Assistance for the insolvent – is it all one way?

The current recession will inevitably lead to more insolvencies in the construction industry. Parliament, and to some extent the courts, seem to be doing as much as possible to soften the blow. However, sometimes it is the party facing a claim from an insolvent company that needs the help.

Relief for companies in trouble has come in the form of the Corporate Insolvency and Governance Act 2020 (Lindy Patterson QC commented on the bill in Building on 15 June). The act allows eligible companies to claim protection from creditors, via a moratorium lasting 20 working days (initially) simply by filing documents with the court. It also contains a provision that helps “clients” – in a construction context, employers, but also main contractors as against their subcontractors – that have gone insolvent. A “supplier” (eg the main contractor) cannot now terminate a contract or “do any other thing” because of a breach that occurred prior to the start of the formal insolvency.

The bar on doing “any other thing” seems to stop the supplier from even suspending work. Does that override the statutory right to suspend for non-payment in section 112 of the Construction Act? The legal position, where there are these two apparently conflicting statutes, is unclear.

Of course, helping the client may mean not helping the supplier. Unless the supplier can show hardship, it must continue to perform the contract, at least until any further non-payment after the date of the insolvency. The new law will thus cause some headaches for main contractors with financially wobbly employers; and for subcontractors when their main contractor goes insolvent.

Parliament has not said anything recently about adjudication, but the courts have. It used to be the case that anyone faced with an adjudication by an insolvent company could get an injunction to stop it. Not now. Earlier this year the Supreme Court said that an insolvent company has as much right to a decision in adjudication as anyone else (in the case of Bresco). However, administrators and liquidators will still have to clear a number of hurdles to get their decision enforced.

What about the situation where someone is facing a claim in court from a company that is financially unsound, and where the real beneficiary of an action – often the majority shareholder – is in the background… apparently immune from any court order for costs?

Looking at all of this, it seems that the law is doing a lot to assist companies that are in financial difficulties. That is no bad thing in itself. But the merits are now always on the side of such companies. What about the situation where someone is facing a claim in court from a company that is financially unsound, and where the real beneficiary of an action – often the majority shareholder – is in the background, directing operations, but apparently immune from any court order for costs? The defendant, if it wins, may then be left with a costs order against an insolvent company – which is worthless.

Section 51 of the Senior Courts Act 1981 provides a potential remedy. It allows a court to make an order that someone who is not a party to a High Court action should nonetheless pay the winning party’s costs. The courts have in fact had this power for many years, but the last decade or so has seen an increasing use of it.

A section 51 order may be made where a person is actively directing and funding a losing case in litigation. If that person stands to gain personally from the action as well, he or she is even more at risk of being ordered to pay costs if the company’s claim fails. By way of example, such an order was made in the Technology and Construction Court against the majority shareholder of two companies a few years ago in the case of Weatherford Global Products Ltd vs Hydropath Holdings Ltd and others.

The shareholder/director in question had controlled, funded and pursued the companies’ counterclaims in the litigation, mainly for his own benefit. The companies would probably have been insolvent had it not been for the director’s loans and cash injections. The counterclaims were speculative. When those counterclaims failed, the court held that the director could be ordered personally to pay the costs of the winning party – even though he was not otherwise a party to the litigation.

Recent changes in the law will assist construction companies that are in some form of financial trouble. Section 51 orders are perhaps a reminder that there are limits to that assistance. Such orders are worth bearing in mind for those being sued by a company that is only pursuing a claim because of the existence of a rich benefactor.

Ian Yule is construction and engineering partner at Shoosmiths