Case Law Update: Can a company in liquidation adjudicate?
The webinar looked at the widely debated issue of whether a company in liquidation can commence an adjudication by examining three recent cases on this topic.
Bresco v Michael J Lonsdale
The first being the Court of Appeal decision in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27, which has recently been heard in the Supreme Court but whose judgment is awaited.
Background
Lonsdale entered into a sub-contract with Bresco in August 2014. Bresco went into insolvent liquidation six months later. There were cross-claims made by both parties for monies owed and regarding the termination of the sub-contract. Three years after the liquidation, Bresco’s liquidator commenced an adjudication against Lonsdale claiming damages and payment for works completed. Lonsdale successfully applied to the TCC seeking an injunction to prevent the adjudication.
Court of Appeal decision
The Court of Appeal overturned the TCC’s decision regarding the jurisdictional issue, holding that there is no absolute jurisdictional bar to adjudication where the claimant is in liquidation.
However, the Court of Appeal upheld the injunction on the basis of the “utility argument”. There would be a significant risk that Bresco would be unable to repay the adjudication judgment sum should any Lonsdale cross-claims be successful. As such, there was almost no prospect of an adjudicator’s decision being enforced and therefore pursuing the adjudication, and incurring wasted costs in doing so, would be futile.
However, the court noted that there may be “exceptional circumstances” in which an adjudication would have practical utility where the claiming party is in liquidation.
Meadowside v 12-18 Hill Street Management Company
The “exceptional circumstances” were addressed in the case of Meadowside Building Development Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651.
The court clarified that a case is likely to be an exception to the ordinary position, that the adjudication and insolvency regimes are fundamentally incompatible, where the following are satisfied:
- The adjudication must determine the final net position between the parties under the relevant contract.
- Satisfactory security is provided in respect of both (a) any sum awarded in the adjudication; and (b) any adverse costs order made against the company in liquidation in any enforcement or other future proceedings.
- What constitutes “satisfactory security” is a question of fact in each case, but it may be in the form of a guarantee or bond provided by a third party or ATE insurance.
- Any funding agreement or security put in place by the liquidator is not an abuse of process.
On the facts, the court held that the funding agreement was an abuse of process as it did not comply with the Damages-Based Agreement Regulations 2013.
The court was also concerned about the sufficiency of the security provided. ‘Ring-fencing’ the adjudication award or purchasing sufficient ATE insurance cover were acknowledged to be satisfactory security options, as was a guarantee or bond provided by a reputable “bank or equivalent” that could provide a “high degree of certainty that the guarantee will be called successfully”. However, the court considered that the financial position of the proposed guarantor (who was a funder of cases for insolvent companies) did not provide sufficient certainty that should the guarantee be called 12 or 18 months down the line, the guarantor would be in a position to cover an adverse order for costs.
Balfour Beatty v Astec
In Balfour Beatty Civil Engineering Ltd v Astec Projects Limited (In Liquidation) [2020] EWHC 796, the TCC applied the principles in Bresco and Meadowside, and would have permitted Astec (the sub-contractor) to commence three adjudications against Balfour Beatty for works carried out at Blackfriars Station, despite being in liquidation. However, commencement of the adjudications was subject to various conditions, including Astec providing security of £750,000 for any adverse costs order in any litigation to overturn any adjudicator’s award in their favour.
What does this all mean?
- The courts remain supportive of the use of adjudication as a means of dispute resolution. At present there is no absolute jurisdictional bar to a company in liquidation commencing an adjudication, however they will need to satisfy the “exceptional circumstances” set out in Meadowside.
- A key factor will be whether the entirely of matters in dispute between the parties can be resolved in the adjudication – i.e. can a net position be achieved? Satisfactory security is also likely to be a requirement, which for many companies in liquidation could be prohibitive.
The industry is hoping that the Supreme Court in Bresco will provide a definitive answer as to whether a company in liquidation can adjudicate, and if so, in what circumstances.
This article was written by Katherine Keenan following our Construction & Infrastructure Webinar on the 10th June 2020, which discussed topics including:
- Covid-19 – an overview of the relevant health and safety laws for construction sites.
- Whether a company in liquidation can adjudicate? - We will review the recent cases on this question applying the Court of Appeal’s decision in Bresco v Lonsdale.
- Modular construction – are the standard forms suitable?
Please click here to listen to the webinar.
