2020-02-17
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The effectiveness of adjudication where the claimant is in insolvent liquidation

Home / Knowledge base / The effectiveness of adjudication where the claimant is in insolvent liquidation

Posted by Philip Harris on 09 January 2017

Philip Harris Partner & Solicitor-Advocate

As long ago as July 2000, Lord Justice Chadwick in the case of Bouygues (UK) Limited –v- Dahl-Jensen (UK) Limited [BLR 2000, 522]  recognised that an Adjudicator’s decision should not be enforced by summary judgment where the Claimant had subsequently gone into insolvent liquidation and where there were claims and cross-claims between the two parties.

This is because, where the Claimant in the adjudication has gone into liquidation, Rule 4.90 of the Insolvency Rules 1986 comes into effect.

This rule says that where, before the company goes into liquidation, there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving in the liquidation, then an account shall be taken of what is due from each party to the other. If, during the account process it proves that there is a balance due to the company in liquidation, then only that balance shall be paid to the liquidator.

These Insolvency Rules were considered by the Lord Hoffman in the House of Lords in the case of Stein –v- Blake [1996 AC 243].  The case concerned a bankruptcy but the principles apply equally to a company in liquidation.

The principal issue in the Stein –v- Blake case was, if A and B have mutual claims against each other and A becomes bankrupt, does A’s claim against B continue to exist – so that it could be assigned to a third party, or is the effect of the Insolvency Rules to extinguish the claims of A and B altogether and to substitute a claim for the net balance owing after setting one off against the other, in the account taking process?

Lord Hoffman pointed out that insolvency set off requires an account to be taken of liabilities which at the time of the bankruptcy or liquidation may not yet be payable or may be unascertained or even subject to a contingency (i.e. depending on something else happening in the future). Nevertheless the account is deemed to have been taken and the sums due from one party to the other set off, as at the date of the bankruptcy or liquidation.

Of course, the fact that the account is deemed to have been taken as at the date of bankruptcy or liquidation does not mean that the account does not have to be taken subsequently.

In the Stein –v- Blake case, Lord Hoffman explained that there were two techniques for taking the account. The first was to take into account everything which had actually happened between the bankruptcy or liquidation date and the date of the actual taking of the account itself. If the cross-claim by the creditor is subject to a contingency or event and that contingency has happened and the claim is quantified, then that is the amount which is treated as due as at the date of bankruptcy or liquidation.

The second technique is simply to make an estimate, so that the trustee in bankruptcy or liquidator estimates the value of the debt which, because it is subject to a contingency, does not yet bear a certain value. In this way the creditor’s claim can be quantified and the assets distributed in the bankruptcy or liquidation. Lord Hoffman pointed out that the taking of the account really means no more than the calculation of the balance due in accordance with the principles of insolvency law.

The result of the application of the Insolvency Rules, “in my judgment must be that the ordinary chose in action ceases to exist and is replaced by a claim to a net balance”.

The debt represented by an Adjudicator’s decision is in the eyes of the law “a chose in action” and therefore the cause of action represented by the decision and the debt due under it cease to exist.

This is why an Adjudicator’s decision cannot be enforced where the Claimant has gone into liquidation.

But although claims and cross-claims  which exist before liquidation cease to exist, for the purposes of taking the account Lord Hoffman said this,

“The cross-claims must obviously be considered separately for the purpose of ascertaining the balance. For that purpose they are treated as if they continue to exist. So for example, a liquidator or trustee will commence an action in which he pleads a claim for the money due under a contract and the Defendant will counterclaim for damages under the same or a different contract. This may suggest that the respective claims actually do continue to exist until the Court has decided the amounts to which each party is entitled and ascertained the balance due one way or the other … But the litigation is merely part of the process of retrospective calculation in which only the claim to the balance exists as an item of property”.

Comment

It can be seen from the reasoning of Lord Justice Chadwick in the Court of Appeal in the Bouygues -v- Dahl-Jensen case and the reasoning of Lord Hoffman in the Stein –v- Blake case, that the Courts are not in any way seeking to water down the effectiveness of adjudication by refusing to enforce adjudication decisions where the Claimant has become insolvent.  The Courts will simply not enforce any debt or chose in action of any kind until the account of the cross claims had been taken in the liquidation and a balance found to be due. 

Importantly, if there are no cross claims of any kind by the Respondent to the adjudication, whether present or future, ascertained or unascertained, then there is simply nothing to which insolvency set off can apply. In that situation the Adjudicator’s decision should be enforced because there is no account between the parties to be taken in the liquidation.  This is subject to the question of stay of execution  of a Summary Judgment to enforce the adjudicator’s decision.(see below).

Adjudication in liquidations

The next issue to consider is whether the liquidator can or should enlist adjudication as an effective mechanism in the process of taking the account under the Insolvency Rules.  There is no apparent reason why he shouldn’t and a number of practical reasons why he should. 

In the Stein –v- Blake case, Lord Hoffman referred to liquidators making use of litigation by commencing a Court action to plead a claim for money due under a contract, in which there might be a counterclaim.  Under the Housing Grants Construction and Regeneration Act 1996 any party to a contract can adjudicate any matter at any time.  A liquidator may find it much quicker and cheaper to adjudicate in order to get an ascertainment of the value of the creditor’s claim than to litigate. If the liquidator takes the matter to the Court, then he may face an application for Security for Costs against the company in liquidation.  In adjudication, there will be no application for Security for Costs.  If the company in liquidation is successful in the adjudication it will be the liquidator’s decision whether to regard the issue as concluded for the purposes of the account taking process. If the unsuccessful Respondent wishes to proceed to Court against the company in liquidation, not accepting the adjudicator’s decision, it will certainly need the leave of the Court to do so.  

Even in a situation where there are cross claims under different contracts, there is no obvious reason why the company in liquidation cannot adjudicate under more than one contract seeking a decision that the company in liquidation is owed money under one contract and does not owe money as claimed by the creditor, under another contract.  If the outcome of these adjudications is that the creditor’s set off is decided to be invalid,  then one can  conclude that there is simply no account to be taken in respect of cross claims, or that the account has been taken, or that the account is easily taken in the light of the adjudicators’ decisions.

What is the significance of an adjudicator’s decision made in favour of the Claimant company before it goes into liquidation?  Clearly that decision is not enforceable but is it entirely worthless? 

This must be a grey area.  Although the decision has ceased to exist as an original chose in action, it may still be influential.  It is the liquidator who takes the account under the insolvency rules.  We are told in the Stein –v- Blake case that for the purpose of ascertaining the balance, cross claims must be considered separately and are treated as if they continued to exist.  It may be persuasive of the liquidator in the process of “retrospective calculation” which is the process of taking the account under the Insolvency Rules, that an Adjudicator has previously ascertained an amount to be due to the Claimant.

Stay of execution – further case law

In the case of Wimbledon Construction Company 2000 Limited –v- Derek Vago [2005] BLR 374 HH Judge Coulson set down certain principles to be considered in deciding whether to stay the enforcement of an adjudicator’s decision, as follows:-

(a)           Adjudication (whether pursuant to the 1996 Act or the consequential amendments to

the standard  forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.

(b)           In consequence, adjudicator’s decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money.

(c)            In an application to stay the execution of summary judgment arising out of an adjudicator’s decision, the court must exercise its discretion under Order 47 with considerations (a) and (b) firmly in mind.

(d)           The probably inability of the claimant to repay the judgment sum (awarded by the adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances rendering it appropriate to grant a stay.

(e)           If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted.

(f)            Even if the evidence of the claimant’s present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:

               (i)             the claimant’s financial position is the same or similar to its financial position at the time that the relevant contract was made; or

               (ii)            the claimant’s financial position is due, either wholly, or in significant part, to the defendant’s failure to pay those sums which were awarded by the adjudicator.

HH Judge Coulson in the subsequent case of Mead General Building Limited (in Company Voluntary Arrangement) –v- Dartmoor Properties Limited [CILL] 2009, 2686, pointed out, correcting his judgment in Wimbledon –v- Vago, that if a company was in insolvent liquidation, then judgment should not be entered at all.  He went on to say that the fact that a company was in Company Voluntary Arrangement with its creditors was a relevant factor in considering whether to grant a stay of execution but the mere fact of the CVA will not automatically mean that a party will be unable to repay sums and that a stay of execution should be granted.

Comment

It is obviously fair that a stay of execution should not be granted where the claimant’s inability to repay the money ordered to be paid by the adjudicator is due in significant part to the defendant’s failure to pay the sums decided upon by the adjudicator.  Similarly, it is obviously correct that a defendant should not be able to get a stay where the claimant’s financial situation is no weaker than it was at the time the parties made the contract with each other.

However, can it really be said that it is fair that the claimant’s inability to repay the  sum awarded by the adjudicator and enforced by way of summary judgment should constitute special circumstances justifying granting a stay of execution of the judgment?

It is necessary to weigh in the balance not only the risk that monies may not be repaid, but also the respective rights and entitlements of the parties.

The claimant, on the one hand, had the right to adjudicate either as a matter of contractual entitlement, or statutory entitlement or both.  He has exercised his right and he has received an adjudicator’s decision in his favour, deciding that he is entitled to payment of a sum.

The adjudicator’s decision (provided that the claimant is not bankrupt or in liquidation) is binding on both parties pending any inconsistent judgment of the court or award of an arbitrator.

The defending party, on the other hand, has lost the adjudication.  He is bound by the adjudicator’s decision.  He has the right to litigate or arbitrate the same matter, depending which route the contract allows.  If and only if, he can persuade a court or arbitrator to make a decision contrary to the adjudicator’s decision, he is relieved of the binding nature of that decision.

In those circumstances, why should a defendant be granted a stay of execution which will deprive the claimant of the fruits of the adjudication which he was perfectly entitled to bring and which he has won, because of the possibility (which cannot be pre-judged) that he might persuade a court or arbitrator to reach a decision so different from that of the adjudicator that the monies ordered to be paid by the adjudicator become repayable and that the claimant cannot then repay those monies?

When one weighs in the balance the claimant’s lawful entitlement to adjudicate, the binding effect of the adjudication and the right to enforce, with the possibility of a divergent judgment or award and the potential risk that monies cannot be repaid, it is difficult to see any substantial unfairness in giving the claimant the benefit of the adjudication whilst allowing the defendant the right to litigate against the risk that litigation might be fruitless.

Are the Courts simply not giving adjudicator’s decisions their proper effect?

Enforcing the account taken under Rule 4.90 of the insolvency rules

Having considered the insolvency rules and the rules with regard to stay of execution, one comes back to consider the position of a company in liquidation where the liquidator has taken the account in liquidation and has done so by adjudicating in order to ascertain the net balance after setting off the mutual claims of the creditor and the company in liquidation.  It is clearly arguable that the balance has been arrived at under the insolvency rules and that balance constitutes a debt.  That balance could be assigned to a third party, as decided in the Stein –v- Blake case.  If it constitutes a valid assignable debt, then it can be enforced as a right of action.  The fact that the debt has been arrived at by the process of adjudication does not deprive it of its validity.  The liquidator had every right to adjudicate to ascertain the balance due.

If this is correct, then adjudication is a useful tool in the armoury of liquidators in the process of taking the account under Rule 4.90 of the Insolvency Rules.

About the author

Philip Harris

Partner & Solicitor-Advocate

Philip has 30 years’ experience as a construction solicitor and advises on all aspects of construction law.

Philip Harris

Philip has 30 years’ experience as a construction solicitor and advises on all aspects of construction law.

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