Funerals, Liquidators and Adjudication
It is a well-known fact that more companies go bust coming out of a recession than during the depths of a recession. Overtrading and lack of bank funding will inevitably cause companies to fail. Contractors and Specialist Sub-Contractors are no exception.
It is inevitable that we will experience a significant increase in the number of corporate insolvencies in the construction sector over the next few years as more and more companies are forced to adopt one or more of the insolvency procedures laid down in the Insolvency Act 1986. Liquidation is one of those procedures.
A company that ends up in liquidation gets there by two methods. The directors may decide to place the company into liquidation. They do this by calling an extraordinary general meeting of the company. The directors report to the shareholders (the members) advising that there is no real prospect of paying existing creditors, that they believe it would be wrong to take on further credit and they advise the shareholders that the company should voluntarily enter liquidation (Creditors Voluntary Liquidation).
Alternatively, a creditor may petition a court to compel a company into liquidation.
Once a company is in liquidation it is dead. There is no way back and the “company undertaker”, or liquidator to you and me, will then be required to carry out his or her legal duties.
The main function of an appointed liquidator is to convert the assets of the company into cash and then to distribute this cash fairly and evenly amongst all the creditors of the company. So far so good, but what happens if the company in liquidation is a contractor or sub-contractor which has various unpaid disputed final accounts? Sound familiar?
And, at the risk of being cynical, it never ceases to amaze me just how many buildings that were defect free up to the point of the contractor’s insolvency suddenly manifest more defects than you can “shake a stick at”. We all know the reason why. The insolvency of a contractor is often seen as a green light for an employer to try and avoid payment of a due debt or, at the very least, obtain a significant discount.
So how does the liquidator go about collecting these disputed debts and - the really key question for this article – can the liquidator adjudicate with clients who refuse to pay up?
We all know that the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”) provides that a party to a construction contract can refer a dispute to adjudication at any time. But is this right somehow fettered if the contractor is in liquidation? I hate doing this but....the answer depends on whether there is more than one contract or “other mutual dealings” between the contactor and the employer. Let me explain.
Rule 4.90 of the Insolvency Rules 1986 says.....
"4.90 – Mutual credits and set-off
(1) This Rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.
(2) The reference in paragraph (1) to mutual credits, mutual debts or other mutual dealings does not include [and then various excluded debts are identified including, for example, a debt due after the company went into liquidation].
(3) An account shall be taken of what is due from each party to the other in respect of the mutual dealings, and the sums due from one party shall be set off against the sums due from the other.
(4) A sum shall be regarded as being due to or from the company for the purposes of paragraph (3) whether–
(a) it is payable at present or in the future;
(b) the obligation by virtue of which it is payable is certain or contingent; or
(c) its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion. …"
What all this means is that where monies are owed by an Employer under one contract but the same Employer has a claim from the rectification of defects under a separate contract, there is clearly more than that dispute to resolve and under more than one contract.
The real question then is whether or not a claim under rule 4.90 of the Insolvency Rules 1986 can be considered in an adjudication?
This issue was addressed in the case of Enterprise Managed Services Limited -and- Tony McFadden Utilities Limited 2009 presided over by his Honour Mr Justice Coulson. The facts of this case are complex and relate to an assignment of a claim by a liquidator to a third party (“Utilities”), the Claimant in the case and a subsequent adjudication by the Claimant against the Defendant (“Enterprise”).
Enterprise successfully argued that it would be unfair to allow Utilities to make a claim in the adjudication without there being any recognition of Enterprise’s own claims against the company in liquidation in respect of other contracts, one of which was not even a construction contract.
His Honour Judge Coulson agreed with the position advanced by Enterprise saying, amongst many other noteworthy things, that .....
“Rule 4.90 provides that when a company goes into liquidation sums due from one party will be set off against sums due from the other. The rule is mandatory.
It was not possible for Utilities to adjudicate the net balance due under rule 4.90 for a number of reasons:
(1) Under the act an adjudicator can only deal with one dispute under one contract. Unless the parties agreed, an adjudicator under the act could never undertake an adjudication under rule 4.90 if there was more than one contract between the parties. In addition, here one of the subcontracts was not a construction contract within the act
(2) Enterprise had a cross claim and, as a result, it would be necessary to join in the liquidators. This was not possible with adjudication
(3) As stated by Lord Hoffmann in Stein vs Blake, rule 4.90 envisages the taking of a “single account” which would rule out adjudication because the results could only be obtained “piecemeal, contract by contract, and could only ever be temporarily binding”.
Where one party goes into liquidation the insolvency rules envisage that claims and cross claims under separate contracts are to be dealt with in detail and finality until a net sum due from one party to another is established.
Thus, unless there is a single dispute arising under one contract between the parties, it is highly unlikely that adjudication could ever be used to resolve a dispute where one of the parties is in liquidation. Even then, given the practical problems of enforcing such decisions in the courts, it would be a very brave man who recommended adjudication to a liquidator in such circumstances.
Although I hate to say it, it does appear that adjudication and liquidation just cannot live together. Will somebody please call the undertaker.
Peter Vinden is a practising adjudicator, mediator, expert and conciliator. He is Managing Director of Vinden and can be contacted by email at firstname.lastname@example.org