This much-anticipated appeal raised important questions about the compatibility of adjudication with the operation of insolvency set-off. The Supreme Court allowed the appeal, deciding that a liquidator was entitled to refer an insolvent company’s claims to adjudication where there were cross-claims between the parties. Your right under the Construction Act to adjudicate “at any time” therefore remains unfettered.
The rules on insolvency set-off provide for the mandatory and automatic setting-off of cross-claims between a company in liquidation and each of its creditors arising out of their mutual dealings. The application of these rules therefore gives rise to a single net balance payable either to or from the company.
Bresco’s liquidator commenced an adjudication against Lonsdale who issued proceedings in the TCC to stop the adjudication by way of an injunction. Lonsdale’s key argument was that where the parties to a construction contract are in dispute, and one party is insolvent, there can be no adjudication of those disputes where there are cross-claims between the parties.
Lonsdale’s arguments were that (1) the adjudicator would have no jurisdiction to hear the dispute under the construction contract because insolvency set-off replaces the cross-claims (with one single claim for the net balance in the liquidation) i.e. adjudication and insolvency set-off were incompatible; and (2) any adjudication would generate an unenforceable award which would therefore be futile.
The TCC agreed with Lonsdale and granted the injunction to restrain the pursuit of the adjudication for Bresco. The Court of Appeal upheld the injunction by agreeing that adjudication in the context of insolvency set-off was an “exercise in futility” as it would not lead to an enforceable award and the two regimes were incompatible (although the Court of Appeal held that the adjudicator did have jurisdiction to consider the claim).
However, the Supreme Court unanimously disagreed with both arguments and set aside Lonsdale’s injunction. Key learning points for those of us working with construction contracts include the following:
- There was still a claim under the construction contract; the existence of insolvency set-off does not extinguish it. Adjudication on the application of the liquidator (as was the case here) was not incompatible with the insolvency set-off process.
- An adjudication process isn’t futile just because an adjudication award cannot be enforced immediately. There are several possible outcomes and questions about enforcement of an adjudicator’s decision in favour of an insolvent company can be resolved during enforcement proceedings.
- The right to adjudication under a construction contract is a statutory one and a contractual one. The circumstances in which a court would restrain a contractual right (let alone a statutory right) by injunction would need to be exceptional.
All good news for those seeking to use adjudication to recover sums owed to insolvent companies (even where there are cross claims). Remember though that the court won’t necessarily enforce a decision in the insolvent company’s favour if there remains a real risk that the summary enforcement of an adjudication decision will deprive a respondent of its right to the company’s claim as security for its cross-claim.
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