Insolvency statistics throughout 2019 have slowly increased from Q1 but what is more alarming is the insurgence of administrators appointed in an attempt to resurrect failing businesses. Q2 of this year saw administration levels increase by 20% with the likelihood of further increases to come. Further, the construction sector is experiencing somewhat of a downturn which is causing contractors to writing-off profit margins just to win the work.
This is quite alarming especially given a contractor’s reliance on cash flow and profit. Due to the low levels of liquidity held by construction companies it makes it very difficult for these companies to recover from administration. The increase in administration and low-ball bidding will therefore likely trigger an increase in liquidation throughout the sector in Q3 and Q4.
Administrators and liquidators will of course use a number of avenues in an attempt to recover monies with adjudication being the most favoured. For companies entering liquidation their recovery rights have been restricted by the Court of Appeal’s decision in Londsdale v Bresco (“Bresco”), which is on appeal to the Supreme Court.
The Bresco case involved a dispute between Bresco and Lonsdale whereby Bresco’s contract was terminated and sought recovery from Lonsdale for wrongful termination. Bresco then went into liquidation and the liquidator referred the dispute to adjudication. Lonsdale made an application for an injunction to discontinue the adjudication which the Court of Appeal upheld.
The Court based its decision on the fact that the adjudication lacked utility and it would be unjust for it to continue in circumstances where:
- The adjudication could not be enforced;
- Lonsdale had previously issued its cross claim; and
- Lonsdale would be put to unnecessary costs which it could not recover.
Most importantly, the decision leaves the door slightly ajar for liquidators to adjudicate. This is limited to circumstances where the respondent has not previously issued or raised its cross claim. If this is the case, respondents will likely need to participate in the adjudication to evidence their cross claim.
This strategy puts the liquidator at risk of a personal liability claim but in our experience it does not seem to deter them from proceeding with adjudications in an attempt to squeeze the other party for money. Low value claims between £20,000 and £60,000 seems to be the sweet spot due to assimilation of costs.
Our recent experience has seen a liquidator refer a £70,000 claim to adjudication on the basis that the other party had never formally issued a cross claim.
So what options are available at this point?
- Participate in the adjudication process and incur fees without the right of recovery.
- Do nothing and make an application to stay the adjudication decision at the risk of being exposed to the loophole created by Bresco.
- Bring a personal liability against the liquidator.
- Settle the matter in an attempt to avoid time and costs associated with options 1, 2 and 3.
Time, costs and business interruptions are the resulting effect of any adjudication but for liquidators they reap the benefits of this process regardless of the personal liability exposure. Even the latter has been watered down somewhat especially given the decision in Meadowside Building Developments v 12-18 Hill Street Management where the court confirmed that insolvent parties can use adjudication, if:
- The adjudication covers all claims and cross claims between the parties (i.e. following final account); and
- The insolvent party puts up security to protect the respondent from unrecoverable costs.
With administration on the rise, we are likely to see an increase in this sought of behaviour if and when companies end up in insolvency.
It is important to note that when dealing with administrators the exception in Bresco does not apply and they are free to enforce adjudication decisions.
Nevertheless, if you are dealing with a company that is or is likely to enter administration or liquidation it would be prudent to make your claims heard now (if you haven’t already) otherwise you may exposed to time and unrecoverable expenditure unless adequate security is made available by the liquidator.