A new ruling clarifies when adjudication by a company in liquidation can be enforced, reports Stuart Thwaites
Earlier this year, the Court of Appeal held that although an adjudicator has jurisdiction to determine an adjudication brought by a company in insolvent liquidation, this would be an “exercise in futility”. That was in Bresco Electrical Services Ltd vs Michael J Lonsdale (Electrical) Ltd. As a result, the court would normally grant an injunction to stop the adjudication. However, the court did say that there could be “exceptional circumstances” to that general rule, such as to allow adjudication and enforcement.
In Meadowside Building Developments Ltd (In Liquidation) vs 12-18 Hill Street Management Company Ltd  EWHC 2651 (TCC), the court considered and explained the nature of those exceptional circumstances.
The case involved a claim by the contractor, Meadowside, against its employer, Hill Street Management Company (HSMC) for unpaid money. The contract was a JCT Minor Works Building Contract 2011.
Prior to practical completion disputes had arisen over interim payments, delay, variations and defects.
After practical completion, but before resolution of the final account, Meadowside was placed into voluntary winding-up. Liquidators were appointed.
Liquidation triggered the taking of the final account under the contract, on the basis that no further money became due until the taking of the account after making good of defects. However, agreement could not be reached on that account. Meadowside believed money was owed by HSMC.
The liquidators subsequently appointed Pythagoras Capital Ltd to pursue the debt. Pythagoras commenced an adjudication against HSMC on behalf of Meadowside.
HSMC did not participate in the adjudication, beyond saying that Meadowside being in liquidation meant the adjudicator did not have jurisdiction.
The adjudicator continued and determined that a net balance of £26,629.63 was due to Meadowside. The adjudication was an attempt to arrive at a net balance of the sums due between the parties. HSMC did not pay.
Following the Court of Appeal’s ruling in the Bresco case, Meadowside commenced enforcement proceedings.
Pythagoras said that if HSMC paid the adjudication award, litigated against Meadowside to show the adjudicator’s decision was wrong and succeeded, then Pythagoras would meet Meadowside’s liability in the amount of the adjudication award plus costs. Pythagoras offered security in the form of a guarantee from itself and/or ringfencing the amount paid in respect of the adjudicator’s award and potentially after-the-event (ATE) insurance to cover any adverse costs order in that subsequent litigation.
As a result of these proposals, Meadowside argued the court should enforce the adjudicator’s decision under the exception allowed in Bresco.
The judge in the Meadowside case confirmed that Bresco did provide for an exception to the general position that normally the courts would issue an injunction to prevent an adjudication brought by a company in liquidation or refuse to enforce such an award from an adjudicator.
The judge found that there is “likely to be an exception” to the above general position where:
- The adjudication determines the net position between the parties. This appears to exclude “smash and grab” adjudications and disputes under more than one contract.
- Satisfactory security is provided, both for the amount enforced under the adjudicator’s award and for any adverse costs order that follows. This could include a combination of an undertaking to ringfence the adjudication money, a third-party guarantee or bond, or ATE insurance.
- Any agreement to provide funding or security, in order to avoid the normal position in Bresco, “cannot amount to an abuse of process”.
Applying these factors, the judge refused to grant Meadowside summary judgment, mainly in relation to his finding that the funding agreement between Pythagoras and Meadowside was subject to the Damages-Based Agreement Regulations 2013. Those provided that an agreement under which more than 50% of the sum recovered by Meadowside should be paid to Pythagoras was unenforceable.
Pythagoras had refused to disclose its funding agreement with Meadowside, despite being requested to do so. The judge found the “obvious inference” was that Pythagoras’ funding agreement was for more than the permitted 50% of recovered money.
HSMC had also argued Meadowside’s arrangement with Pythagoras was an “abuse of process”.
The judge found he could not properly deal with that abuse of process issue in the context of a summary judgment application, again largely due to Pythagoras’ refusal to provide its funding agreement with Meadowside.
This judgment is important in that it provides guidance on the “exceptional circumstances” referred to in Bresco. It will be closely studied by both liquidators and companies such as Pythagoras. Clearly, changes will need to be made to persuade a court to enforce an adjudicator’s decision brought by a company in liquidation, such as disclosing the details of any funding arrangement.
Stuart Thwaites is legal director of Wright Hassall