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| CONSTRUCTION NEWS - FEBRUARY (1) 2019 |
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| ADJUDICATION AND INSOLVENCY |
Last week’s Court of Appeal decision in Bresco Electrical Services Ltd (in liquidation) v. Michael J Lonsdale (Electrical) Ltd and Cannon Corporate Ltd v. Primus Build Ltd [2019] EWCA Civ 27 tackled several issues including, in the Bresco appeal, both whether an adjudicator can ever have jurisdiction to deal with a claim by a company in liquidation, and (assuming there was jurisdiction), whether an adjudication could ever serve any useful purpose.
Background
Bresco which was a sub-contractor to Lonsdale went into voluntary liquidation in March 2015. Some 2 years later Lonsdale intimated a claim against Bresco for c£325k which broadly related to its costs of appointing a new sub-sub-contractor.
In June 2018 (some 3 years after the liquidation) Bresco served an adjudication notice claiming that Lonsdale had wrongfully repudiated the sub-sub-contract. The claim amounted to c.220k.
Lonsdale requested that the adjudicator discontinue the adjudication because Bresco had gone into liquidation. The adjudicator refused and issued a decision concluding he had jurisdiction to decide the dispute.
The adjudicator’s decision resulted in Lonsdale issuing a Part 8 claim in the TCC seeking an injunction to prevent the adjudication from continuing.
Fraser J gave judgment in July 2018 granting the injunction. The basis of his decision was that the Insolvency Rules (Rule 14.25) requires an account of dealings between the insolvent company and the other party, with the result that claims and cross-claims are merged into a single balance which will be paid to one of the parties. As a result, any claim would cease to exist on liquidation and was replaced by the net claim under Rule 14.25. Accordingly, an adjudicator had no jurisdiction to hear that dispute.
Court of Appeal
In the Court of Appeal both parties appeared to be in agreement about the fact that Bresco could have brought its claim through court proceedings or arbitration - thus why was it that the same claim could not be referred to adjudication? Counsel for Bresco argued that the distinction was due to the fact that court proceedings or arbitration was a final determination, whereas adjudication wasn’t.
Toulson LJ concluded that as a matter of jurisdiction there wasn’t any reason why a reference to adjudication should be treated any differently to a reference to arbitration. If a contractual right to refer the claim to arbitration is not extinguished by the liquidation, then the underlying claim must continue to exist for all purposes. In short, a choice of forum cannot dictate whether or not the claim exists or has been extinguished.
Despite the above, his Lordship suggested the jurisdictional issue was only part of the answer. It was also necessary to focus on the utility (if any) to be derived from the liquidator’s theoretical jurisdiction, when a claimant is in liquidation and the responding party has a cross-claim.
His Lordship felt there was an incompatibility between adjudication and the regime set out in Rule 14.25 of the Insolvency Rules. Adjudication was focussed on obtaining improved cashflow quickly and cheaply, whereas the Insolvency Rules were an abstract accounting exercise, designed to assist liquidators to recover assets in order to pay dividends to creditors.
Furthermore, adjudication claims are not generally claims for net balances envisaged by Rule 14.25. Rather, they are more about whichever claim has arisen at the appropriate time during the life of the contract itself. An interim payment being a good example.
His Lordship made reference to the potential inequity which had been identified by Chadwick LJ in Bouyges (UK) Ltd v. Dahl-Jenson (UK) Ltd [2000] EWCA Civ 507. In that case Chadwick LJ highlighted the fact that if Bouyges had to pay the amount awarded by the adjudicator to Dahl-Jensen, then those monies when received by the liquidator would form part of the distributable fund for Dahl-Jensen’s creditors. If Bouyges had a cross-claim, and was required to prove that claim in the liquidation of Dahl-Jensen, it would only receive a dividend pro-rata to the amount of its claim. Importantly, therefore, it would be deprived of the benefit of treating Dahl-Jensen’s claim under the adjudicator’s determination as security for its own cross-claim. For that reason, Chadwick LJ said that, ordinarily, summary judgment to enforce an adjudicator’s decision would not be available.
The above scenario was precisely the position Lonsdale found itself in with Bresco.
His Lordship agreed with a submission by counsel that a reference to adjudication of a claim by a contractor in liquidation, in circumstances where there is cross-claim, would be incapable of enforcement and, therefore, “an exercise in futility”.
However, his Lordship wasn’t prepared to leave matters there, and he went on to identify some other considerations which highlighted the utility issue.
Firstly, a liquidator only has limited assets to pursue claims of an insolvent company. It would therefore be a waste of those assets to make a claim which could not be enforced.
Secondly, why should a responding party have to incur costs of defending an adjudication brought by a company in liquidation, in the knowledge that even if it was unsuccessful in the adjudication, it would subsequently be able to resist summary judgment or enforcement, yet it would still have to spend further sums in order to achieve that result.
Thirdly, even if the insolvent company was successful in the adjudication and, for whatever reason the summary judgment was granted, the responding party would then have to bring its own claim to overturn the result of the adjudication. That would entail yet more costs, and it is very likely those further costs would not be recovered.
Lastly, if insolvent companies could run successful adjudications all the way through to enforcement there would be a further strain on the limited resources of the TCC.
In summary, therefore, his Lordship held that an insolvent company’s right to adjudicate is not lost because it is in liquidation, however in situations where the responding company has a cross-claim then the adjudication decision will not be capable of being enforced.
Thus, it was right to grant the injunction not on the grounds of theoretical jurisdiction (as Fraser J had found) but on the grounds of practical utility.
Comment
To the extent there was still some uncertainty surrounding adjudication and insolvency, this judgment makes it clear that companies in liquidation which attempt to bring money based adjudications are unlikely to get out of the starting blocks for the reasons stated above.
Note the focus was on companies in liquidation. In the Cannon part of the appeal there was a question about whether the approach taken in Bresco also applied to a company which had entered into a Company Voluntary Arrangement (CVA) which was the situation Primus found itself in. His Lordship said it did not as the purpose of a CVA was to allow an organisation to trade out of any difficulties. Furthermore, if Primus was able to enforce its adjudication award then it was more likely to avoid liquidation altogether. |
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| CONTACT: Christopher Filor |
| EMAIL: cfilor@filorsolicitors.co.uk TELEPHONE: 01647 231475 |
| MOBILE: 07891 055856 www.filorsolicitors.co.uk |
| This publication is not intended to provide legal or other professional advice and should not be relied upon as such. Readers should take legal advice before applying the information contained in this briefing. |
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