This article first appeared in Building on 21 April 2011
Adjudication can help companies’ cashflow, but what happens in cases of insolvency when there is no cash to flow?
There’s no point winning an adjudication if the other party can’t be made to comply with the decision. The robust approach taken by the Technology and Construction Court to enforcing adjudicators’ decisions has made it a powerful tool to help companies protect their cashflow – but only if they are still solvent. Although adjudication is a quick, “rough and ready” procedure, the court has enforced adjudicators’ decisions by granting summary judgment. Judges have felt able to do this because although adjudicators’ decisions are binding, they are not final, so a losing party can begin proceedings for final determination of the dispute.
This approach runs into difficulty, however, when it conflicts with the law of insolvency, because the insolvency rules pull the rug out from underneath the assumption that a losing party can always have another day in court. When a company goes bust, it is not possible to bring legal proceedings against it unless permission is granted by the administrator, liquidator or court. Permission is rarely granted, meaning that the decision is binding and final. While judges are comfortable saying “pay now, argue later” when granting summary judgment, they find it less attractive saying “pay now” if there is little or no prospect of “argue later” or of the money being recovered, because the winning party is insolvent.
The case of Straw Realisations vs Shaftesbury House illustrates the approach that the Technology and Construction Court takes if an insolvent company seeks to enforce an adjudicator’s decision. Straw contracted with Shaftesbury to carry out a development in north London for £8.5m. The contract provided for disputes to be referred to adjudication and stated that an adjudicator’s decision would be final and binding, unless one party gave notice within three months of the decision to appeal. Following practical completion in April 2009, two disputes were referred to adjudication in July 2009. The first adjudication was decided in Straw’s favour, for £31,000 on 31 July. On 13 August, Straw went into administration. On 13 October, Straw won the second adjudication and was awarded £475,000.
Shaftesbury did not pay, and Straw applied for summary judgment. The judge decided that, because Straw’s financial position was very different from when it entered into the building contract and was not caused by Shaftesbury’s failure to pay (Straw had become “spectacularly insolvent” with debts of £35m), the law is that:
Straw was granted summary judgment for the first adjudication, because it had become final and binding (Shaftesbury did not issue a notice of intention to appeal in time) but subject to a stay. The judge refused summary judgment on the second adjudication as, for that decision, Shaftesbury had served its notice in time.
Adjudication may be good for keeping cash flowing, but it’s much less use once you’re out of cash altogether – there is little difference between having a summary judgment subject to a stay and not being granted judgment at all – either way, no money is immediately forthcoming. This is thin reward, but there is a possible benefit of having a decision backed up by a summary judgment – even if it’s not what was in mind when starting the adjudication – as it has significant value when the administrator or liquidator comes to set off debts when taking the final account before a distribution of assets.