Can an insolvent party adjudicate? Another nail in the coffin…

Technically, insolvent companies can adjudicate – but a recent case has put yet another nail in the coffin of those that try. While they may be able to get a decision, it will only be enforceable in exceptional circumstances.

We’ve written before about the dangers of adjudicating while insolvent. John Doyle v. Erith Contractors, a Court of Appeal decision from October 2021, didn’t go quite as far as to say that a company in liquidation could never enforce an adjudicator’s decision, but it did show that it would be a rare case when it could. A case in the last few weeks from the TCC – J A Ball Limited (in Administration) v. St Philips Homes (Courthaulds) Ltd (currently unreported) – has reinforced that position.

Background facts

J A Ball was a main contractor based in Nottingham that went into administration in late 2020. It persuaded an adjudicator to accept jurisdiction – which generally will be the case since the Supreme Court in Bresco v. Lonsdale decided that insolvent companies had an in-principle right to adjudicate – and to award it a balancing payment from St Philips Homes, its employer.

St Philips resisted enforcement on the basis of a breach of natural justice (the adjudicator had apparently gone off on frolic of their own), but of more interest in this context were its (unsurprising) references to Ball’s financial position. Although the court actually decided against enforcement because of the breach of natural justice, it went on to provide guidance on the insolvency position – guidance which will be very useful given the proliferation of insolvency-related adjudications in recent years.

Court’s guidance on insolvent companies adjudicating

The court’s first observation was that a company in insolvent liquidation facing cross-claims or set-offs will generally not be entitled to enforce an adjudicator’s decision. That is now established law and arises out of the effect of the Insolvency Rules – but doesn’t apply to companies in administration unless a ‘notice of distribution’ is given. Ball therefore argued that this well-settled position didn’t apply because rather than being in liquidation, it was in administration. However, the court said that wasn’t correct: there was no doubt as to Ball’s insolvency in this case and therefore the fact it was in administration rather than liquidation was a technicality which made no difference to the adjudication enforcement.

Administration is a common insolvency procedure for construction companies – often more-so than liquidation. In part, that’s because administration allows companies to continue to trade by facilitating pre-pack sales. Strictly speaking the idea of administration is to allow the company to recover as a solvent, trading company, and often that can work – think of a string of high street retail names that have gone into administration and come out the other side. But that almost never happens to construction companies. As such, it’s likely that for most construction companies in administration the court would reach the same decision as in this case.

The second useful observation was about the sufficiency of security. Because St Philips had a cross-claim it wished to pursue, Ball accepted that it would have to offer security to ensure that St Philips wasn’t at an unfair disadvantage – effectively, by having to pay the adjudication award and face the substantial prospect that, in light of Ball’s financial position, it would never be able to pursue those cross-claims.  The security offered by Pythagoras – the company that has made its name through pursuing claims on behalf of insolvent companies – was twofold: an offer to ‘ringfence’ the award pending a final decision, and on offer to guarantee St Philips’ costs of proceedings to overturn the decision.

However, the court said that these offers weren’t good enough. Having to ringfence the adjudication monies was pointless, the court said: it would mean that neither party could use the cash, which was at odds with the whole purpose of adjudication to facilitate cashflow. And it said that the guarantee wasn’t wide enough – it was “limited to the extent that the defendant’s “proceedings are successful in overturning the Adjudicator’s Decision”, and therefore did not give “full costs protection to the defendant to the extent of the action it proposes to bring to defeat the claim based on the award”. This wasn’t the first time that Pythagoras’s offer of security was found to be insufficient: in Meadowside Building Developments Ltd v. 12-18 Hill Street Management Company Ltd, the court said it wasn’t sure that Pythagoras itself had “the financial wherewithal” to stand behind a guarantee, and there was no bank guarantee or bond to assist.

Finally, the court considered Pythagoras’s position. As mentioned, it has been at the forefront of trying to establish a line of court precedent to allow insolvent companies to recover monies through adjudication – largely unsuccessfully, it has to be said. The court didn’t have to decide this point, but it did express ‘reservations’ about the position it held as funder and an agent for Ball’s administrators, as well as having a close relationship with Ball’s lawyers Circle Law (Gregory McMahon is listed at Companies House as a director and controlling shareholder of both entities).

The end of insolvent companies adjudicating?

All in all, this is another blow for insolvent companies seeking to seek a quick win through adjudication. There will doubtless be some cases where adjudication remains appropriate – but that will only generally be where there’s no contested counterclaim or set-off from the solvent party.

Parties facing an adjudication from an insolvent party need to think carefully about how they proceed. Where there is a genuine cross-claim, given the difficulties the insolvent party will face in enforcing it, companies will have to decide whether there is any merit in incurring the cost of taking part in an adjudication. As well as their direct costs, by taking part in an adjudication a solvent party will also assume joint and several liability for the adjudicator’s fees – another reason why not taking part, at least without binding guarantees from the insolvent company or its backers, may often be a sensible option.

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