Court of Appeal considers interplay of insolvency and adjudication regimes (Bresco v Lonsdale)

38535298_custom

The Court of Appeal considered that while an insolvent company in liquidation can, in theory, commence an adjudication, it was appropriate to grant an injunction restraining continuation of the adjudication. This is because the adjudication would be ‘an exercise in futility’—it will only be in exceptional circumstances that a company in insolvent liquidation (and facing a potential cross-claim) could obtain summary judgment to enforce an adjudication without a stay of execution being ordered. Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd; Cannon Corporate Ltd v Primus Build Ltd [2019] EWCA Civ 27

First published on LexisPSL Construction.

What are the practical implications of this case?

Practitioners should take this case as clear guidance that a company in liquidation is unlikely to be permitted to adjudicate against a respondent that has a potential cross-claim. Although injunctions are rarely granted where an adjudication is on foot, one can be ordered to prevent commencement/continuation of an adjudication where progressing with the adjudication would be pointless (and a waste of time and costs). This futility arises from the fact that enforcement of an adjudication decision in favour of a company in insolvent liquidation (without a stay of execution being ordered) will only be granted in an exceptional case.
 

What was the background?

The TCC had granted an injunction preventing the continuation of an adjudication in which Bresco (which was in insolvent liquidation) sought declarations and sums said to be due and payable by Lonsdale. This was on the basis that:
 
  • an adjudicator does not have the necessary jurisdiction to deal with a claim advanced by a company in insolvent liquidation (because any contractual claims are effectively extinguished, and replaced with one net payment/claim under the 2016 Insolvency Rules)
  • a stay of execution will generally be ordered where an insolvent party is seeking to enforce a decision, so it would be neither just nor convenient to permit an adjudication to continue

For a review of the TCC’s judgment, see News Analysis: Appoint your liquidator and sack your adjudicator (Michael J Lonsdale v Bresco Electrical).

What did the court decide?

The Court of Appeal upheld the injunction on the grounds of ‘practical utility’, although it did not agree with the TCC’s proposition that an adjudicator has no jurisdiction where the claimant is in liquidation. In relation to the jurisdiction issue, the Court of Appeal noted that since an insolvent company still had the right to refer a claim to arbitration or court proceedings, there is no reason why its claim should be extinguished simply because it chooses to refer the claim to adjudication. Although adjudication only produces a temporarily binding decision, this does not ‘provide an answer to the hard-edged question of jurisdiction: either there is jurisdiction, or there is not’.
 
The Court of Appeal acknowledged that there is a ‘basic incompatibility’ between adjudication and the insolvency regime contained in the Insolvency Rules 2016, as well as wider considerations/policy reasons which support the futility of a insolvent party referring a claim to adjudication where there is a cross-claim. 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 (because a stay of execution would be ordered) and therefore would be an ‘an exercise in futility’.
 
The solution to the incompatibility issue was to uphold the TCC’s granting of an injunction to restrain further continuation of the adjudication. In accordance with Twintec v Volkerfitzpatrick [2014] EWHC 10 (TCC), an injunction was just and reasonable because ‘the nascent adjudication is a futile exercise’.
 

Cannon Corporate v Primus Build

This analysis considers the issues in relation to the appeal of the TCC decision in Michael J Lonsdale (Electrical) v Bresco Electrical Services. For analysis of the Court of Appeal’s reasoning in relation to the other case considered in this judgment (Cannon Corporate v Primus Build [2018] EWHC 2143), see News Analysis: Use it or lose it—Court of Appeal casts doubt on general reservations as to an adjudicator’s jurisdiction (Bresco v Lonsdale; Cannon v Primus).

Filed Under: Construction

Relevant Articles
Area of Interest