Change to the rules on adjudication with an insolvent company

Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (In Liquidation) [31.07.18]

This recent decision held that a company in liquidation cannot commence adjudication proceedings when there is a dispute for further sums believed to be due from the responding party to the referring party.

Companies in liquidation have often looked to adjudication to resolve monetary claims with creditors because of their quick decision, provided within 28 days of commencement and their costs are cheaper than litigation. As such, adjudication, has tended to be the preferred method by a successful party in the Technology and Construction Court (TCC).

Background

Bresco Electrical Services Ltd (the referring party) were engaged in a sub-sub-contract for an electrical installation project with Michael J Lonsdale (responding party). The referring party left the project with both parties believing the other had wrongfully ended the contract and were owed money.

Shortly after, the referring party went into liquidation and began adjudication proceedings for the money they claimed to be owed. The responding party called for the adjudication to be discontinued as the referring party was in liquidation. The adjudicator refused and so the responding party brought court proceedings to seek to prevent the adjudication from moving any further.

Decision

Mr Justice Fraser in the TCC found that the adjudicator had no jurisdiction to decide on the dispute, as the referring party was in liquidation. The court also confirmed that when a company is in liquidation, claims and cross claims cease to be enforceable. Instead they are replaced ‘by a single debt’, under the Insolvency Rules (England and Wales) 2016 (The Rules).

The Rules confirm that an account should be taken of what is due from the company in liquidation and its creditor in respect of their ‘mutual dealings’. The sums due from the one must be set off against the other, which occurs on the date of liquidation.

Fraser J concluded that the amounts claimed in this case clearly fell within the definition of mutual dealings and that on liquidation an account needed to be taken to arrive at a single balance.

Comment

This cases confirms that the decision in Philpot v Lycee Francais Charles de Gaulle School [2015], that liquidators are entitled to refer a claim to adjudication is no longer valid.

This case will significantly impact companies in liquidation attempting to resolve disputes. Whereas previously this was a relatively quick and cheap process through adjudication, this will no longer be available and alternative methods will need to be found.

One potential unintended consequence of this decision will see an increase in insolvency court applications by creditors of a company in liquidation, where they do not agree with the liquidator’s views. If this does happen it will likely increase costs, the effects of which could see the insolvent company’s estate diminishing and therefore so will the returns for unsecured creditors.

Read other items in the Commercial Brief - September 2018

Read other items in the Construction and Engineering Brief - November 2018