The various automatic consequences triggered under the Insolvency Rules 1986 and 2016, coupled with the difficulties in persuading the court to enforce an adjudicator’s decision in favour of an insolvent company, led to a real belief within the industry that adjudication and insolvent companies did not mix.

That changed in 2020 when the Supreme Court handed down its judgment in the landmark case of Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25. In Bresco, the Court confirmed that even though enforcement might be an issue, insolvent companies still have the statutory and contractual right to adjudicate construction disputes. Following this judgment, it appeared futile for a party to avoid an adjudication by arguing that the referring party was insolvent. Instead, any issues that are raised by insolvency set-off are factors to consider further down the line, on a case-by-case basis during the enforcement stage.

The recent decision in FTH Ltd v Varis Developments Ltd [2022] EWHC 1385 (TCC) is the latest in a series of decisions that focus on the interaction between adjudication and insolvency. This case focusses in particular relates on the summary enforcement of adjudicators’ decisions by an insolvent company.

Background

In August 2018, Varis engaged FTH under a design and build contract. The parties fell out and by October 2019 matters had significantly deteriorated. On 22 October 2019 Varis issued a Pay Less Notice stating that £317,000.00 was due but withheld on the basis of an alleged failure by FTH to provide collateral warranties.

Then on 25 October 2019 Varis purportedly terminated the contract.

In November 2019, Varis issued a further Pay Less Notice which reduced the value of the works to £90k being due, but again withholdings applied.

Then followed a series of adjudication decisions and developments:

• January 2020: Decision 1 - The Pay Less Notice of 25 October was held to be valid;

• February 2020: Decision 2 - Varis’ purported termination of the contract was found to be invalid and Varis had therefore repudiated the contract;

• May 2020: FTH entered into a Company Voluntary Arrangement. At its very best this would result in recovery of 56p in the £ though noticeably it made no provision for any cross-claim by Varis.

• September 2020: Decision 3 - FTH was awarded payment of around £757,000.

Enforcement

Varis did not pay the amount awarded in Decision 3. It also confirmed that it would oppose enforcement of the adjudicator’s decision on the basis that it had a cross-claim against FTH of £1.7m flowing from the losses which arose from its “entitlement to terminate”.

Nevertheless, FTH sought to enforce Decision 2 and Decision 3 by way of an application to the Court for Summary Judgment. The Court confirmed that even though FTH was insolvent there was jurisdiction to grant Summary Judgment. However, whether it should do so was based on the “real risk” test, i.e. if the decision is enforced in FTH’s favour, would Varis’ cash be distributed amongst FTH’s creditors and thus deprive Varis of the security that it would ordinarily be entitled to set-off, pound-for-pound, against the decision under the various insolvency rules.

Ultimately, the Court did not suggest that companies under CVA cannot enforce an adjudicator’s decision. However, in this particular case, it decided that enforcement would give rise to a real risk that Varis would be deprived of its security in respect of its cross claim against FTH. Summary Judgment was therefore refused. A number of case-specific factors influenced the Court’s decision, including:

• The fact that even if the CVA fulfilled all financial expectations, it would still only permit recovery of 56p in in the £1 though this was a very optimistic amount. The assumptions underlying that forecast were flawed and did not take into account Varis’s cross claim. If this succeeded in whole or in part, then the CVA would fail.

• The Court was not persuaded that FTH had recently been trading profitably and concluded that the CVA was not designed to allow FTH “to trade its way out of trouble”. Instead, it was more akin to the situation where the liquidator is engaged in the process of recovering what he can in order to make a distribution to creditors.

• The CVA was for 12 months only and had not been validly extended.

Conclusion

When it comes to insolvent liquidation, the starting point is Bouygues (UK) Ltd v Dahl-Jensen, which held that such a decision will not generally be enforced due to the risk that the other side would be exposed. However, it was acknowledged that a CVA differs in form to insolvent liquidation. The decision in FTH v Varis highlights that the Court may be willing to enforce an adjudicator’s decision if a party is experiencing an insolvency event, such as entering into a CVA, but it will depend on the circumstances. The question of whether enforcement by way of Summary Judgment is appropriate is therefore dependent on the facts of each individual case, and expert legal and accounting advice should be sought by any party considering this option. There have been circumstances where adequate security to cover the risks highlighted here have been addressed, so all hope is not lost when pursuing and enforcing adjudication decisions when an insolvency event has arisen.

This case also highlights the importance of parties carrying out sufficient investigation into the financial standing of those they contract with and, if necessary, seeking actual security from insolvent parties to ensure that adjudication decisions can be enforced. Parties should also ensure that they serve timely Pay Less Notices especially where there is a risk that the receiving party may be at risk of becoming insolvent.

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If you would like to discuss any of the issues raised in this blog or any other construction related issue, please get in touch with our specialist construction team today.

You can contact the author, Amelia Anderson-Jane on 01482 324252 or via email: aaj@gosschalks.co.uk.

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