The Court of Appeal's recent decision in John Doyle provides some useful guidance on the Court's approach to enforcing adjudication awards obtained by an insolvent party.
It seems that, following both the Technology and Construction Court and the Court of Appeal's judgments in John Doyle, the threshold to be met when enforcing an award in these circumstances may be high. Liquidators of insolvent construction companies will need to carefully consider whether an adjudicator's award in its favour will be of practical benefit moving forward. Conversely, a Responding Party which has an adjudication decision made against it may feel able to take a robust position in any adjudication enforcement proceedings.
Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd
Back in the summer of 2020, the Supreme Court's decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd was widely reported as a landmark case giving guidance on the impact of insolvency on the adjudication regime. After years of uncertainty, the Court concluded that there was no incompatibility between the insolvency process and the adjudication regime; and there was no reason why liquidators could not refer disputes to adjudication and subsequently enforce them to assist them in the insolvency process. The Supreme Court was comfortable that there was "no reason not to give summary judgment for the company for the balance in its favour" provided that:
- There was no dispute about the cross-claim and the claim being pursued was the greater sum; or
- The disputed cross-claim was found to be without substance; and
- The cross-claim had been determined by the adjudicator because the claim and cross-claim formed part of the same 'dispute' under the contract, and the adjudicator was therefore able to ascertain the net balance in the adjudication itself.
This appeared likely to give rise to a fresh spate of adjudications and subsequent enforcement proceedings being pursued by liquidators. Adjudication is a significantly quicker and cheaper dispute resolution method than litigation and arbitration, and would have therefore been a powerful tool for liquidators to help them recover insolvent companies' debts.
John Doyle at first instance
Shortly after judgment in Bresco was handed down by the Supreme Court, the case of John Doyle was heard by Fraser J in the Technology and Construction Court.
John Doyle had completed hard landscaping works in preparation for the 2012 Olympics. After a short period in Administration in 2012, John Doyle entered into a Creditors Voluntary Liquidation in June 2013. After the liquidator assigned the claim to a third party litigation funder, the funder pursued an adjudication in January 2018 seeking to recover approximately £4 million on a final account assessment. The adjudicator awarded John Doyle circa £1.2 million (after taking account of various contra charges and cross-claims) and John Doyle issued proceedings seeking an order for summary judgment to enforce the award.
Fraser J refused to enforce the award. He accepted that a 'final net determination' had been reached by the adjudicator, as the dispute was in respect of the final account and took into account Erith's various cross claims. This met the first requirement from Bresco for enforcement of an award. However, this alone is not enough. Additionally, if an adjudicator's decision is to be enforced in favour of an insolvent Claimant, then the insolvent Claimant must provide reasonable assurances to the Defendant that, should the Defendant successfully overturn the adjudicator's decision in later proceedings, the Claimant will be able to repay the capital sum and meet any costs orders.
These assurances can include an undertaking by the liquidator to ringfence the funds pending any subsequent attempt to overturn the adjudicator's award, an ATE insurance policy to cover any adverse legal costs order, a letter of credit from a bank, or any other mechanism agreeable to the Court.
John Doyle's security was insufficient as there was no offer to ringfence funds by the liquidator, a proposed ATE insurance policy included avoidance provisions, and a letter of intent was rejected as it did not go as far as a letter of credit, and was not therefore binding on the bank.
The Court therefore declined to give Judgment in favour of John Doyle, and Fraser J noted that even if he had granted judgment, he would have stayed execution of that judgment debt.
John Doyle on appeal
The decision was appealed on various grounds, focussing primarily on John Doyle's assertion that the security it offered should have been considered to be adequate and in reliance on a provision in the Insolvency Rules.
The Court of Appeal dismissed the appeal, agreeing with Fraser J that the security offered was inadequate and finding that the Insolvency Rule relied upon did not rescue John Doyle.
Of particular interest were the comments of Coulson LJ over whether an insolvent company can ever obtain summary judgment to enforce an adjudicator's decision. Whilst he did not deliver any binding and definitive guidance on the issue, it was clear that he foresaw real problems. These comments are likely to be highly persuasive in future cases:
"The adjudicator's decision, while binding, is not a final decision. It is open to the court (or an arbitrator) to revisit the question of set-off."
"Since it has been said that the nature of adjudication is such that it is 'likely to result in injustice' (Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] BLR 93 at [14]); and the purpose of insolvency set-off is to do justice, there is, in my judgment, a real problem in entering judgment for the company simply on the basis of an adjudicator's rejection of a claimed set-off."
The above comments show Coulson LJ considers there to be a real tension between the adjudication and insolvency processes. The insolvency regime requires a final, just decision to be reached, whereas adjudication is inherently temporary, and any adjudicator's decision can always be re-visited through litigation or arbitration. While an adjudicator may decide that a Defendant's claims by way of set-off will fail, this decision appears to be insufficiently final in Coulson LJ's view, and may mean that enforcement of an adjudicator's award in favour of an insolvent Claimant is unlikely.
The conclusion seems to be that the scope for enforcement of adjudicator's decisions in favour of insolvent parties, as laid out in Bresco, is not as wide as initially thought. It may be difficult to enforce an adjudicator's award where the Claimant is an insolvent party and the Defendant has an arguable cross-claim, as the risk may be too great that payment would be made by a Defendant who would subsequently be unable to recover that the sums paid over following subsequent litigation.
This may leave some liquidators questioning the benefit of pursuing claims via adjudication. Even if a liquidator can commence an adjudication and obtain an award in its favour, if there are to be real barriers to enforcement of such a decision then it may conclude that commencing the adjudication in the first place is an exercise in futility leading to wasted costs.
Coulson LJ went on to say that where summary judgment of an adjudicator's award in favour of an insolvent party has been granted, "a stay of execution is appropriate […] That should, I think, be regarded as the default position."
Lasting impact of John Doyle
So what, practically, does all of this mean? Well:
While liquidators and representatives of insolvent parties are free to adjudicate to resolve disputes with debtors:
- There are barriers which will make it difficult for an insolvent Claimant to persuade the Court to enforce the award; and
- Even if judgment is entered, the 'default position' is that a stay of execution will be granted.
For insolvent parties in this position, in order to persuade the Court to enforce an adjudicator's award in its favour, they will likely need to ensure that there are no viable cross-claims and that they have comprehensive, evidenced and unequivocal security in place well in advance of any final hearing (probably including an undertaking from the liquidator to ringfence funds, which of course is not always possible). Even then, it seems that the default position is that a stay of execution will be granted.
Traditional litigation via the Courts may therefore be a preferable route to bringing claims on behalf of an insolvent party, but this is likely to be significantly more expensive and time-consuming than bringing claims via adjudication.
- Debtors on the receiving end of a claim for payment by an insolvent party, particularly those with valid disputes and cross-claims, may consider that even if an adjudication is lost the prospects of the Claimant being able to enforce the award are slim.
- Companies in 'distributing administration' will be treated the same as those in 'liquidation' as the Insolvency Rules treat both situations as functionally the same; the aim in both cases is to maximise assets and make a distribution to the company's creditors. Where the party is in administration but the aim is to rescue the business and to continue trading, then there is no specific guidance. However the Court is likely to take a softer approach and be more willing to enforce an adjudicator's award provided it is satisfied the rescue of the company is likely to succeed. Alternatively the Court may still require security, but be willing to accept a less rigorous standard.
