Insolvency in Construction, CVAs and Adjudication

My firm, The Vinden Partnership (TVP) spends a lot of its time advising Directors, Banks and Insolvency Practitioners on the best way to restructure and/or recover businesses involved in the construction supply chain. We have been doing this since TVPs inception in 1994. It is true to say that over the last 15 years I can remember the Company Voluntary Arrangements (CVAs) I have been involved in on less than the fingers of one hand! However, for reasons that I am hopefully about to explain, things may be about to change.
 
 
My firm, Vinden (“Vinden”) spends a lot of its time advising Directors, Banks and Insolvency Practitioners on the best way to restructure and/or recover businesses involved in the construction supply chain. We have been doing this since Vinden’s inception in 1994. It is true to say that over the last 15 years I can remember the Company Voluntary Arrangements (CVAs) I have been involved in on less than the fingers of one hand! However, for reasons that I am hopefully about to explain, things may be about to change. 
 
Many readers of this article will know that from 1 May 1998, statutory adjudication became available to parties involved in the construction industry following the introduction of The Housing Grants Construction and Regeneration Act 1996 or “Construction Act” as it has become known throughout the industry. The whole point of adjudication is to give contracting parties swift access to justice and the accompanying money in the form of temporary binding decisions which can then be decided finally by arbitration or litigation at a later date.
 
In practice, statistics show that adjudication has caused what can only be described as a seismic shift in the construction industry. I say this because, with very few exceptions, parties tend to treat adjudicators’ decisions as being the last word in a construction dispute.
 
Since 1 May 1998, when the Construction Act came into force, Administrative Receivers, Liquidators and Administrators have tried with varying degrees of failure to use the adjudication process to try and recover debts and work-in-progress values on behalf of insolvent companies.
 
The first attempt made on behalf of an Administrative Receiver to use adjudication to recover debts is documented in the case of Rainford House Ltd (in Administrative Receivership) -v- Cadogan Ltd (February 2001).  In this case the Administrative Receiver began court proceedings to enforce an adjudicator’s decision in its favour and applied for summary judgement. The judge held that the decision should be so enforced but there was to be a sting in the tail. The judge decided that execution of the summary judgement should be stayed pending the trial of the employer's counterclaim by reason of the contractor being in administrative receivership. To balance this decision the Court stated that the stay was subject to the employer paying the judgement sum into court and the contractor having permission to apply to lift the stay in the event of it being willing to provide security for the repayment of that sum.
 
The judge in this case recognised that the enforcement of a decision will usually be stayed where the claimant company is in administrative receivership unless that company can provide security for repayment of the sum awarded by the adjudicator in the event of subsequent court or arbitration proceedings reversing the decision.
 
This is somewhat defeating the object and many commentators at the time recognised that Administrative Receivers would be unwilling to offer the security required to obtain payment of the judgement and incur the costs associated with fighting out the case to the death in a subsequent arbitration or court case.
 
Liquidators have not faired much better, although in Bouygues -v- Dahl-Jensen (November 1999) a Liquidator was successful in persuading a Court to order the enforcement of an Adjudicator’s decision even though the Adjudicator had made an error in his decision and the claimant was in liquidation at the time the adjudication reference commenced. Following this judgement many legal commentators pointed out that had Bouygues relied on the provision contained in the 1986 Act and accompanying insolvency rules Dahl-Jensen would never have been successful.
 
Not surprisingly Bouygues appealed against the judgement. The appeal was heard in July 2000 and in the appeal court case of Bouygues -v- Dahl-Jensen (CA) (July 2000) a stay of execution of the summary judgement awarded in the first case in Dahl-Jensen’s favour was ordered. The rationale for this decision was that there were latent claims and cross-claims between the parties and, as one of the parties (the sub-contractor) was in insolvent liquidation, all the claims and cross-claims should be dealt with in the liquidation as required by rule 4.90 of the Insolvency Rules 1986 (made under section 411 of the Insolvency Act 1986) before any money could change hands.
 
For the last 8 years and in a series of cases that have followed the decisions in Rainford House Ltd (in Administrative Receivership) -v- Cadogan Ltd and Bouygues -v- Dahl-Jensen, most Insolvency Practitioners have effectively abandoned any thought of using adjudication to resolve disputes and collect debts through adjudication, that is, until now.
 
In Mead General Building Ltd -v- Dartmoor Properties Ltd (February 2009) the claimant contractor was awarded a specified sum by the adjudicator and brought court enforcement proceedings against the employer in which it successfully applied for summary judgement to be entered in its favour even though the contractor was subject to a company voluntary arrangement.
 
In this case the employer, following ten years of developing law on adjudication and the enforcement of decisions in the courts, applied to have execution on the judgement stayed on the grounds that the contractor would be unlikely to be able to repay the judgement sum if the employer was successful in the arbitration it intended to commence to overturn the adjudicator's decision.
 
The judge in this case, however, held that the summary judgement should not be stayed. The contractor's financial troubles had been directly caused by the employer's failure to pay the sums found by the adjudicator to be due insofar as the contractor was too small a business to be able to withstand losses of the magnitude created by the employer. The company voluntary arrangement to which the contractor was subject was the result of the employer's failure to pay the sums due. The supervisor of the company voluntary arrangement believed that the contractor was a viable ongoing concern which could trade its way out of its financial difficulties. The contractor was currently trading successfully and there was no reason to believe that it would not be in a position to pay back any part of the judgement sum if, in a subsequent arbitration, the arbitrator concluded that they had been overpaid.
 
The fact that a claimant was the subject of a CVA was a relevant factor for the court to take into account when deciding whether or not to grant a stay. The mere fact of the CVA did not, however, mean of itself that the court should automatically infer that the claimant would be unable to repay any sums paid out in accordance with the judgement such that a stay of execution should be ordered. Matters relevant to whether a stay should be granted included the circumstances of both the CVA and the claimant's current trading position and whether or not the claimant's financial position and/or the CVA was due wholly or in significant part to the defendant's failure to pay the sums awarded by the adjudicator .
 
Peter Vinden is a practising adjudicator, mediator, expert and conciliator. He is Managing Director of Vinden and can be contacted by email at pvinden@vinden.co.uk
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