Companies In Liquidation Do Not Have A Right To Adjudicate Financial Claims

Picture the scenario: your sub-contractor has walked off site and goes into liquidation during a termination dispute about who owes what to whom. The sub-contractor refers the dispute to adjudication. You are then faced with the possibility of paying out on a temporarily binding adjudicator's decision. Worse, you know that if the adjudicator gets it wrong, the chances of recovering your money in later court proceedings are non-existent.

A similar scenario faced the court in Michael J Lonsdale (Electrical) Ltd v. Bresco Electrical Services Ltd [2018] EWHC 2043 (TCC).

Lonsdale had contracted with Bresco for the carrying out of electrical installation works. A termination dispute arose and both parties claimed money from the other. Bresco went into liquidation and, shortly after, referred the dispute to adjudication.

Lonsdale invited the adjudicator to resign and Bresco to withdraw from the adjudication on the basis that the mandatory set-off provisions in the Insolvency (England and Wales) Rules 2016 (SI 2016/1024) (the Rules) had effectively extinguished the claims and the adjudicator did not have jurisdiction to adjudicate. Both Bresco and the adjudicator refused the invitation.

Lonsdale issued court proceedings to stop the adjudication - and was successful.

Court intervention in adjudication proceedings is rare

Court intervention mid-flow in an adjudication is highly unusual: jurisdiction challenges are normally dealt with at the enforcement stage. So why did Fraser J intervene here?

The answer lies in the relationship between the Construction Act* and the Rules and the effect of a party's liquidation under the Rules on the parties' rights. (Note, for these purposes, Fraser J's judgment applies to both the 1986 version of the Rules (Insolvency Rules 1986 (SI 1986/1925) at rule 4.90), and the 2016 version (at clause 14.25).)

The effect of liquidation

Under the Rules, when a company enters liquidation, its creditors are ranked "pari passu" (treated equally ) in pursuing what is owed to them. However, different rules apply where the company in liquidation also owes money to a creditor.

The Rules require "an account [to] be taken" of what the parties owe to each other. This involves an analysis of the parties' "mutual dealings" and a set-off of the different sums due in each direction to arrive at a single balance owing one way or another upon liquidation.

This "pound-for-pound", mandatory, insolvency set-off prevents the hardship of a debtor...