Insolvent abuse

Do you recall Bouygues (UK) Ltd vs Dahl-Jensen Ltd – case number 12 in my adjudication series? It was an adjudication that involved some big money and went against Bouygues. But the contractor wouldn’t pay. It pointed to what it said was a whopper of a mistake in the adjudicator’s decision. So Dahl-Jensen took it to the High Court and the judge listened to why Bouygues wouldn’t pay.

Bouyges said that each party had won something from the other in the adjudication, but the adjudicator deducted 5% retention from Bouygues’ winnings when he ought not to have done. As a result, said Bouygues, instead of Dahl-Jensen paying it £141 000, it was ordered to pay Dahl-Jensen £207 000. The adjudicator stood by his decision and said no error had occurred.

The contractor was horrified because, by now, Dahl-Jensen was in liquidation. Bouygues could see that if it stumped up the £207 000, it would go straight to the liquidator. And even if Bouygues fought the dispute all over again and won a big lump of money, it would rank only as an unsecured creditor in the winding up. It would get only a dividend – if it was lucky.

Bouygues wanted the judge to stop the money flowing or put right the “obvious” mistake. But the judge wouldn’t do either. If the adjudicator makes a mistake in law or fact on an issue within his jurisdiction, the decision binds until decided in litigation or arbitration.

Bouygues decided to go to the three-man Court of Appeal. It was decided on 31 July. This court decided that an adjudicator’s decision is binding whether right or wrong, provided he answered the issues referred to him under a construction contract: in other words, the three men agreed with the first judge. But they said something very interesting about enforcing an adjudicator’s decision when one of the parties becomes bankrupt or enters into liquidation.

As soon as a company or person gets into financial straits, insolvency law pops up like a jack-in-the-box. Jack is not interested solely in the contract between Bouygues and Dahl-Jensen, it is interested in all the people who might be injured by the enterprise that has gone, or is going, bust. Insolvency law attempts to share out the remaining assets as fairly and equally as possible. It recognises special circumstances such as “preferred creditors” but recognises, too, the mutual dealings and claims that companies might have in their private contracts.

As soon as Jack sprang up from his insolvency box, he had a pile of rules that work alongside the Construction Act

A 1986 Insolvency Rule (number 4.90) says that when a company – such as Dahl-Jensen – goes into liquidation and has had mutual dealings with, say, Bouygues, “an account shall be taken of what is due from each party to the other in the mutual dealings, and the sums due from one party shall be set off against the sums due from the other”. It then says that “only the balance (if any) shall be paid to the liquidator”.

That’s all very interesting, but Bouygues didn’t have a piece of paper from an adjudicator saying Dahl-Jensen owed it money. So, on the face of it, nothing was available to set off against the £207 000. But that all depends on whether you interpret the phrase “sums due” to mean “payable now” or “payable in the future”, or even “may be payable in the future”.

This was explained in a 1996 House of Lords case, Stein vs Blake. The position seems to be that, when a company enters into liquidation, the liquidator can claim moneys due to the company, but liabilities must be set against that cash. And it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, whether it can be ascertained or calculated. In short, account is to be taken of liabilities that may be due but not yet payable.

In Bouygues vs Dahl-Jensen, the High Court judge was convinced that the adjudicator was wrong to take off the 5% retention and send money from Bouygues to Dahl-Jensen. So it could easily be ascertained as a liability arising, if not at the time, then in the future. If that is the right approach, the court could have ordered “an account” to be taken of that contingent sum of cash and set it off against the £207 000.

The really interesting point is that the contract had the adjudication provisions nicely set out. They said the adjudicator’s decision would be obeyed. But as soon as Jack sprang up from his insolvency box, he had a pile of rules that work alongside the Construction Act. Bouygues would be protected from Dahl-Jensen’s insolvency if it could persuade the court that it had a likely liability against Dahl-Jensen.