Insolvency and adjudication
Insolvency has been very much in the news over the last few months. We have seen the recent spate of High Street retailers finding themselves in difficulties. We have also seen the recent case of Wright & Another v The Prudential Assurance Company Limited (2018) concerning the liability to pay rent as an expense of administration following the termination of the BHS voluntary arrangement. Of course, in the construction industry we have seen the recent collapse of Carillion.
In 2017, two cases highlighted the interaction between construction adjudication and insolvency protection.
What is construction adjudication?
The Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) implies into Construction Contracts (as defined in the Construction Act) a right to resolve disputes through adjudication. Adjudication is a swift process designed to resolve disputes which arise during the currency of a construction project, without derailing the project itself.
Many adjudications concern the entitlement to be paid. Once published, an adjudicator’s decision is converted into an enforceable judgment by a specific summary procedure commenced in the Technology and Construction Court (TCC).
Rossair Limited v Primus Build Limited (2017)
Primus Build Limited (Primus) was engaged as the main contractor in a project to construct a hotel in Central London. Rossair Limited (Rossair) was a specialist mechanical installation sub-contractor, engaged by Primus to undertake work on the project.
A dispute arose over Rossair’s entitlement to be paid. Rossair referred the dispute to adjudication. The adjudicator published a decision under which Primus was required to pay Rossair just over £350,000. Rossair failed to pay and Primus commenced enforcement proceedings in the TCC.
Bernhards Sports Surfaces Limited v Astrosoccer4u Limited (2017)
Bernhards Sports Surfaces Limited (Bernhards) was engaged by Astrosoccer4u Limited (Astro) to lay a football pitch.
As with Rossair, there was a dispute over payment. Bernhards referred the dispute to adjudication. The adjudicator published a decision under which Astro was required to pay Bernhards just over £175,000. Astro failed to pay and enforcement proceedings were commenced.
The Insolvency Act 1986 (the 1986 Act) provides a number of ways in which a company in financial difficulty can be shielded from claims. Some examples are set out below.
Company Voluntary arrangements
A Company Voluntary Arrangement (CVA) is a statutory compromise between a debtor and its creditors. Under a CVA 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 time.
If approved by a majority of creditors, the CVA becomes binding on all. The rationale 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 CVA is not approved.
Administration is a process under which a company in financial difficulty is protected against prosecution of claims (new and existing) for a period of time. Its purpose is to provide space to allow an assessment of whether a company can be rescued and to implement a rescue plan.
Both administration and CVAs bring with them a statutory moratorium on claims In the case of administration, the moratorium automatically commences on service of a notice of intention to appoint an administrator and will continue for the duration of the administration. With a CVA, the position is different. It only lasts for a 28 day period, has to be applied for (through court) and is only available to Small Companies (as defined in the 1986 Act). The Small Companies moratorium is distinct from any moratorium imposed within the CVA itself.
During any moratorium new claims cannot be commenced and existing ones cannot be progressed without (in the case of administration) the consent of the administrator or the permission of the court. In considering whether to grant permission the court must consider the guidelines laid down by the Court of Appeal in Re Atlantic Computer Systems plc (1992).
The Insolvency Protection in Rossair and Bernhards
In Rossair, it was Primus’ case that a proposal for a CVA had been made and proceedings should therefore be stayed. While it was not explicitly advanced as reliance upon the Small Companies moratorium available under the 1986 Act, the court treated Primus as seeking to rely upon it.
In Bernhards, following the service of notice of the intention to appoint an administrator of Astro, Berhnards sought the court’s permission to continue with its enforcement application.
While insolvency protection, if used appropriately, can aid companies in distress, the court determined that in each of these cases it was being cited as nothing other than a tactic to try and avoid payments that were otherwise legitimately due.
In Rossair this was a straightforward conclusion to draw. While Primus advised the court that it was proposing a CVA and had filed the necessary paperwork (which would have had the effect of imposing a moratorium), there was simply no evidence produced to support this conclusion.
The 1986 Act does make provision for directors of eligible companies who propose a CVA to take steps to seek a Small Companies moratorium pending approval of it. However, the court concluded that Primus had taken no steps to obtain one and was therefore unable to rely on it.
In Bernhards, there was no dispute that a moratorium came into effect and that it was for the creditor to demonstrate why enforcement proceedings should be continued under the Atlantic Computer Systems guidelines. In drawing upon an enforcement decision from earlier in the year (South Coast Construction Limited v Iverson Road Limited (2017)), the TCC identified the following factors as the most persuasive:
- The proceedings were effectively at an end (the claim was for judgment to enforce already concluded proceedings);
- Continuing the enforcement proceedings would not frustrate the administration process;
- There was no risk of undue or unfair prejudice; and
- The conduct of the debtor.
As to conduct, the TCC was highly critical of Astro’s attempt to avoid enforcement through the use of administration. It described the notice of intention to appoint as being entirely bogus and solely intended to frustrate legitimate attempts to secure payment of a legitimate debt. The conduct of Astro’s solicitors was also heavily criticised by the TCC.
Insolvency protection, when used legitimately, is an important tool to aid companies in distress. Used properly businesses can be saved, jobs retained and debtor losses minimised or extinguished. The moratorium on new and existing court processes is an important part of such protection. However, what the cases of Rossair and Bernhards (and the earlier case of South Coast Construction) illustrate is that the courts are alive to the risk of such processes being misused and, in the context of enforcing construction adjudication decisions, they will be slow to allow such protections to be used to the detriment of legitimate claims and innocent creditors.
This article first appeared in Estates Gazette.