Insolvency has been very much in the news over the past few months. We have seen the recent spate of high street retailers finding themselves in difficulties. Wright & Anor (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd [2018] EWHC 402 (Ch) concerned the liability to pay rent as an expense of administration following the termination of the BHS voluntary arrangement. Of course, in the construction industry we have witnessed the collapse of Carillion.
The Housing Grants, Construction and Regeneration Act 1996 (the 1996 Act) implies into construction contracts (as defined in the 1996 Act) a right to resolve disputes through adjudication. Adjudication is a swift process designed to resolve disputes which arise during the currency of a construction project, without derailing the project itself.
Many adjudications concern the entitlement to be paid. Once published, an adjudicator’s decision is converted into an enforceable judgment by a specific summary procedure commenced in the Technology and Construction Court (TCC).
Insolvency protection
The Insolvency Act 1986 (the 1986 Act) provides a number of ways in which a company in financial difficulty can be shielded from claims. These include:
■ Company voluntary arrangements
A company voluntary arrangement (CVA) is a statutory compromise between a debtor and its creditors. Under a CVA a debtor makes a proposal to discharge liabilities either in full or at a reduced rate; typically to be paid by instalments at fixed points in time.
If approved by a majority of creditors, the CVA becomes binding on all. The rationale is that creditors may be willing to accept all or part of the money owing to them over a set period, rather than face the prospect of recovering nothing if a CVA is not approved.
■ Administration
Administration is a process under which a company in financial difficulty is protected against prosecution of claims (new and existing) for a period of time. Its purpose is to provide space to allow an assessment of whether a company can be rescued and to implement a rescue plan.
The moratorium
Both administration and CVAs bring with them a statutory moratorium on claims. In the case of administration, the moratorium automatically commences on service of a notice of intention to appoint an administrator and will continue for the duration of the administration. With a CVA, the position is different. It only lasts for a 28-day period, has to be applied for (through court) and is only available to small companies (as defined in the 1986 Act). The small companies moratorium is distinct from any moratorium imposed within the CVA itself.
During any moratorium new claims cannot be commenced and existing ones cannot be progressed without the permission of the court or (in the case of administration) the consent of the administrator. In considering whether to grant permission the court must consider the guidelines laid down by the Court of Appeal in Re Atlantic Computer Systems plc [1990] EWCA Civ 20.
The cases
In 2017, two cases highlighted the interaction between construction adjudication and insolvency protection.
In Rossair Ltd v Primus Build Ltd [2017] EWHC 2430 (TCC), Primus was engaged as the main contractor in a project to construct a hotel in central London.
Rossair was a specialist mechanical installation sub-contractor, engaged by Primus to undertake work on the project.
A dispute arose over Rossair’s entitlement to be paid. Rossair referred the dispute to adjudication.
The adjudicator published a decision under which Primus was required to pay Rossair just over £350,000. Rossair failed to pay and Primus commenced enforcement proceedings in the TCC.
It was Primus’s case that a proposal for a CVA had been made and proceedings should therefore be stayed.
While it was not explicitly advanced as reliance on the small companies moratorium available under the 1986 Act, the court treated Primus as seeking to rely on it.
In Bernhard Sport Surfaces Ltd v Astrosoccer4U Ltd [2017] EWHC 2425 (TCC), Bernhard Sports Surfaces was engaged by Astrosoccer4u to lay a football pitch.
As with Rossair, there was a dispute over payment. Bernhard’s referred the dispute to adjudication. The adjudicator published a decision under which Astrosoccer4u was required to pay Bernhard’s just over £175,000. It failed to pay and enforcement proceedings were commenced.
Following the service of notice of the intention to appoint an administrator of Astrosoccer4u, Bernhard sought the court’s permission to continue with its enforcement application.
The outcomes
While insolvency protection, if used appropriately, can aid companies in distress, in each of these cases the court determined that it was being cited as nothing other than a tactic to try to avoid payments that were otherwise legitimately due.
In Rossair this was a straightforward conclusion to draw. While Primus advised the court that it was proposing a CVA and had filed the necessary paperwork (which would have had the effect of imposing a moratorium), there was simply no evidence produced to support this conclusion.
The 1986 Act does make provision for directors of eligible companies who propose a CVA to take steps to seek a small companies moratorium pending approval of it. However, the court concluded that Primus had taken no steps to obtain one and was therefore unable to rely on it.
In Bernhard, there was no dispute that a moratorium came into effect and that it was for the creditor to demonstrate why enforcement proceedings should be continued under the Atlantic Computer Systems guidelines. In drawing on an enforcement decision from earlier in the year (South Coast Construction Ltd v Iverson Road Ltd [2017] EWHC 61 (TCC)) the court identified the following factors as the most persuasive:
■ The proceedings were effectively at an end (the claim was for judgment to enforce already concluded proceedings);
■ Continuing the enforcement proceedings would not frustrate the administration process;
■ There was no risk of undue or unfair prejudice; and
■ The conduct of the debtor.
As to conduct, the TCC was highly critical of Astrosoccer4u’s attempt to avoid enforcement through the use of administration. It described the notice of intention to appoint as being entirely bogus and solely intended to frustrate legitimate attempts to secure payment of a legitimate debt. The conduct of Astrosoccer4u’s solicitors was also heavily criticised by the TCC.
Conclusions
Insolvency protection, when used legitimately, is an important tool to aid companies in distress. Used properly, businesses can be saved, jobs retained and debtor losses minimised or extinguished. The moratorium on new and existing court processes is an important part of such protection. However, Rossair and Bernhard (and the earlier case of South Coast Construction) illustrate is that the courts are alive to the risk of such processes being misused and, in the context of enforcing construction adjudication decisions, they will be slow to allow such protections to be used to the detriment of legitimate claims and innocent creditors.
Nitej Davda is a partner and Natasha Holme is a trainee solicitor at Cripps
Insolvency tips
Know where you stand: The inter-relationship between insolvency protection and creditor claims can be complicated. From a creditor’s point of view understanding at an early stage what is being proposed and how it may affect you in practical terms is vital to deciding how to respond to a debtor (whether under a construction contract, a lease or any other property document) in financial difficulties.
Understand what you can and cannot do: Insolvency protection can be in place at a very early stage (eg the small companies moratorium which can be in place before any CVA is approved). Ignoring the scope of such protection (whether wilfully or accidentally) can have serious consequences.
Participate: Most if not all insolvency processes require creditor action, whether it be voting on a CVA or providing evidence of creditor claims. It is important that information is provided as requested and on time to ensure that legitimate claims are not adversely affected.
Gather information: With some of the larger insolvencies affecting the
high street, the insolvency practitioners administering the process will likely have thousands of individual claims or potential claims to consider. Don’t assume that you can pick up the phone and get answers to questions or queries about the insolvency process and how it affects your particular scenario. Information and updates can often be located on standalone microsites set up specifically for a particular company’s insolvency. You will need to ensure that you are clear on what notice of updates (if any) the insolvency practitioners will provide.
Competing interests: The effect of insolvency protection can often seem unfair to a creditor. Insolvency protection is designed to strike a balance between the interests of creditors (as a collective) and the possibility of restoring a debtor’s financial health. If you feel that your interests are prejudiced by insolvency protection, you should take appropriate advice to ensure that you understand: (1) if you can challenge the effect of insolvency protection, and (2) the costs and risks associated with seeking approval (whether from the court or the insolvency practitioners engaged) for a course of action which will circumvent the insolvency protection used.
Nitej Davda is a partner and Natasha Holme is a trainee solicitor at Cripps
