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Right to adjudicate survives insolvency – subject to practical utility

In August 2018 we reported on the TCC decision of Fraser J in the case of Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043. See our previous article here. Following an appeal by Bresco, the case has recently been heard by the Court of Appeal.     

TCC decision

As we reported in our article on the TCC decision, Bresco was injuncted from proceeding with Adjudication on the basis that if the claiming company is in insolvent liquidation the adjudicator has no jurisdiction to deal with their contractual claim, because that claim ceased to exist at the liquidation and was replaced by the net claim under the Insolvency Rules.  However, Bresco appealed which gave the Court of Appeal an opportunity to consider this particularly contentious topic – which takes precedence, the Insolvency Rules or the statutory right to adjudicate at any time?

Court of Appeal

The Court of Appeal, whilst upholding the injunction, has walked the tightrope between two sets of statutory rules and confirmed that, in theory, the right to adjudicate at any time remains in an insolvency situation. After all, to determine the balance of claims under the Insolvency Rules, each claim or cross claim needs to be confirmed. However, as we explain below, whether there is any practical benefit to an Adjudication can, and in this case did, lead to an injunction preventing the Adjudication from proceeding.

The jurisdiction argument

The Court of Appeal held that liquidation set-off does not, in principle, preclude the determination of the underlying claims and that there was "no reason why, purely as a matter of a jurisdiction (as opposed to utility), a reference to adjudication should be treated any differently to a reference to arbitration." Lonsdale conceded that Bresco would have been entitled to bring its contractual claim by way of court proceedings or arbitration. The Court went on "If the contractual right to refer a claim to arbitration is not extinguished by the liquidation, then the underlying claim must continue to exist."   As such, the Court of Appeal held there was no bar to the adjudicator's jurisdiction.

The utility argument

However, this lead the Court to consider whether there was any worth or value in an adjudication when the claiming company is in liquidation and the Responding Party has a cross claim.  The Court called this the "utility argument"

Reviewing the authorities, the Court reiterated that a decision of an adjudicator in favour of a company in liquidation, like Bresco, would not ordinarily be enforced by the Court where the Responding Party has a cross claim.  Coulson LJ held that Counsel for Lonsdale was right to say that a reference to adjudication of a claim by a contractor in insolvent liquidation, in circumstances where there is a cross claim, would be incapable of enforcement and therefore "an exercise in futility". As such, on this occasion, the Court upheld the grant of an injunction to restrain the further continuation of the adjudication.

What about CVAs?

At the same time as the Bresco appeal, the Court also heard the conjoined appeal in the case of Cannon Corporate Limited v Primus Build Limited. Cannon appealed the enforcement of an adjudicator’s decision which had been allowed despite the fact that the Referring Party, Primus, was in a CVA (Company Voluntary Arrangement).   The Court noted that a CVA is very different to a liquidation stating “Here, not only was the CVA designed to allow Primus to trade out of its difficulties but, on the judge’s findings, if the CVA was allowed to run its proposed course, Primus would avoid liquidation altogether.”

The Court dismissed the appeal, noting that “Although each case will turn on its own facts, there are potentially important differences between a company in liquidation and a company in a CVA”.

Comment

Whilst it may first appear to be positive news that the right to adjudicate at any time remains, the practical approach of the Court makes it likely that many adjudications will be stayed in circumstances where the Referring Party is in liquidation and the Responding Party has a cross claim. Whilst this may avoid incurring potentially significant costs, which would not be recoverable, it will leave little option for companies in liquidation to enforce their rights other than to commence formal court or arbitral proceedings. Fortunately for those in CVAs, the right to adjudicate is not limited by the Court’s practical approach.

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