REUTERS | Kai Pfaffenbach

Meadowside: one small step for companies in liquidation but a giant leap forward for adjudication enforcement

Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd provides another development in the law of adjudication (and adjudication enforcement) that places liquidators (acting on behalf of a company in liquidation) closer to being able to enforce adjudicators’ decisions.

How did we arrive here?

I won’t run through the judgment in detail but, in the Court of Appeal in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd, Coulson LJ advanced the cause of liquidators by confirming that parties to a construction contract did not lose the right to refer a dispute to adjudication, even after insolvency. This meant that the adjudicator’s jurisdiction was not supplanted by the statutory obligation under rule 14.25 of the Insolvency Rules 2016 for there to be an assessment of the mutual dealings between the parties.

If the above can be regarded as two steps forward, the one step back came in the form of the part of that judgment where Coulson LJ decided that, in the majority of cases, the adjudication would lack utility. Focusing on smash and grab decisions (which demonstrate a sum calculated at a particular point in time, and which may be unrelated to the sums actually owing as between the parties under rule 14.25), Coulson LJ explained that he could not see that an adjudicator’s decision would assist the parties in understanding the sums owing between them under that rule. To that extent, he saw that there was an incompatibility between the insolvency and adjudication regimes.

He also saw a lack of utility in the fact that, even if a defendant might technically retain the right to fight an enforcement and, even, to pursue litigation to overturn an erroneous adjudicator’s decision, the defendant would be unlikely to get the costs spent in that endeavour back from the party in liquidation.

Now, Adam Constable QC has decided that the liquidator should be allowed to advance claims again, on the basis of a judgment that is both pragmatic but also lays down principles that bridge the gap between adjudication and liquidation. On this point, the judge found that:

“I am also persuaded that the Court should as a matter of public policy be slow to hinder the liquidator’s efforts to ascertain and recover debts in accordance with its statutory obligations.”

Meadowside v Hill Street

The judgment recognises that the TCC’s understandable desire to protect the efficiency of the adjudication procedure was also obstructive of another important statutory right, or rather an obligation, that is to say, the liquidator’s obligation to take steps to recover all debts owing to the company in liquidation.

In practice, debtors of insolvent companies are unlikely to making paying those debts their top priority, preferring instead to focus on paying creditors with whom they hope to maintain a working relationship. It might also be that, when the insolvency hits, they start to scrutinise the work provided by a newly insolvent company to a degree that they may not have done were the companies to be working together again. Therefore, such debtors will often wish to seek to avoid making any payment to the insolvent company, whether for genuine or slightly more cynical reasons.

Have you got the right “type” of adjudication?

Having carefully considered the judgment in Bresco, the judge found that the exception to the general rule enunciated by Coulson LJ will first be met (aside from the issues of security discussed below) where the adjudication brought or to be brought determines the final net position between the parties under the relevant contract.

The contract before the court in this particular case was the JCT Minor Works Building Contract, 2011 Edition, which prescribes a strict final accounting procedure that the parties are obliged to follow when the contractor enters insolvency. The initiation of the procedure is in the gift of the employer and relevant clauses provide that:

Clause 6.7.3 … following the completion of the Works and the making good of defects in them (or of instructions otherwise, as referred to in clause 2.10), an account of the following shall within 3 months thereafter be set out in a certificate issued by the Architect/Contract Administrator or a statement prepared by the Employer:

.1 the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 6.7.1 and, where applicable, clause, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise;

.2 the amount of payments made to the Contractor; and

.3 the total amount which would have been payable for the Works in accordance with this Contract.

The judge confirmed (at paragraph 87(1) of the judgment) that:

“An adjudication, by definition, will not be able to determine the net position between parties with dealings on more than one contract. The extent to which the adjudication is not capable of dealing with the entirety of the mutual dealings between the parties (and as such will not mirror the Rule 14.25 process between the parties) is to be taken account of in all the circumstances when looking at the utility of the adjudication and the discretion either to injunct, or, following adjudication, to enforce.”

Therefore, the judge was satisfied that the adjudication before the court got over the first test because it was a decision concerning the final account, where there were no other extraneous dealings between the parties, and where the adjudicator had done his best to carry out a substantive final account calculation. Therefore, it bore, on the basis of the evidence available, a sufficient resemblance to the “net balance owing” under rule 14.25.

It would be open, on a case-by-case basis, for the parties to argue that a decision arising in respect of an interim payment would, nevertheless, meet that first test. However, the judge understandably left the question open as to whether there might be utility in such a decision on the facts of a particular case.

Liquidators’ use of third parties, champerty and security

As was recognised by Coulson LJ in Bresco, liquidators have limited resources and so will often seek assistance from third parties who will fund the pursuit of a debt, whether through litigation or otherwise. Remuneration is then taken from any damages received in the litigation, usually calculated on the basis of a percentage of those damages.

In this particular case, the third party was Pythagoras Capital Ltd. The judge found that there was nothing in principle that prevented a liquidator from relying on third parties like Pythagoras. Indeed, there is a wealth of authority that recognises the need for and efficacy of such arrangements in order to ensure that the liquidator can, as best they can, meet their statutory obligations.

What the involvement of Pythagoras enabled the liquidator to do was to offer a security that satisfied all of the “wider concerns” about the defendant’s time and money being wasted, or being unable to recoup the adjudication sum if it was paid over to the liquidated company’s estate and then that decision was later reversed. The claimant’s proposal in Meadowside was that the adjudication sum should be protected by being ring-fenced until the defendant came to a view about whether it was going to take any proceedings in order to overturn the adjudicator’s decision (by staying enforcement for an appropriate period). Concerns about the defendant’s exposure to costs could similarly be met by a substantial security in the form of a bank-backed bond or guarantee, or a suitable ATE insurance policy.

Despite the judge’s willingness to accept the theoretical enforceability of the type of adjudicator’s decision presented in the application before him (it was not a smash and grab adjudication, but was one dealing with a final account, which was akin to a careful assessment under rule 14.25, (or as close as one may get)), the practical point that got in the claimant’s way was the fact that the agreement underlying Pythagoras’appointment was not disclosed. I touch on (below) the reasons of principle why the courts might want to support such an approach. However, that fact led to the judge deciding that he could not enter summary judgment.

On that point, the judge found squarely that Pythagoras had been acting under a damages-based agreement within the meaning of the Damages-based Agreements Regulations 2013. Under those rules, if the agreement was non-compliant, it would be unenforceable and, as a result, champertous in the eyes of the law.

The judge accepted the argument that the fact that a funding arrangement was champertous did not necessarily mean that a claim could not be pursued by a champertously-funded party. Ultimately, unenforceability of the agreement was a matter between the parties to the agreement (that is, between Pythagoras and the liquidator). However, following the authorities cited to him concerning litigation outside of adjudication enforcement, the judge would not allow an adjudicator’s decision to be enforced insofar as that amounted to an abuse of process – namely, trafficking in litigation.

Although it is perhaps understandable why the judge did not feel he could allow enforcement in circumstances where he had not seen the terms of Pythagoras’s appointment, given  the developing nature of this line of cases, the TCC may take some time to accustom itself to enforcement hearings being funded (and indeed underwritten) by third parties.

However, one legitimate concern might be that the inevitable need to produce the third party’s terms of appointment could give grist to the ever-turning mill of the archetypal “disgruntled defendant”. The fact that the third party would invariably need to provide its terms opens the door to the equivalent of the “disgruntled defendant” pawing over an adjudicator’s decision to attempt to find (unmeritorious) defences to enforcement. There is some support for the court to take that view insofar as the general rule in the insolvency court is that liquidators will be trusted to make appropriate decisions and that:

“…the court should not generally interfere with a commercial or administrative decision of liquidators after the event, unless it is a decision that was taken in bad faith or was a decision that no reasonable liquidator could have taken.”

(Allen and another, Re Longmeade Ltd (in liquidation)).

Therefore, it would be for the defendant, in the adjudication or enforcement proceedings, to show that there was some element of bad faith or Wednesbury unreasonableness, in step with the fact that it is for the defendant to satisfy the court that there are grounds for a stay on the grounds of insolvency in Wimbledon v Vago.

We will have to see what the courts make of this issue in future. In particular, it will be interesting to see how the general principles laid down in this case intersect with the right of a responding party in an adjudication brought by an insolvent party to apply to the court for an injunction, a right that was acknowledged in Bresco. Will the battle ground be the injunction, or enforcement? That is likely to depend on many factors, including the value of the adjudication.

Hopefully, all good material for a future blog…

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