An increase in numbers of business insolvencies is a likely consequence of the Covid shutdown. The increased importance of whether an insolvent party can adjudicate is reflected in recent court activity. This has been covered in previous editions of Construct. The issue arises from incompatibility between insolvency law and adjudication. The former requires a set off of mutual indebtedness, whereas the approach in the latter is “pay now and argue later” reflecting the interim binding nature of an adjudicator’s decision.
To recap, in Bresco v Lonsdale the Court of Appeal decided that there is no absolute jurisdictional bar on an insolvent party adjudicating but pointed out that, save in exceptional circumstances, it would be futile as the adjudicator’s decision would not be enforceable. The decision has been the subject of an appeal to the Supreme Court (the hearing was conducted by remotely illustrating the pragmatic approach of the courts in deciding important cases during lockdown), the outcome of which is awaited and will be the subject of comment in future.
The decision in Meadowside v 12-18 Hill Street Management provided an illustration of the circumstances in which an insolvent party could adjudicate. They were:
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The dispute referred should be determinative of the final position between the parties
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Adequate security should be provided for:
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Any sum awarded and paid to the insolvent party
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Adverse costs arising from:
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Unsuccessful enforcement
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Subsequent litigation to finally determine the dispute referred
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- Any funding arrangement by which the above requirements are met should not be an abuse of process
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Balfour Beatty v Astec provides further insight into how the courts approach such situations. Astec was insolvent and sought to adjudicate in respect of work carried out at Blackfriars station under 3 separate contracts. Astec had legal expenses insurance, adverse costs cover and a funding arrangement in place arranged by the liquidator.
Balfour Beatty sought to prevent adjudication on the grounds that: Astec was insolvent; and that 3 adjudications were necessary to determine the final position between the parties; and the security available was not adequate.
The court took a pragmatic approach in line with the policy of encouraging adjudication. Since the parties agreed that the final position between them would arise from the outcome of the 3 adjudications, it was ordered that Astec should refer the remaining 2 disputes within 21 days and that all 3 should be decided by the same adjudicator to arrive at the net position between the parties.
A stay was imposed on enforcement of the adjudicator’s decisions if in favour of Astec. If Balfour Beatty brought proceedings within 6 months of the decisions the stay would be extended. This provided security in respect of any sum decided to be payable to Astec. Astec had £750,000 of adverse costs cover which was considered adequate for the time being as security for adverse costs. Balfour Beatty would be entitled to apply for security to be increased should that change. The judge reviewed and made amendments to the funding agreement with the agreement of the funder who was present in court.
Therefore, subject to the Supreme Court decision in Bresco on the fundamental jurisdiction point, where there is a claim or claims with merit adjudication is likely to be an option for insolvent parties. Funding will almost always be required. Liquidators are well placed to access funding in these circumstances. Parties facing claims from insolvent companies will therefore have to face up to the prospect of having to contest claims on their merits or settle.
