Adjudication and liquidation – the final word?

It is generally the case (though not always!) that courts are reluctant to enforce monetary award adjudication decisions in favour of companies in liquidation (CILs). This is because of the uncertainty surrounding the CIL’s ability to repay those sums should it later transpire it was not entitled to the award.

That, however, has not prevented CILs and those advising them from commencing adjudications, which, at best, result in wasted time and costs for the unfortunate responding party (as well as potential liability for adjudicator's costs due to the joint and several liability that the parties have).

Tuesday's decision in the TCC case of Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043 (TCC) (Lonsdale) has (potentially…) provided the final word on adjudications brought by CILs. 

In Lonsdale, the head of the TCC, Fraser J considered whether "a company in liquidation can refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of a claim for further sums said to be due to the referring party from the responding party?"

Lonsdale

Michael J Lonsdale (MJL) and Bresco Electrical Services (Bresco) entered into a contract in 2014 whereby Bresco agreed to perform electrical installation works for MJL. Various disputes arose between the parties and Bresco ultimately left site. The parties were in dispute as to the circumstances of the termination but in 2015 Bresco went into liquidation and as a result, its dealings are governed by the Insolvency Rules 1986 (the 1986 Rules).

In June 2018, Bresco commenced adjudication proceedings against MJL seeking declarations on a number of different issues, including that payment of monies was due from MJL to Bresco. Separately, MJL considered there to be sums due to it from Bresco. In essence, there were claims and cross-claims between the parties.

In the circumstances, MJL invited the Bresco to withdraw the Referral and, when Bresco's representatives refused, invited the adjudicator to resign due to a lack of jurisdiction. The adjudicator refused and MJL commenced injunctive proceedings under Part 8 of the CPR to restrain the adjudication. Following the agreement of a stay in the adjudication (which the adjudicator sought to circumvent), the TCC was asked to determine whether the adjudication should continue.

Rule 4.90 of the 1986 Rules provides:

(1) This rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.

(2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other... 

(4) Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets.

The Insolvency Rules 2016 (the 2016 Rules) contain very similar provisions and whilst Lonsdale was decided on the 2016 Rules, the 1986 Rules and the 2016 Rules (together, the Insolvency Rules) are very similar and Fraser J confirmed his decision as applicable to both.

The Insolvency Rules treats the situation the parties found themselves in in Lonsdale as mutual dealings (that is, mutual credits, debts or other dealings between a company and a creditor) and accordingly, Fraser J confirmed that, when this occurs, the only claim the exists between the parties is the claim for the net balance under Rule 4.90:

I therefore conclude that, as at the date of the liquidation, and as a direct result of what occurs upon the appointment of the liquidator and the operation of the Insolvency Rules, the disputes between [MJL] and Bresco that consist of claims and cross-claims between them become replaced with a single debt. That is thereafter the dispute, namely the result of the account that the 2016 Rules require to be taken to determine the balance payable in which direction…

…I therefore entirely agree with that particular part of the judgment in [the earlier case of] Enterprise where the conclusion to this part of the analysis is provided in the following terms:

“79. It follows from my analysis in Section 7 above that the adjudicator does not have the necessary jurisdiction to deal with this dispute.  The only claim now extant between the parties is the claim by Utilities as assignees for the net balance under Rule 4.90.   That is not a claim which could be referred to adjudication and it is not the claim that has been purportedly referred to this adjudicator.  The claim which has been purportedly referred to the adjudicator no longer exists.  Further, for the reasons noted above, Rule 4.90 does not contemplate that the account process would be taken in a piecemeal or slice-by-slice fashion, by reference to potentially different tribunals, including adjudicators who could, at most, make a decision that is only of temporary effect.”(emphasis added)

In my judgment that is precisely what happens to claims and cross claims when a liquidator is appointed. They cease to be capable of separate enforcement upon, or at, the date of liquidation.

Accordingly, the dispute between the parties was no longer a dispute arising from a construction contract, but rather one arising under the Insolvency Rules. After liquidation, the only dispute that remains in law is that of taking the account under the Insolvency Rules and an adjudicator cannot conduct such an account. On that basis, it is not a claim which can be dealt with in adjudication. The phrase “a dispute arising under the contract” in the Housing Grants Construction & Regeneration Act, or “any dispute under the contract” in the Scheme both include the important words “under the contract”. Upon the appointment of the liquidator, any number of disputes between the parties to a construction contract become a single one, namely a dispute relating to the account under the Insolvency Rules. It becomes a claim for the net balance under Rule 4.90 of the 1986 Rules or Rule 14.25(2) of the 2016 Rules.

Accordingly, in Lonsdale, the Judge concluded:

This therefore means that the adjudicator in this case does not have jurisdiction to determine the dispute referred to him. The dispute referred to him included both money claims and cross claims, and an analysis of how much was owed to Bresco. The answer to the issue that I framed at [22] above is as follows:

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.

Practical implications 

Essentially, where a CIL has made claims for monies owed by a party, and that party also has claims for monies owed by the CIL, the claims between the parties are mutual credits and/or mutual debts between the company and in accordance with the Insolvency Rules. An account must be taken on liquidation of those dealings in each direction to arrive at a single balance due either to, or from, the CIL. An adjudicator cannot conduct such an exercise under the Insolvency Rules and would not have jurisdiction to determine such a dispute referred to him.

A CIL cannot therefore 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. A CIL who does so should discontinue with such proceedings as, from the moment the CIL went into liquidation, adjudication stopped being a forum for any disputes which involve mutual claims, even if those claims arise from different contracts. Should the CIL refuse to discontinue the adjudication, then the adjudicator must resign. 

Despite this decision only being published on Tuesday (31 July) we have already successfully asked an adjudicator to resign in very similar circumstances (having first invited the Referring Party to withdraw their claim).