Insolvency: a high, but not absolute bar, to adjudication enforcement

27.11.19

Meadowside Building, Development Ltd (In Liquidation) V 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC)

INTRODUCTION

The English Court of Appeal in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd settled that insolvency will not, of itself, deprive an adjudicator of jurisdiction. However, it reasoned that, absent exceptional circumstances, an insolvent party would struggle to enforce any decision obtained.  The practical effect was that commencing adjudication proceedings would be a futile exercise for an insolvent party.

The recent decision by the TCC in Meadowside provides guidance on what exceptional circumstances might be. Although ultimately unsuccessful on summary application, the insolvent party, Meadowside, very nearly won the day in their attempt to enforce a decision in their favour won at adjudication.

BACKGROUND

Meadowside Building Developments Ltd entered into a JCT Minor Works Building Contract with 12-18 Hill Street Management Company Ltd to carry out repair works in September 2014. There were various disputes between the parties in relation to interim payments, delay, variations and defects. In July 2015 Meadowside was placed into voluntary winding-up. Eventually, the liquidators appointed Pythagoras Capital Limited to pursue the debts of the company. Pythagoras initiated adjudication proceedings and sought a determination of the final valuation of, and payment for, the works under the contract.

HSMC did not participate in the adjudication process beyond making a jurisdictional challenge based on the insolvency of Meadowside.

The adjudicator decided he did have jurisdiction and found Meadowside entitled to payment of £26,629.63.  

EXCEPTIONAL CIRCUMSTANCES

The TCC held that the reasoning in Bresco, that an adjudicator’s decision in favour of an insolvent party would not generally be enforceable was not an absolute rule and that exceptions may exist.   It found that a case was likely to be exceptional when the following factors arise:

  1. Where the adjudication brought (or to be brought) determines the final net position between the parties under the relevant contract; and
  2. Where a satisfactory security is provided
    1. in respect of any sum awarded in the adjudication so that a responding party can recover the sum if the decision is effectively overturned on final determination (litigation or arbitration);
    1. in respect of adverse costs awards made against the insolvent party in respect of any unsuccessful application to enforce and/or associated with any final determination.

The Court was persuaded that an adjudication to determine the final sums (if any) due to Meadowside under the contract broadly mirrored the exercise required under the insolvency regime; and so provided that adequate security was in place it could conceivably be capable of enforcement. As it happens, Meadowside came unstuck in relation to the form of security being offered and the underlying funding arrangements which the Court could not resolve on summary application. 

IMPLICATIONS

There are some takeaways from the Court’s reasoning. 

The first is that a final account adjudication, whilst rarer than adjudications on interim payments, is not terribly exceptional in our view. However, the difficulties that parties will have to navigate in relation to security are still likely to present a reasonably significant obstacle if seeking to enforce adjudication on insolvency; and that will be exacerbated where there are cross claims in the final account. 

The second is that where parties have more than one contract together – other mutual dealings – then it will be very difficult to bring yourself into the exceptions identified.  In such a case, an adjudicator tasked with only resolving one account and contract, cannot effectively carry out a mirror exercise of that required under the insolvency regime.