Adjudication where one party is insolvent

Two recent Court of Appeal decisions (Bresco v Lonsdale and Cannon v Primus) have thrown into doubt the viability of pursuing an adjudication, as a means of resolving an issue concerning a construction contract, where one of the parties is in an insolvency procedure.

In the first, where the liquidators of Bresco had appealed an earlier decision of the Technology and Construction Court (TCC), the Court of Appeal (CoA) confirmed that whilst the adjudicator did have jurisdiction, any decision made may not be enforceable. The CoA upheld the TCC’s decision granting an injunction to prevent the adjudication decision from being enforced, bringing into question the futility of adjudication in these circumstances.

Bresco had entered into a construction contract (which included adjudication provisions) under which Lonsdale had subcontracted electrical works to them. Bresco left site with both they and Lonsdale alleging the other had wrongfully terminated. Bresco later entered into voluntary liquidation and the liquidators issued a notice of intention to refer the dispute to adjudication. Lonsdale sought to prevent Bresco from bringing a claim to adjudicate on the basis of the liquidation challenging both jurisdiction and the enforceability of any decision.

Their argument rested on the question of whether a company in liquidation could refer a dispute to adjudication without reference to all sums owed between the parties. The TCC agreed. The liquidators of Bresco appealed and the CoA refused the appeal; whilst it accepted that the matter could be adjudicated upon, it concluded it would be “an exercise in futility”, as any decision would be unenforceable.

Essentially, this is because Insolvency Rules trump adjudication provisions as soon as one of the parties has gone into liquidation as, at that point, the focus is on taking account of all mutual dealings to achieve a single balance for the benefit of creditors. Adjudication focuses on only one part of that whole.

The second CoA decision touched on the same area, but with a very different insolvency situation and a different outcome. In this case, the contractor, Primus, succeeded at adjudication for payment for work completed and damages for loss of profit, but by the time of the adjudication it had entered a CVA. When it came to enforce the judgment (by issuing a Part 8 proceedings and seeking summary judgement), the defendant (Cannon) initially conceded that summary judgment could be entered, though it later withdrew this on the grounds of the contractor’s CVA. Cannon sought a stay and later also sought to challenge the adjudicator’s jurisdiction.

The TCC decided that Primus was entitled to enforce – Cannon appealed, and whilst the appeal was subsequently settled (the court had allowed Cannon to appeal but only on the basis that it paid £2.128m into court), the CoA retained the ability to hand down judgment on this as well as the Bresco matter.

Unlike Bresco, Primus had entered a CVA, a different insolvency process to liquidation, and continued to trade, whilst Bresco had ceased trading. While the Insolvency Rules do not directly apply to a company in a CVA, they are often incorporated into the proposal (put to creditors) by way of reference. The CoA found the jurisdiction arguments too vague to be effective but did consider that there were good reasons to allow Primus to enforce and enter summary judgment. The CoA decided that the general position relating to a CVA may, depending on the facts, be very different to insolvent liquidation. On the basis that the parties had already reached an agreement, the CoA made no further order.

In a CVA, claims being made could be treated as part of what might be called a damage limitation exercise as the quick and cost-effective mechanism of adjudication may be an extremely useful tool to permit a CVA to work. A company in a CVA will usually continue to trade, whist a company in liquidation does not.

In making its decision, the CoA highlights the incompatibility between adjudication and the insolvency regime and that different principles apply in different insolvency regimes.

Finally, and whilst not referred to by the CoA, where a company is in administration (an insolvency process with a different approach to that of either a CVA or liquidation), the administrator’s requirement to take an account of all mutual dealings to arrive at a single balance only arises where notice has been given of the administrator’s intention to declare a dividend. Administrators of companies involved with construction contracts which may have previously benefitted from an adjudication will therefore have to give consideration to the purpose of the proposed adjudication and whether or not taking account of all mutual dealings to achieve a single balance, would be a more appropriate strategy.

For further advice on these issues, please contact Alan Meiklejohn at [email protected] or on 01905 744 866.