Adjudication and liquidation – the TCC gets it wrong…but right

Back in August, we wrote a blog about adjudication and liquidation, following the judgment in the TCC case of Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043 (TCC) (Lonsdale). The judgment concluded, for the reasons set out below, that an adjudicator does not have jurisdiction to determine a dispute involving a company in liquidation (CIL).  

Perhaps unsurprisingly, Bresco Electrical Services Limited (in liquidation) (Bresco) appealed the TCC decision, with the Court of Appeal judgment being issued last week. The Court of Appeal agreed that adjudication involving a CIL would be futile…but not for the TCC's reasons.

The Facts

Lonsdale concerned a 2014 contract whereby Bresco agreed to perform electrical installation works for MJL. Various disputes arose between the parties and Bresco ultimately left site. The parties were in dispute as to the circumstances of the termination when, in 2015, Bresco went into liquidation.

In June 2018, Bresco commenced adjudication proceedings against MJL seeking declarations on a number of different issues, and payment of monies allegedly due to Bresco. Separately, MJL considered there to be sums due to it from Bresco.

MJL invited Bresco to withdraw the Referral and, when Bresco refused, invited the adjudicator to resign due to a lack of jurisdiction. The adjudicator refused and MJL commenced injunctive proceedings under Part 8 to restrain the adjudication. Following the agreement of a stay in the adjudication, the TCC was asked to determine whether the adjudication should continue.

The TCC Decision

Fraser J agreed with MJL and decided the adjudicator did not have jurisdiction on account of Bresco being a CIL.

The Insolvency Rules (set out in our original blog) provide that when a company goes into liquidation, an account shall be taken of what is due from each party to the other in respect of their mutual dealings, and sums due from one party set-off against those due from the other.

Claims and cross claims between the parties becomes a single debt due from one to the other and that debt is one that can only be considered under the Insolvency Rules and not the Housing Grants Construction & Regeneration Act (it not arising under a construction contract). An adjudicator would therefore not have jurisdiction to hear a monetary dispute involving a CIL.

The Court of Appeal

Bresco sought to set aside the order of Fraser J with the primary argument that a dispute under a contract continued to exist when a company went into liquidation, and had not been extinguished or replaced on the occurrence of the liquidation. Rather, the claim still played its part in the underlying calculation of the single debt due under the Insolvency Rules. A dispute involving a CIL could be heard by way of court proceedings or arbitration, and there was no reason as to why adjudication should be treated any differently.

MJL agreed that a CIL could turn to court proceedings and arbitration, but argued that adjudication was different because any decision given in adjudication is temporarily binding. This was not a process envisaged by the Insolvency Rules and the temporary nature of the relief available in adjudication prevented an adjudicator from having any jurisdiction to consider a claim by a CIL.

Perhaps unexpectedly, Coulson LJ agreed with Bresco's position and found that an adjudicator would have jurisdiction to consider a claim advanced by a CIL. He explained that he could see no reason why, purely as a matter of jurisdiction, a reference to adjudication should be treated any differently to a reference to court proceedings or arbitration. If the contractual right to refer the claim to court proceedings or arbitration is not extinguished by the liquidation, then the underlying claim must continue to exist. Moreover, it must continue to exist for all purposes. The same must therefore be said of adjudication. The fact that a reference to adjudication may not result in a final and binding decision cannot mean that the underlying claim is somehow extinguished.

However, Coulson LJ then went on to explain that it is unlikely that adjudication would provide a useful vehicle for claims made by a CIL. He explained that there is a basic incompatibility between adjudication and the regime set out in the Insolvency Rules and that incompatibility limits a CIL's ability to refer a dispute to adjudication. There are several reasons for this, including:

1. An adjudicator's decision would be of limited use to the liquidator because 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 is usually far removed from the CIL's overall entitlement to recover, and the result would not be any kind of estimate or assessment of the parties' mutual debts.

    

2. When a CIL refers a dispute to adjudication, and succeeds, there is a real risk that the other party which has a cross-claim will have to prove its claim in the liquidation and receive only a dividend instead of being able to recover the sums awarded in the adjudication. On that basis, an adjudication decision favouring a CIL would not ordinarily be enforced by the court and would be stayed.

    

3. It would be wrong, as a matter of principle, for the other party to incur costs defending an adjudication brought by a CIL when it knows that, even if it was unsuccessful in the adjudication, it would be able to resist summary judgment or enforcement as of right, and would have to spend even further (likely irrecoverable) sums to achieve that result. Even in the unlikely event that summary judgment is granted, it would still be wrong as a matter of principle to require the other party to bring its own claim by way of court proceedings or arbitration to overturn the result of the adjudication, incurring more costs in the process and facing the possibility that any recovery may be rendered difficult or impossible by the liquidation.

As such, the incompatibility between adjudication and the regime set out in the Insolvency Rules, and a CIL's likely inability to enforce a decision, makes adjudication a futile exercise. Coulson LJ concluded that adjudication in such circumstances should not be permitted to continue and it would be just and convenient to grant an injunction to stop the adjudication.

What does this all mean?

Coulson LJ overruled Fraser J's decision and decided that an adjudicator does have jurisdiction to hear a dispute involving a CIL. However, he continued to conclude that a responding party to an adjudication involving a CIL should obtain an injunction to stop the adjudication on the basis of adjudication being incompatible with the Insolvency Rules.

In practice, whilst we have seen the number of adjudications brought by insolvency practitioners has declined, we anticipate some CILs will continue to attempt to refer disputes to adjudication despite this judgment. Whether the court will grant an injunction will depend on the facts of each case. A key issue will be whether the responding party has a cross-claim and the legitimacy of that cross-claim is likely to be considered by the court. In Lonsdale, Bresco had been aware of MJL's cross-claim for some time before Bresco referred the dispute to adjudication, which led Coulson LJ to conclude it was legitimate. It is important that any claims and cross-claims involving CILs are assessed and notified to the CIL promptly to strengthen the responding party's position should it need to apply for an injunction.