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26 July 20207 minute read

Bresco v Lonsdale: Supreme Court rules insolvent company can adjudicate

Introduction

With grimly apposite timing, in June, the Supreme Court gave its decision in Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd and turned on its head the construction industry’s understanding of an insolvent company’s right to pursue an adjudication. It will fundamentally affect construction insolvencies.

It has always been the case that you cannot usually adjudicate against a company in liquidation. For the past 20 years, the industry has worked on the basis that neither could an insolvent company adjudicate a claim against a respondent with a cross-claim. Now that understanding has been reversed. Insolvent companies enjoy the right to pursue adjudications, even against respondents with a cross-claim.

Facts of the case

The salient facts can be stated very briefly. Bresco and Lonsdale were in a construction contract. Each claimed the other owed it money. Bresco went into liquidation. Lonsdale saw little point in starting proceedings against an insolvent company. Pythagoras Capital acted for the liquidator of Bresco and funded an adjudication commenced against Lonsdale. The TCC (Fraser J) granted an injunction to stop the adjudication and the Court of Appeal upheld the injunction (the judgment was given by Coulson LJ). The Supreme Court has set the injunction aside (Lord Briggs gave the only judgment). Bresco is permitted to pursue its adjudication against Lonsdale, who will be permitted to raise its cross-claim against Bresco as a defence but not to recover money, even if the cross-claim is bigger than the claim (because the adjudicator who is asked to decide on the referring party’s claim would not have jurisdiction to award the respondent money).

The Supreme Court’s reasoning

The old law had two bases:

  1. Bresco’s claim and Lonsdale’s cross-claim had cancelled each other out by the process of insolvency set-off. This meant there was no longer any claim, or therefore any dispute under the contract, so adjudication was unavailable (the jurisdiction point).

  2. In any case, the adjudicator’s decision would not be enforced on a summary judgment application. So an adjudication was pointless (the futility point). Fraser J found for Lonsdale on both bases. Coulson LJ did not agree on the jurisdiction point but did agree on the futility point. Lord Briggs rejected both bases.
The law now

The facts of the case are likely to be close to typical. So the issue is now clearly decided by the Supreme Court and I think it would be futile for a party to challenge jurisdiction simply because the referring party is insolvent or to attempt an injunction to stop an adjudication, unless the circumstances were very unusual. Even if not every judge in the TCC might agree with the decision, each one is bound to follow it (three very experienced construction lawyers came to the opposite conclusion: Fraser J and Coulson LJ in this case and Edwards-Stuart J in the 2014 case of Twintec v Volkerfitzpatrick Ltd).

The Supreme Court did not make clear whether an insolvent company can enforce an award. Lord Briggs said nothing to alter the common perception that enforcement is unlikely in most cases. The possible exception to this position is if the insolvent company offers some sort of ring-fencing of the money, so that the solvent party can get it back if it subsequently litigates and wins. It was this sort of offer that Adam Constable QC (sitting as a deputy judge in the TCC) considered in Meadowside Building Developments v 12-18 Hill Street Management Company Ltd in October 2019 (again, Pythagoras Capital ran and funded the liquidator’s action).

Where does that leave us?

Adjudications pursued by insolvent parties will go ahead and arguments about the competing rights of the insolvent and solvent participants will be postponed to the enforcement stage. However, the liquidators of an insolvent company would have to fund an adjudication knowing that any award would be unlikely to be enforced - unless they can offer some form of ring-fencing (or, at least, an undertaking to keep that money aside in case of a successful challenge). Occasionally, an insolvent estate will be sufficiently well-funded to be able to afford the costs of adjudication and the sums involved will merit such expenditure. In those cases, as envisaged by Lord Briggs, the liquidator might use adjudication as part of the process of assessment of proofs to reduce the likelihood of a creditor’s challenge to their decision on the proof. However, such a sufficiently well-funded estate seems likely to be a rare occurrence in construction insolvencies.

In the great majority of insolvencies, it is difficult to see how ring-fencing could be offered – unless a third party funder puts the money up (which probably addresses the adjudication costs as well). Therefore, the Supreme Court’s decision probably only helps well-funded liquidators (either from the estate itself or from third party funding). The decision has helped to create a market for third party funders.

The solvent respondent will not be able to stop the adjudication at the outset. Even if it has a cross-claim, the best it can do is a zero award from the adjudicator. The defence of the adjudication will cost tens of thousands of pounds, and on occasion more, and will take up a great amount of management time. If it loses, the respondent will probably successfully resist summary enforcement, unless faced by a sufficiently well-funded opponent.

If not faced by a sufficiently well-funded opponent, I suggest that the respondent should consider seriously defending the adjudication to a minimal extent only, and save its resources for enforcement. The facts of Meadowside (as recorded in his judgment by the deputy judge) are of interest in this respect. In the adjudication, the insolvent Meadowside claimed at least GBP171,585. The respondent declined to serve a response. Notwithstanding this, the adjudicator treated as such a letter from the respondent’s solicitors setting out the substance of the respondent’s cross-claims, allowed full liquidated damages to the respondent and found a net balance due to Meadowside of only GBP26,629. This does not appear a great result for Meadowside’s liquidators given that the respondent appears to have participated in the adjudication only minimally.

On the other hand, if faced by a sufficiently well-funded opponent, I suggest that the respondent will have to fight the adjudication as hard as it can, unless it is prepared to litigate the dispute (only a tiny proportion of adjudication paying parties go on to litigation seeking a different result). The funder is likely to be willing to put up the money for the ring-fencing (a likely condition of summary enforcement), and the ring-fencing would be time-limited. In Meadowside, the judge thought that, in the ordinary case, about 6 months for the respondent to commence litigation would be appropriate. Therefore, unless the respondent is prepared to litigate, in the likely event that the funder is willing to put up the money , the adjudication award will be enforced summarily and that will be the end of the matter.

Summary

The Supreme Court has opened the gate to adjudications from insolvent companies. Some third party funders are likely to want to make a market in this area. We shall probably see more such adjudications. The key first step for the respondent is to understand how well funded its opponent is.

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