Stop right there: the new insolvency moratorium and adjudication

Author: Michael Comba

The effect of the moratorium provisions of the Corporate Governance and Insolvency Act 2020 and adjudication.

Insolvency, not COVID-19, is promising to be adjudication’s hot topic for 2020. Following the landmark judgment in Bresco, the recently passed Corporate Governance and Insolvency Act 2020 (the “Act”) raises yet more questions for when dealing with insolvency and adjudication.

Among other developments, the Act introduces a new, standalone insolvency regime, the ‘moratorium’ by inserting new provisions in the Insolvency Act 1986 (the ‘1986 Act’). Companies entering financial difficulties, provided they demonstrate that it would help it recover as a going concern, can now enter a moratorium in which they enjoy, alongside a payment holiday on certain debts, protection from any:

“legal process (including legal proceedings, execution, distress or diligence) may be instituted, carried out or continued against the company or its property”.

This protection is subject to a few exceptions for employment proceedings and where the court gives permission for a legal process to continue.

But what does that mean for adjudication? Would a party be constrained from commencing an adjudication against a company a moratorium? What about enforcement of an unpaid award? Could entering a moratorium be an effective tactic in resisting an adjudication?

With continuing economic turmoil and subsequent corporate insolvencies, we may see the court giving answers to these questions in the coming months.

The drafting of the moratorium provisions actually draw heavily on old and existing provisions in the 1986 Act governing a moratorium for a company in administration. This moratorium similarly precludes legal proceedings and offers clues as to how the court will consider the new moratorium in the context of adjudication.

Would enforcement proceedings be allowed?

It’s one thing successfully adjudicating, but getting paid an award can often be quite another. The risk of non-payment is only higher in a dispute with an insolvent party and enforcement proceedings can be a necessary backstop.

The moratorium, however, explicitly precludes legal proceedings unless the court otherwise gives permission. Therefore, absent that permission, parties will not be able to pursue enforcement proceedings to pursue payment of an award against a company that has entered a moratorium.

Would the court grant permission?

In South Coast Construction Ltd v Iverson Road Ltd[i] the defendant sought to evade enforcement of an award relating to incorrect levying of liquidated damages against the claimant. Following its appointment of administrators, the defendant entered a moratorium under paragraph 43(6) of Schedule B1 to the 1986 Act. This moratorium precludes any ‘legal process’ without permission of the court.

The court held that allowing the enforcement would not frustrate the objectives of administration and, applying the well-known principles of Carillion Construction Ltd v Royal Devonport Dockyard Ltd[ii], that adjudication should be seen as an exceptional case that the court would only rarely interfere with and it ought to enforce any award given under one, save for the rarest of circumstances.

That suggests the court, subject to the facts in question, would likely permit enforcement proceedings in the context of the new moratorium. Adjudication does not obviously frustrate the objectives of the moratorium and the court is generally loathe to undermine the adjudication process.

However, for enforcement of awards made against a party before it enters a moratorium, a straightforward application of those principles is not possible.

The new moratorium, and the provision to commence legal proceedings with court permission, comes with a proviso:

“An application may not be made for permission…for the purposes of enforcing a pre-moratorium debt for which the company has a payment holiday during the moratorium.[iii]

There is nothing in the Act that carves out an award from the payment holiday and therefore this exception would apply to enforcement of an award.

It is therefore likely that any application to enforce an award against a party in a moratorium in this scenario would fall at the first hurdle.

Is an adjudication precluded by the moratorium?

Litigation obviously amounts to legal proceedings, but what of adjudication? Does an adjudication come under the vague heading of ‘legal process’?

A Straume (UK) Ltd v Bradlor Developments Ltd[iv] concerned a dispute between a contractor seeking payment under interim certificates and the employer pursuing several counterclaims. The contractor, suffering insolvency, then entered administration and, under the old section 11(3)(d) of the 1986 Act, entered a moratorium. The employer brought a notice of adjudication. Those moratorium provisions stated that no other proceedings and no execution or other legal process may be commenced.” The court was asked to determine whether adjudication came under “other proceedings”.

The court determined that adjudication was caught by the moratorium on the basis that adjudication was akin to arbitration and therefore was ‘quasi-legal proceedings’; under the ambit of “other proceedings”.

A party would therefore likely require permission to commence an adjudication against a company in the new moratorium.

Would the court grant permission?

The restriction on applications to enforce pre-moratorium debts is not so readily applicable to adjudication. It explicitly refers to applications “for the purposes of enforcing a pre-moratorium debt”.

While it may pertain to debts allegedly incurred prior to moratorium, adjudication is quite distinct from enforcement. The adjudicator may only provisionally determine what sums, if any, are due to a party under a contract and the adjudicator is not afforded any powers to enforce that determination.

The court would probably therefore entertain an application to permit adjudication proceedings. Whether permission would be granted would be dependent on the facts in question and in Straume permission was refused.

The exact test that the court would apply in determining an application is difficult to confirm. In Straume the court applied the ‘balancing exercise’, that between the interests of the parties and against those of wider creditors, as articulated in Re Atlantic Computer Systems Plc.[v] But that was in the context of administration. The new moratorium, with a greater emphasis on rescuing companies as a going concern, may require consideration of different principles.

Could a moratorium be a useful evading tactic?

More unscrupulous parties may be considering a moratorium to evade payment of an enforcement award. They would be wise to consider other means of doing so.

The moratorium is difficult to obtain. A company must be unable to pay its debts and the independent monitor must consider that the moratorium would result in the company being rescued as a going concern. It is difficult to see how these requirements can be fulfilled because of an award alone.

The court also takes a dim view of those using the insolvency regime to evade payment of awards. In South Coast Construction, the court was highly critical of the defendant’s procedural tactics in this vein and its conduct contributed to its failure to resist enforcement.

Practical tips

The new moratorium may present procedural hurdles for adjudications and it could lead to particular problems for enforcement.

Parties may be comforted by the time-limits on moratorium; an initial 20-day period, extendable for a further 20 days and then only extendable with court or creditor consent up to an overall cap of 365 days. Adjudication will not be restrained forever.

It will nonetheless serve as a reminder to parties to bring claims promptly and to not delay enforcement of awards if necessary. Otherwise, they risk awards vanishing with insolvency.

Parties may also be comforted by the limited application of moratoriums. They are reserved for companies in particular financial distress and the court will not reward parties abusing these provisions as means to evade payment of awards.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this article, please contact us today by telephone or email enquiries@sharpepritchard.co.uk.

[i] [2017] EWHC 61 (TCC)

[ii] [2005] EWCA Civ. 1358

[iii] Section A21(2), Insolvency Act 1986

[iv] [2000] B.C.C. 333

[v] [1992] Ch. 505

Posted in Recent cases.