Adjudication and insolvency

Parties contemplating adjudication where insolvency is a relevant consideration must closely consider both the nature of the proposed adjudication and the nature of the insolvency procedure. The different combinations of each can make all the difference, as is shown by comparing two recent cases.

In Indigo Projects London Ltd vs Razin & Anor [2019] BLR 454, the defendants engaged Indigo to build a house. Their contract included an express right to refer disputes to adjudication. About a year later, Indigo issued an interim payment notice in the sum of £202,036.05; the defendants disagreed with this figure but failed to serve a pay less notice.

The defendants paid only a small proportion of this and so Indigo referred the dispute to adjudication, claiming the substantial balance. Indigo was successful and issued an application to enforce the adjudicator’s decision. 

However, the defendants then intimated various cross-claims. 

It would be highly unusual to enforce an adjudicator’s decision in favour of a company in insolvent liquidation where there was a cross-claim (at least without a stay) because it would defeat the principle of equal distribution

Further, between the issue of its application for summary judgment and the hearing, Indigo had successfully proposed a company voluntary arrangement to its creditors. The outstanding enforcement of the adjudication was a matter that had been expressly considered by Indigo’s creditors, and the terms of the CVA provided that any sum received under the contract with the defendants was to form part of the assets available under the arrangement, subject to the following conditions: 

• After the commencement of the CVA, no proceedings were to be taken in respect of any debt that formed part of the CVA, and the remedies provided by the CVA were to be the creditor’ sole recourse during that duration.
• To the extent that – before commencement of the CVA – there had been mutual credits, debts or mutual dealings between Indigo and its creditors, a set-off was to be undertaken, and only the balance was either to be subject to the CVA or paid to the debtor.

Among the bases on which the defendants resisted Indigo’s application was that enforcement of the adjudicator’s award would undermine the basis of the CVA. If the sums awarded by the adjudicator award had been paid before commencement of the CVA, then a set-off exercise would be undertaken. This would have taken into account the defendants’ own claims, to arrive at a final balance due between the parties. 

However, if (as was in fact the case, given Indigo’s application) the sum awarded by the adjudicator would be paid after commencement of the CVA, then it would be available for general distribution to all Indigo’s creditors, which could only operate to the defendants’ disadvantage. This was because the adjudicator had not determined the final account between the parties; he had only enforced Indigo’s contractual right to the interim payment due under the contract.

The judge found in favour of the defendants and dismissed Indigo’s application. The interest of the case lies in its discussion of the interaction between the nature of a “technical” adjudication (as distinct from a final account adjudication, determining the true state of credits and debits between the parties) and the various insolvency proceedings into which a company may enter.

First, take the nature of the adjudication. The decision in Indigo to refuse enforcement of the adjudicator’s decision sharply contrasts with that in Cannon Corporate vs Primus Build [2019] EWCA 27. There, too, the party seeking to enforce the adjudicator’s award was a contractor in a CVA, but in this case enforcement was granted. It was highly relevant that the adjudication between the Cannon parties had not been a technical objection; it had, instead, determined the parties’ claims and counterclaims. There was therefore no reason to suppose that the supervisors of the CVA would go behind that decision when undertaking the netting process required. 

It may, however, be questioned whether, when considering to grant enforcement, the emphasis placed by the court in Indigo and Cannon on the adjudication having considered both the claims and the cross-claims of the parties is, in fact, critical in the insolvency context. The exercise an adjudicator undertakes is not the same as that of a supervisor under a CVA because the decision reached by an adjudicator may be opened up in litigation or arbitration. This was exactly the situation in Cannon, where the parties appear to have agreed that everything decided by the adjudicator would subsequently be finally settled by litigation in any event.

A second point of interest is the difference between the various forms of insolvency procedure, in particular between a CVA and insolvent liquidation. The court in Indigo was referred to the decision in Bresco Electrical Services vs Michael J Lonsdale (which was a joined appeal with Cannon). In that case, the court considered it would be highly unusual to enforce an adjudicator’s decision in favour of a company in insolvent liquidation where there was a cross-claim (at least without a stay), because it would defeat the principle of equal distribution on which liquidation is founded. 

However, the court considered that a CVA may attract different considerations from insolvent liquidation when deciding whether to enforce. The statutory purpose of a CVA is to cater for situations in which a company may yet be able to “trade its way out of trouble” (at [108]). In those circumstances, the court in Bresco considered that adjudication may serve an important and useful purpose, namely “a quick and cheap method of improving cash flow”. If there is a prospect of the company doing so, the risk that the enforcement of an interim decision may prejudice the other party is lessened, because the final remedies will still be available.

Sir Robert Akenhead is an arbitrator, mediator, DRB member and adjudicator at Atkin Chambers. He was assisted in the writing of this article by Christopher Reid, a barrister at Atkin Chambers.