Insolvent companies are not barred from adjudication

The spectre of insolvency is looming large, over not just our own sector but huge swathes of the economy as a result of covid-19. The Supreme Court has recently handed down its judgment in the case of Bresco vs Michael J Lonsdale, which is likely to have an impact on claims brought by insolvent construction companies.

The Supreme Court grappled with the competing tensions of two statutory regimes, attempting to reconcile statutory adjudication with the insolvency set-off rules.

The first enables any party to a construction contract to refer a dispute to adjudication “at any time” and, as a host of cases have shown over the past 20 years, in the vast majority of cases an adjudicator’s decision will be enforced. The second provides that once a company enters liquidation, an account must be taken of what is due from the insolvent company and the creditor to each other. The sums due from the one must be set off against the sums due from the other to calculate a single net balance.

The Court of Appeal had in effect held that the insolvency set-off rules trumped the right to adjudicate at any time if there were cross-claims between the parties and one of them was in liquidation. Save for exceptional circumstances, adjudication was not an option. So the parties landed up in the Supreme Court.

In 2014 Bresco had been appointed to carry out electrical installation works for Michael J Lonsdale. Having ceased to attend the site in December 2014, Bresco entered creditor’s voluntary liquidation in March 2015. Bresco and Lonsdale made various claims for damages against each other for repudiatory breach of contract. In June 2018 Bresco commenced adjudication proceedings against Lonsdale. Faced with the unappealing prospect of defending an adjudication brought by an insolvent company, Lonsdale sought an injunction from the Technology and Construction Court to prevent the adjudication from proceeding.

The argument that found favour at first instance was that the insolvency set-off rules meant that a whole series of claims between the parties should be replaced by a single claim for the net balance – thereby extinguishing a claim under the construction contract. There was nothing for the adjudicator’s jurisdiction to bite on.

The right to refer a dispute under the Construction Act, and the jurisdiction of an adjudicator to hear it, were not extinguished by the insolvency rules

This jurisdiction argument failed in both the Court of Appeal and the Supreme Court. Fundamentally the right to refer a dispute under the Construction Act, and the jurisdiction of an adjudicator to hear that dispute, were not extinguished by the insolvency rules. The claims that fell within the insolvency set-off did not lose their separate identity when amalgamated into the final net balance.

However, the Court of Appeal had upheld the injunction against the adjudication proceeding on a second argument – futility. In essence, this was that the whole adjudication exercise was a waste of time, money and effort as any adjudicator’s decision would not be an enforceable award. One has to wait for the single net balance figure to drop out of the sausage machine. In addition, an adjudicator’s decision could be reversed in subsequent court or arbitration proceedings. If this was done after the money had been paid to the insolvent company, the money would be subsumed into the creditor pool and the other party would at best only be able to recoup a portion of it. Courts were reluctant to enforce adjudication awards to avoid such a potentially unfair outcome. Adjudications by insolvent companies should therefore not proceed other than in “exceptional circumstances”.

The insolvent company had a statutory and contractual right to adjudicate and this should not be stripped away

The Supreme Court did not accept this futility argument. The launchpad for this reasoning was that the insolvent company had a statutory and contractual right to adjudicate and this should not be stripped away. In the construction context, adjudication has led to the speedy, cost-effective and final resolution of most of the disputes referred. The process of proof of debt in insolvency is similar in many respects to adjudication, but adjudication has the added advantage that a specialist adjudicator is likely to be better placed to assess the value of the claims and cross-claims than many liquidators.

Ultimately, the adjudicator’s resolution of the construction dispute may be of real help in the conduct of the process of set-off within the insolvency process as a whole.

Whether summary enforcement is available can be dealt with on a case-by-case basis, and the Supreme Court noted that there are cases where it would not be inappropriate.

The ability to adjudicate is likely to be a useful tool for insolvency practitioners seeking to determine claims and cross-claims quickly

So what does this mean? Doubtless in these fraught times the ability to adjudicate is likely to be a useful tool for insolvency practitioners seeking to determine claims and cross-claims quickly. A non-insolvent party will not simply be able to dismiss the adjudication and so will have to bear the irrecoverable costs that comes with the process.

Enforcement remains an issue, but insolvency practitioners operating in this space are already working on products that may enable enforcement to go ahead. There is more to come on this, I suspect.

Steven Carey is head of the construction, engineering and projects team at Charles Russell Speechlys