UK: Court Of Appeal Confirms Decision In Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (In Liquidation) [2018] - A Lesson In Practical Utility

In July 2018, the Technology and Construction Court (TCC) handed down judgment in a case of particular significance for the construction industry and insolvency practitioners taking appointments in the sector in the case of Primus Build Limited v Cannon Corporate Limited (unreported). The substance of the dispute related to the contractor's claim for payment allegedly due for work completed, and damages for loss of profits.

A few weeks later in August 2018, we reported on the significant judgment in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation) [2018] EWHC 2043 (TCC). As set out in our review of the judgment, the judgment confirms that a company in liquidation cannot refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of "any claim for further sums said to be due to the referring party from the responding party". As anticipated, the first instance judgment was appealed by the company in liquidation, Bresco.

On the face of it, it seemed that these two first instance judgments were somewhat contradictory and potentially gave rise to more questions than they answered and so it is little surprise that the two appeals in these cases were heard together by the Court of Appeal, albeit that the Cannon appeal settled two weeks after the hearing. The Court retained discretion to hand down judgment in the Cannon appeal and so due to the close links between the two cases, it took an unusual step and decided that the judgment would address both appeals.

The judgment has been much anticipated.

The Bresco Appeal

Bresco had sought to set aside the order of Fraser J dated 31 July 2018, whereby he granted an injunction preventing the continuation of an adjudication in which Bresco sought declarations and sums said to be due from Lonsdale, by way of payment for works completed prior to leaving the site and/or damages for loss of profits.

The Court of Appeal dismissed Bresco's claim in the conjoined appeals. The Bresco appeal looked at two key issues:

  1. whether an adjudicator can have jurisdiction to deal with a company in insolvent liquidation; and
  2. assuming the answer to 1 is yes, whether (i) such an adjudication could ever have any "utility" and, if not, whether (ii) an injunction preventing the continuation of the adjudication process was "justified in any event".

The Jurisdiction Issue

In the TCC, Lonsdale argued that Bresco's right to adjudicate pursuant to s108 of the Housing Grants, Construction and Regeneration Act 1996 ceased to exist when Bresco went into voluntary liquidation, being replaced with a net balance under the Insolvency Rules relating to set-off. This issue turned around the provisions of the Insolvency Rules 2016 in relation to mutual dealings and set off.

Fraser J had found at first instance that that mandatory set off in liquidation under Rule 14.25 of the Insolvency Rules had the effect that, when a liquidator is appointed "claims and cross claims... cease to be capable of separate enforcement upon, or at, the date of liquidation" and are "replaced by a single debt" (Paragraph 48 of the TCC judgment, emphasis added).

It is this interpretation of Rule 14.25 as operating to extinguish money claims on liquidation, and replace them with a single balance figure that alone can be determined, that had caused some consternation among insolvency professionals, as potentially having a wider impact than purely in construction cases.

The Court of Appeal, however, decided that "the underlying claim must continue to exist..." and that "it must continue to exist for all purposes".

As such, the Court of Appeal decided that, purely as a matter of jurisdiction, Fraser J was wrong to find that the adjudicator had no jurisdiction to consider the claim. The Court of Appeal considered that "...Bresco's right to refer a dispute to adjudication was not automatically lost when they went into liquidation".

However, the Court of Appeal went on to consider a further issue beyond that of the "theoretical jurisdiction" of the adjudicator - referred to in the judgment as the "utility argument".

The Utility Issue

The Court of Appeal considered the fact that, in circumstances where an adjudicator's decision was in favour of Bresco, a company in liquidation facing a separate cross-claim, this would ordinarily not be capable of being enforced by way of Part 8 proceedings (together with an application for summary judgment if the other party has no real prospect of defending their non-compliance with the adjudicator's decision) (the usual method of enforcement of adjudication decisions). This is because the granting of summary judgment in this situation (i.e. where Bresco was in liquidation) would result in Lonsdale being deprived of the benefit of treating Bresco's claim as security for its own cross claim - and instead would leave Lonsdale only able to claim for a dividend in the liquidation. As such, the adjudication would be "an exercise in futility" (paragraph 46 of the Court of Appeal judgment). It was therefore just for Fraser J to conclude that an injunction was appropriate in these circumstances.

The Court of Appeal therefore upheld Fraser J's decision on the grounds of practical utility rather than on the basis of the adjudicator's lack of jurisdiction.

The Cannon Appeal

The Court of Appeal addressed the Bresco and Cannon appeals together on the basis of the close interrelationship of the issues raised in the appeals, and the important issue as to waiver raised in the Cannon appeal. Cannon itself was not in fact in liquidation, but rather a company voluntary arrangement (CVA) had been approved in respect of it. While Rule 14.25 of the Insolvency Rules 2016 does not apply to CVAs, it is often (and was in this case) incorporated into a CVA proposal by way of reference.

Whilst the factual background to the Cannon case is more complicated, it raised a jurisdictional argument which was the same in principle as that advanced by Lonsdale in the Bresco appeal. The Court of Appeal concluded that the contractual claim of a company in liquidation continues to exist following insolvency, and so may (in theory at least) be capable of being referred to adjudication.

The Court of Appeal decided that this jurisdictional argument was not open to Cannon on the facts of this particular case - it had waived its right to run the argument because the reservation of position in relation to jurisdiction was said to be "so vague" as to be ineffective on enforcement. The judgment is therefore a useful reminder on the applicable principles on waiver and general reservations in the adjudication context.

The key issue in the Cannon case was whether the first instance judge was entitled to enter summary judgment in favour of the contractor, Primus. The Court of Appeal decided that there were, on the facts of this case, "good reasons" to justify the entering of summary judgment to enforce the adjudicator's decision. Therefore, it was seemingly inevitable that the judge would refuse Cannon's application for a stay of execution.

The Court had ordered Cannon to pay £2.128 million into court as a condition of granting permission to appeal. The parties reached a settlement and asked for an order by consent that this sum be paid out to Primus' solicitors. That order having been made, no further order was required in this appeal.

Commentary

The Bresco case remains of significant importance as it deals with the interplay of issues between the construction adjudication process and the insolvency regime, and highlights the incompatibility of the two.

As a matter of general practice going forward, it will not be appropriate for a company in liquidation (facing a cross claim) to refer a money claim to adjudication. Whilst adjudicators retain jurisdiction when a company enters liquidation, the Court of Appeal confirmed that ordinarily "it is not a jurisdiction which can lead to a meaningful result".

However, in coming to that decision and dismissing Bresco's appeal, the Court of Appeal has given useful guidance on the nature of monetary claims in liquidation, and dismissed the idea that insolvency set-off, in some way, extinguishes underlying claims.

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