UK: Can A Company In Liquidation Refer A Dispute To Adjudication?

The Technology and Construction Court (TCC) has delivered a significant judgment in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation) [2018] EWHC 2043 (TCC) where the company seeking to refer a dispute to adjudication was in liquidation. The substance of the dispute related to the contractor's claim for payment allegedly due for work completed, and damages for loss of profits.

The contract and the facts

  • Bresco Electrical Services Ltd (the "Referring Party" or "Bresco") was engaged by Michael J Lonsdale (Electrical) Ltd (the "Responding Party" or "Lonsdale") under a sub-subcontract for electrical installation works on an office refurbishment project in London dated 21 August 2014 (the "Contract"). The form of Contract was the JCT Construction Management Trade Contract, 2011 Edition (CM/TC 2011) with bespoke amendments.
  • The Contract was a "construction contract" governed by the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the "Construction Act") meaning that the parties had a right to refer a dispute under the Contract to adjudication at any time.
  • Bresco left the project in controversial circumstances, with each of the parties alleging wrongful termination of the other. After leaving the project, Bresco went into voluntary liquidation, with a liquidator appointed on 12 March 2015. Bresco then commenced an adjudication against Lonsdale alleging repudiatory breach and seeking a decision from the adjudicator that sums were due from Lonsdale, by way of payment for works completed prior to leaving the site and/or damages for loss of profits.
  • Lonsdale invited Bresco to discontinue the adjudication and the adjudicator to resign on the basis that the adjudicator had no jurisdiction owing to the mandatory set off rule applicable where a company is in liquidation. The adjudicator refused to resign and issued a "non-binding decision" explaining why he rejected Lonsdale's arguments and declared that he did have jurisdiction to decide the dispute.

These proceedings

Lonsdale subsequently commenced proceedings under Part 8 of the Civil Procedure Rules (Part 8) seeking declarations and an injunction to prevent Bresco from bringing a claim to adjudication on the basis that the liquidation operated to extinguish the claim(s) relied upon by Bresco in that adjudication. The adjudication was stayed until the Part 8 claim was determined.

The parties were unable to agree how the Part 8 claim should be framed but considered that the most important elements of the dispute related to:

  1. the liquidation of Bresco;
  2. the effect of Rule 14.25 (Winding up: mutual dealings and set-off) of the Insolvency Rules 2016 upon the parties' rights; and
  3. the adjudicator's jurisdiction to deal with the dispute referred to him.

The TCC summarised the issue to be resolved as:

"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" (Paragraph 22).

The main issues

Mr Justice Fraser, identified five key issues:

  1. whether the Insolvency Rules 1986 or Insolvency Rules 2016 (which came into force on 6 April 2016) applied in this case;
  2. the applicable test of whether the TCC has power to grant injunctions preventing or halting adjudications commenced under the Construction Act;
  3. whether monetary claims and cross-claims are available to a party in liquidation;
  4. the correct legal characterisation of what happens to such claims and cross-claims when a liquidator is appointed;
  5. whether preventing adjudication in situations of insolvency contravenes the statutory right to adjudicate at any time.

Mandatory set-off in insolvency

This case turns around the provisions in the Insolvency Rules (in this case the 2016 Rules - to which see further below) in relation to mutual dealings and set off. As such, it is worth pausing before looking at the TCC decision to consider Rule 14.25 of the Insolvency Rules 2016, which deals with mutual dealings and set off in liquidations.

Rule 14.25(2) provides as follows:

"An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings and the sums due from the one must be set off against the sums due from the other."

Mutual dealings do not have to be amounts due in either direction under one contract - instead what is required is mutuality of the parties. So a debt owing under one contract in one direction can be set off against a debt owing under another contract in the opposite direction. As such, it was clear that the debts owing between Lonsdale and Bresco fell within the category of mutual dealings.

The TCC decision

The TCC found in favour of Lonsdale on the following basis:

Issue 1

Bresco entered voluntary liquidation in March 2015, but did not serve its Notice of Intention to Refer a Dispute to Adjudication until June 2018. In the meantime, the Insolvency Rules 1986 had been replaced (save for transitional provisions) by the Insolvency Rules 2016. Both parties to the current case agreed that it should be decided on the basis of the Insolvency Rules 2016, and the TCC accepted this and further noted that the 2016 Rules "were likely to be of wider application in other cases".

In any event, this was a relatively moot point, given the TCC's view that Rule 14.25 of the Insolvency Rules 2016 produced the same effect as its predecessor, Rule 4.90 of the Insolvency Rules 1986.

Issue 2

Bresco argued that it was inappropriate for the TCC to interfere with the ongoing adjudication proceedings.

The TCC rejected this argument stating that it does have the jurisdiction to grant an injunction in an ongoing adjudication but that such jurisdiction will "be exercised very sparingly". Injunctive relief is not usually sought under Part 8. The TCC did not want this case to open the floodgates to Part 8 claims seeking to interfere with the course of an adjudication and "it will only be appropriate in rare cases for the TCC to intervene in an ongoing adjudication" (Paragraph 17). This follows earlier case law.

Issue 3

The disputes between Lonsdale and Bresco in this case consisted of claims and cross-claims between them. The TCC decided that when a liquidator is appointed, as a result of Rule 14.25, "...claims and cross claims...cease to be capable of separate enforcement upon, or at, the date of the liquidation" and are "replaced by a single debt" (Paragraph 48, emphasis added).

On Bresco's liquidation, the only dispute that would remain would be that of taking the account required under the Insolvency Rules 2016. All Bresco could have is a claim to the balance following the taking of the account required by those Rules. The TCC confirmed that an adjudicator does not have the power to conduct such an account under the Insolvency Rules 2016.

Issue 4

Counsel for Bresco argued that the different claims and cross-claims of the parties could not cease to exist, as if there was only a single debt between the parties that would preclude any of the "closing out" transactions commonly seen in liquidation. This is because those all follow the exercise of contractual rights after liquidation. Counsel for Bresco referred in particular to closing out transactions following the Lehman and Carillion insolvencies.

The TCC rejected this argument stating that this case was concerned with an adjudication and "closing out" transactions are not determined by an adjudicator.

The TCC conceded that there is much disagreement over the correct legal characterisation of what happens to claims and cross-claims when a liquidator is appointed - however Mr Justice Fraser concluded that this did not matter in the current case. Bresco's claims under the Contract ceased to be capable of separate enforcement on the date of the liquidation.

Issue 5

Bresco argued that its statutory right to refer a dispute to adjudication "at any time" prevented the TCC from interfering in the adjudication. The TCC rejected this argument stating that the right to adjudicate did not take priority over the Insolvency Rules.

The only claim that could exist was one for the net balance in accordance with the Insolvency Rules 1986 or the Insolvency Rules 2016. Any dispute about that would be a dispute arising in the liquidation not under the Contract. The Construction Act did not give adjudicators the power to decide disputes relating to the net balance payable under the Insolvency Rules 1986 or Insolvency Rules 2016.

Commentary

In very simple terms - this case is of particular significance for the construction industry and insolvency practitioners taking appointments in the sector as it confirms 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".

Given the substantive similarities between the mandatory set off rules for liquidation (Rule 14.25 of the Insolvency Rules 2016), administration (Rule 14.24 of the Insolvency Rules 2016) and bankruptcy (section 323 of the Insolvency Act 1986), this decision should be viewed as applicable in those processes also.

The authors fully agree with Mr Justice Fraser's comments at paragraph 48 of his judgment that "the practical behaviour of liquidators... cannot affect the correct legal characterisation of disputes and mutual dealings which are set down in the Insolvency Rules, which have statutory force". That said, the conclusion that the TCC has reached in this instance seems to provide an unsatisfactory position, in which technical questions about payments due under a construction contract will fall initially to liquidators to determine and subsequently, if challenged, to the Insolvency and Companies Court Judges. Could the future be that adjudicators will find themselves taking on a quasi-adjudication role as experts to help insolvency practitioners take the account required by mandatory set off rules?

"Read the original article on GowlingWLG.com"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions