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Liquidators can use, but not enforce, adjudication in construction contracts

Out-Law Legal Update | 04 Feb 2019 | 4:23 pm | 3 min. read

Companies in liquidation can theoretically refer claims to an adjudicator under construction law but it would be a futile exercise as the decision could not be enforced in most cases, the Court of Appeal in England has ruled. 

The ruling narrows the options for liquidators seeking payments from solvent companies.  The practice of liquidators threatening or commencing low cost adjudications as a tactic to reach settlements for the benefit of creditors, even where the enforcement of an adjudicator's decision could be stayed, is likely to be a futile exercise. Whilst the appeal does not strictly prohibit the tactic, it places the liquidators at a significant costs risk, which could include personal liability, if a responding party has to defend the adjudication. The ruling makes it clear that courts will take a different approach if the company is in a company voluntary arrangement (CVA), and leaves the door open for an administrator to run an adjudication if they continue to trade the business, and can satisfy the court that the purpose of the administration is to rescue the company as a going concern.

The Court said that liquidators do have a theoretical right to use adjudication to secure payment from companies that have a contract with a company in liquidation. But it said that where the solvent company has any cross-claim in the dispute, which it will in most
cases, it will not be enforceable and a court would grant an injunction preventing the adjudication from continuing.

It said that the adjudication process and the insolvency set-off rules are incompatible regimes, designed to achieve completely different outcomes. Adjudication provides quick and short term resolution to cash flow disputes, whilst reserving the position for parties to litigate later, while insolvency set-off provides an account of the net balance due following a detailed determination of claims between the parties.

Under the Insolvency Rules when a company enters into liquidation a mandatory, automatic and self-operating set-off regime kicks in to calculate the value of claims owing to or from the company in liquidation.

Where a company is in a CVA, the situation is likely to be different and a company in a CVA can seek to enforce an award.  

The case was a dispute between Michael J Lonsdale (Electrical) and Bresco Electrical Services. Lonsdale had employed Bresco for installation works. Bresco stopped work in December 2014 and each company claimed the other had wrongfully terminated the contract. Bresco went into liquidation in March 2015 and Lonsdale claimed for the cost of completing the works.

The High Court had previously ruled that when a company goes into liquidation individual claims are no longer capable of being enforced and are replaced by one single claim, following an account of the mutual debts and mutual dealings between the parties.

The High Court decided that an adjudicator has no jurisdiction to hear the single claim arising out of the insolvency set-off rules, as this was not a claim arising under a construction contract.

The Court of Appeal disagreed with the High Court and said that the right of action continues to exist and a liquidator could seek to enforce it through normal court proceedings or arbitration. The fact that any adjudicator's decision may not be final and binding should not prevent an adjudicator from hearing the case.

Enforcing an adjudicator's decision, however, would not be possible where other cross claims exist from the solvent counterparty. Therefore, the courts would always grant an injunction preventing any such adjudication from continuing, unless exceptional circumstances applied.

The Court of Appeal also said that adjudication process would be futile because it would use up the limited resources of the liquidated company, and that the other party would incur costs in defending the action and launching an action seeking final determination. It could not recover these costs.

While the Court of Appeal did not allow Bresco's appeal and upheld the original decision of the High Court, it did so for different reasons.

The appeal was heard jointly with an appeal in a dispute between Cannon Corporate and Primus Build. This case actually settled shortly before the judgment was published but the Court of Appeal has made an important distinction between the position in the Bresco case where a company is in insolvent liquidation and that of the Primus case where a company is in an informal company voluntary arrangement (CVA).

An adjudicator decided that Cannon owed Primus over £2 million. Cannon sought to resist enforcement of this decision on the basis that Primus was insolvent. Whilst the case had settled, the Court of Appeal was keen to highlight the fundamental differences between a CVA and an insolvent liquidation. In doing so, the Court confirmed it would have rejected Cannon's application for an injunction preventing the decision being enforced and would have ordered Cannon to pay the sums due to Primus.

A CVA is not the same as an insolvent liquidation, the Court found, because the company is still trading and, if the CVA is successful, should avoid a formal insolvency process. The purpose of the Primus CVA was to allow Primus some time and space to recover sums it said was due under various claims, including against Cannon. The Court was satisfied that the failure by Cannon to pay the sums due to Primus was one of the key factors why Primus was in financial difficulty and why the CVA was required.

In such circumstances it would be unjust to delay the enforcement of the adjudicator's decision. Cannon would still have the right to litigate on the ultimate question of liability, and indeed this was catered for under the terms of the CVA.

Andrew Robertson is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com