John Doyle Construction Ltd v Erith Contractors Ltd – Insolvency and Adjudication continued

The case of John Doyle Construction Ltd v Erith Contractors Ltd [2021] EWCA Civ 1452 (07 October 2021) saw the Court of Appeal re-explore the conflict between the adjudication process and insolvency following the Supreme Court decision of Bresco Electrical Services Ltd v Michael J Lonsdale Ltd.

Last October, we followed the case of John Doyle Construction Limited v Erith Contractors Ltd here,  with the High Court declining to enforce the adjudicator’s decision due to the applicant’s inadequate security offering for the Respondent’s cross-claims and the costs of bringing any such claim. This decision came just 4 months after the Supreme Court case of Bresco Electrical Services Ltd (“Bresco”) v Michael J Lonsdale (Electrical) Ltd, which held that insolvent construction companies have jurisdiction to refer a dispute to adjudication. For a summary of the Bresco case, please see our previous article here.

On 7 October 2021, the Court of Appeal dismissed the appeal of John Doyle Constriction (“JDC”) Ltd, whilst taking the opportunity to clarify the burden that a claimant company in liquidation faces when seeking to enforce an adjudicator’s decision.

The Appeal

JDC appealed the October 2020 High Court decision on the following grounds:

1. The Judge failed to consider JDC’s alternative security offer of their liquidators paying the judgment sum by Erith Contractors Limited (“EC”) into either an escrow account or into court.
2. The Judge erroneously concluded that the Deed of Indemnity would only be engaged by the commencement of litigation by JDC, which made it inadequate security for EC’s costs in any action that EC might commence for seeking repayment.
3. The Judge erred in law by deciding that Insolvency Rule 6.42 did not provide adequate security for EC.

Before addressing the above grounds, the Court acknowledged that the process for a summary judgment application had not been established with the intention for it to be pursued by a company in liquidation. The Court stressed that a claimant company in liquidation must endeavour to outline clearly the issues in contention to ensure an efficient hearing, as the process is unsuitable for the complexities that arise from unclear cases.

JDC failed to produce “clear, evidenced and unequivocal” undertakings or securities when required, as well as providing unnecessarily extensive witness statements as evidence. The Court attributed these failings to JDC’s liquidators, who adopted an “unhelpfully aggressive approach of enforcement” in their attempt to recover and use the money, instead of focusing on ring-fencing the money or providing an adequate security to EC.

The Court of Appeal’s Judgment

Concerning the first ground, the Court of Appeal concluded that the liquidators had failed to clearly and unequivocally present the offer that the Respondent should pay the sum identified in the decision to an escrow account or into the court to serve as a necessary security for EC’s set-off and counterclaim. The Court dismissed the Appellant’s argument that the Judge had failed to consider this as an alternative in the first instance, as this “offer” would have contradicted the existing agreement between the Appellant and their liquidators that the monies paid by the Respondent would be paid to the liquidators and therefore could not have been presented as a viable option.

In order for the second ground to succeed, the Court stated that JDC would have to present a statement by an insurer that indicated they would be prepared to offer EC a Deed of Indemnity in this particular case as security for any orders for EC’s costs that may be made in proceedings in which they pursued JDC for payment. Although the Court agreed that it was not for JDC to complete these arrangements, evidence of such a Deed of Indemnity provided by an insurer was deemed by the Court to be an absolute minimum requirement.

The Appellant relied on Insolvency Rule 6.42 for the third ground, which provides the following:

• Rule 6.42(1): all fees, costs and charges and other expenses incurred in the course of the winding up are to be treated as expenses of the winding up.

However, Rule 6.42(4)(a) prioritises expenses incurred by the liquidator in legal proceedings over the costs and expenses in the liquidation. Consequently, if EC commenced proceedings for repayment and obtained cost orders against the liquidator in those proceedings, those costs orders would not be prioritised at all. As a result, the Court dismissed Ground 3 on the basis that Rule 6.42 did not apply.

A Company in Liquidation’s Entitlement to Enter Judgment

The Court of Appeal directly applied Lord Briggs’ observations in the Bresco judgment that summary judgment to enforce an adjudicator’s decision will often be unavailable when the claimant is in liquidation but it would also be refused where it would deprive the Respondent of their right to have recourse to the insolvent company’s claim as security for its cross claim.

Lord Briggs further submitted in Bresco that when the cross-claim can be determined by the adjudicator, then summary enforcement would not be inappropriate because the claim and cross-claim form part of the same dispute under the contract. However, the Court of Appeal disagreed with this position on the basis that it failed to take into account that an Adjudicator’s decision is provisional and therefore cannot be regarded as the final determination of a net balance. The Court of Appeal concluded that an Adjudicator’s provisional finding cannot be treated as a final determination of the net balance when the other party maintains its set-off and cross claim, as the insolvency set-off must apply to adjudication. Therefore, the Court of Appeal concluded that JDC would not have been entitled to summary judgment in any event if any of the grounds of appeal had succeeded.

Comment

A year after the decision of Bresco, this appeal has clarified a few points concerning insolvency and adjudication.

Firstly, a claimant company in liquidation must ensure that they take the necessary steps to deliver an efficient hearing, which clearly presents their areas of dispute. Companies in liquidation should be prepared for the Court to decide against the Applicant if they fail to demonstrate to the Court a focused  and well-structured approach to the summary judgment application with viable alternatives.

Secondly, companies ought to remember that whilst this case reaffirmed that insolvent companies may commence an adjudication for a dispute, it also serves as a reminder that enforcement is only possible in limited circumstances as the Courts cannot exercise discretion to disapply the Insolvency Rules. The Adjudicator’s award must represent a final account of the dealings between the parties and, also, the insolvent party must be able to provide adequate security for costs. The Adjudicator’s provisional finding, however, cannot be treated as a final determination of the net balance when the opposing party maintains a set-off and cross claim.