Compatibility of liquidation and adjudication

A recent decision in the TCC provides the latest judicial guidance on the ability of a company in liquidation to refer a dispute to adjudication.

Background

Before the Court of Appeal decision in Bresco Electrical Services Ltd (In Liquidation) v Michael Lonsdale (Electrical) Ltd; Cannon Corporate Ltd v Primus Build Ltd [2019] EWCA Civ 27 it was commonly thought that liquidation and adjudication were incompatible and mutually exclusive. At first instance it was found in Bresco that the adjudicator lacked jurisdiction to decide a dispute where the Referring Party was in liquidation although that decision, in respect of jurisdiction, was reversed on appeal. Nevertheless, an injunction to prevent the adjudication proceeding was awarded because, in the context of the Referring Party's liquidation and the fact that the adjudication would not resolve all issues between the parties, the adjudication decision would not be capable of being enforced and served no useful purpose.

General rule

Therefore, the starting point is that, in the absence of exceptional circumstances, where a company is in liquidation it will not be permitted to proceed with an adjudication on the basis that such an adjudication decision would not be enforced and therefore has no purpose. Generally speaking, the purpose of adjudication is to speed up cash flow and allow the speedy resolution of disputes. Such disputes might pertain to a small aspect of the overall dealings between two parties. Conversely, the purpose of liquidation is to resolve the final accounting position between two parties in respect of all their dealings. As a result, there is often an incompatibility between the two regimes.

Latest judicial guidance

However, the recent case of Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC) sets out clear parameters where the general rule will be departed from.

There were a number of difficulties highlighted in Bresco and the judgment in Meadowside clarifies how these difficulties might be overcome to permit an adjudication brought by a party in liquidation to proceed.

Utility

As set out above, unless the adjudication would resolve the final accounting position between the parties and the Responding Party has no other cross-claims, the adjudication decision could not be enforced and therefore has no utility. For example, if two parties only had dealings with each other in respect of one contract and the adjudication was in respect of the Final Account, the adjudication would seek to resolve the final accounting position and would therefore have utility. If two parties had liabilities under multiple contracts, an adjudication in respect of one contract would not resolve the final accounting position between the parties and so would not have utility and a Responding Party could expect to obtain an injunction preventing such an adjudication from proceeding.

Temporarily binding nature of adjudication

Adjudication is temporarily binding and could be overruled by Court. If an adjudication decision requires a Responding Party to pay a sum to the Referring Party it would therefore be unjust if that money entered the general liquidation pot because, if the Responding Party succeeded in obtaining a Court decision opposite to the adjudication decision, it would only recover a dividend in respect of the money the Court has decided the adjudicator wrongly decided the Responding Party must pay. However Meadowside confirms that this issue could be overcome if the liquidator agrees in advance to ringfence any adjudication award for a period of time (eg 6 months) in which the Responding Party may commence litigation in respect of the dispute. If litigation is commenced, the adjudication award monies must be ringfenced until judgment in the litigation.

Costs

The first costs issue is if an adjudication decision is not capable of being enforced. The Responding Party would have to defend enforcement proceedings and would not recover its costs as the Referring Party is in liquidation. Secondly, it is unjust for a Responding Party to potentially participate in adjudication, then litigation if it does not like the adjudication decision, but have no prospect of recovering its litigation costs because the Referring Party (and defendant to the litigation) is in liquidation. Meadowside suggests that costs issues can be overcome by providing some form of security for costs, such as a Bank Guarantee.

Summary

Overall, this would seem to be a sensible conclusion to make two statutory schemes as compatible with each other as possible. To the extent that a Responding Party is not prejudiced by the fact that the Referring Party is in liquidation it seems fair that a Referring Party in liquidation should not be deprived of the statutory right to adjudicate.

Where an adjudication will resolve the final accounting position between two parties (and therefore aligns with the liquidation process); the Responding Party does not lose the ability to litigate and recover the sums paid pursuant to an adjudication decision; and the Responding Party will not be prevented from recovering its court costs as a result of the Referring Party's liquidation, it seems perfectly just that the Referring Party should be entitled to adjudicate and enforce the adjudicator's decision.

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