In this article, Consultant Solicitor Ken Salmon explains and provides commentary on a recent case in relation to construction insolvency.
John Doyle Construction Ltd (In Liquidation) v
Erith Contractors Ltd EWCA (Civ) 1452 Lewison, Coulson and Edis LJJ judgment 7 October 2021
The Court of Appeal (“CA”) handed down what will prove to be an important judgment for those concerned with construction insolvency and adjudication.
In John Doyle v Erith the CA commented on and explained the judgment of the Supreme Court (“SC”) in Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited [2020] UKSC 25; [2021] 1 All ER 697 (“Bresco“). In Bresco the SC had ruled that a company in liquidation has the right to commence adjudication and the court should not grant an injunction to restrain the adjudication simply because of the referring party’s insolvency. The SC also took the opportunity to point out that adjudication could serve a useful purpose even where it did not lead to enforcement or payment. It had “utility”.
John Doyle v Erith
The appeal was against the refusal of Fraser J at first instance to enforce an adjudicator’s decision in favour of John Doyle in Liquidation (“JDC”) for £1.2m.
On appeal JDC argued: –
- The judge was wrong to consider that the security offered by way of a letter of credit for the judgment sum was inadequate;
- The Judge was also wrong to consider that the security for costs offered by way of an After The Event Insurance policy was inadequate;
- That alternative security was available and had been offered by way of ring fencing the sum awarded, or paying the money into an escrow account or into court;
- That the Insolvency Rules (Rule 4.62), which prioritised “Expenses” effectively provided security for Erith’s costs.
The appeal failed on the facts on all grounds. The importance of the decision is that the appeal would also have failed on principle in any event. On what was called “the wider point” underlying the appeal, the court decided that an insolvent claimant was not entitled to enforce an adjudicator’s award in its favour when the other party continued to maintain cross claims and or set-offs which were still to be finally determined. That is because (as enshrined in case law and the Insolvency Rules) until an account has been taken of all claims and cross claims and the net balance due either way has been finally determined (whether in the Insolvency, or by legal proceedings or agreement), there is no net sum due and payable.
The above finding on the ‘wider point’, was not necessary to the outcome of the appeal but Coulson LJ, giving the leading judgment, said the court should not duck an issue of such importance to construction and insolvency practitioners.
The result in summary was this:
- When it came to security for the judgment sum and future costs, the court made it plain that the questions: by whom, what and how security was being offered, needed to be clear and unequivocal. The court was critical of the confused and inadequate offers made or relied on by JDC. The judge had been right to reject the security as inadequate and had not failed to consider the material and arguments put before him.
- The so called alterative offers of ring fencing, or payment to an escrow account or into court, had not been put before the judge. Ring fencing or payment to an escrow account were inconsistent on the facts with the liquidator’s obligation sot pay the recovery to a third party. Payment into court was “ a last resort” as it benefited no one.
- Even if the court had been persuaded that the judge had failed to consider the adequacy of the security offered, it would have refused summary judgment in any event. A company in liquidation is not entitled to summary judgment where there are cross claims and set-offs that are being maintained and yet to be finally decided (noting again, that the adjudicator’s decision is not final).
- Both the Insolvency Rules and well established equitable principles of set-off provide that the balance found on the taking of an account is the only sum due and for which summary (or any) judgment can be entered. Until that balance has been established there is no sum due for which judgment can be given. Lords Justices Coulson and Lewison in separate judgments, reviewed and approved the old law (Stein v Blake and Hanak v Green). The Insolvency Rules are not to be trumped by the adjudication regime any more that they can be contracted out of. Lord Lewison put it succinctly:
“153. As Lord Briggs pointed out, there is considerable procedural flexibility in the conduct of a liquidation. The flexibility should be used to ascertain the net balance (one way or the other). In my judgment, it is only once the net balance has been ascertained, by whatever are the appropriate means, that judgment should be entered.”
- Further and for the same reasons any judgment would have been stayed on Wimbledon v Vago grounds as in the case of an impecunious claimant. This was to be regarded as “the default position”. Where judgment might be given for the net sum due after the taking of an account by the adjudicator, (i.e. where the adjudicator deals with all claims and cross claims extant at the time), such a decision is not final, and if the other party is challenging the net sum, the claimant would need to show that the sum was to be ring fenced in the hands of the liquidator and not distributed and adequate security given for costs. The court gave some limited support to the case of Meadowside where ring fencing was considered.
Comment
It can perhaps now be said with some certainty, that the prevailing view at first instance and in the court of appeal will be this. That a company in insolvent liquidation (or an individual in bankruptcy) will not be entitled to summary judgment to enforce an adjudicator’s award for the payment of money where there are cross claims and set-offs yet to be finally decided. Such a final decision can be made in the liquidation or bankruptcy itself under the Insolvency Rules, or, by the final determination of a court or arbitrator, or, by agreement between the parties.
In those cases where there has been such a final determination judgment will be available. Coulson LJ recognised, there may be a residue of cases where judgment may be entered for a net sum determined by an adjudicator having considered all claims and cross claims, where there is yet to be a final determination of that net sum. In those few cases, a stay may be avoided where ring fencing and appropriate and adequate security for costs is available and offered.
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