J&A Construction (Scotland) Limited, a construction company (“the pursuers”) and Windex Limited, a property development company (“the defenders”) had been through the process of adjudication. The outcome of the adjudication was an order in favour of the pursuers for £120,000. The defenders disagreed with the decision, and resisted enforcement of the adjudicator's award in the Scottish courts on the grounds of the alleged insolvency or near insolvency of the pursuers (and thus the inability of the pursuers in future to pay back any sums paid to them now by the defenders in terms of the adjudicator’s decision).
The defenders had two main lines of argument as to why the decision ought not to be enforced:
- Firstly, they argued that the pursuers were “insolvent, or at least verging on insolvency” due to their accounts showing an excess of liabilities over assets. They argued that as this was a basis for winding up a company under sections 122(1) and 123(2) of the Insolvency Act 1986, the court should find the pursuers to be insolvent.
- Secondly, the equitable principle under Scots law of the balancing of accounts in bankruptcy should apply.
These points were argued to be sufficient to refuse enforcement now, but if not, the court should at least allow an inquiry into the pursuers’ finances.
The pursuers’ argument was also primarily twofold:
- Firstly, they argued that although their accounts showed an excess of liabilities over assets, there had been no formal insolvency event (i.e. liquidation or administration). The pursuers were trading as a going concern, and they argued that many companies operate successful with deficiencies in their balance sheet.
- Secondly, adjudication was intended to be a quick commercial process, with the decisions arising out of it to be enforced by the courts. They argued that the adjudication process would be undermined if the court refused to enforce the decision for ‘near insolvency’ situations.
The Court of Session found in favour of the pursuers, and enforced the adjudicator’s decision. Although the court considered the defenders arguments carefully, Lord Malcolm held that “much more” evidence would be required before the court would be prepared to prevent or delay enforcement of an adjudicator's award. The court agreed with the pursuers’ second argument above, that to refuse enforcement of a decision just by looking at a balance sheet deficiency alone would create “too much violence” and have “serious ramifications” for the adjudication system as was intended by Parliament.
The court did comment that it was not the case that formal insolvency alone would prevent the enforcement of an adjudicator’s decision for insolvency reasons, but in this case there was not enough evidence presented by the defenders to suggest the pursuers would be unable to reimburse them if the decision was enforced and the money paid over. The court cited Lord Macfadyen in SL Timber Systems Limited v Carillion Construction Limited 2002 SLT 997 in support of this position.
Considering the defenders’ second argument the court commented that they would not order an inquiry into the pursuers’ finances, as it would create “unacceptable delay and uncertainty”, contrary to the intention behind adjudication.
In the absence of ‘clear or uncontested evidence of insolvency’ the court will be unlikely to prevent the enforcement of an adjudicator’s decision. Language such as “violence” and “serious ramifications” used in describing the effect of a refusal to enforce an adjudicator’s decision in such circumstances as these, suggests a strong commitment by the courts not to undermine the system of adjudication. This case may be contrasted with other recent cases in Scotland where the courts appear to have allowed an expansion of the grounds based on which enforcement may be refused.
The practical challenge for defenders wishing to avoid enforcement on grounds of insolvency, is obtaining the necessary evidence as to the pursuers’ financial position. Such information is not often readily available except through published accounts information, which is often out of date.