Integrated Building Services Engineering Consultants Ltd v PIHL Ltd (Scot, OH, CS - 1.7.2010)

The contractor was entitled to invoke the principle of Scots law of the balancing of accounts in bankruptcy as a defence to the enforcement proceedings brought by the insolvent sub-contractor
 

INTEGRATED BUILDING SERVICES ENGINEERING CONSULTANTS LTD v PIHL UK LTD
Scotland, Outer House, Court of Session
Lord Hodge
1st July 2010

 

The sub-contractor referred disputes to adjudication, was awarded specified sums and began court enforcement proceedings in the Scottish courts. Shortly after beginning the enforcement proceedings its bank appointed administrators. The sub-contractor’s statement of affairs recorded an estimated deficiency of £6.9m of assets available for unsecured creditors who could expect no more than 3p in the pound.

 
Lord Hodge held that the adjudicator’s decision should not be enforced summarily because the contractor was entitled to invoke the principle of the balancing of accounts in bankruptcy as a defence to the enforcement proceedings brought by the sub-contractor in view of the clear and uncontested evidence of the sub-contractor’s insolvency.
 
The provisional nature of the adjudicator's decision and the reservation of a final determination to another decision maker are important characteristics of the adjudication process. It is most unlikely that Parliament intended that provisions intended to improve the efficiency of the construction industry in the Construction Act should determine priorities between the employer and an insolvent contractor's creditors. Scots law has long recognised an equitable extension of the compensation of debts in the form of the principle of the balancing of accounts in bankruptcy which (i) is an equitable one with the result that the court can regulate its operation to ensure fairness (ii) is available not only on bankruptcy or liquidation but also when the party is vergens ad inopiam (verging on insolvency) (iii) may be applied if an administrator is appointed to a company by the court under section 8 of the Insolvency Act 1986 (iv) may also be applied if the company itself or the holder of a floating charge appoints an administrator under Schedule B1 to that Act provided that there is sufficient prima facie evidence of insolvency (v) is not excluded by the Construction Act (vi) is not confined in its application to the circumstances in which it is pleaded before the adjudicator and (vii) may be pleaded when an insolvent claimant seeks to enforce the adjudicator's decision in a court action. The obligation to pay the sum due under the adjudicator's decision is a contractual one which does not supersede the responding party’s rights to assert the principle if the referring party is insolvent. It was, however, doubtful if seriously contested allegations of insolvency alone would justify the application of the principle in the context of the Construction Act.
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