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Supreme Court holds that companies in liquidation can adjudicate their disputes

On 17 June 2020 the Supreme Court handed down its decision in Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd, which resolved the issue of the compatibility of the adjudication of construction disputes under the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”), and the operation of insolvency set-off under the Insolvency Act 1986 and Insolvency (England and Wales) Rules 2016 (“Insolvency Rules”). Companies in liquidation can refer claims to an adjudicator.  Indeed, an adjudication may be a useful and proportionate method for a liquidator to determine the net balance due between the insolvent company and a party with a cross claim.

Background

The dispute between the parties related to a sub-sub contract dated 21 August 2014 pursuant to which Bresco carried out electrical works for Lonsdale at a property in London.  In December 2014 Bresco stopped attending site and subsequently went into liquidation.  Each party accused the other of repudiatory breach of contract.  Bresco claimed the sum of £219,000 which it said it was owed for the works plus damages for loss of profits.  Lonsdale claimed £325,000 from Bresco, arguing that Bresco had abandoned the works and Lonsdale had to pay others to complete the works.

In June 2018 Bresco (in liquidation) commenced an adjudication against Lonsdale.  Lonsdale sought an injunction restraining Bresco from proceeding with the adjudication.  Lonsdale argued that as a result of the operation of insolvency set-off, there was no dispute under the construction contract to be referred to adjudication, such that the adjudicator did not have jurisdiction.

As referred to in our previous articles, at first instance (see our previous article on this judgment here), the Court agreed with Lonsdale, holding that a company in liquidation could not refer a construction dispute to adjudication when the dispute includes (whether in whole or in part) determination of a claim for further sums said to be due to the referring party from the responding party.

On appeal to the Court of Appeal, (see our previous article on this judgment here) the Court considered that adjudication was possible (i.e. the adjudicator did have jurisdiction) but that to proceed with the adjudication would likely be an exercise in futility which the Court would restrain by way of an injunction.

Bresco appealed to the Supreme Court, and Lonsdale cross appealed on the Court of Appeal’s decision on jurisdiction.

Issues for the Court

The issues for the Supreme Court to consider were:

  • Whether insolvency set-off replaces the cross claims with a single claim for the net balance, the point being that this would amount to a dispute pursuant to the Insolvency Rules rather than under a construction contract and would thus deprive an adjudicator of jurisdiction.
  • Even if there is jurisdiction for an adjudicator to determine the dispute, would adjudication be an exercise in futility if the Court then refuses to enforce the award because it would interfere with the insolvency process? Any such adjudication would not serve the “pay now, argue later” purpose underpinning Part II of the Construction Act.  If the adjudication is not going to lead to an enforceable decision and will waste resources, should an injunction be issued preventing the progress of any such adjudication?

The jurisdiction argument

As regards the jurisdictional point, the Supreme Court held that the insolvency set-off between Bresco’s claim and Lonsdale’s cross-claim did not mean that there was no longer a dispute under the construction contract.  The Supreme Court confirmed that companies in liquidation have the option for adjudication, including where there are cross claims by the other party, and that this is compatible with the insolvency set-off regime.  This places adjudication on the same footing as other types of dispute resolution that companies in liquidation are entitled to use such as litigation or arbitration.  The Court could see no good reason why adjudication should be treated differently from the other means of resolving disputes in the circumstances of a liquidation.

The futility argument

The Supreme Court also held that adjudications by companies in liquidation are not automatically an exercise in futility, on the basis that adjudications can lead to a quick and cost effective resolution of a dispute. The Court held that “Dispute resolution is therefore an end in its own right, even where summary enforcement may be inappropriate or for some reason unavailable.“.  Furthermore,  the Court noted that, in some circumstances, summary enforcement might be appropriate.  For example, it might be that there is no dispute on the cross claim, and the claim is in a larger amount, such that judgment can be given on the balance.   Alternatively, it might be that the claim and cross claim form part of the same dispute such that an adjudicator may be able to determine the net balance.  The Court noted that in situations where there are disputed cross claims to be resolved, an adjudicator (an experienced construction professional) may be better placed than a liquidator (who may have limited construction knowledge) to resolve them.

In connection with the concern that a summary enforcement of an adjudication decision by a company in liquidation could leave a respondent to pursue the cross claim against an insolvent estate which has distributed the proceeds of the enforcement, the Court endorsed the approach set out in the case of Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Limited [2019] EWHC 2651 (TCC).  This involves appropriate undertakings being given with regard to ring-fencing the proceeds of the adjudication enforcement and as to potential security for costs in respect of any subsequent litigation to overturn the adjudication decision. The Court also considered that where there remains a real risk of the respondent being deprived of the company’s claim as security for its cross claim, then the Court will be “astute to refuse summary judgment”. However, these are matters to be addressed at enforcement stage and should not prevent the adjudication from proceeding.

Effect of the Supreme Court judgment

This important judgment confirms that adjudication is an additional tool for liquidators to use in the fulfilment of their obligations to maximise realisations for creditors.  Companies in liquidation will be able to commence adjudication proceedings in much the same way as they are able to commence other types of proceedings.  However, there will still be potential limitations with such a process as any adjudication decision may be challenged by later court or arbitration proceedings.

This decision is also likely to impact solvent counterparties who may face the cost of responding to an adjudication, summary judgment and enforcement, before their cross claim can be determined. An insolvent referring party is still permitted to narrowly phrase an adjudication referral such that the solvent counterparty may be unable to obtain any determination of their cross claim and is under no obligation to agree that the adjudicator may consider disputes under other contracts.  That said, the liquidators’ duty is to realise assets for the benefit of the creditors and one would hope that liquidators will look to use the adjudication process to determine the claims and cross claims as far as permissible and to establish the true value of the net balance, thus avoiding further litigation or arbitration proceedings. 

 This article was written by: Patrick Blake, Katie Farmer and  Lianne Edwards.

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