Neil Mason
Posted on 10 Apr 2019

Can an insolvent company commence adjudication proceedings?

In the combined cases of Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited and Cannon Corporate Limited v Primus Build Limited [2019] EWCA Civ 27, the Court of Appeal (CA) considered whether an adjudicator has jurisdiction to decide a claim brought by an insolvent company.

This issue is not clearly answered by legislation. The Housing Grants Construction and Regeneration Act 1996 (as amended) (HGCRA) grants a party to a construction contract the right to refer a dispute to adjudication, irrespective of its solvency. Case law also tells us that liquidators can refer matters to adjudication (see, for example, Fastrack Contractors Ltd v Morrison Construction Ltd [2000] B.L.R. 168). While any adjudicator's award is binding, its finality is temporary. This is because it is subject to a different – and perhaps more legally rigorous - result being achieved by subsequent litigation, arbitration or a settlement agreement. The relationship between the HGCRA and insolvency law has never been an easy one.

In this instance, both cases related to claims for breach of contract but were factually different. Bresco Electrical Services Limited (Bresco) had been in insolvent liquidation for two years when its liquidators commenced adjudication proceedings against Michael J Lonsdale (Electrical) Limited (Lonsdale). On the other hand, Primus Build Limited (Primus) entered into a company voluntary arrangement (CVA) in the midst of several separate adjudications against Cannon Corporate Limited (Cannon). The judgment emphasised the differences between the different situations of Bresco (being in insolvent liquidation) and Primus (being in a CVA) and how the law treats these insolvency regimes differently when it comes to enforcing adjudicators' awards.

Bresco: a company in insolvent liquidation

In this case, Bresco was engaged by Lonsdale to carry out electrical installation works. Bresco left the site before completing its works and subsequently went into insolvent liquidation. Two years later, Lonsdale brought a claim against Bresco for the costs of completing the works after Bresco departed the site. In response to that, Bresco's liquidator referred the matter to adjudication, asserting that Bresco departed because Lonsdale had wrongfully terminated the contract, and claiming outstanding sums.

Lonsdale argued that, because Bresco was in liquidation, the Insolvency (England and Wales) Rules 2016 (the Insolvency Rules) applied, and that the adjudication should not continue. This is because Rule 14.25 of the Insolvency Rules creates a mandatory set-off of claims where the dispute involves cross-claims by a company in insolvent liquidation (here, Bresco) and a creditor (here, Lonsdale). Thereby, the cross-claims are set-off against each other and only the net balance owing to one party is recoverable.

Despite this, the adjudicator maintained that he had jurisdiction over the dispute. In disagreement, Lonsdale issued Part 8 proceedings in the TCC for an injunction against continuing this adjudication for the reasons described above.

The TCC granted the injunction, agreeing that this was "a dispute relating to the account under the Insolvency Rules" and concluding that "[A] company in liquidation cannot refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of any claim for further sums said to be due to the referring party from the responding party." Bresco appealed to the CA.

The CA upheld the TCC's decision but for a different reason. The CA held that a company in liquidation can refer a dispute to adjudication and an adjudicator does have jurisdiction to hear a claim brought by such a company in the same way that an arbitrator would. But in cases such as this, where a cross-claim was brought by a creditor (Lonsdale), it would be unjust to allow the adjudication to continue. Although the CA decided that the adjudicator had jurisdiction to adjudicate on Bresco's referral, it upheld the TCC decision on the grounds of what Coulson LJ termed 'Utility'; where the referring party is in insolvent liquidation and the responding party has a cross-claim, it would be a ‘serious risk’ of prejudice and unjust not to stay the enforcement of any order to pay an adjudicator's award under CPR Part 83.7.    

This is because if a court were to compel Lonsdale to pay an adjudicator’s award to Bresco's liquidator, the money would simply form part of the fund applicable for distribution amongst the Bresco’s creditors.  However, if Lonsdale's cross-claim was successful it too would be a creditor and like Bresco's other creditors it would receive only a dividend pro rata to the amount of that claim  - which could be very few pence in the pound - and would not get the benefit of set-off as Rule 14.25(2) requires. Liquidation marks the death of an insolvent company, so Lonsdale would have no opportunity to recover what was due to it in future.  

Bresco's liquidator sought to argue that adjudication may yet be of value to liquidators facing a cross-claim, but Coulson LJ rejected that for various reasons, and these are probably the most compelling:

"I do not accept the idea that the adjudicator's decision might be of some use to the liquidator because it could somehow stand as a reduced proof amount (under Rule 14.11), or an estimate, or as some sort of assessment of the claim and cross-claim. The result of an adjudication is not the liquidator's best estimate of the value of a claim, but a sum found due by an adjudicator at a particular date, often based on the operation of the contractual payment provisions and the employer's failure to operate those provisions correctly. That may be far removed from the referring party's overall entitlement to recover, and the result would not be any kind of estimate or assessment of the parties' mutual debts…" and, "In any event, this would require the responding party to participate in the adjudication and incur the costs of mounting its own cross-claim, just so that the liquidator can see what a net, non-binding result might look like. In circumstances where the liquidator would be unlikely to use litigation or arbitration for this exercise, because of the costs exposure, and/or in circumstances where the responding party would otherwise let its cross-claim lie because of the claiming party's insolvency, it would be an abuse of the cost-neutral adjudication regime to use it as a cheap assessment service, knowing that enforcement could never happen."

In such circumstances, the injunction to prevent the adjudication from proceeding and to curtail further legal costs and court time being incurred was justified.

Primus: a company in a CVA

In this case, Primus was engaged by Cannon to design and build a hotel. In dispute over a payment notice, Cannon terminated the contract and Primus left the site. Each party accused the other of breach of contract, creating a cross-claim scenario similar to Bresco.  Four adjudications followed.

The second of these adjudications found Cannon in repudiatory breach of contract. Primus subsequently obtained a freezing order in the TCC worth up to £750,000 against Cannon. 

A few months later, Primus entered into a CVA. A CVA is a voluntary agreement entered into between the struggling company and its creditors relating to repayment of debts. It is a "rescue" mechanism which allows the company to continue trading, and unlike liquidation or administration it is regulated less formally. CVAs entail putting a proposal to creditors which typically contain provisions for a similar set-off procedure as liquidation, with the evaluation of claims and cross-claims being undertaken by the supervisor of the CVA.  Here, there was a strong likelihood that the CVA would be successful. 

Whilst still in its CVA, Primus was awarded in the fourth adjudication damages payable by Cannon totaling £2,128,000 plus interest. The adjudicator wholly rejected Cannon's cross-claim. Primus commenced enforcement proceedings in the TCC. Cannon both contested the adjudicator's jurisdiction and sought a stay of enforcement. The TCC dismissed Cannon's unspecific reservations of rights to contest the adjudicator's jurisdiction and enforced the award, then assessed whether a stay of execution was appropriate. It applied the well-established principles enunciated by Coulson J (as he then was) in Wimbledon Construction Company 2000 Limited v Vago [2005] EWHC 1086, which the courts use where insolvency is alleged rather than proven in court by way of winding-up, bankruptcy or administration hearings. It denied a stay of enforcement, considering that Primus' insolvency was due in no small part to Cannon's failure to pay for Primus' services under the contract. 

Cannon appealed, including running a new jurisdictional objection based on Primus being in a CVA, but also re-stating its arguments about a stay. However, the CA agreed with the TCC's decision. In the combined decision, the CA again dismissed Cannon's jurisdictional objection, which was too both too late and a poor one. On the question of the stay, it held that while Primus' CVA was relevant in deciding whether to grant the stay, Cannon's failure to pay was the principal cause of Primus' financial situation, so no stay of execution was merited. On the contrary, the CVA could be helped by the enforcement of the order to pay the adjudication award sooner rather than later.

What does this mean for your business?

This judgment demonstrates that the courts will distinguish between companies in insolvent liquidation and companies in corporate rescue arrangements (such as CVAs). 

The CA did not say that a company in insolvent liquidation could not refer a dispute to adjudication. However, it emphasised that where a genuine cross-claim exists on the part of the creditor, that creditor may well be granted an injunction against the adjudication continuing (if it applies for one). This certainly restricts the likelihood of liquidators obtaining an enforceable adjudication decision, as cross-claims are common in the construction sector. However, it should be remembered that, firstly, Londsdale's cross-claim had been aired very early (indeed it was Lonsdale's claim on the liquidation which caused Bresco's liquidator to make the referral to adjudication) and secondly, an injunction is, like the decision to stay enforcement, a discretionary remedy. While Coulson LJ's observations about 'Utility' are clearly correct where the cross-claim is not fanciful, which supports the grant of an injunction, that will not always be the case.  Now the CA has re-stated adjudicators' jurisdiction to hear referrals from liquidators, the insolvency vs. adjudication debate will continue. 

On the other hand, it appears that the courts will be more accommodating to a company in a CVA wishing to enforce an adjudicator's award. This is particularly true where the payer's failure to pay has exacerbated the payee's financial situation, and the payee company has a genuine chance of trading out of that situation as a result of the CVA.  A payee being in a CVA is less prejudicial to a payer's future ability to recover the sums paid pursuant to an adjudicator's award than a payee which is in liquidation.

In practical terms, if you believe you have a counter-claim, the sooner you prepare it properly and deploy it against an opponent who is or is likely to be insolvent, the greater your ability to obtain a stay of enforcement of any subsequent adjudicator's award.  

If you require advice in relation to adjudication proceedings, or for any construction related query, please contact Chris Hoar or Alan Tate.