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Court of Appeal shuts the door on insolvent companies adjudicating

The Court of Appeal today handed down a judgment confirming the interplay between construction adjudication and the insolvency regime. Fladgate acted for the successful respondent.

The appeal was from a decision of the judge in charge of the Technology and Construction Court in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation).

Broadly, the background is that in 2014 Bresco were sub-sub-contracted by MJL for works to a commercial development in London. Bresco entered into voluntary liquidation in March 2015. MJL engaged replacement contractors to complete and/or remedy Bresco’s works. In 2017, MJL notified Bresco of a claim for c.£320,000.

In June 2018, Bresco commenced an adjudication against MJL alleging wrongful repudiation of the sub-sub-contract and claiming damages. MJL applied to the TCC for a permanent injunction restraining the adjudication, which Mr Justice Fraser duly granted.

Fraser J considered the few authorities addressing the insolvency and adjudication regimes and concluded that where there are claims and cross-claims with a company in liquidation, the insolvent company only has a claim to a net balance under the Insolvency Rules 2016, which an adjudicator cannot determine. Fraser J granted MJL the injunction because, in essence: (i) adjudicators did not have jurisdiction to deal with claims advanced by companies in insolvent liquidation; and (ii) adjudicators’ decisions in favour of insolvent companies are not ordinarily enforceable and it is therefore neither just nor convenient to permit such adjudications.

The Court of Appeal upheld the injunction against Bresco. The leading judgment was given by Lord Justice Coulson and he focused on two issues - jurisdiction and the utility of adjudication.

As to jurisdiction, Coulson LJ found that contrary to Fraser J’s judgment, an insolvent company’s contractual claim did not cease to exist at liquidation and was not replaced by a net balance claim. It was plain that such a claim could be referred to arbitration or court proceedings and Coulson LJ did not consider there was any reason to treat adjudication differently. As such, he decided that “technically the adjudicator would have jurisdiction to consider the claim advanced by a company in liquidation”.

Coulson LJ however agreed that the permanent injunction was the appropriate remedy in the circumstances. He noted that the adjudication regime was neither intended to be used for applying the Insolvency Rules nor was it, by its nature, appropriate. He says in this regard:

in the ordinary case where the claiming party is in insolvent liquidation, the difficulties and wasted costs of using adjudication to arrive even at the enforcement stage – let alone the costs and possible complexities of enforcement itself – make plain that the two regimes are incompatible”.

Coulson LJ accepted that the appropriate solution to this incompatibility was to grant MJL the injunction restraining the adjudication. This renders the issue of the adjudicator’s jurisdiction merely “theoretical”. Coulson LJ’s judgment concludes that it would be “an exercise in futility” to have permitted the adjudication to continue in circumstances where, amongst other things, “an adjudicator’s decision in favour of Bresco, a company in liquidation facing a separate cross-claim, will not be capable of being enforced”.

We consider this judgment to be a fairly clear message that insolvent companies facing cross-claims will not be permitted to adjudicate their claims.

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