Is this the end of insolvency auctions?

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Peter Clyde is General Counsel in the Construction and Engineering Litigation team at Addleshaw Goddard Law Firm

The decision of the Court of Appeal in the case of John Doyle Construction Ltd v Erith Contractors Ltd to mark the end of insolvent judgments? No, this is not the case. Sorry to spoil the suspense.

Think about June 2020. The UK was tentatively emerging from the first lockdown, live sport was back on TV (even if it was South Korean football), and the Supreme Court issued a landmark ruling in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd, confirming that insolvent parties to construction contracts could rule at any time and should not be prevented from doing so.

This ruling overturned an earlier finding by the Court of Appeal, led by Lord Justice Coulson, that ruling while a party was insolvent was a futile exercise, inconsistent with the insolvency regime.

“It would be unfortunate if the narrower opinion of Lord Justice Coulson prevailed. For insolvency subcontractors and insolvency practitioners alike, adjudication offers a rapid means of recovering amounts owed ”

Taking the opposite view in his Supreme Court judgment, Lord Briggs described adjudication as a beneficial way to resolve disputes, much faster and cheaper than a court. He held that there was no basis for concluding that the auction was inconsistent with the insolvency process or with the requirement to deal with cross-claims in insolvency by set-off let alone a futile exercise. .

The Supreme Court’s decision on Bresco vs. Lonsdale sparked a rush of arbitrations brought in by insolvent parties and a new industry arose to finance and manage them. The question turned to security and other protections that should be in place to ensure summary execution in these circumstances.

But, ruling on the appeal in John Doyle vs. Erith, Lord Justice Coulson has returned to pick up a bone with the Supreme Court. Returning to his theme of “fundamental incompatibility”, he considered that arbitrators’ decisions are in most cases provisional and that provisional decisions are inconsistent with the insolvency regime’s requirement to determine the net balance definitively.

When he was “taken in turn”, he argued, Lord Briggs in the Supreme Court could not mean that a company in liquidation had the right to judge, let alone collect claims. fund, “on the basis of an interim decision, in circumstances where there was continuing set-off and a counterclaim”.

Not the end of the adjudication in the event of insolvency

Cue the sound of a giant door slamming on an insolvency decision? This is certainly what some have concluded. But nothing is that simple.

First, the Court of Appeal’s comments in this regard are obiter and not binding (although they may be persuasive) in England and Wales, let alone Scotland.

Second, Lord Justice Coulson himself believed that there would be exceptions. The decisions of the arbitrators could still be enforced if they ultimately determine the net balance – when the circumstances give the decision finality.

Third, we could see a battle of non-binding obiter comments. At the level of the high courts of England and Wales, and in the Scottish courts, judges can decide that since the Supreme Court is superior to the Court of Appeal, Lord Briggs’ non-binding comments prevail in the event inconsistency. It certainly seems that Lord Briggs envisioned a larger set of circumstances in which an arbitrators’ decision would be appropriate.

He proposed a number of circumstances under which decisions could be enforced, including when any counterclaim can be determined in the same judgment. He considered that execution risks in insolvency could in some cases be addressed at the execution stage, with appropriate commitments if necessary.

Fourth, there is the question of whether the logic of Lord Justice Coulson’s comments on winding-up and Rule 14.25 also applies in other insolvency situations, particularly where there is no set-off. obligatory. Lord Briggs refers in Bresco vs. Lonsdale to the similar application of rule 14.24 in a distribution administration but what about where no distribution is contemplated? And let’s not forget that Scotland has its own insolvency rules.

Finally, it is likely that the Supreme Court will get another execution sooner or later. One would expect her to favor the approach of Lord Briggs, where she deviates from John Doyle vs. Erith.

In my opinion, it would be unfortunate if Lord Justice Coulson’s narrower view prevailed. For insolvency contractors and insolvency practitioners alike, auction offers a way to quickly collect amounts owed. This path is all the more valuable in today’s market, where many parties are on the verge of insolvency given spiraling costs and supply uncertainty.

Insolvency is not always the death knell for these companies, but time is often essential to facilitate recovery, and it is in the speed that arbitration makes sense.


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