Adjudications involving insolvent companies have historically proven to be fertile ground for ‘spin-off’ litigation between the parties. A range of issues have previously come before the courts against the backdrop of one party’s insolvency such as: the enforceability of an adjudicator’s decision; or circumstances when it may be appropriate to request that the courts grant an injunction to stop an adjudication in its tracks.
Lonsdale v Bresco was a notable TCC judgment in respect of adjudication with insolvent companies. This case recently found its way to the Court of Appeal, which was heard as a conjoined appeal alongside the separate case of Cannon v Primus.
Lonsdale v Bresco
At first instance Fraser J granted an injunction which prevented Bresco (in liquidation) from proceeding with an adjudication against Lonsdale. Fraser J concluded that upon liquidation, an insolvent party would only be able to claim the sum resulting from an overall reconciliation exercise, taking into account all of the mutual dealings between the parties. He decided that this claim, properly construed, was pursuant to the Insolvency Rules. On this basis, it was not a claim arising out of a construction contract, and was therefore incapable of being referred to adjudication.
The Court of Appeal (as a result of concessions made by Lonsdale in advance of the appeal hearing and having reviewed the authorities) respectfully disagreed with Fraser J. It decided that “a claim of the kind with which this case is concerned is not a process which was extinguished by the occurrence of the liquidation.”
The Court of Appeal first determined that no jurisdictional issues arose with the commencement of an adjudication by a company in liquidation per se. The Court of Appeal then considered whether or not Fraser J was right to grant the injunction at first instance in any event.
The Court found there to be a “basic incompatibility” between adjudication and the regime set out in the Insolvency Rules. Adjudication typically produces a temporary obligation which is more akin to an interim payment, and does not take cross-claims into account. Enforcement of this type of decision by the Courts would be directly at odds with the requirements of an overall equal distribution amongst all creditors (known as pari passu), as provided for by the Insolvency Rules.
The Court of Appeal decided that a claim made on behalf of a company in liquidation where there is also a cross claim would be unlikely to be enforced by the courts and would be “an exercise in futility”. The Court of Appeal therefore upheld Fraser J’s decision to grant an injunction preventing Bresco from proceeding with its adjudication.
Cannon v Primus
The facts of the conjoined appeal in Cannon v Primus were rather different, and perhaps merit a separate blogpost of their own! However, of crucial importance when considered alongside the appeal judgment in Lonsdale, was that Primus was not in liquidation. Rather, it was the subject of a Company Voluntary Arrangement (“CVA”), whereby a company that cannot pay its debts makes an arrangement with its creditors to make repayments over a fixed period.
The Court of Appeal drew a distinction between the position in Lonsdale and the position in Primus. One of the purposes of a CVA is to provide an ailing company with a potential route to trade out of its problems. With a CVA, there is no requirement for an overall reconciliation exercise to take account of all mutual dealings between the parties. There is therefore no “basic incompatibility” between a CVA and adjudication. It therefore found that, while the individual merits of cases should of course be considered carefully, there was no basis upon which to say that enforcement of an adjudicator’s decision should be refused merely because the claiming party is subject to a CVA.
While there is no jurisdictional issue which would prevent a party in liquidation from commencing an adjudication, it will be rare for any decision in its favour to be enforced. Following the Court of Appeal’s rationale in Lonsdale, a responding party would likely get a sympathetic hearing from the court were it to seek an injunction.
The position is less straightforward if the referring party is subject to a CVA. A careful consideration of the individual facts of the case would be required in order to understand the prospects of restraining an adjudication or resisting enforcement of an unfavourable decision.
Unfortunately, the Court of Appeal provided no guidance as to what the position might be if the referring party is in administration, which is perhaps the most common form of insolvency that a party can adopt. Presumably though as a company in administration still has the ability to trade, then cross claims can be considered and therefore this position is not incompatible with the process of adjudication.