Adjudication Matters – September 2018

11th September 2018

Insolvency Adjudication: This is the End

The recent judgement in Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (In Liquidation) [2018] EWHC 2043 (TCC) makes clear that a company in liquidation cannot refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of any claim for further sums said to be due to the referring party from the responding party.

Summary

In this landmark case, it was held that a company in liquidation cannot refer a dispute to adjudication because, at the date of liquidation, all claims and cross-claims cease to be capable of separate enforcement.

All disputed amounts arising from a contract between a company and a creditor become replaced with a single debt, upon the appointment of the liquidator, which must be taken account of by operation of the Insolvency (England and Wales) Rules 2016.

Mr Justice Fraser ruled that an adjudicator does not have the jurisdiction to conduct this account and so, such claims cannot be referred to adjudication.

Background

In August 2014, two parties entered into a sub-sub-contract whereby Bresco Electrical Services Limited (“Bresco“) agreed to perform electrical installation works for Michael J Lonsdale (Electrical) Limited (“Lonsdale“). Bresco ceased works and left the site in “controversial circumstances” in December 2014, with each party alleging wrongful termination against the other.

Shortly afterwards in March 2015, Bresco became insolvent and entered into voluntary liquidation.

Lonsdale intimated a claim against Bresco for wrongful termination and the direct costs of appointing a third party to complete the works. Whereas, Bresco maintained in response that it was Lonsdale who had wrongfully terminated Bresco’s employment under the contract and it was Lonsdale who owed Bresco money.

In June 2018, the liquidator’s commenced adjudication proceedings against Lonsdale on Bresco’s behalf, alleging repuditory breach and claiming particular sums due from Lonsdale, by way of payments under the contract for the works done before leaving site and/or damages for loss of profit.

Lonsdale invited the referring party to discontinue with the adjudication and the adjudicator to resign, on the basis that he had no jurisdiction as a result of Bresco’s insolvency. Both refused. Subsequently, Lonsdale issued Part 8 proceedings for declarations and a permanent injunction to prevent Bresco from bringing a claim to adjudication. The parties agreed a consent order that the adjudication be stayed, pending the decision of the Part 8 proceedings.

Decision

The Court found in favour of Lonsdale and it granted a declaration that a company in liquidation could not commence adjudication proceedings.

In consideration of Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd (2009) and the effect of Rule 14.25 of the Insolvency (England and Wales) Rules 2016 (previously Rule 4.90 of the Insolvency Rules 1986) (together the “Insolvency Rules“), Fraser J found that at the date of liquidation, the claims and cross-claims between Lonsdale and Bresco ceased to be capable of separate enforcement and became replaced with a single debt.

Under the Insolvency Rules, a mandatory set-off takes effect upon a company’s entry into liquidation and account must be taken of the different sums due from the company (i.e. Bresco) and the creditor (i.e. Lonsdale) to each other in respect of their mutual dealings. These sums are required to be set-off in each direction to determine a single balance payable either to, or from, the company in liquidation.

It was held that an adjudicator does not have the necessary jurisdiction to take this account and identify the net balance due to either party pursuant to the Insolvency Rules.

The adjudication between the parties was not allowed to continue and Fraser J, when giving his judgement, expressed his surprise if any adjudicator (in such circumstances) would decline to resign in future cases, if their attention was brought to this decision.

Practical implications

This is a significant decision in the construction and insolvency industry, as it bars companies in liquidation from using adjudication proceedings as a mechanism for determining disputed amounts with creditors.

If followed, this judgement will likely to have major implications on the practical behaviours of liquidators, who regularly refer disputes to adjudication as a way of valuing the outstanding sums they consider due to insolvent companies, as it has clearly been decided by the Courts that an adjudicator does not have the jurisdiction to determine any such claim.

The decision could be seen as useful resource for creditors who, now have a clear authority in case law to challenge an adjudicator’s jurisdiction and encourage him to resign, if they are on the receiving end of adjudication proceedings commenced by a company in liquidation.