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Posted May 8, 2020 | Published in General

Insolvency and adjudication – a relationship likely to survive lockdown?

Many things have changed during the Covid-19 lockdown. Additional time with family and time to catch up with things I wouldn’t otherwise have had time to do are two of the main benefits I have enjoyed. Being a rather boring lawyer, one guilty pleasure I have indulged in is watching transmissions of Supreme Court hearings. 

I have a confession: this is not a new thing developed during lockdown, but a long-standing habit; it even pre-dates the fascinating Brexit hearings last year. What I have discovered during lockdown is the video archive of old Supreme Court hearings going back to 2017. I assume those reading this blog will have a construction bias, so I recommend watching the hearing in MT Hojgaard A/S v E.On Climate Renewables UK Robin Rigg East Limited from 2017, particularly the afternoon session. The interventions of the Supreme Court Justices and the answers given are great theatre.

Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited

Over the past couple of weeks (during lockdown) I watched part of the live transmission of the Supreme Court hearing in Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited, a hearing conducted remotely. I then caught up with the parts I was unable to watch live from the video recordings of the sessions available on the Supreme Court website. Who needs Netflix? 

One of the main downsides of the Covid-19 lockdown for the construction industry is likely to be contractor and subcontractor insolvencies, so the timing of this Supreme Court hearing and the judgment that will follow is helpful.

We discussed the TCC and Court of Appeal decisions in Bresco in our blogs shortly after the judgments: September 28, 2018 and March 25, 2019. What we have not covered in this blog (but which we covered in our other publications Dispatch and Insight­) is cases that have been heard since the Court of Appeal hearing in Bresco that may affect the Supreme Court’s findings. 

Bresco was a case where an insolvent subcontractor (Bresco) commenced adjudication proceedings against the contractor (Lonsdale) regarding termination and payment issues. The adjudicator found that he had jurisdiction to decide the dispute. Lonsdale sought an injunction to restrain the continuation of the adjudication and to determine the question of “Whether a company in liquidation can refer a dispute to adjudication when that dispute includes (in whole or in part) determination of a claim for further sums said to be due to the referring party from the responding party?” 

" I then caught up with the parts I was unable to watch live from the video recordings of the sessions available on the Supreme Court website. Who needs Netflix? "

The TCC found that after insolvency of one party, where there are claims and cross-claims the only claim that survives is a claim for the net balance under the Insolvency Rules. The Construction Act allows a party to a construction contract to refer a dispute “arising under the contract” to adjudication. Mr Justice Fraser in the TCC held that the adjudicator had no jurisdiction and granted the injunction because the only claim left in the circumstances was a claim for the net balance under the Insolvency Rules and not a claim “arising under the contract”. Mr Justice Fraser also found that it would be neither just nor convenient to permit an adjudication to continue when the decision would never be enforced. 

Adjudication was intended to allow parties to “pay now, argue later”. Where a decision is made in favour of an insolvent party, the payer would be required to “pay now” but not be able to “argue later”. It was established by the Court of Appeal in one of the first adjudication enforcement cases that adjudicators’ decisions in favour of insolvent parties would not be enforced. 

Bresco appealed Mr Justice Fraser’s judgment and sought to set aside the injunction. 

In the Court of Appeal, Lord Justice Coulson found that an adjudicator would have jurisdiction to determine such a dispute. However, he found that the injunction was appropriate as Bresco would never be able to enforce a decision in its favour; he said that such an adjudication would be “an exercise in futility”. 

Bresco’s appeal to the Court of Appeal was heard alongside another appeal arising out of different facts (Cannon Corporate Limited v Primus Build Limited). The key difference here was that Primus had entered into a Creditors Voluntary Arrangement (“CVA”) and not liquidation. As the CVA allowed Primus to continue trading, with a prospect of all creditors being paid in full, Primus was able to refer its claims to adjudication. The Court of Appeal decisions in Bresco and Cannon therefore established that there were limited circumstances in which an insolvent company could pursue its claims in adjudication. 

Post-Bresco cases

The first case to consider the “limited circumstances” identified in Bresco was Meadowside Building Developments Limited (in liquidation) v 12-18 Hill Street Management Company.  Adam Constable QC, sitting as a deputy High Court Judge in October 2019, set out to identify such possible limited circumstances. This was an adjudication enforcement and not an application for an injunction as in Bresco, but the same principles applied.

The Judge found that where an adjudication deals with claims and cross-claims so as to arrive at a net balance due between the parties (the same outcome as the application of the Insolvency Rules) this was a circumstance which may allow an adjudication to proceed. He also found that many of the reasons why the injunction was continued in Bresco would fall away if relevant safeguards were provided to place the responding party in a similar position to what it would have been in if the insolvent party was solvent.  These safeguards include security for the sum awarded by an adjudicator to an insolvent party and security for the costs of the subsequent litigation. These could be provided by the liquidator undertaking to ring-fence the sum awarded, a third party providing a guarantee or bond and/or ATE insurance.

One difficulty faced by Meadowside was that the third party funding the claims and offering to provide a guarantee had an interest in the outcome of over 50%. This was contrary to the rules governing damages-based agreements and was also held to be champertous (champerty prevents parties with no previous interest in a case financing it with a view to sharing the profits). Champerty was a ground for refusing enforcement.  Further difficulties arose as a result of the financial status of the proposed guarantor and the fact that no ATE insurance was in place.

It is clear from Meadowside that there are limited exceptions to the general rule that an insolvent party would not be permitted to commence an adjudication, but the facts of the case meant that the Judge was not satisfied that the conditions were met. 

More recently, in February this year, Mr Justice Waksman in Balfour Beatty Civil Engineering Limited v Astec Projects Limited (in liquidation) considered the Meadowside exceptions on an application for an injunction to restrain three adjudications. Astec was engaged by Balfour Beatty to carry out works under three separate subcontracts. Astec commenced the first of three adjudications (one under each contract) in January 2020. Balfour Beatty sought injunctions on the basis that Astec’s claims did not fall under the limited exceptions identified in Bresco or satisfy what were termed “the Meadowside Conditions”. 

One hurdle for Astec was that three separate adjudications were required, as (absent the parties’ agreement) only one dispute under one contract may be referred to adjudication at any one time. Balfour Beatty argued that any one adjudication could not therefore arrive at the net balance between the parties. Mr Justice Waksman found that a simple mathematical calculation at the end of the third adjudication (or enforcement hearing) could arrive at the net balance, so this was not a barrier to the adjudications proceeding. 

As to the further difficulties that arose in Meadowside, the arrangement between the funder and Astec provided that the funder’s share of any recovery was less than 50% and therefore allowable. Astec had also offered to provide security and/or do various things to ensure that the Meadowside Conditions were met. 

Mr Justice Waksman held that Astec could proceed with the adjudications provided that the remaining two were commenced within 21 days, the same adjudicator was appointed and that all three were dealt with together, albeit consecutively. Balfour Beatty was given six months after the date of the last decision to commence Court proceedings if it was dissatisfied with the outcome of the adjudications. If Balfour Beatty did not do so, Astec could enforce the decisions. Significant security for costs was to be provided and the ATE insurance policy was to be amended. 

The Judge’s approach, to amend what had been offered by Astec and to adjust timescales for certain subsequent steps, was a pragmatic approach to the issues which might otherwise have prevented Astec from pursuing its claims in adjudication.  

Conclusion

As Adam Constable QC said in Meadowside, the interrelationship between the adjudication and insolvency regimes is a developing area of law. Thankfully, following the hearing in Bresco, Supreme Court guidance will be available shortly to clarify the issue. As neither party was happy with the Court of Appeal decision, there was full argument on all of the issues. The guidance should therefore be comprehensive. 

The Supreme Court in Bresco was referred to both Meadowside and Astec, and taken to the “limited exceptions” in those cases.  The Supreme Court is more likely to provide general principles and guidance than take the pragmatic approach adopted in Astec, which is sensitive to the facts of any particular case. We will have to wait and see how the Supreme Court deals with this developing area of law and these latest developments. As contractor and subcontractor insolvency is likely to be an unfortunate consequence of the Covid-19 pandemic, it will be helpful for insolvency practitioners to have clear guidance on their options for recovery. 

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