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All doom and gloom for insolvent companies?

All doom and gloom for insolvent companies?

How the construction industry can survive the "pingdemic"

Understanding the link between insolvency and adjudication through the Court of Appeal's decision in John Doyle Construction Ltd v Erith Contractors Ltd.

The Court of Appeal (CoA) recently upheld Mr Justice Fraser's (Fraser J) judgment in John Doyle Ltd (In Liquidation) v Erith Contractors Ltd [2020] EWHC 2451, establishing guidance on the necessary security arrangements for insolvent companies in adjudication proceedings. Here, the CoA re-explored the distinction between adjudication and insolvency following the Supreme Court decision of Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd.

This blog post will look at whether insolvent companies can enforce a valid adjudicator’s decision, and how the courts will apply the decision in Bresco when deciding whether to award summary judgment to an insolvent company.

Background

  • In October 2020, the High Court refused to enforce the adjudicator’s decision in John Doyle Construction Limited (JDC) v Erith Contractors Ltd, due to the applicant’s inadequate security offering.
  • This fairly surprising decision came only four months after the Supreme Court case of Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd, where it was held insolvent companies have the right to refer a dispute to adjudication.
  • On 7 October 2021, the CoA dismissed JDC’s appeal and decided to use its decision as a way of clarifying the burden on a claimant company in liquidation seeking to enforce an adjudicator’s decision.
  • The issue was whether a company in liquidation, with a valid adjudication decision in its favour, but facing a set-off and counterclaim from the other party, is entitled to summary judgment at all.

Outcome of the case

In order to come to his decision, the judge posed himself a number of questions relating to this matter and answered them as follows:

  1. In what circumstances will a company in liquidation be entitled to summary judgment on a valid adjudicator’s decision in its favour? Here, the Judge based his decision on whether awarding summary judgment of the award would risk depriving Erith (the paying party) of security for its future cross claim.
  2. Are those circumstances present here, such that JDC is entitled to a summary judgment? The judge answered this with a resounding ‘no’ due to the inadequate security offered by JDC and its liquidators. Perhaps, if the security had been more substantial than a mere ‘letter of intent’, summary judgment may have been awarded. In particular, the judge in Bresco suggested that an appropriate undertaking from the liquidators, ring-fencing any awarded amount, might be acceptable in some circumstances.
  3. Would a stay of execution be granted in any event? The judge concluded that even if he was wrong in his answers to questions 1 and 2 above and summary judgment was granted, Erith would be entitled to stay of execution in any event.

Judge’s criticisms of the case

From the outset, the court commented that more generally, the process for adjudication followed by a summary judgment application had not been established with an insolvent company in mind, and emphasised how important it was for an insolvent company to outline the contentious issues clearly. Here, JDC had done the opposite, and produced unreasonably long witness statements as evidence.

The judge was also critical of the length of time taken between the dispute arising (by the time the works were completed in 2012) and the date of the referral to adjudication (2018) with the consequent difficulties to the parties with gathering evidence and witness statements.

Key takeaways

The main point to take away from this case is how imperative it is for an insolvent party to be able to provide adequate security in order to have a chance of obtaining summary judgment for a valid adjudication award. Without this, it is unlikely that a party in liquidation will be successful in an application for summary judgment. 

So, following the decision in Bresco it has been confirmed that an insolvent company has the right to adjudicate. However, the judgment in JDC has shown that while obtaining an adjudication award might be a useful step in resolving a dispute between the parties, any monetary award will only be summarily enforced in limited circumstances. Therefore, it might be worth considering alternative solutions which may ultimately be more cost-effective than adjudication.

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