication concerned payments due to Rossair. The adjudicator awarded Rossair just over £350,000.

Bernhards Sports Surfaces Limited v Astrosoccer4u Limited

Bernhards were engaged to lay a sports pitch. Payment was not forthcoming and an adjudication seeking payment of just over £175,000 was commenced. Bernhards were awarded the sum claimed.

Insolvency protection

Insolvency legislation provides a number of ways by which a company in financial difficulty can receive an element of protection against financial claims. Rossair was a case concerning a voluntary arrangement. Bernhards concerned administration.

A voluntary arrangement (VA) is a statutory compromise between a debtor and its creditors. Under a VA a debtor makes a proposal to discharge liabilities either in full or at a reduced rate, typically to be paid by instalments at fixed points over a period of time. If approved by a majority of the creditors, the VA becomes binding on all. The rationale of a VA is that creditors may be willing to accept all or part of the money owing to them over a set period of time, rather than face the prospect of recovering nothing if the VA is not sanctioned.

Administration is a process under which a company in financial difficulty is protected against claims for a period of time. An effect of a company being moved to administration is to prevent new enforcement proceedings from being commenced or existing enforcement proceedings being continued without consent of the administrator or permission of the court. The purpose of the administration is to assess whether the company can be rescued and, if not, to commence an orderly disposal of assets for the benefit of the creditors of the company. The moratorium on new and existing court proceedings enables this assessment to be carried out properly and lasts for the duration of the administration.

In Rossair enforcement proceedings were commenced. In response Primus wrote to the court to advise that it was subject to a VA and as such any enforcement proceedings should be stayed.

In Bernhards, following the adjudicator’s decision, solicitors appointed for Astrosoccer4u advised that while the award might be due they should either mediate to reach agreement on the payment of a lesser sum or face the prospect of their client being moved to administration. Bernhards declined, at which point Astrosoccer4u and its solicitors engaged in what can only be described as an extraordinary course of conduct which included issuing a draft notice of intention to appoint administrators and taking steps to restructure the debtor in such a way as to frustrate Bernhards’ claim.

The outcomes

The outcome in Rossair was straightforward. While Primus advised the court that it was covered by a VA the evidence demonstrated that a VA had merely been proposed. While it is open to a company proposing a VA to seek a stay on new and existing court proceedings pending a conclusion of the VA process no such steps had been taken by Primus. Therefore Primus was not entitled as of right to stay on enforcement. Furthermore, while the court has its own jurisdiction to stay enforcement there was nothing in this case that would justify Rossair being kept out of its money.

In Bernhards the court was scathing about the conduct of both Astrosoccer4u and its solicitors (it is understood the solicitor’s conduct is the subject of review by the Solicitor’s Regulation Authority) describing it as a clear attempt to use company legislation as a means of avoiding having to pay a legitimate debt. While the commencement of the administration process would prevent the continuance of the enforcement proceedings the court had no hesitation in giving permission for the enforcement proceedings to continue notwithstanding the commencement of a formal insolvency process.

Conclusions

Insolvency protection, when used legitimately, is an important tool to aid companies in distress. Used properly they can result in businesses being saved, jobs retained and debtor losses minimised or extinguished. The moratorium on new and existing court processes is an important aspect of such protection. What these two cases illustrate however is that courts are alive to the risk of such processes being misused and that judges will seek to do what they can to ensure that such protections are not abused to the detriment of legitimate claims and innocent creditors.