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Confirmation that liquidators cannot refer a dispute to adjudication when there are claims and cross claims. The “mutual dealings” under the Insolvency Rules have to be taken into account.

In Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (In Liquidation) [2018] EWHC 2043 (TCC), the High Court recently held that companies in liquidation will be unable to use adjudication to pursue money claims in respect of construction projects or operations, as in such instances there are claims and counterclaims between the parties, which should be taken into account pursuant to the Insolvency Rules.

The dispute

Lonsdale and Bresco entered into a sub-contract for electrical installation works, which were never completed. Both parties alleged wrongful termination against the other. Subsequently, Bresco entered into voluntary liquidation on 12 March 2015.

Under the Housing Grants, Construction and Regeneration Act 1996 (as amended), which grants a party to a construction contract the right to refer a dispute to adjudication at any time, Bresco commenced an adjudication. The dispute referred to the adjudicator included various claims for sums due to the insolvent Bresco and also sought a decision from the adjudicator as to how much was owed to Bresco.

Under Rule 14.25 Insolvency Rules (IR) 2016, an account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings. The sums due from one must be set off against the sums due from the other. Mutual dealings includes “mutual credits, mutual debts or other mutual dealings between the company and a creditor proving or claiming to prove for a debt in the liquidation”.

Judgment

The Court held that the sums claimed by Bresco and Lonsdale from each other were caught by Rule 14.25 IR 2016, falling within the definition of “mutual dealings”. This required an account to be taken of those dealings in each direction to arrive at a single balance due either to, or from, the company in liquidation.

As a result, the various claims and cross-claims were replaced with a single debt and Bresco was left only with a claim to a net balance under Rule 14.25 IR 2016, and not under the construction contract, which meant the claims did not fall under the jurisdiction of the adjudication.

In summary, the Court decided that (1) once a company is placed into liquidation, all financial claims under a construction contract cease to be capable of separate enforcement and are replaced with a single claim for the net balance to be determined after taking into account the mutual dealings of the parties under IR 2016, (2) an adjudicator does not have jurisdiction to ascertain the net balance under IR 2016 or any of the claims which constitute that balance, and (3) this applies irrespective of whether the parties’ mutual dealings are limited to the one construction contract before the adjudicator or whether they relate to several contracts.

Impact and future role of adjudication

This significant case highlights that the Courts are prepared to refuse to enforce an adjudication decision concerning a company in liquidation, as well as to preclude an adjudication.

Given the construction industry is currently vulnerable to financial distress, this decision is likely to have widespread implications, including in relation to the practice of liquidators who regularly refer disputes to adjudication, either as part of the exercise of taking an account under IR 2016, or in making financial claims outside that exercise, which will now have to change. Further, liquidators may also now have less opportunity to assign claims to third parties as a way of raising funds for the liquidation, which would otherwise have been assigned at a discount to third parties on the basis that the claims could be pursued through adjudication at reasonable cost.

Since this decision prohibiting liquidators commencing an adjudication only applies to claims for payment to a company in liquidation, it appears to leave open the prospect of non-financial claims being referred to adjudication. This is because the referral notice in this case sought a decision concerning sums due, i.e. a claim for financial relief, which might suggest that liquidators may use adjudication to resolve pure disputes of principle (such as the question of repudiation), without any financial claim attached.

If you would like to discuss the insolvency aspects of the matters set out above in any more detail, please feel free to contact Kunal Gadhvi – Partner, Felicity Jordan – Associate, or any member of our Restructuring & Insolvency team.

Please feel free to also contact Nik Haria – Head of Construction or Brenna Baye – Associate of our Construction team, if you would like to discuss construction contract claims including adjudication issues.

Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.

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