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Adjudication and Insolvency: Exploring Bresco24 January 2020

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In a recent decision,[1] the English Technology and Construction Court (“TCC”) has provided useful guidance on exceptions to the general rule that a company in liquidation cannot pursue and enforce an adjudication.

Importantly, the case demonstrates that the insolvency prohibition set out in the Court of Appeal decision of Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd[2] is not absolute and sets out some exceptional circumstances in which a company in liquidation might still be able to pursue and enforce an adjudication.

"The insolvency prohibition set out in the Court of Appeal decision of Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd is not absolute."

Background

In September 2014, 12-18 Hill Street Management Company (“HSMC”) appointed Meadowside to carry out repair works under a Joint Contracts Tribunal Minor Works Building Contract 2011. Prior to practical completion, various disputes arose between the parties, including disputes over interim payments, delay, variations and defects. In July 2015, Meadowside was placed into voluntary winding-up. Meadowside contended that HSMC owed it sums, whilst HSMC considered that it was in fact a creditor in Meadowside’s insolvency.

Meadowside’s liquidators appointed Pythagoras Capital Limited (“Pythagoras”) to pursue the claim and, in February 2019, a notice of adjudication was issued. HSMC did not take part in the adjudication, arguing that due to Meadowside’s insolvency the adjudicator lacked jurisdiction to determine the dispute. The adjudicator disagreed and proceeded to find that Meadowside was entitled to a net balance of £26,629.63.

Following the adjudication, the first instance decision in Bresco was handed down, finding that an adjudicator did not have jurisdiction where the referring party was in insolvent liquidation. Subsequently, the Court of Appeal overturned the decision that the adjudicator lacked jurisdiction, but held that, in circumstances where a company was in insolvent liquidation, it was unlikely that an adjudication claim would be capable of enforcement. Whilst the Court of Appeal acknowledged that adjudication is not necessarily a final determination and that parties should be able to challenge an adjudication award, it also recognised that if a claimant is insolvent then a defendant is unlikely to be able to get its money back. It was therefore held to be an “exercise in futility” to allow an adjudication to proceed in such circumstances and an injunction preventing the adjudication from continuing was upheld. However, Lord Justice Coulson did comment that “exceptional” circumstances might permit a company in insolvent liquidation (and facing a cross-claim) to obtain an adjudication award, summary judgment and avoid a stay of execution of enforcement.

The decision

Pythagoras sought to enforce the adjudication award on Meadowside’s behalf by way of application for summary judgment.

Having considered the reasoning in Bresco and the surrounding case law,[3] the TCC considered that the correct balance between the rights of the parties was to permit enforcement where:

  • The subject of the adjudication is for the purposes of determining the final net position between the parties; and
  • The insolvent party provides security which is satisfactory both in respect of the amount awarded in the adjudication and any adverse costs order which may be made against the claimant in enforcement proceedings or subsequent litigation.

In coming to this decision, the TCC considered that the “fundamental difficulty” in enforcing an adjudication award in favour of a company in liquidation, that “it would deprive the responding party of its security and bring finality by default to a temporary decision”, could be addressed. In the TCC’s view, where there is a satisfactory guarantee in relation to any sum awarded, and/or in circumstances where the sum is temporarily ringfenced pending becoming finally due, this mischief “at the heart of the justification for not enforcing” is eliminated. This is akin to the final accounting/balancing exercise in insolvency and avoids the problem of the responding party being unable to recover the sum awarded if an award is partly or wholly overturned in subsequent litigation.

Pythagoras' guarantee was deemed inadequate, even in conjunction with an undertaking to ringfence the principal sum.

Security for an adjudication claim

In Meadowside, a range of security options had been proposed by Pythagoras. The TCC did not see a problem with Pythagoras offering a guarantee as part of a package of security to meet the concerns arising from Bresco. It did, however, accept HSMC’s argument that Pythagoras was inadequate to stand as guarantor. The TCC noted that for security to be satisfactory, a guarantee should be from a bank (or equivalent financial institution), providing a high degree of certainty that it can be called upon successfully. The guarantee proffered by Pythagoras did not meet these requirements. There had been no payment into court, bank guarantee or bond as security for costs, and Pythagoras provided insufficient evidence to demonstrate that it would have the financial means to pay an adverse costs order or any awarded sum deemed to be repayable as a result of subsequent court proceedings. Its guarantee was deemed inadequate, even in conjunction with an undertaking to ringfence the principal sum.

"HSMC also argued that the agreement between Pythagoras and Meadowside’s liquidators pursuant to which the claim was brought was potentially champertous and unenforceable."

Champerty

HSMC also argued that the agreement between Pythagoras and Meadowside’s liquidators pursuant to which the claim was brought was potentially champertous and unenforceable, rendering the proceedings an abuse of process which would prevent Meadowside from bringing itself within the exception to Bresco.

Whilst Meadowside’s liquidators had appointed Pythagoras by a letter of appointment, it did not contain any terms as to the basis of remuneration. The TCC, therefore, assumed that some other commercial agreement was in place. If Pythagoras makes a recovery for an insolvent company, it keeps a pre-agreed percentage. In this case, neither Pythagoras nor Meadowside had disclosed what percentage recovery the agency agreement gave rise to.

Damages-based agreements include agreements providing for claims management services under which the recipient of those services must pay the service-provider if the recipient obtains a specific financial benefit from the related matter.[4] The TCC accepted that the Damages Based Agreements Regulations 2013 applied to the agreement on the basis that Pythagoras were providing “claims management services”.[5] Although Pythagoras had not disclosed its percentage recovery under the agreement, “the obvious inference” was that the percentage was greater than the 50% permitted under the Regulations, which would render the agreement unenforceable and, in the TCC’s view, champertous. That did not necessarily mean that Meadowside’s claim should be stayed as an abuse of process, which was a question of fact in any give case. However, in this case there was insufficient information available to determine the issue since Meadowside had not disclosed the details of its funding agreement with Pythagoras. This gave HSMC a realistic prospect of establishing that the proceedings were an abuse of process and so summary judgment was refused.

Conclusion

The decision in Meadowside provides useful guidance on the exception to the rule in Bresco that a company in liquidation cannot pursue and enforce an adjudication award. However, an insolvent company encouraged by the decision and seeking to recover debts as quickly as possible should note the need to provide effective and adequate security. Meadowside has affirmed the narrow scope of this exception and that, for the most part, an insolvent company will be unable to bring an adjudication. The decision therefore supports Bresco; however, it should be noted that Bresco is currently on appeal to the Supreme Court with a decision expected later this year.

The TCC’s decision also demonstrates the importance of ensuring that any funding agreement a party enters into complies with the appropriate legal framework. A finding that an agreement is champertous may not automatically lead to a finding that the underlying proceedings amount to an abuse of process, but there is clearly a strong risk of such a finding.

Trainee Luke Denton also contributed to this article.

 

[1] Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC)

[2] [2019] EWCA Civ 27

[3] Wimbledon Construction Company 2000 Limited v Derek Vago [2005] BLR 374; Absolute Living Developments Ltd (In liquidation) v DS7 Ltd [2018] EWHC 1432 (Ch)

[4] Courts and Legal Services Act 1990, s 58AA(3)

[5] Courts and Legal Services Act 1990, s 58AA; Financial Services and Markets Act 2000, s 419A; explanatory note to the Damages Based Agreements Regulations 2013

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