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Liquidated companies cannot commence adjudications for further sums

11 Sep 2018

In the recent case of Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd [2018] EWHC 2043 (TCC), the Technology and Construction Court (a division of the High Court) has held that a company in liquidation cannot refer a dispute to adjudication when that dispute includes determination of any claim for further sums said to be due to the referring party from the responding party.

 

For those new to adjudication, the general law is that a party to a construction contract the right to refer a dispute to adjudication at any time.  Adjudication are interim-binding (i.e., they stand unless they are overturned by legal proceedings, or arbitration if relevant in the circumstances).  They are, however, rarely overturned.

 

This is to be contrasted in insolvency matters, where Rule 14.25 Insolvency (England and Wales) Rules 2016 provides for an account to be taken of what is due from the company in liquidation and its 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 as at the date of liquidation.

 

In this case, Bresco was the subcontractor, and left the construction project in controversial circumstances.  It alleged that Lonsdale was in breach, and Lonsdale alleged the opposite.  Bresco then went into liquidation, and its liquidator commenced an adjudication for payment of works completed (before Bresco left site) and damages for loss of profit.  Lonsdale argued that the adjudicator has no jurisdiction purely because Bresco was insolvent.  The adjudicator disagreed, so Lonsdale commenced court proceedings for an injunction to prevent the adjudication.

 

His Honour Judge Fraser, Judge in Charge of the TCC, agreed with Lonsdale that the dispute could not be referred to adjudication.  The stand out reasoning for this decision was that, o liquidation, claims and cross claims cease to be capable of separate enforcement and are replaced by a single debt. In effect, the Insolvency Rules take precedence and the only claim to be determined is what the single debt is (rather than the specific disputes relating to the construction contract).

 

Further, the need to achieve finality (as propagated by the Insolvency Rules) was crucial, whereas adjudication is not binding.

 

This is a key judgment for insolvency practitioners, as liquidators often refer disputes to adjudication.  However, it is now good law that such action is not permitted where the claim is for further sums said to be due.

 

For more information please contact Alexandra Withers, Associate in the Insolvency Department.

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