Liquidation and adjudication

Adjudication is a relatively quick and cheap way of determining a construction claim. It is temporarily binding, meaning that with limited exceptions, it will be enforced by the courts unless and until it is overturned in subsequent litigation.  

A Liquidator will often have insufficient assets to fund litigation to pursue claims, especially if ordered to provide security for costs.  Faced with this problem, the Liquidator of Bresco Electrical Services Limited started an adjudication against M J Lonsdale.  Bresco had already been in liquidation for three years by the time of the adjudication and Lonsdale had lodged its own claim against Bresco.  Lonsdale successfully obtained an injunction to restrain the Liquidator from pursuing the adjudication.  Bresco appealed.

Lord Justice Coulson in the Court of Appeal considered the two grounds on which the injunction had been granted:

• The effect of the mandatory rules of insolvency set-off deprived the Adjudicator of jurisdiction to decide the claim
• The adjudication would be an ‘exercise in futility’ because the court would never order enforcement of the Adjudicator’s award

Having considered the issues in length, the Court decided that the Adjudicator did have jurisdiction.  The set-off rules do not prevent a company in liquidation from bringing litigation or arbitration and there was no reason why adjudication should be treated differently.  However, it remained the case that the adjudication would be pointless.  The existence of Lonsdale’s cross claim would prevent the court ordering summary judgment to enforce the Adjudicator’s award.  Even if that were not the case, the fact of the liquidation meant that the court would order a stay against enforcement.  Coulson LJ explained that there were a number of policy reasons for preventing pointless adjudications, including the need to avoid unnecessary costs for all parties and to protect the resources of the court for other litigants.

As the appeal was partially successful, the decision leaves open the possibility of Liquidators bringing an adjudication that would not be an exercise in futility.  One example might be a claim for a non-monetary award.

At the same time, the Court heard the appeal in Cannon Corporate v Primus Build, which concerned a company in CVA.  The Court confirmed that the CVA did not deprive an adjudicator of jurisdiction.  In contrast to Lonsdale, the adjudication was allowed to proceed.  Primus was not in liquidation and, if the CVA succeeded, would never enter liquidation.  Accordingly, it was likely that the adjudication award would be capable of enforcement.  On the facts of the claim, Cannon was the cause of Primus’ financial difficulties, meaning that the Court was unlikely to order a stay.

Whilst the two appeals give very helpful guidance, cases will still turn on their own facts.  Before commencing an adjudication, a company in any form of insolvency process must ask the question – is the court likely to enforce the adjudication award?