Court of Appeal’s decision in Bresco -V- Lonsdale [2019] overturned

As anyone familiar with construction law will know, it is a fundamental principle that a party with a dispute arising under a qualifying construction contract may refer that dispute to adjudication at any time.

However, in the 2019 decision in Bresco Electrical Services Limited (in liquidation) -v- Michael J Lonsdale (Electrical) Limited the Court of Appeal decided that the right to adjudicate a dispute at any time was not available to an insolvent company because there would be no utility in an adjudication that would almost certainly result in an unenforceable decision (since allowing an adjudicator’s decision to be enforced would cut across the Insolvency (England and Wales) Rules 2016 requirement that an account be taken of parties’ mutual dealings).  Thus, the Court of Appeal concluded, an injunction would almost certainly be granted against any insolvent company seeking to exercise a right to adjudicate a dispute.

The Supreme Court has now reversed that decision (Bresco Electrical Services Limited (in liquidation) -v- Michael J Lonsdale (Electrical) Limited [2020] UKSC 25).   It concluded that an adjudicator does have jurisdiction to consider a dispute referred to it by an insolvent company, notwithstanding insolvency mutual dealings rules; and that an adjudication by an insolvent company is not an exercise in futility.  Any questions about enforcement of an adjudicator’s decision in favour of an insolvent company can be resolved during enforcement proceedings and the fact that a Court might decline to enforce an adjudicator’s decision in such circumstances does not mean that an adjudication ought not to be allowed to go ahead.

On the question of enforcement of an adjudicator’s decision in favour of an insolvent company, the Supreme Court noted that a liquidator might offer undertakings, such as to ring-fence any enforcement proceeds, as a means of persuading a Court to allow enforcement.  Such options have already been considered in two recent cases of Meadowside Building Developments Limited -v- 12-18 Hill Street Management Co Limited and Balfour Beatty Civil Engineering Limited -v- Astec Projects Limited.  Other grounds on which enforcement might be permitted is if the liquidator has offered satisfactory security in respect of the sum awarded and any future adverse costs award, such as through the provision of a third party bond or after the event costs insurance.

The Supreme Court decision will be a particularly welcome one for insolvency practitioners, who rely for the effective performance of their duties on the ability to recover debts owed to insolvent companies quickly and cost-effectively, using any available means.  Adjudication will now again form a vital tool in an insolvency practitioner’s toolbox to ensure that she or he is able to realise assets of insolvent construction companies and distribute those assets to qualifying creditors.

If you would like to discuss this development further, or insolvency or construction issues generally, please contact our Head of Construction, Ian Seeley; or our Head of Insolvency, Scott Porter.