Is adjudication incompatible with insolvency?

By Neil Harrold, Partner, Head of Restructuring and Insolvency, Hay & Kilner and Rebecca Weir, Solicitor, Construction Team, Hay & Kilner

The introduction in the 1990s of adjudication as a quick and effective means of resolving disputes in construction contracts has had a transformative effect.

At the same time, construction companies are no strangers to insolvency processes. But does the ability to adjudicate disputes prevent one of the parties entering into administration, liquidation or bankruptcy?

Earlier this year the Court of Appeal heard two cases which concerned the ability of a company to refer a dispute to adjudication whilst insolvent, although in one the form of insolvency concerned was liquidation, while the other concerned a company in a company voluntary arrangement (CVA).

It’s important to understand the difference between a company that is in liquidation and one which has an approved CVA in place. Whilst liquidation pretty much means the end for a company, a CVA is a procedure under which a company can escape either administration or liquidation by entering into a legally binding arrangement with its creditors.

In the first case, the judge had the issue of deciding what the Insolvency Rules meant for the contractor’s right to adjudicate.

Under both the Construction Act 1996 and the Scheme for Construction Contracts 1998, a party can commence an adjudication “at any time”. It was held that a company in liquidation cannot refer a dispute to adjudication when one party is in liquidation because the dispute is no longer a construction contract dispute.

Accordingly, the judge granted an injunction to restrain the adjudication – and it got everyone talking.

On appeal, the judge held that while the underlying claim was not extinguished upon liquidation with the consequence that, as a matter of jurisdiction, it continued to exist and was capable of being referred to adjudication. He concluded that adjudicators do have jurisdiction to hear disputes referred by insolvent companies. In doing so, he overturned the original reasoning. The judge confirmed however that adjudication would be a futile exercise and the court would ordinarily grant an injunction stopping the adjudication.

In contrast, in the appeal in the second case, the judge granted summary judgement and refused a stay of execution to an insolvent contractor in a CVA.

In other words, a company in a CVA might still be able to refer matters to adjudication. The judge said an adjudication is likely to be a practical benefit under a CVA.

Unlike an insolvent liquidation where the purpose is to secure the interest of creditors and limit damage, the goal of a CVA is to ensure cash flow and help a company recover.

For further information, visit www.hay-kilner.co.uk or call 0191 232 8345.