How insolvency affects the jurisdiction of an adjudicator

An important appeal court ruling on insolvency matters was made last month in a joint decision on two cases: Bresco Electrical Services Ltd (in liquidation) vs Michael J Lonsdale (Electrical) Ltd and Cannon Corporate Ltd and Primus Build Ltd [2019] EWCA Civ 27.

In the Bresco appeal, Bresco was in insolvent liquidation where the Insolvency Rules mutual debit, credit and set-off provisions automatically applied, the practical effect of which is that an account must be taken by the liquidator of what is due to or from the company and a creditor to produce a single figure for payment. Lonsdale argued that the effect of Bresco being in liquidation meant these provisions applied such that only the Bresco liquidator had the jurisdiction to determine that single payment figure, and that Bresco’s attempt to do this by way of adjudication was inappropriate because an adjudicator had no jurisdiction to perform that exercise. Lonsdale therefore sought an injunction to prevent the adjudication from proceeding, and a declaration that the adjudicator had no jurisdiction. 

At first instance, the court decided that a dispute about the taking of an Insolvency Rules’ account is not “a dispute arising under a contract”: it is a dispute arising from a liquidation. Accordingly, an adjudicator did not have jurisdiction to determine that dispute and an injunction was granted to prevent the adjudication from continuing.

In the Primus appeal, Primus was in a company voluntary arrangement (CVA), which adopted the same Insolvency Rules “netting off” provisions as an express contractual term. The adjudicator’s lack of jurisdiction was not raised at first instance but was raised by Cannon when seeking permission to appeal. As is typical in many pre-dispute written exchanges between parties, the right to challenge the jurisdiction of the adjudicator was expressly reserved by Cannon in broad and general terms during the adjudication.

Key issues

The court considered in both appeals whether the netting-off provisions removed the jurisdiction of an adjudicator to decide what was owed via an adjudication, or whether only the liquidator (in a liquidation) or the supervisor (in a CVA) could decide that. It also considered what amounted to a proper reservation of rights on the jurisdiction of an adjudicator. 

Lord Justice Coulson decided there was a basic incompatibility between the insolvency netting-off and adjudication regimes. He held that an adjudicator has jurisdiction to determine a claim by a company in insolvent liquidation (or a CVA) where there is also a creditor cross-claim. However, where a party is in insolvent liquidation the adjudication outcome is incapable of enforcement because this would be an “exercise in futility”. Accordingly, the court can grant an injunction to stop any adjudication.

In considering whether Cannon had waived its ability to challenge the adjudicator’s jurisdiction, Lord Justice Coulson considered what amounted to a proper reservation on jurisdiction and decided that:

• A challenge to the jurisdiction of an adjudicator must be made “appropriately and clearly”. A jurisdictional objection will be waived if a party participates in the adjudication without effectively reserving its position. 
• For a jurisdiction reservation to be effective it should be based on a specific objection, the rationale being that it is only then that an adjudicator can investigate the point and determine whether or not to proceed. 
• If a specific objection to jurisdiction is rejected by the adjudicator (and by the court if raised again on enforcement), the party challenging jurisdiction cannot later raise a different jurisdictional challenge. 
• A general reservation of rights may be effective, but this is unsafe and its effectiveness will depend on the wording in each case. A general reservation is unlikely to be effective if, at the time it was made, the objector knew, or should have known, of specific grounds for a jurisdictional objection but failed to articulate them, or if the court concludes that the general reservation was worded simply to try to keep all options open.

Conclusions

Permission to appeal was refused but may be sought direct from the Supreme Court. Unless that happens the relevant practical guidance is as follows:

• Adjudicators have jurisdiction to determine disputes involving parties in liquidation, or in a CVA that incorporates the insolvency netting-off provisions.
• Parties in liquidation who adjudicate can expect that a responding party will apply to the court for an injunction to prevent the adjudication from proceeding, which the court is likely to grant as the adjudication would be an “exercise in futility”. In any event, the adjudication outcome will be incapable of enforcement.
• The court distinguished a case where a party was in liquidation from a case where it was in a CVA on the basis that a party may emerge from the CVA and continue trading, so the adjudication would not be “futile”. If a responding party can prove the company in a CVA has little prospect of emerging from that CVA it may be possible to argue that proceeding with adjudication would also be an exercise in futility. 
• The court set out principles on effectively reserving the right to challenge an adjudicator’s jurisdiction, in particular noting that a general reservation of rights is unreliable and effective only in limited circumstances. 

Katherine Flynn is a senior associate at Fieldfisher