Bresco v Lonsdale – Court of Appeal
The Court of Appeal has recently considered two appeals in which the interplay between the construction adjudication process and the insolvency regime was considered; Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited (see my blog of 28 September 2018 on the TCC decision) and Cannon Corporate Limited v Primus Build Limited.
The appeals provided the opportunity for the Court of Appeal to deal with the extent (if at all) to which an adjudicator can decide claims made by an insolvent company and whether such decisions could then be summarily enforced. This, Coulson LJ remarked, was an issue that had not remained free from doubt since it arose in the decision of the Court of Appeal in Bouygues (UK) Limited v Dahl-Jensen(UK) Limited nearly 19 years ago.
Bresco and Lonsdale fell into dispute following Bresco’s departure from site and cross-allegations of wrongful termination. Bresco went into liquidation in March 2015 and its liquidator commenced an adjudication against Lonsdale over two years later.
Lonsdale sought an injunction to prevent the continuation of the adjudication, which Fraser J granted in the TCC last year on the basis that (1) adjudicators did not have jurisdiction to deal with claims advanced by companies in insolvent liquidation; and (2) the “utility” argument where Fraser J (quoting Edwards-Stuart J) said he was “unable to see how it would be either just or convenient to permit an adjudication to continue in circumstances where the decision of the adjudicator will be incapable of enforcement”.
Court of Appeal Judgment
The Court of Appeal upheld the injunction against Bresco, but on a different basis to the decision at first instance, focusing on the utility argument.
Coulson LJ considered there was no reason to treat adjudication any differently from litigation or arbitration, which insolvent parties are able to pursue. He found, contrary to the judgment at first instance, an insolvent company’s contractual claim did not cease to exist at liquidation:
“…technically the adjudicator would have jurisdiction to consider the claim advanced by a company in liquidation”.
However, was Fraser J right to grant the injunction?
" Although Coulson LJ did not accept that Bresco’s right to refer a dispute to adjudication was automatically lost when they went into liquidation, he agreed that the injunction granted to restrain the continuation of the adjudication was the appropriate remedy in the circumstances. "
Coulson LJ considered that adjudication and the Insolvency Rules regime were not compatible. On the facts, there was nothing to demonstrate that it would be just or convenient for the underlying adjudication to continue. On the evidence, Bresco had been insolvent for over three years before the adjudication referral, there was no suggestion Bresco could ever trade again and Lonsdale’s cross-claim had been issued by the time of the adjudication. There was no good reason to make Lonsdale incur the costs of defending a claim in adjudication that could not be enforced.
Although Coulson LJ did not accept that Bresco’s right to refer a dispute to adjudication was automatically lost when they went into liquidation, he agreed that the injunction granted to restrain the continuation of the adjudication was the appropriate remedy in the circumstances.
The decision of Fraser J was upheld, not as perhaps might have been expected on the grounds of jurisdiction, but on the grounds of practical utility.
The factual background to the Cannon appeal concerns a Creditors Voluntary Arrangement (“CVA”) and is significantly different to circumstanceswhere a liquidator seeks to recover sums to be distributed to the creditors of an insolvent company.
A series of adjudications took place between the parties, the second of which decided that Cannon was in repudiatory breach. In January 2017, Primus issued court proceedings claiming damages for the repudiatory breach and the sums awarded in the third adjudication. Primus obtained a freezing order up to the value of £750,000.
In July 2017, Primus entered into a CVA. The CVA had been accepted as, although the company was insolvent, there was a clear way forward that would result in all creditors being paid in full, and Primus continuing to trade. This was a key distinction with the insolvent liquidation in Bresco.
In March 2018, Primus commenced a fourth adjudication, claiming damages caused by Cannon’s repudiation. Primus was awarded in excess of £2.1 million. The adjudicator considered, and almost entirely rejected, Cannon’s cross-claims in reaching the decision.
Primus commenced enforcement proceedings. Cannon accepted judgment may be entered but sought a stay of enforcement. HHJ Waksman QC declined to grant the stay (applying the principles set out in Wimbledon Construction Co 2000 Limited v Vago) because the financial position of Primus had arisen partly due to Cannon’s refusal to pay the monies awarded to Primus.
Court of Appeal Judgment
The Court of Appeal had to decide whether HHJ Waksman QC was wrong to enter summary judgment for Primus and decline the stay.
Coulson LJ agreed with HHJ Waksman’s judgment in relation to both issues. As Primus’ financial difficulties had arisen substantially because of Cannon’s refusal to pay, “…it was plainly open to [HHJ Waksman QC] to exercise his discretion against granting a stay of execution”.
This judgment provides clear reasoning why it will only be in very limited circumstances that a company in liquidation would be allowed to proceed with an adjudication, even though the right to adjudication is not automatically lost on entering liquidation. This recognises the potentially important differences between a company in liquidation and a company in a CVA.
In practical terms, one would not expect claims to be pursued in adjudication by the liquidator of an insolvent company. However, the onus is on the responding party to take appropriate action to seek an injunction in circumstances where such a claim is referred to adjudication. The court should grant the injunction if the adjudication is an exercise in futility. However, on some occasions (such as where there is a CVA that shows a clear way forward) the courts will allow an adjudication to proceed.