Liquidators Welcome Supreme Court Bresco Decision
On 17 June 2020, the much anticipated Judgment in the Supreme Court case of Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd  was handed down.
This article analyses the key outcomes of the decision, however, in order to contextualise the Judgment we first provide an overview of the relevant background.
The Technology & Construction Court
Bresco and Lonsdale were initially involved in a dispute which related to cross-allegations of wrongful termination following Bresco’s departure from site. Following its entry into liquidation in March 2015, Bresco commenced an adjudication against Lonsdale (more than two years later).
Lonsdale successfully applied for an injunction to prevent the adjudication from continuing.
Lonsdale argued that an adjudicator did not possess the requisite jurisdiction to deal with claims brought by a company in liquidation. This argument was made on the basis that if a company enters liquidation, the Insolvency Rules prescribe that an account should be taken of what each party owes the other in respect of their previous dealings, and any sums due from one party shall be set off against sums due from the other party.
Fraser J agreed that claims and cross claims between the parties ought to be aggregated into a single debt that is owed from one party to the other, and that the effect of the Insolvency Rules is that they take priority over the Construction Act in the event of a conflict between the two pieces of legislation and which to apply to the debt. Accordingly, it followed that an adjudicator did not have the jurisdiction to hear a pecuniary dispute involving a company in liquidation.
Court of Appeal
Expectedly, Bresco appealed the TCC decision. Coulson LJ overturned Fraser J’s previous decision and determined that an adjudicator has the jurisdiction to adjudicate on a dispute which involves an insolvent company in liquidation. However, Coulson LJ ultimately concluded that where a party that is responding to an adjudication (involving a company in liquidation with cross claims) wishes to obtain an injunction to prevent the adjudication from being able to continue because the adjudication is in conflict with the Insolvency Rules, the court should award the injunction.
The Court stated as follows:
“…the court will grant such an injunction if the court concludes that the nascent adjudication is a futile exercise. This is an important power in the context of adjudication. Adjudication is a quick process which can require a responding party to spend a good deal of money in a short space of time, to defend itself from claims which may prove to be utterly hopeless, yet with no prospect of recovering those costs (because adjudication is cost-neutral). It is therefore important that, whatever the theoretical jurisdiction position may be, a responding party has the right to try and put a stop to the adjudication process at an early stage.”
The Court of Appeal considered that because of the Insolvency Rules, any positive award resulting from the adjudication would not ultimately be enforceable – making the adjudication pointless. However, the respondent would still have been required to incur the costs of defending the “futile” adjudication. The Court’s ruling was intended to protect the respondent’s right to apply for an injunction to prevent this from occurring.
This has become known as the “futility point” and it effectively meant that it would only be in an extremely rare situation that a company in liquidation (and confronted with a cross-claim) could commence an adjudication, defend a potential application for a prohibitory injunction by the respondent, succeed in the adjudication, obtain summary judgment and avoid a stay of execution.
Impact of Court of Appeal Decision
The reality is that a large number of claims brought by insolvency practitioners on behalf of insolvent companies involve cross claims. Accordingly, despite the Court of Appeal making it clear that an adjudicator does have the required jurisdiction to adjudicate on a claim of that nature, the fact that it ruled that where there is a cross claim an injunction will likely be granted on the basis of the “futility point”, has resulted in a decline of the number of adjudications issued by insolvency practitioners on behalf of insolvent companies.
The Supreme Court Decision
In a Judgment given by Lord Briggs, the Supreme Court determined that an adjudicator has the requisite jurisdiction to adjudicate and that an adjudication where the respondent has cross claims is not futile.
It reversed the Court of Appeal’s decision on the “futility point” and Fraser J’s decision at first instance on both points. A summary of the rationale behind the Supreme Court’s decision is set out below:
- Jurisdiction – the Supreme Court found that despite the potential of the Insolvency Rules (in respect of set off) to reduce the value of a claim under a construction contract to zero, this did not affect the existence of such a claim. Accordingly, Bresco had not lost its right to pursue court proceedings for the purpose of determining the value of the claim, or in the alternative it could have utilised its contractual right to commence an arbitration. For that reason Bresco was also entitled to refer its claim to adjudication.
- Futility – the Supreme Court determined that the insolvency rules and the fact that cross claims existed was not a proper basis for prohibiting an adjudication. The Court simply stated that “the insolvent company has both a statutory and a contractual right to pursue adjudication” (paragraph 59 of the Judgment). The Court considered that it would not normally preclude a party from being able to exercise its contractual and statutory rights by providing injunctive relief, and that it should not be the case here.
The Supreme Court emphasised that the ultimate enforcement of an adjudicator’s award was a separate point. It was acknowledged that the Court may not always determine that the enforcement of an adjudicator’s award is appropriate, however, that was a matter that could be dealt with at the enforcement stage.
The Judgment is certainly welcome news for insolvency practitioners. It means that liquidators can now take advantage of the “swift and cost-effective” adjudication process and adjudicate disputes with creditors on behalf of insolvent construction companies (and are in fact encouraged by the court to do so).
It is of note that in its Judgment, the Supreme Court acknowledged the benefits of adjudication, stating that adjudication has been a successful vehicle for resolving disputes since its introduction. The decision identifies that adjudication often results in the final resolution of disputes between the parties (without the requirement for enforcement).
The current economic climate will likely bring about an increase in the amount of construction companies that become insolvent. Accordingly, employers/contractors may become involved in more adjudications as a result of this Judgment (particularly adjudications which have lay dormant pending this Judgment).
The Court’s approach to enforcing such an adjudicator’s decision remains to be seen, however, we are keeping a close eye on developments within this area and will provide a follow up to this article when this does occur.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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