Adjudication – Insolvency – Summary judgment – Liquidators of claimant insolvent company applying for summary judgment for enforcement of adjudication award – Agent appointed by liquidators guaranteeing liability of claimant in any successful cross-claim by defendant – Whether case exception to general rule that adjudication in favour of party in liquidation unenforceable – Whether funding arrangements for agent champertous – Application dismissed
The claimant was appointed by the defendant to carry out repair works under a JCT Minor Works Building Contract 2011. Practical completion was certified and the contract administrator issued a certificate for payment valuing the works at £162,531.07. Soon after, the claimant was placed into voluntary winding-up and liquidators were appointed.
The contract required a final account to be taken of the sums due between the parties. Under the Insolvency Rules 1986, an account had to be taken of all the parties’ claims and cross-claims. The claimant argued that there were sums owing from the defendant but the defendant considered that it was a creditor in the claimant’s insolvency.
The liquidators engaged a company (P Ltd) to take over the claim. The claimant referred its claim to adjudication where it was represented by P Ltd. The defendant did not substantively take part in the adjudication, contending that the adjudicator lacked jurisdiction because of the claimant’s insolvency. The adjudicator gave a decision finding a net balance due to the claimant of £32,629.63.
Before enforcement proceedings were commenced, the High Court granted an injunction in the case of Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27 restraining the claimant from adjudicating, on the basis that an adjudicator lacked jurisdiction where the referring party was in insolvent liquidation: [2018] EWHC 2043 (TCC). The Court of Appeal overturned that decision on the question of jurisdiction: [2019] EWCA Civ 27; [2019] PLSCS 20.
In response to concerns raised by the Court of Appeal in Bresco, that any recovery would be rendered difficult or impossible by the liquidation, P Ltd proposed that if the defendant paid the adjudication award but subsequently obtained a ruling in its favour that the award was incorrect, it would guarantee to meet the claimant’s liability in those proceedings. The claimant applied for summary judgment of the adjudicator’s award contending that the case was an exception to the normal rule that an adjudication in favour of a party in liquidation was unenforceable. The defendant argued that the funding arrangement with P Ltd were champertous and unenforceable.
Held: The application was dismissed.
(1) In Bresco, the Court of Appeal had distinguished jurisdiction from utility and concluded that, although the adjudicator had jurisdiction, an injunction was appropriate to prevent the adjudication from proceeding because its enforcement would be futile in the context of the insolvent liquidation. However, there might be exceptional circumstances where a company in insolvent liquidation and facing a cross-claim could refer a claim to adjudication and obtain summary judgment. It was the fundamental thrust of Bresco, which rippled through the wider considerations, that a decision would not be enforced because, where there was a cross-claim, it would deprive the responding party of its security and bring finality by default to a temporary decision. Where a decision was a futile exercise, it would ordinarily be a waste of resources to pursue the limited assets available to the liquidator upon such a course of action. However, that futility resulted from the lack of enforceability and where the decision was capable of enforcement, the decision might not be a waste of assets. Moreover, where the liquidator had appointed agents who bore the financial risk of recovering the net sum due, it did not impact the liquidator’s assets at all: Bresco [2019] EWCA Civ 27; [2019] PLSCS 20 followed.
(2) The fundamental incompatibility of the adjudication process and the insolvency regime meant that in the ordinary case, a company in liquidation could not pursue an adjudication and successfully enforce the decision. As a result, the court would injunct a party seeking to do so, and/or refuse to enforce the decision or grant a stay of execution. However, there would be circumstances in which the correct balance between the rights of parties under the Insolvency Rules and the contractual and/or statutory rights of parties to adjudicate under the Housing Grants, Construction and Regeneration Act 1996 at any time was to permit enforcement. That exception arose where the legitimate concerns of the court relating to the utility of an adjudication, the preservation of the responding party’s right to security for its cross-claim and the reduction or elimination of costs risk upon the respondent successfully overturning the adjudicator’s decision were all met by relevant safeguards. A case was likely to be an exception to the ordinary position where the adjudication determined the final net position between the parties under the relevant contract; and satisfactory security was provided both in respect of any sum awarded in the adjudication and successfully enforced and any adverse order for costs made against (or agreed by) the company in liquidation in respect of any unsuccessful application to enforce the adjudication decision and the subsequent litigation/arbitration, in which the responding party was seeking to overturn the adjudication decision.
(3) P Ltd’s appointment to take over the pursuit of the debt and act as the liquidators’ agent and take all steps to ascertain and recover amounts due to the claimant. That amounted to “claims management services” for the purposes of section 58AA(3)(a) of the Courts and Legal Services Act 1990, in respect of which the funder’s recovery was limited to 50% of the sums awarded, under the Damages-Based Agreements Regulations 2013. Assuming that P Ltd’s percentage recovery in its agency agreement exceeded 50%, the funding agreement was champertous and therefore unenforceable. While mere champerty was not an abuse of process, the establishment of champerty might be an element of that abuse. A court would not permit a party to bring itself within an exception to the ordinary position of a company in liquidation through the auspices of a funding agreement which was not merely champertous, but an abuse of process. On the facts before the court, the matter of abuse of process could not be satisfactorily disposed of and it would be wrong to grant summary judgment.
(4) In principle, there was no difficulty with the provision of a guarantee as part of a package of security seeking to meet the concerns expressed in Bresco. However, if a party intended to provide a guarantee and expected reliance to be placed it, in order for a court to exercise a discretion it would not ordinarily exercise in its favour, the court would consider whether the guarantor would be good for the guarantee. The position of P Ltd did not give the court any real degree of certainty that, should the guarantee be called upon, it would have the financial wherewithal to pay a significant adverse order for costs. Therefore, the capital guarantee provided by P Ltd was not adequate, even in conjunction with an undertaking to ringfence the principal sum.
Helena White (instructed by Blaser Mills LLP) appeared for the claimant; Arthur Graham-Dixon (instructed by Russell-Cooke Solicitors) appeared for the defendant.
Eileen O’Grady, barrister
