Supreme Court allows Bresco's appeal confirming companies in liquidation can adjudicate
Locations
Today (17 June) the Supreme Court released Lord Briggs' judgment [2020] UKSC 25, unanimously allowing Bresco's appeal of the Court of Appeal's decision in January 2019 [2019] EWCA Civ 27, thereby enabling parties in liquidation to use contractual and statutory rights to adjudicate disputes.
A great deal of attention has focused on the decision, given the number of challenges adopted by parties responding to adjudications launched by insolvent parties.
The Supreme Court's decision may not surprise those who followed Mr Justice Waksman's recent decision in Balfour Beatty v Astec Projects Limited (in liquidation) [2020] EWHC 796, in which it was held that a sub-contractor in liquidation could proceed with an adjudication on the basis that sufficient security was provided.
We now know the courts will not prevent adjudications from running on grounds that adjudicators lack jurisdiction because of a contravention of insolvency set-off rules, nor will it be futile for an adjudication in such circumstances to continue.
Refresher
Bresco carried out works for MJ Lonsdale at a site in London. Bresco entered liquidation in 2016. A dispute arose in relation to a final account, with Bresco alleging it was due c.£220,000 in unpaid fees and lost profits. Lonsdale alleged it was due to be paid c.£325,000 from Bresco for additional costs to complete the works. About two and a half years after the insolvency, Bresco's liquidators took steps to refer the dispute to adjudication.
Lonsdale applied for injunctive relief to prevent the adjudication on the basis that the adjudicator lacked jurisdiction and that any award would be futile, given Lonsdale's cross-claim cancelled out Bresco's claim, which meant Bresco's liquidator would have to calculate the net balance before any award could be enforced.
Lonsdale's argument was predicated on rule 14.25 of the Insolvency Rules 2016 (previously rule 4.90 of the Insolvency Rules 1986) requiring a mutual account to be made between parties where more than one claim and a cross-claim exists. Lonsdale argued the dispute had not arisen under the construction contract but existed under the Insolvency Rules (and therefore could not be referred to adjudication pursuant to the Housing Grants, Construction and Regeneration Act 1996).
Mr Justice Fraser, sitting in the Technology & Construction Court, granted the injunction at first instance. This decision was upheld by the Court of Appeal, albeit the court disagreed that there was no longer a dispute under the construction contract (and hence the adjudicator had jurisdiction), but found that proceeding with the adjudication would be futile because any award could not be enforced – one of the limited grounds where an adjudicator's decision may not be enforced being where the claimant is insolvent and there is a real risk that any award would not be repaid when the dispute is finally resolved (as per the conditions in Wimbledon v Vago).
Bresco appealed again and Lonsdale cross-appealed the jurisdiction angle, because Lonsdale considered Mr Justice Fraser's decision that an adjudicator lacked jurisdiction since the dispute arose out of the liquidation, rather than the contract, should be restored by the Supreme Court.
The Supreme Court's decision
The Supreme Court's decision allowed Bresco's and dismissed Lonsdale's cross-appeal. The adjudication can now go ahead. The full judgment can be found here.
In reaching their decision, the Justices held the insolvency set-off does not relinquish the existence of contractual claims. They continue to exist in their own right and therefore any contractual or statutory right to refer a dispute to adjudication is not lost and an adjudicator maintains jurisdiction over a dispute. In this regard, the Court of Appeal's reasoning has been upheld.
With respect to the futility point, the Justices decided it follows that if an adjudicator retains jurisdiction "it would ordinarily be entirely inappropriate for the court to interfere with the exercise of that statutory and contractual right".
Significance
This incompatibility between a party's right to adjudicate and the insolvency set-off rules is unlikely to be over.
As the judgment states: "the proper answer to all these issues about enforcement is that they can be dealt with…at the enforcement stage". However, it is at least clear that an adjudication is no longer deemed to be futile in such circumstances and will be able to proceed.
The Supreme Court's decision is therefore likely to see the end of injunctions to prevent insolvent parties from adjudicating on the grounds of their financial position.
It is probable that, at enforcement, the principles established in Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 and re-established in Balfour Beatty v Astec Projects Limited (in liquidation) [2020] EWHC 796, will become critical. Accordingly, the nature and extent of funding arrangements and security for potential adverse costs of enforcement proceedings are likely to be scrutinised in further detail, with the terms of any such funding arrangement and insurance policy becoming integral to enforcement.
Ring-fencing awards and agreements over staying enforcement proceedings will be equally significant.
In the meantime, the decision will be welcome news for insolvent parties and insolvency practitioners. After something of a hiatus following the TCC's decision, we now expect more adjudications to be launched, especially those which may have lain dormant pending the outcome of the Supreme Court's findings.