INSOLVENCY FOR ADJUDICATORS - TeCSA · 2019-12-23 · INSOLVENCY IN THE CONSTRUCTION SECTOR . THE...

INSOLVENCY FOR ADJUDICATORS

SUE RYAN

INSOLVENCY IN THE CONSTRUCTION SECTOR

THE LIE OF THE LAND

• Q2 2019 – 4,621 company insolvencies in construction industry

• Evidence of stress in the construction industry in 2019:

• EY Q1 Profit Warning Stress Index at ten-year high

• EY - Construction sector has issued 14 profit warnings in 2019, almost double 2018 total with Q4 still to go;

• Over a quarter of the sector has "warned" in the last 12 months;

• EY report a "broad based slowdown" in the construction sector;

• Gov report construction output increased by 0.6% in Q3 2019 but offset by a fall in maintenance and repair by 0.8%;

• Lack of public spending/lack of spending on new infrastructure projects due to austerity;

• General economy issues, HS2 – under Gov review with a stated "go or no go" decision by end of 2019, BREXIT….

VULNERABILITY OF CONSTRUCTION COMPANIES

• Fluctuation in the market

• Liquidity

• Late payments;

• Sub-contractor structure – solvency issues in one part of the structure

have a domino effect;

• HMRC/CIS arrears;

• Fluctuating work loads driven by external factors.

• Project specific issues/disputes

INSOLVENCY ISSUES FOR ADJUDICATORS

• Does the contract terminate automatically?

• Effect of termination

• Notice Provisions

• Impact on sub-contractors/suppliers

• Contractor/Consultant Insolvency – Step-In Rights

• Ownership of materials and equipment

• What does insolvency mean for proceedings already underway (including adjudication)?

• The latest cases

DOES THE CONTRACT TERMINATE AUTOMATICALLY?

• Insolvency is not a breach of contract in itself – it does not automatically

give rise to a right to terminate

• It can however be provided for in the contract (and usually is in a

construction contract)

• How widely is insolvency defined in the contract – getting it wrong can be

repudiatory

• If an insolvency provision in the contract applies, carefully consider its

effect e.g. no payment obligation?

THE EFFECT ON THE PAYMENT OBLIGATION?

S111 Requirement to pay notified sum – Construction Act as amended

• S111(10) Subsection (1) does not apply in relation to a payment provided

for by a construction contract where—

• (a) the contract provides that, if the payee becomes insolvent the payer

need not pay any sum due in respect of the payment, and

• (b) the payee has become insolvent after the prescribed period [within

which a pay less notice has to be served] referred to in subsection (5)(a). Emphasis added

THE EFFECT ON THE PAYMENT OBLIGATION?

• S111(10) was implemented to codify the HL decision in Melville Dundas Ltd (In Receivership) v George Wimpey UK Ltd [2007] which addressed the impact that the contractor's insolvency had on its right to payment.

• As confirmed by the CA in Wilson and Sharp v Harbour View [2015], under S111(10), a paying party can avoid paying as long as the unpaid party's insolvency occurs (1) after the deadline for giving a pay less notice has passed and (2) the contract includes the appropriate provisions.

• There is continuing debate around the ambit of S111(10) i.e. is its effect limited to insolvency occurring after the deadline for giving a pay less notice but also before the final date for payment?

• Some argue that the CA decision in Wilson can be distinguished as it relates to an injunction restraining a winding-up petition – speculation that there might be a different approach in (say) adjudication enforcement proceedings.

JCT DESIGN AND BUILD 2016 (CONTRACT CONDITIONS, SECTION 8)

Definition of insolvency

A company:

• entering into administration;

• appointing an administrative receiver or a receiver or manager;

• passing a resolution for voluntary winding-up; or

• becoming the subject of a winding-up order

JCT DB 16 - EMPLOYER ACTION (FOR CONTRACTOR'S INSOLVENCY)

• The employer can terminate the contractor's employment at any time.

• The contractor's works obligations are suspended from the date of insolvency. Whether or not termination occurs, payment stops until after completion of the works and making good defects.

• If the employer terminates, it may take possession of the site and employ others to carry out and complete the works. The contractor cannot hinder or delay the taking of these measures.

• The employer will have to pay the contractor (in liquidation or administration) the balance due, if any, upon completion of the works by others.

JCT DB 16 – CONTRACTOR ACTION (FOR EMPLOYER’S INSOLVENCY)

• The contractor can, by notice to the employer, terminate the contractor's employment.

• Whether or not the contractor terminates, as from the date the employer becomes insolvent, its obligations under the contract to carry out and complete the works are suspended.

• The contractor should prepare an account and provide it to the employer (in liquidation or administration) within two months. The employer (in liquidation or administration) must pay the contractor any amount due within 28 days of submission of the account or the contractor must prove its debt in the liquidation

NEC3 ENGINEERING AND CONSTRUCTION CONTRACT (CLAUSES 90 – 92 AND TERMINATION TABLE)

Definition of insolvency

A company or partnership that has:

• had a winding-up order made against it (R5);

• had a provisional liquidator appointed to it (R6);

• passed a resolution for winding-up (other than in order to amalgamate or reconstruct) (R7);

• had an administration order made against it (R8);

• had a receiver, receiver and manager, or administrative receiver appointed over the whole or substantial part of its undertaking or assets (R9); or

• made an arrangement with its creditors (R10).

NEC3 ENGINEERING AND CONSTRUCTION CONTRACT (CLAUSES 90 – 92 AND TERMINATION TABLE)

Employer action (for contractor's insolvency)

• The employer may terminate for any reason under NEC3.

• If the contractor is insolvent the employer may terminate and pay a third party to complete the works. It can also instruct the contractor to leave the site, assign the benefit of subcontracts and use any equipment to which he has title that remains on site.

Contractor action (for employer's insolvency)

• In the situation of contractor termination, the employer's entitlement to complete the works remains.

• The employer is only entitled to use the plant and materials to which it has title. The contractor removes any plant and materials to which it may still have title.

NEC4 ENGINEERING AND CONSTRUCTION CONTRACT

Same as in NEC3, save that in NEC4, in relation to Employer action

(for contractor's insolvency) - the Employer may only terminate if the

relevant secondary option has been chosen.

Note: NEC3 provides that the Employer may terminate for any reason.

NOTICE PROVISIONS FOR TERMINATION

• Carefully check the notice provisions in the contract so as to ensure

that the party exercising the right to terminate has followed the

correct procedure, otherwise, likely to be repudiatory.

IMPACT ON SUBCONTRACTORS AND SUPPLIERS

The impact can flow down to subcontractors and suppliers. In a

subcontractor dispute check the terms of the contract upstream

including for example:

• any "pay when paid" clauses entitling the withholding of payments

when the upstream payer has become insolvent - S113 of the

Housing Grants, Construction and Regeneration Act 1996 but

narrowly construed.

CONTRACTOR/CONSULTANT INSOLVENCY - STEP- IN RIGHTS

• If the company has provided collateral warranties, these may

include step-in rights by the employer/funder/purchaser. If step-in

rights are included there may be a number of additional

considerations. Step-in provisions allow the beneficiary to step into

the shoes of the contractor if the contractor becomes insolvent.

• The beneficiary who steps in will (subject to the express terms of

the warranty) have a right to refer a dispute under the warranty to

adjudication, despite not being a party to the original contract (see

Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited [2013])

OWNERSHIP OF MATERIALS AND EQUIPMENT

• Issues often arise as to ownership of materials and equipment

• The terms of a contract may not always be conclusive as to ownership of materials or equipment on site.

• Be aware that

‒ At common law, goods and materials affixed to the land become the landowner’s property.

‒ Assets on site may be leased, rather than owned, by the insolvent company and so may be recovered by the lessor as soon as it becomes aware of the insolvency and this can lead to complicated disputes (and potentially stray outside the adjudicator’s jurisdiction)

‒ These disputes may require consideration of sub-contractor/suppliers’ terms as to retentions of title

‒ The position may be less clear when it comes to unfixed materials off-site. Reasonable proof that ownership of off-site materials is vested in the contractor or employer will be needed;

WHAT DOES INSOLVENCY MEAN FOR PROCEEDINGS ALREADY UNDERWAY (INCLUDING ADJUDICATION)? A company becoming unable to pay its debts will not have any impact on proceedings that are already underway.

However, a company that becomes subject to a formal insolvency process will be in a different position.

Various scenarios include:

• Receivership

• Administration

• Liquidation

• Company Voluntary Arrangements (CVA)

• Administrative Receivership

Keep in mind that each will give rise to a different set of constraints.

WHAT DOES INSOLVENCY MEAN FOR ADJUDICATION PROCEEDINGS ALREADY UNDERWAY? • Receivership: As proceedings underway will be against the company, rather than the asset over which the receiver is

appointed, these will continue.

• Administration: The appointment of an administrator triggers a statutory moratorium for the insolvent counterparty that has been placed into administration. During this time creditors are prevented from exercising their rights against the insolvent counterparty in order that the objectives of administration can be achieved. This means that, for example:

‒ A party would not be able to commence an additional set of insolvency proceedings against the company;

‒ Any existing winding up petitions will be dismissed (assuming the administrator has been appointed by a charge-holder);

‒ Other types of legal proceedings such as adjudication proceedings can typically only be commenced or progressed with the consent of the administrator or the court if certain conditions are satisfied.

• Liquidation: The effect of liquidation on new or existing proceedings by creditors depends on whether the liquidator has been appointed by the court or by the company's creditors.

‒ If a liquidator has been appointed or a winding up order has been made by the court (compulsory liquidation), proceedings can only be commenced or progressed with the permission of the court.

‒ If the liquidator has been appointed by creditors, the liquidator can apply to court for existing proceedings to be put on hold.

LONSDALE V BRESCO

CAN A COMPANY IN LIQUIDATION REFER A DISPUTE TO ADJUDICATION?

• Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation) [2018] EWHC 2043 (TCC)

• Company seeking to refer the dispute was in liquidation.

• Claim for payment allegedly due for work completed and damages for loss of profit.

• The facts:

• Bresco engaged by Lonsdale in a sub-contract for electrical installation at an office refurbishment in London.

• The contract was the JCT Construction Management Trade Contract 2011 Edn (CM/TC 2011).


• The facts (cont.):

• Governed by the Housing Grants, Construction and Regeneration Act 1996 – gives parties a right to refer to adjudication at any time.

• Bresco left the project– both parties alleging wrongful termination.

• Bresco went into voluntary liquidation in 2015 and subsequently commenced an adjudication against Lonsdale in 2018.

• Lonsdale invited Bresco to discontinue the adjudication and/or the adjudicator to resign.


• The five issues:

• Whether the Insolvency Rules 1986 or 2016 applied?

• The applicable test of whether the TCC has power to grant injunctions preventing/halting adjudications?

• Whether monetary claims/cross claims are available to a party in liquidation?

• What is the correct legal characterisation of what happens to monetary claims/cross claims when a liquidator is appointed?

• Does preventing adjudication during an insolvency process contravene the statutory right to adjudicate at any time?


• Insolvency Rules 1986 or 2016?

Insolvency Rules 2016

• The applicable test of whether the TCC has power to grant injunctions preventing/halting adjudications?

TCC did have jurisdiction, but such jurisdiction will be exercised very sparingly.

• Whether monetary claims/cross claims are available to a party in liquidation?

• “Claims and cross claims cease to be capable of separate enforcement upon, or at, the date of liquidation” and are “replaced by a single debt”.


• What is the correct legal characterisation of what happens to

monetary claims/cross claims when a liquidator is appointed?

Bresco’s claims under the Contract ceased to be capable of

separate enforcement.

• Does preventing adjudication during an insolvency process

contravene the statutory right to adjudicate at any time?

Right to adjudicate doesn’t take priority over set-off in the

Insolvency Rules.

MEADOWSIDE V HILL STREET MANAGEMENT COMPANY


• Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC)

• An application for summary enforcement of an adjudicator’s decision in the sum of £32k

• The action was brought by Meadowside, a company in liquidation both at the time of the adjudication and now

• In the Bresco case - the CA overturned a decision at first instance that an adjudicator did not have jurisdiction where the referring party was in insolvent liquidation. The CA then upheld an injunction to prevent the adjudication from continuing because they considered that the adjudication was a futile exercise.

• In doing so, the CA did leave open the possibility that in “exceptional circumstances” a company in insolvent liquidation might be able to obtain summary enforcement of an adjudicator’s decision.


• No dispute that the adjudication was, in effect, dealing with the substance of full extent of the parties’ mutual dealings (insolvency set-off)( Rule 14.25 of the Insolvency Rules 1986)

• The adjudication was to determine the balance due to Meadowside pursuant to the strict final accounting procedure laid down in the JCT Minor Works Building Contract, 2011 Edition

• The facts:

• In 2015 Meadowside was placed in voluntary liquidation

• By 2017, efforts taken by Meadowside’s liquidators to realise a sum from HSMC had not been successful. The liquidators engaged Pythagoras Capital Limited to take over the claim.

• In 2018, Meadowside referred its claim to adjudication. Pythagoras represented Meadowside.

• HSMC did not take part in the adjudication, saying that the adjudicator lacked jurisdiction and the decision would be unenforceable

• On 3 April 2018, the adjudicator produced a decision in which a net balance to Meadowside of £32,629.63 was found to be due.


• On 31 July 2018, before enforcement proceedings were commenced, the first instance judgment in Bresco v

Lonsdale was handed down.

• Fraser J granted an injunction restraining Bresco from adjudicating, on the basis that an adjudicator lacked

jurisdiction where the referring party was in insolvent liquidation. The reasoning of Fraser J was similar to the

reasons given by HSMC in correspondence for its non-participation in the adjudication.

• On 24 January 2019, the Court of Appeal overturned Fraser J’s decision on jurisdiction, whilst the injunction

was upheld on grounds that the adjudication in that case would have been futile. (Pythagoras, incidentally,

also acted on behalf of Bresco’s liquidators).

• Following the CA’s judgment in Bresco, arguments proceeded between Pythagoras and HSMC on the effect

of the CA’s decision.

• By the time that Meadowside issued enforcement proceedings in the summer of 2019, Pythagoras was

seeking payment of the adjudication award by offering security for HSMC’s claim for repayment of the same

amount.


• The security offered was a guarantee from Pythagoras itself

• By closing submissions, a range of potential options for security including ringfencing by the liquidators of the adjudication award pending the conclusion of any subsequent litigation, as well as the potential procurement of an ATE insurance policy to cover any adverse costs order in such proceedings, had been proposed.

• Meadowside argued that these proposals made it appropriate to grant summary judgment to enforce the adjudication award.

• Issue: what was the effect of the Court of Appeal’s decision in Bresco, in particular what was meant by the “exceptional circumstances” in which an insolvent company may properly adjudicate on a dispute and enforce any award in its favour

• Adam Constable QC (sitting as a High Court judge) was satisfied that the adjudication before the court got over the first test as to exceptional circumstance because it was a decision concerning the final account, where there were no other extraneous dealings between the parties, and where the adjudicator had done his best to carry out a substantive final account calculation. Therefore, it bore, on the basis of the evidence available, a sufficient resemblance to the “net balance owing” under rule 14.25.


• Held: there is likely to be an exception to the rule in Bresco v Lonsdale where (1)

the adjudication determines the final net position and (2) satisfactory security is

provided in respect of (i) the adjudication award and (ii) any adverse costs order in

both the enforcement proceedings themselves and any subsequent litigation.

• However, summary judgment was refused on this occasion due to the security not

being adequate: Held: “the fundamental thrust of Bresco, which then ripples through the

wider considerations” is that enforcement, without any security provided for the claim to

overturn the enforced decision, would deprive the responding party of the security to which it is

properly entitled under Insolvency Rule 14.25 and so would wrongly make final, by default, a

temporary decision


• Held: despite the judge’s willingness to accept the theoretical enforceability of the type of

adjudicator’s decision presented in the application before him, the practical point that got in the

Meadowside’s way was the fact that the agreement underlying Pythagoras’ appointment was

not disclosed.

• On that point, the judge found squarely that Pythagoras had been acting under a damages-

based agreement within the meaning of the Damages-based Agreements Regulations 2013.

Under those rules, if the agreement was non-compliant, it would be unenforceable and, as a

result, in the eyes of the law.

• The judge would not allow an adjudicator’s decision to be enforced insofar as that it could

amount to an abuse of process – namely, trafficking in litigation.

champertous


• So, clarification on the effect of Bresco but a step too far for enforcement …

• What’s next?

• it will be interesting to see how the general principles laid down in this case

intersect with the right of a responding party in an adjudication brought by

an insolvent party to apply to the court for an injunction, a right that was

acknowledged in Bresco.

• Will the battle ground be the injunction, or enforcement?

That is likely to depend on many factors, including the value of the

adjudication.

QUESTIONS?

INSOLVENCY FOR ADJUDICATORS - TeCSA · 2019-12-23 · INSOLVENCY IN THE CONSTRUCTION SECTOR . THE...

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