The recent cases of Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd and Cannon Corporate Ltd v Primus Build Ltd [2019] EWCA Civ 27 (heard together) provide useful guidance as to adjudication by insolvent companies in circumstances where the opposing party has a genuine monetary cross-claim.
In Bresco, Lonsdale engaged Bresco to provide electrical installation services. Bresco ceased provision of services and each party alleged wrongful termination. Bresco entered into liquidation and some 3 years later referred the dispute to adjudication. Lonsdale challenged the adjudicator's jurisdiction and applied for an injunction restraining the adjudication on the basis that the parties' financial relationship was governed by the Insolvency Rules and the set-off provisions in particular. The TCC held that the adjudicator did not have jurisdiction to determine the dispute on the basis that the cause of action ceased to exist on liquidation and had been replaced by a net-balance claim under the Insolvency Rules. The Court of Appeal disagreed with the TCC's reasoning, but granted the injunction: the underlying causes of action persist and the adjudicator has jurisdiction; however, in these circumstances, any such adjudication would be futile.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."
In Cannon, Cannon engaged Primus to design and build a hotel. Cannon terminated Primus' employment. Primus entered into a Company Voluntary Arrangement (CVA). Primus commenced a series of adjudications and Cannon was found to have wrongfully terminated Primus' employment, as a result causing Primus' financial difficulties. Cannon was ordered to pay Primus damages for wrongful termination accordingly. Cannon sought to resist enforcement of the adjudication decision awarding damages on the basis that Primus may not be able to repay the sums because it was in a CVA, raising arguments similar to those in Bresco predicated on insolvency and the Insolvency Rules. The TCC awarded summary judgment on the adjudication decision and declined to grant a stay of execution of enforcement. The parties settled, however the Court of Appeal agreed with the TCC.
The important distinction with Bresco, and between liquidation and a CVA, was that the aim of a CVA is to allow the company to trade out of its financial difficulties; the company is intended to survive the insolvency procedure. In these circumstances, adjudication (being a quick and cost-neutral process) may be a useful tool to permit the CVA to work. Indeed, Coulson LJ stated that "courts should be wary of reaching any conclusions which prevent the company from endeavouring to use adjudication to trade out of its difficulties. On one view, that is what adjudication is there for: to provide a quick and cheap method of improving cashflow."
As the law stands, a company in liquidation has the right to refer a dispute to adjudication at any time, and an adjudicator has jurisdiction to decide any such dispute. However, in circumstances where the responding party has a genuine cross-claim, the Court is likely to grant an injunction to restrain any such adjudication. A company in a CVA has a right to refer a dispute to adjudication at any time and an adjudicator has jurisdiction to decide any such dispute. Save in exceptional circumstances, the Court is unlikely to grant an injunction to restrain any such adjudication and whether or not a Court would grant a stay of execution of enforcement of any such adjudication decision is to be determined in accordance with established principles.
However, it is important to note that the Court of Appeal's judgment is of application to circumstances in which it is the insolvent company referring a dispute to adjudication and the responding party has a genuine, monetary, cross-claim. The judgment does not address the circumstances in which it is the creditor who seeks to bring adjudication proceedings against the insolvent company, where a liquidator seeks to pursue a non-monetary claim or insolvency processes other than liquidation and CVA (however, Coulson LJ's comments will be of application to insolvency processes in which the intention is for the company to survive the insolvency process).