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Is adjudication incompatible with insolvency?

27 Feb 2019

The introduction in the 1990s of adjudication as a quick and effective means of resolving disputes in construction contracts has had a transformative effect. At the same time construction companies are no strangers to insolvency processes. So does the ability to adjudicate disputes survive one of the parties entering into administration, liquidation or bankruptcy?

The Court of Appeal recently determined the conjoined appeals of Bresco Electrical Services Ltd –v- Michael Lonsdale (Electrical) Ltd and Cannon Corporate Ltd –v- Primus Build Ltd [2019] EWCA Civ 27 as to the interplay between the construction adjudication process, on the one hand, and the insolvency process, on the other. In particular, the issue before the Court was the extent (if at all) to which an adjudicator can decide claims made by an insolvent company which can then be summarily enforced. At first instance in Bresco, Fraser J. held that a company in liquidation cannot refer a dispute to adjudication when that dispute includes (in whole or in part) determination of any sum for further claims said to be due to the referring party from the respondent party on the grounds that an adjudicator did not have the jurisdiction to deal with a claim by a company in insolvent liquidation. Accordingly, Fraser J. granted an injunction to restrain the adjudication.

At its heart this dispute concerned the mandatory nature of set-off which applies in liquidation, where claims and cross-claims between the parties merge into the taking of an account which results in a net balance being due one way or the other, either as an amount due to the company in liquidation, or due from it to the other party which is provable as a debt in the liquidation alongside the company’s other creditors.

Giving judgment in the Court of Appeal, Coulson LJ. (with whom the other two judges agreed) held that whilst the underlying claim was nevertheless not extinguished upon liquidation with the consequence that, as a matter of jurisdiction, it continued to exist and was capable of being referred to adjudication, as a matter of utility there was a fundamental incompatibility between adjudication (being a “rough and ready” process of obtaining an improved cashflow quickly and cheaply) and the insolvency regime (being concerned with the taking of a detailed account as between the insolvent company and the other party).

Coulson LJ. gave an example where, if the contractor was in insolvent liquidation, its claim in an adjudication would not necessarily form any part of the proper calculation of the net balance for the purpose of liquidation set-off; it would merely be a potential cashflow gain based on the employer’s failure to serve a proper notice at a particular time. There were also wider considerations to take into account:-

  • A liquidator has limited assets with which to pursue the claims of the insolvent company and it ordinarily be a waste of those assets to make a claim which could not be enforced, either at all or only in exceptional circumstances.
  • Why should a responding party have to incur the costs of defending an adjudication brought by a company in insolvent liquidation, when it knows that, even if it was unsuccessful in the adjudication, it would be able to resist summary judgement or enforcement as of right? It would be wrong in principle to oblige a responding party to funds its (reluctant) role in a futile process.
  • Even if it was assumed that the insolvent company were to be successful in adjudication and obtain summary judgment, the responding party would then have to bring its own claim in court to overturn the result of the adjudication, requiring yet more costs to be incurred by it.
Rebecca Weir and Neil Harrold

For all those reasons, Coulson LJ was in no doubt that the adjudication process and the insolvency regime are incompatible; even though the adjudicator may technically have the necessary jurisdiction, it is not a jurisdiction which can lead to a meaningful result and Lonsdale was entitled to an injunction to prevent the continuation of the adjudication.

In contrast in the appeal in Cannon, Primus were in a company voluntary arrangement (CVA) where, at first instance, HHJ Waksman refused a stay of execution and enforced the adjudication award and granted summary judgment in favour of Primus. Cannon appealed the decision.

In upholding the Court below, Coulson LJ’s judgment was that in his view an adjudication is likely to be a practical benefit under a CVA. Unlike an insolvent liquidation where the purpose is to secure the interest of creditors and limit damage, the goal of a CVA (much like adjudication) is ensure cash flow and help a company recover. Coulson LJ was of the view that the “quick and cost neutral mechanism of adjudication may be an extremely useful tool to permit the CVA to work … On one view, that is what adjudication is there for: to provide a quick and cheap method of improving cash flow”.

In summary the type of insolvency process that a counter-party enters into will determine whether adjudication remains viable and appropriate; professional advice should be sought as soon as a problem arises to determine the appropriate response.

Hay & Kilner has specialist teams of construction and insolvency lawyers to assist you in navigating the treacherous shoals where these incompatible, but all too frequently inter-connected, worlds collide..

For further information on any of the above, or how we can help you or your business, please contact Neil Harrold or Rebecca Weir, or alternatively please call 0191 232 8345.