Adjudication and Insolvency: Exploring Bresco24 January 2020

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.