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An Exercise in Futility

A party on the receiving end of an adjudication is usually in a difficult position. Its situation is only made worse if the referring party is insolvent.

In such a situation, if the adjudicator makes an award in favour of the insolvent company the chances of subsequently recovering any sums awarded in litigation are very limited. While a stay to enforcement may be available, there are costs associated with obtaining a stay which will probably also be irrecoverable.

The joined appeals of (2009) Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale Limited & (1838) Cannon Corporate Limited v Primus Build Limited [2019] EWCA Civ 27 considered this issue and offered a potential solution to the receiving party.

Bresco Electrical v Michael J Lonsdale

Bresco Electrical Services Limited (‘Bresco’) was employed by Michael J Lonsdale Limited (‘Lonsdale’) to undertake electrical installation works at a site in London. During the works, Bresco, through no fault of Lonsdale, became insolvent and subsequently entered liquidation. Three years later, Bresco’s liquidator issued adjudication proceedings against Lonsdale to recover sums that it claimed it was owed. Lonsdale obtained an injunction from the High Court preventing the adjudication from continuing. The issue before the Court of Appeal was whether the injunction should be upheld.

Coulson LJ, giving the leading judgment, set out the basis on which the courts will consider adjudications referred by companies in liquidation. In essence:

  1. Insolvency does not extinguish a contractual claim. Therefore an adjudicator’s jurisdiction will not be fettered by the insolvency of the referring party.  This is not affected by Rule 14.25 of the Insolvency ‘Rules’ 2016 (the ‘Rules’), which deals with mutual dealings and set-off during the winding-up of a company in liquidation.

  2. However there is a fundamental incompatibility between adjudication and the ‘Rules’ –

    “[Adjudication] is a method of obtaining an improved cashflow quickly and cheaply.  [The ‘Rules’ are] an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors.” 

    Put simply, adjudication will commonly deal only with part of the overall position between the parties.  However, the ‘Rules’ require the overall position to be considered in its entirety. 

  3. The court will generally not enforce an adjudicator’s decision in favour of a company in liquidation.  As such, an adjudication referred by a company in liquidation would be “…an exercise in futility”, particularly where there is a cross-claim.

Coulson LJ then provided the solution:

In my view, the solution to the incompatibility issue is the one that was adopted in the present case: the grant of an injunction to restrain the further continuation of the adjudication.

Therefore the Court of Appeal upheld the injunction.

Cannon Corporate v Primus Build

Cannon Corporate Limited (‘Cannon’) employed Primus Build Limited (‘Primus’) to design and build a new hotel in London.  On 11 August 2015, Cannon served notice on Primus, terminating its employment and ordering it to immediately leave the site. 

Each party then accused the other of being in repudiatory breach of contract for the termination.  Three adjudications followed, in which it was held that Cannon was in repudiatory breach and that it owed Primus over £200,000. Cannon did not pay however.

As an earlier court found, Primus subsequently became insolvent wholly or substantially because of Cannon’s failure to pay sums that were due to Primus, including the sums due under the adjudication decisions. It entered into a Creditor’s Voluntary Arrangement (CVA) on the basis that, if it was able to recover sums due to it from Cannon, it would be able to pay all of its debts in full.

A few months later, Primus began a further adjudication against Cannon. The adjudicator found that Cannon should pay Primus in excess of £2 million. Cannon again failed to pay and Primus sought to enforce the decision. 

In the High Court, Cannon argued that Primus was insolvent and that therefore either the decision should not be enforced or that enforcement should be stayed. Judge Waksman QC rejected Cannon’s submissions and ordered the adjudicator’s decision to be enforced. Cannon appealed the decision.

In its judgment, the Court of Appeal agreed with the High Court’s decision to grant summary judgment, finding that:

…A CVA is, or can be, conceptually different [from a liquidation]. It is designed to try and allow the company to trade its way out of trouble.  In those circumstances, the quick and cost-neutral mechanism of adjudication may be an extremely useful tool to permit the CVA to work.  In those circumstances, courts should be wary of reaching any conclusions which prevent the company from endeavouring to use adjudication to trade out of its difficulties. On one view, that is what adjudication is there for: to provide a quick and cheap method of improving cashflow.

Coulson LJ also rejected the application for a stay of enforcement, in particular as Primus’ financial position was caused, wholly or at least significantly, by Cannon’s failure to pay sums awarded by the adjudicator (per Wimbledon Construction Company 200 Limited v Vago [2005] EWHC 1086 at [25]). 

Conclusions

The two cases heard by the Court of Appeal presented facts at the opposite ends of the spectrum.  Bresco was in liquidation through no fault of Lonsdale. The ‘Rules’ therefore required the liquidator to undertake an accounting exercise to consider the overall position between the parties. Lonsdale also had counterclaims against Bresco and, if it had been forced to pay up on an adjudicator’s decision, it would never have been able to recover the sums paid. Any adjudication started by a liquidator therefore would be futile, as enforcement would inevitably be stayed.

Primus, on the other hand, was in a CVA. Its financial position was caused wholly or substantially by Cannon’s failure to pay sums it had been ordered to pay. There was no reason for the adjudicator’s decision therefore not to be enforced.

These cases show the facts of an individual case will determine whether adjudication will be available to an insolvent company. In particular, both the type of insolvency and the reasons for the insolvency will be important.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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