The Supreme Court has overturned the Court of Appeal's grant of an injunction restraining a company in insolvent liquidation from referring a dispute with a cross-claiming creditor to adjudication.
In doing so, it provides for a relaxation of the stringent conditions imposed on insolvent companies seeking to adjudicate, and points towards an increase in adjudications both from insolvents and from employers and contractors, who will need to consider making cross-claims at an early stage. The decision also increases the likelihood of battles at the enforcement stage where a respondent seeks to protect its rights of recourse in respect of its cross-claims.
The decision
The case concerned an appeal from a 2019 judgment in which the Court of Appeal injuncted the adjudication due to concerns that the incompatibility of the adjudication process with the insolvency regime meant that any decision made by the adjudicator would not be capable of enforcement.
That was one of a recent run of cases grappling with perceived incompatibilities between the adjudication process and the insolvency regime; namely, that a creditor's claims may only be pursued by way of proof and participation in a pari passu distribution of any surplus, whereas the liquidator may pursue the company's claims in full. To overcome those difficulties, two recent cases had laid down stringent conditions in which insolvent companies may adjudicate (Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd and Balfour Beatty Civil Engineering Ltd v Astec Projects Ltd (In Liquidation)). Those cases provided that an insolvent entity could only bring an adjudication claim if: (i) it determined the net final position between the parties; and (ii) if satisfactory security was provided both in respect of any sum awarded in the adjudication and in respect of any adverse costs order - the rationale being that to allow an adjudication in any other circumstances would undermine the insolvency setting-off process.
However, in what will be seen as a welcome move by insolvency practitioners, yesterday's Supreme Court decision confirms that there is no basic incompatibility between the adjudication regime and the insolvency process.
Rather, the Supreme Court found that the adjudication right is founded in both contract and statute and that process need not determine the final net position. Whilst a respondent to an adjudication brought by an insolvent company might need to pursue parallel or counter proceedings to establish a "true balance" in its favour against an under-funded liquidation estate, that is a matter that can be dealt with at the enforcement stage (should it be necessary), and is not a reason to injunct an insolvent company from pursuing adjudication.
Similarly, the enforcement stage was also said to be the proper time to address security, with the Supreme Court suggesting that a liquidator pursuing summary enforcement may need to offer "appropriate undertakings, such as to ring-fence any enforcement proceeds" in the proceedings.
Comment
As the Supreme Court highlighted, in practice most adjudications are not challenged, and so offer a quick and cost effective route to a final resolution of a dispute between cross-claiming parties. The purpose of the adjudication regime is a method of alternative dispute resolution which is "an end in its own right". Accordingly, its usefulness is not undermined by the fact that the courts may not grant summary enforcement of the adjudicator's decision.
While that is a pragmatic view and one aimed at assisting the insolvency process and seeking effective resolution of disputes, it is one which may not be welcomed by the responding party, who will need to consider any cross-claims at an early stage. It also increases the likelihood of costly wrangling at enforcement level in circumstances where the respondent wishes to ensure its rights of recourse in respect of its cross-claim are protected.
Authors: Tom Duncan, Madeleine Pope and Lucy McKenzie.
Cases referred to:
Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25
Balfour Beatty Civil Engineering Ltd v Astec Projects Ltd (In Liquidation) [2020] EWHC 796 (TCC)
Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC)
