Case in focus: Insolvency

The facts

Under a contract dated 21 August 2014 Lonsdale engaged Bresco to carry out electrical installation works at premises in St James’s Square, London. Bresco left the site on 8 December 2014 and on 12 March 2015 Bresco entered into voluntary liquidation and a liquidator was appointed. 

In October 2017 Lonsdale initiated a claim against Bresco on the grounds that it had wrongfully terminated the contract, requiring Lonsdale to incur additional costs when completing Bresco’s works. 

On 18 June 2018 the liquidator issued a notice of intention to refer a dispute to adjudication. The notice alleged repudiatory breach of the contract by Lonsdale and claimed unpaid amounts for the work Bresco had completed prior to 8 December 2014 together with lost profits. The adjudicator rejected Lonsdale’s submission that he should resign on the grounds that he had no jurisdiction as a result of Bresco’s liquidation. 

On 26 June 2018 Lonsdale commenced a Part 8 application seeking a declaration and injunction to prevent Bresco from bringing a claim in adjudication on the grounds that the liquidation had operated so as to extinguish the claims set out by Bresco in the notice of adjudication. 

The issue

Could Bresco as a company in liquidation refer to adjudication a dispute that included claims for further sums said to be due from Lonsdale? 

The judgment

The judge first confirmed that the court did have jurisdiction to grant an injunction – or equivalent declarations – to prevent an adjudication from going ahead, but he noted that this jurisdiction would be exercised sparingly and cautioned against attempts to use Part 8 as a shortcut in conventional adjudication cases. The judge then reviewed the mechanisms set out in the Insolvency Rules. He found that their effect was that, in the event of a liquidation, all claims and cross-claims between the company in liquidation and its creditors were to be set off against each other and merged into a single net balance, due to one or the other. The judge noted the same effect was obtained under rule 4.90 of the Insolvency Rules 1986 and rule 14.25 of the Insolvency Rules 2016.

The judge went on to review the authorities dealing with the impact of liquidation upon the right to adjudicate. He found the authorities were broadly consistent that where as a result of the application of the Insolvency Rules the parties’ originating claims and cross-claims were merged into a net balance, as at the date of the liquidation, the result was that those claims and cross-claims were no longer capable of separate enforcement. Therefore, the only claim a liquidator could bring was for any net balance, but this claim could not be referred to adjudication where an adjudicator did not have jurisdiction to conduct the set off and merger exercise required by the Insolvency Rules.

In connection with this conclusion, the judge said that the finding in Philpott vs Lycee Francais Charles de Gaulle School (2015) – that the liquidator’s election to pursue adjudication was a matter of commercial judgment – was wrong.  

Regarding the liquidator’s submission that this outcome would contravene the right to adjudicate at any time, the judge said that neither the legislation or the authorities demonstrated any intention that the provisions of the Construction Act should supersede the important principle in the Insolvency Rules that creditors were entitled to apply a set-off in respect of cross-claims against a company in liquidation. Finally, where it was clear that a net balance had been created by the liquidation, the judge said it was not necessary to make a finding as to whether or not Bresco’s claims had ceased to exist. Accordingly, the adjudication commenced by Bresco’s liquidator could not continue. 

Commentary

As was pointed out to the judge, it is correct that within the UK liquidators do regularly refer disputes to adjudication. Nevertheless, the practical behaviour of liquidators, even if widespread, could not change the correct legal status of disputes arising between companies in liquidation and their creditors. 

This judgment confirms that the Insolvency Rules preclude a company in liquidation from referring a claim to adjudication. It follows that any adjudicator appointed to determine such a claim lacks jurisdiction and therefore ought to resign. It will be interesting to see if this judgment prompts some parties to retrospectively challenge the validity of any recent adjudication decisions made in favour of liquidators. 

Ted Lowery is a partner in Fenwick Elliott