Adjudication Matters – January 2020

24th January 2020

New possibilities for insolvency adjudication? The TCC considers the “exceptional circumstances” in which a company in liquidation can successfully enforce an Adjudicator’s Decision

Introduction

In the recent judgment of Meadowside Building Developments Ltd (In Liquidation) v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC), the Technology and Construction Court (“TCC”) provided welcome clarity as to the circumstances in which a company in liquidation may be permitted to enforce an Adjudicator’s decision.

Facts

Meadowside Building Development Ltd (“Meadowside”) was appointed by 12-18 Hill Street Management Company Limited (“HSMC”) in September 2014 to carry out internal and external repair works pursuant to a JCT Minor Works Building Contract 2011 (the “Contract”). Meadowside carried out the works and practical completion was certified in March 2015.

Shortly afterwards in July 2015, Meadowside was placed into voluntary liquidation.

In September 2017, Meadowside’s liquidators appointed Pythagoras Capital Limited (“Pythagoras”) as agent to take over the pursuit of the debt that the liquidators claimed was due to Meadowside. Pythagoras sought to recover sums from HSMC by way of adjudication.

The Adjudicator decided that a sum of circa £32,000 (in respect of the award and the Adjudicator’s fees and expenses) was payable by HSMC.

HSMC did not pay and an application for summary judgment was made by Pythagoras to enforce the Adjudicator’s decision on behalf of Meadowside.

Summary – Bresco v Lonsdale

At the time of the adjudication in February 2018, HSMC did not substantively take part. It contended that the Adjudicator lacked jurisdiction and the decision would be unenforceable, on the basis that Meadowside was a company in liquidation.

This general rule that a company in liquidation cannot enforce an Adjudicator’s decision was overturned by the Court of Appeal in Bresco v Lonsdale [2019] EWCA Civ 27 in January 2019.

Since January 2019 it has not been clear whether there are any circumstances in which a company in insolvent liquidation can achieve enforcement of an Adjudicator’s decision.

“Exceptional circumstances”

At paragraph 87 of the judgment, Mr Adam Constable QC considered the effect of Bresco v Lonsdale and set out the “exceptional circumstances” which may allow a company in liquidation to enforce an Adjudicator’s decision:

1. The adjudication determines the final net position between the parties under the relevant Contract
2. Satisfactory security is provided in respect of both:
   • Any sum awarded in the adjudication, so that it is repayable should the responding party successfully overturn the decision in litigation or arbitration; and
   • Any adverse costs order made against the company in liquidation in favour of the responding party for:
     • Any unsuccessful application to enforce the adjudication decision; and
     • Any subsequent litigation/arbitration, in which the responding party is seeking to overturn the adjudication decision;

3. Whether the form, duration and amount of the security is satisfactory is a question on the facts. Mr Adam Constable QC commented that a combination of the following solutions might be appropriate:
   • the liquidator’s undertaking to the court to ring-fence the sum enforced (so that it is not available for distribution);
   • a third party providing a guarantee or a bond;
   • ATE insurance.

4. Any agreement to provide funding or security cannot amount to an abuse of process.

Decision

Whilst there was no dispute that the adjudication was, in effect, dealing with final determination of the parties’ mutual dealings and settlement of the “net balance” following the assessment of the final account and that Pythagoras had offered security by way of a guarantee in respect of repayment of the adjudication award and any adverse costs order, the court rejected the application for summary judgment.

Ultimately, it was Pythagoras’ funding agreement with the liquidators (or lack of it) that caused Meadowside’s application for summary judgment to fail.

Despite numerous requests by HSMC, Pythagoras’ funding agreement with the liquidator was never disclosed. It became apparent that Pythagoras would be paid a percentage of the sums awarded and the funding agreement was of a type is regulated by the Damages Based Agreements Regulations (2013) (“DBAR 2013”), which permits a maximum recovery by the funder of 50% of sums awarded.

In light of Pythagoras’ refusal to disclose the nature of the funding agreement (and in particular to disclose the percentage of any proceeds it would be paid), there was insufficient evidence to decide whether or not the agreement was outside the permitted agreements under the DBAR 2013.

In the circumstances, Mr Adam Constable QC declined to grant summary judgment.

Practical Implications

This is the first judgment that has been handed down by an English court on the application of the Bresco v Lonsdale decision and provides useful guidance for what might constitute “exceptional circumstances” to enable a company in liquidation to successfully enforce an Adjudicator’s decision.

In particular, this decision clarifies that the DBAR 2013 is not just limited to funding agreements for court proceedings, and liquidators/creditors should be mindful to ensure that even in respect of adjudication proceedings, their funding agreements with their respective agents are compliant with the relevant regulations and do not exceed the maximum 50% cap on the percentage of sums awarded.