Summary

Are the regimes of construction adjudication and insolvency incompatible? Recent Court of Appeal authority suggested that they are, but in Meadowside Building Developments Ltd (In Liquidation) v 12-18 Hill Street Management Company Ltd [2019] EWHC (TCC), Adam Constable QC sitting as a district judge in the high court has clarified the exceptional circumstances in which a company in liquidation can enforce an adjudicator’s decision in its favour.

In the conjoined appeals of Cannon Corporate Ltd v Primus Build Ltd and Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Coulson LJ , in the Court of Appeal held that, while a party who was in insolvent liquidation could commence an adjudication, to do so would generally be “an exercise in futility” since in the vast majority of cases, it would be unsuccessful if it applied to the court to enforce that decision by means of a summary judgment application.

The court acknowledged the incompatibility of the two regimes. Coulson LJ rejected the view that the liquidator might find the adjudicator’s decision helpful in terms of assessing the net balance, as required by Rule 14.25 of the Insolvency Rules. He considered that most decisions related to smash and grab adjudications. Interestingly, Report No.18 on adjudication by Construction Dispute Resolution found that in 2018, 16% of adjudications related to final account disputes.

In Meadowside, Adam Constable QC noted that the drafting of the Act did not expressly exclude parties in liquidation, although it might have done had Parliament so intended. There was no absolute rule against enforcing a decision in circumstances where the winning party was insolvent, and it was a question of exercising a judicial discretion.

The judge clarified the exceptional circumstances in which the court might enforce an adjudicator’s decision in favour of an insolvent company. The first is that the adjudication should be of the (fairly rare) final account type, in which the adjudicator decides the net balance between the parties. This is only possible where there is only one contract. The second is that adequate security is provided for the sum awarded, so that if the decision is overturned in subsequent litigation or arbitration, the responding party will be able to recover that sum. The third is that the cost risk is adequately dealt with.

In Meadowside, the judge refused to grant summary judgment of the amount of the adjudicator’s decision. His reasoning was that, because the claimant had refused to disclose the funding agreement, it was impossible for him to decide whether the funding arrangement between the claimant and its funders was champertous and/or an abuse of process, as a result of being outside the agreements permitted by the DBAR 2013.

The responding party made the argument that the claimant and its funder had not provided adequate, or any security, prior to the adjudication, and therefore it had not taken part, causing it prejudice. Because he had declined to grant summary judgment in any event, the judge did not need to decide this, but he indicated that this would not have been a reason to refuse summary judgment. The responding party would have an opportunity to recover any sum awarded in subsequent legal proceedings, and to obtain security for its costs in those proceedings.

Conclusion

This judgment is an interesting development in the evolving law on the interplay between adjudication and insolvency. Given that liquidators have a duty to recover the insolvent company’s assets for creditors, it would appear to be in the public interest to allow them to benefit from the cost effective nature of adjudication, in those cases where the dispute referred requires an assessment of the net balance between the parties. The latest data suggests that those cases might not be all that rare.