Can a company in liquidation adjudicate? Balfour Beatty Civil Engineering Limited & Anor v Astec Projects Limited, or what happens when an irresistible force meets an immoveable object?
“Art is born when the temporary touched the eternal; the shock of beauty is when the irresistible force hits the immoveable post” G K Chesterton
Adjudication and insolvency are again exciting construction lawyers and distracting us from the uncertainties surrounding the COVID-19 emergency with the prospect of a real legal decision to get out teeth into instead of opining on the meaning of force majeure.
Last week the Supreme Court heard the appeal in Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited, which was heard by video link and live streamed. It was intriguing to log in and hear some of the legal arguments.
And while we are waiting for that decision, Waksman J in Balfour Beatty Civil Engineering & Anor v Astec Projects Limited [2020] EWHC 796 (TCC) elaborated upon the current guidance on the vexed question of whether companies in liquidation can pursue claims via adjudication, and if so, under what circumstances.
Construction lawyers are eagerly awaiting the Supreme Court’s decision, which we are all hoping will give us firm guidelines on whether or not a company in liquidation can adjudicate.
Background
Unfortunately, one of the inevitable consequences of the current lockdown will be significant numbers of insolvencies in all commercial spheres, including construction. The government is putting place steps to slow down and pause insolvency proceedings and is making large sums of money available via its various loan schemes, but the sad truth is that many viable businesses are likely to succumb to the economic crisis that is developing as a consequence of the lockdown. Many of those companies are likely to have good claims for money owed to them, potentially very large sums in some cases, and pursuing them by adjudication would, at first glance, appear to offer many advantages to liquidators: adjudication is quick, relatively cheap, and decisions are robustly, and swiftly, enforced by the courts.
However, the problem is that adjudication is designed to be a rough and ready interim remedy facilitating cashflow, not a final conclusion, and the parties have the ability to reopen the dispute via litigation or arbitration for a definitive decision. In addition, an adjudication can only look at one of the issues between the parties and may not, for example, take account of any cross claims, or claims under different contracts. The adjudication regime therefore clashes with the insolvency regime, where it is the duty of a liquidator to take an account of what is due to and from the insolvent company and its creditors in respect of their mutual dealings and set off sums due from one to the other. A definitive account cannot, in the ordinary course of things, be taken via adjudication, because it is only a temporary remedy and may only deal with some of the issues between the parties.
The two statutory regimes of adjudication and insolvency are fundamentally incompatible, and the courts are attempting to define when, and in what circumstances, they can work together. It is not an easy task.
Bresco in the Court of Appeal
In Bresco v Lonsdale [2019] EWCA Civ 27, the Court of Appeal decided that the right to adjudicate is not lost automatically when a company goes into liquidation, and, in certain exceptional circumstances, it might be possible for companies in liquidation to pursue adjudications.
As Lord Justice Coulson put it
"For all these reasons, I am in no doubt that the adjudication process on the one hand, and the insolvency regime on the other, are incompatible. It would only be in exceptional circumstances that a company in insolvent liquidation (and facing a cross-claim) could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution. Thus, in the ordinary case, even though the adjudicator may technically have the necessary jurisdiction, it is not a jurisdiction which can lead to a meaningful result.”
Meadowside
The exceptional circumstances referred to by the Court of Appeal were then explored in Meadowside v 12-18 Hill Street Management [2019] EWHC 2651, where Adam Constable QC explored what the correct balance should be between the rights of the parties under the Insolvency Rules and the rights of parties to adjudicate. In a very thoughtful judgement, he set out a series of guidelines to be followed for a company in liquidation, exceptionally, to be allowed to pursue an adjudication. Those guidelines are
- The adjudication must determine the final net position between the parties. He said that, by definition, an adjudication would not be able to determine the net position where more than one contract was in issue.
- Satisfactory security must be provided both in respect of any sum awarded, so that it is repayable should the decision be overturned, and in respect of any adverse order for costs made against the company in liquidation in proceedings relating to the adjudication award.
- The form of security will be dependent upon the facts.
- Any agreement providing funding or security to the company in liquidation must not be an abuse of process.
The law on when funding of legal claims is an abuse of process, or “champerty”, is pretty complicated and there is not room to look at it here. Suffice it to say that the funding of legal claims by third parties is surrounded by detailed rules and regulations.
Balfour Beatty v Astec
In Balfour Beatty Civil Engineering & Anor v Astec Projects Limited [2020] EWHC 796 (TCC), Waksman J considered the guidelines set out in the Meadowside case and, in a short and decisive judgement, adapted them to suit the particular circumstances of the case to allow Astec, the insolvent party, to adjudicate, on strictly defined terms.
Here, there were 3 contracts in issue, which related to construction works around Blackfriars Station, and Astec, which was in liquidation, had substantial claims in relation to each amounting in total to around £4million. Balfour Beatty had cross claims, worth around £1million. So significant sums were at stake here.
At first glance, because of the number of contracts and competing claims, this would seem not to be a case where an exception to the general rule would be granted. How can an adjudication determine the net position between the parties in these circumstances? An adjudicator is only permitted to decide one dispute at a time, which be definition must involve a single contract.
An added complication was that Astec had gone into liquidation in 2014, but had recently obtained third party funding to pursue its claims from a company called Pythagoras. Interestingly, Pythagoras has also funded the Bresco appeal and the Meadowside case.
Third party litigation funders such as Pythagoras are likely to become more prominent in a post coronavirus landscape as construction companies lack the funds to pursue claims and the number of insolvencies increases.
Astec had started one adjudication in respect of one of the contracts, and Balfour Beatty applied for an injunction restraining Astec from proceeding with that adjudication and from pursuing adjudications in relation to the other 2 contracts.
Unusually, the parties both conceded and the court agreed that resolution of the claims under the 3 contracts would allow the entirety of the disputes between the parties to be resolved.
Balfour Beatty argued that, because there were 3 contracts, an adjudication could not, by definition, deal with the entirety of the disputes between the parties and so Astec should not be permitted to proceed with its adjudication.
The judge undertook a detailed analysis of the situation. Here, he felt that the fact that more than 1 adjudication would have to take place was not, in itself, a bar to the adjudications being allowed to take place. The key issue was that the adjudications, if they proceeded, would allow all of the dealings between the parties to be resolved. The liquidator, or a judge if summary judgement was applied for, could then calculate the net balance due between the parties once the adjudications took place. This exercise would allow the parties to comply with the requirements of the Insolvency Rules.
The judge also considered carefully the offers made by Astec to provide security for Balfour Beatty’s costs.
Taking all these factors into account, Waksman J permitted the adjudication to proceed on strict terms.
- Astec must commence the remaining 2 adjudications within 21 days.
- The parties must ensure that the same adjudicator is appointed to deal with all 3 adjudications.
- The parties may agree that the adjudicator has the jurisdiction to deal with all 3 disputes together if they wish.
- The time limits for the adjudications are extended to 84 days in total and further extensions may be sought and granted.
- Following the decisions, Balfour Beatty has 6 months within which to bring legal proceedings to seek a different result.
- If Balfour Beatty does not commence legal proceedings within 6 months, Astec may take steps to enforce the adjudication awards.
- Astec will provide security for costs in the adjudications of £750,000.
- Balfour Beatty may enforce the balance of any adjudication awards in its favour.
The judge also looked at Astec’s After the Event Insurance and amended its terms slightly to make them clearer.
Conclusions
The case shows the TCC continuing in its usual robust support of adjudication as a method of dispute resolution and edging towards a framework for reconciling the conflict inherent in the adjudication and insolvency regimes, and reconciling the irresistible force with the immoveable object. It also reflects the TCC’s practical approach to the legal issues that come before it.
While the conditions set out by the judge were specific to the case in issue, the guidance on situations where adjudications will be allowed to proceed is extremely helpful. The key issue will be whether the entirety of the matters in issue can be dealt with, and the number of adjudications needed to decide this will be of secondary importance, provided that the adjudications can be managed to produce a comprehensive result.
In these circumstances, adjudications will not be enforceable immediately and the court will build in a process to allow the parties to pursue their general rights to reopen disputes if they wish to do so.
The insolvent party will have to provide proper security for the costs of each of its claims so that the solvent party is protected.
Subject to what the Supreme Court is going to decide, we can expect further cases involving companies in liquidation, as long as the necessary third party funding is made available. As in the Astec case, significant sums of money may be at stake making the investment of third party funders worthwhile.
We shall report on the Bresco decision as soon as it is handed down by the Supreme Court.