Adjudication v Insolvency Set-Off

Published date30 July 2020
Subject MatterLitigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Arbitration & Dispute Resolution
Law FirmCharles Russell Speechlys LLP
AuthorMr Steven Carey, Andrew Keeley and Will Leney

It is an unfortunate reality that the number of insolvencies in the construction sector seems certain to rise in coming months as the economic impact of COVID-19 takes effect. In this context, the recent Supreme Court decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 is particularly relevant.

This case concerned important questions regarding the compatibility of two statutory regimes:

  • the adjudication of construction disputes pursuant to section 108 of the Housing Grants Construction and Regeneration Act 1996, (Construction Act); and
  • the operation insolvency set-off pursuant to Rule 14.24 and 14.25 of the Insolvency (England & Wales) Rules 2016 (Insolvency Rules).

While adjudication was intended to resolve disputes on an interim basis for cashflow purposes on a 'pay now, argue later' basis, it has quickly become the default method of dispute resolution in the construction industry.

The Insolvency Rules provide that an account be taken of all claims and cross-claims between an insolvent company and each creditor, which has the effect of producing a 'net balance' due to the either the insolvent company or the creditor.

The Court of Appeal described adjudication as 'a method of obtaining cashflow quickly', whereas the regime under the Insolvency Rules is 'an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors'. On a literal reading of the individual regimes, both are valid descriptions and stark in their application. In this case the Supreme Court was required to untangle them.

Background

The facts were not in themselves unusual. In 2014, Bresco Electrical Services Ltd (Bresco) was employed to perform electrical installation works by Michael J Lonsdale (Electrical) Ltd (Lonsdale). Having ceased to attend the site in December 2014, Bresco entered creditor's voluntary liquidation in March 2015. Bresco and Lonsdale made various claims against each other for damages.

In June 2018, Bresco served Lonsdale with notice of intention to refer a dispute to adjudication. Faced with the unappealing prospect of defending an adjudication brought by an insolvent company, Lonsdale sought an injunction from the Technology and Construction Court (TCC).

Lonsdale argued that:

  • Bresco's claim and Lonsdale's cross-claim had cancelled each other out by the process of insolvency set-off. This meant there was no longer any claim, or...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT