Adjudication in insolvency: an exercise in futility

04.02.19

In a Court of Appeal decision handed down last week the court considered the interplay between the construction adjudication process on the one hand and the insolvency regime on the other. 


The decision arose out of appeals in the cases of Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Limited (in liquidation) [2018] EWHC 204 (TCC) and Primus Build Limited v Cannon Corporate Limited (unreported). 


The Bresco Appeal


In August 2014 Bresco entered into a sub-contract with Lonsdale to perform electrical installation works. Bresco ceased work in December 2014 and both parties alleged that the other had wrongfully terminated the contract. In March 2015 Bresco became insolvent and entered into voluntary liquidation. In June 2018 Bresco served an adjudication notice referring to adjudication a claim that Lonsdale had wrongfully repudiated the sub-contract together with a claim for damages. Lonsdale challenged the adjudicator’s jurisdiction and sought an injunction to prevent the continuation of the adjudication. Lonsdale argued that Bresco’s contractual claim had ceased to exist when they became insolvent and the financial relationship between the parties was now governed by the set off provisions in the Insolvency Rules. The TCC agreed with Lonsdale and granted the injunction. 


Bresco appealed and the Court of Appeal looked at two issues: (1) whether an adjudicator can ever have the jurisdiction to deal with a claim by a company in insolvent liquidation and (2) whether such an adjudication could ever have any utility and, if not, whether an injunction preventing the continuation of what would be a futile exercise was justified anyway. 


Jurisdiction


The Court of Appeal held that Bresco’s right to refer a dispute to adjudication was not automatically lost when they went into liquidation. If a contractual right to refer the claim to arbitration was not extinguished by liquidation (a point which was conceded by Lonsdale) then “the underlying claim must continue to exist” and “must continue to exist for all purposes.” 


The Utility Argument


The Court of Appeal considered there to be a basic incompatibility between adjudication and the insolvency regime. The Court held that a decision of an adjudicator in favour of a company in liquidation, in circumstances where there is a cross claim, would not ordinarily be capable of being enforced by the court. In this case granting summary judgment would result in Lonsdale being deprived of the benefit of treating Bresco’s claim as security for its own cross claim and would leave Lonsdale only able to claim for a dividend in liquidation. The court stated that reference to adjudication of a claim which would be incapable of enforcement would be “an exercise in futility”. The Court of Appeal therefore upheld the TCC’s decision on the grounds of practical utility. 


The Cannon Appeal


The Cannon case raised similar issues. Primus were not insolvent but had entered into a Company Voluntary Arrangement (CVA). The CVA incorporated the same right of set off as provided for by the Insolvency Rules. When Primus raised enforcement proceedings to give effect to an adjudicator’s award in its favour Cannon resisted enforcement. 


Cannon raised the same jurisdictional argument as advanced by Lonsdale in the Bresco appeal. However as that argument had not been raised by Cannon before either the adjudicator or the judge of first instance the Court of Appeal held that the argument was not open to Cannon on appeal. The reservation of its position in relation to jurisdiction was “so vague” as to be ineffective on enforcement. 


The key issue in the Cannon case was whether the judge at first instance was entitled to enter summary judgment in favour of Primus. The Court of Appeal held that there were “a number of good reasons” to justify entering summary judgment to enforce the decision of the adjudicator. The CVA was designed to allow Primus to trade out of its difficulties and it was clear that if the CVA was allowed to run its proposed course that Primus was likely to avoid liquidation altogether. The court made a distinction between a CVA and a claimant company in insolvent liquidation and noted that “courts should be wary of reaching any conclusions which prevent the company from endeavouring to use adjudication to trade out of its difficulties.” Primus was therefore entitled to summary judgment against Cannon in respect of the adjudication decision. The Court also held that if it was open to the judge to grant summary judgment then the refusal of the application for a stay of execution was “almost inevitable” particularly in this case when Cannon was plainly the principal cause of Primus’ financial difficulties. 


Comments


The two cases are based on the application of Insolvency Rules which apply in England.  The Scottish Insolvency Rules are currently being reviewed to bring them into line with the position now being adopted under the new rules in England and Wales.  


These judgments raise significant issues where one of the parties to an adjudication has entered into an insolvency process. The English court appears to have closed the door on using a company’s insolvency as a valid basis for challenging an adjudicator’s jurisdiction. However, where it has a genuine cross claim, it appears open to a responding party to argue that adjudication proceedings raised against them by a company in liquidation should be halted. 


The court also made an important distinction where a company that has entered into a CVA may still be able to enjoy the benefits of the adjudication process. 


The Cannon case also serves as a useful reminder to parties to make specific jurisdictional challenges during the course of an adjudication or run the risk of having waived entitlement to raising that challenge in enforcement proceedings.