Liquidators / receivers – the right to adjudication?

The insolvencies of several high profile New Zealand construction companies including Mainzeal and Ebert, called into question money available for recovery from a contractor in situations of insolvent liquidation. We know that a receiver / liquidator can stand in the shoes of an insolvent company and bring a contractual claim on behalf of the company in order to pay creditors. It is less clear whether a liquidator or receiver is entitled to recover money, or pursue claims through adjudication.

United Kingdom position

Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited [2019] EWCA Civ 27, a recent United Kingdom case, deals with the interplay between adjudication and the insolvency regime. The Court of Appeal had to consider whether an adjudicator has the jurisdiction to deal with a claim by a company in insolvent liquidation.

In this case, three years after going into liquidation, Bresco initiated adjudication proceedings, saying that Lonsdale had wrongfully repudiated a sub-sub-contract and claimed the cost of this.

Lonsdale, the defendant, applied for an injunction. Their argument was that contractual cross-claims cease to exist once a company enters into liquidation (Stein v Blake [1996] 1 AC 243 (HL)). Cross-claims arising under the contract cannot be adjudicated, only resolved in court or arbitration, because court and arbitration decisions are final and binding, whereas adjudication is only ever meant to be a temporary solution, which was not envisaged by Rule 14.25 of the Insolvency (England and Wales) Rules 2016.

Fraser J at first instance held that the Insolvency Rules, which address mutual dealings where one party is in liquidation, replaced the claim arising under the contract. Breso’s claim was therefore not a claim that arose from the construction contract but rather from the Insolvency rules, and could not be adjudicated.

This was overturned by Coulson LJ in the Court of Appeal. Coulson LJ rejected the argument that the adjudicator did not have jurisdiction, stating that “Liquidation set-off does not, in principle, preclude the determination of the underlying claims”. It was held that a claim did still exist under the contract and that it was not extinguished or replaced by a claim to a net balance.

Whilst technically an adjudicator may have jurisdiction in the United Kingdom, Coulson LJ upheld the injunction, on the basis of practical utility. There was nothing to be gained from Bresco pursuing adjudication because any subsequent enforcement of the adjudication award would either fail or be stayed.

 Australian Position

In Australia, the issue of whether a liquidator or receiver is entitled to bring a claim via adjudication, is governed by security of payments legislation. Australian courts have grappled with how this legislation comes into play.

Section 9(1)(a) of the Building and Construction Industry Security of Payments Act 2002 (Vic), states that a claimant who has a right to progress payments is someone who “has undertaken to carry out construction work under the contract”. The Court of Appeal of Victoria interpreted this to mean that entities in liquidation are precluded from being included in the definition of claimants, as they are no longer capable of undertaking construction work (Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247).

The New South Wales legislation is identical to that of Victoria, however the Supreme Court of New South Wales disagreed with the Victorian Court of Appeal’s interpretation of a “claimant”. In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412, the Court held the narrow interpretation of the claimant in Façade Treatment Engineering Pty Ltd (in liq) to be “plainly wrong”, holding the Court overlooked the fact that companies in liquidation can trade their way out of insolvency, and therefore should not be precluded from adjudication.

After the decision of Seymour Whyte Constructions Pty Ltd, the Building and Construction Industry Security of Payments Amendment Act 2018 (NSW) was passed, and although it has not been commenced yet, it is set to remove the right of companies in liquidation to apply for adjudication, effectively aligning the position in New South Wales with that of Victoria.

New Zealand position

Whether adjudication is available to liquidators or receivers in New Zealand is not clear. It will be interesting to see how New Zealand courts deal with the issue of liquidators or receivers bringing claims through adjudication.

New Zealand’s Construction Contracts Act 2002 (CCA) has similar provisions to the Security of Payments legislation in Australia. Section 16 of the CCA states a party who “agrees to carry out construction work under a construction contract has the right to progress payments”. Whether the New Zealand courts will interpret this definition to mean a contractor who “continues” to carry out work, as in line with the position in Australia, remains to be seen.

Even if it is decided that liquidators in New Zealand have legal entitlement to bring claims under adjudication, the question is, is it worth it? Coulson LJ in Bresco Electrical Services Limited (in liquidation), highlighted the general incompatibility of the adjudication regime with the rules of insolvency – the clash of the rough and ready ‘pay now, argue later’ disputes mechanism and the detailed, exact accounting exercise required under insolvency law provisions. The purpose of adjudication is to provide a temporary resolution to keep projects on foot, and cash flow going. Therefore, adjudication decisions are not seen as the “end of the road”, further dispute forums can be pursued after the adjudicator has made an award. This makes adjudication unsuitable for liquidators who have limited resources to pursue claims. Allowing liquidators or receivers to pursue claims through adjudication may lead to an increase in the number of adjudication enforcement applications (including stay of proceedings, due to the real risk a party will not be able to repay the money if the subsequent proceeding is determined in favour of the referring party), placing further strain on the courts’ limited resources.

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