When adjudication clashes with insolvency – insolvency ordinarily wins

The English Technology and Construction Court held in Indigo Projects London Limited v Razin that entry of a party into an insolvency regime will generally prevent it from enforcing an adjudication decision made in its favour.

Background

  • Party A applied for summary judgment to enforce an adjudicator’s decision against Party B.
  • However, at the time of the adjudication and enforcement, A was in a Company Voluntary Arrangement (CVA).
  • A company bound by a CVA is otherwise entitled carry on business and can sue and be sued.
  • Although a CVA does not act as an absolute bar on a party seeking an adjudication, B argued successfully that there should be no enforcement by A of the adjudication, on the basis that that A would be unable to repay any sum that might ultimately be found due to B in subsequent litigation.

What this means:

The case confirms that entry into an insolvency regime does not prevent a party seeking adjudication in principle. However, there is a fundamental incompatibility between the processes of adjudication and insolvency.

If an adjudication decision is to be enforced against a company in an insolvency regime, it is liable to upset the principle of equality applied to unsecured creditors and might give an adjudicating party unfair priority.

Similarly, if a company in an insolvency regime were entitled to enforce an adjudication decision against a counterparty, this would also distort the insolvency process and produce unintended results. Any sum received by the insolvent company would not be applied for the sole benefit of the paying party and would be applied for the benefit of all creditors generally working unfairness on the paying party.

This case shows that adjudication remains a potent weapon in construction disputes. Parties considering adjudication of disputes should, however, consider carefully whether an adjudication will be cost effective or serve any purpose when either party to the dispute is or is likely to enter an insolvency regime.

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