A recent decision appears to have major implications for financial claims by insolvent companies – but leaves some questions unanswered, explains Oliver Tobin.
Insolvency is unfortunately a common occurrence in the construction industry, where profit margins are slender and cashflow is critical to survival.
The insolvency process itself is invariably a long and expensive one, with creditors often having to wait several years to recover a fraction (or indeed any) of their losses.
In recent years, liquidators and their agents have increasingly sought to use adjudication as a means of recovering sums allegedly due to the insolvent company under construction contracts.
This, in turn, has caused confusion and raised a number of questions. While adjudicators regularly entertain adjudications referred by liquidators or their agents, are adjudications in these circumstances permitted and do adjudicators have jurisdiction to determine such claims?
A recent decision of the Technology and Construction Court (TCC) – Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in liquidation)  EWHC 2043 – may have answered these questions.
Adjudication and Part 8 proceedings
In 2014, Michael J Lonsdale (MJL) appointed Bresco Electrical Services under a sub-subcontract to undertake electrical installation works. Disputes arose between the parties, Bresco vacated the site and its contract was subsequently terminated by MJL.
Bresco entered liquidation in 2015, and in June 2018 commenced an adjudication seeking to recover monies from MJL that were allegedly due. MJL contended that it was entitled to sums from Bresco. There were therefore claims and cross-claims between the parties, creating a net balance to be determined.
The adjudicator was invited to resign by MJL on the basis that the net balance of dealings between the parties could only be ascertained by litigation in accordance with the Insolvency Rules (2016), not adjudication. Upon the adjudicator declining to resign, MJL, for whom Fladgate acted, commenced Part 8 proceedings in the TCC, seeking injunctive relief to restrain the adjudication.
The specific question referred to the TCC was whether “a company in liquidation can refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of a claim for further sums said to be due to the referring party from the responding party”.
Judgement over jurisdiction
Mr Justice Fraser, finding in favour of MJL, held that the adjudicator did not have jurisdiction to determine the dispute. He considered the sums claimed to fall within the definition of “mutual dealings” under the Insolvency Rules (2016).
“It remains to be seen whether there is still a place for adjudication involving companies in liquidation”
Upon Bresco entering into liquidation, the effect of Rule 4.90 of the Insolvency Rules (1986 – now replaced by Rule 14.25 of the Insolvency Rules 2016) was that claims and cross-claims between the parties were no longer capable of separate enforcement.
The judge held that the various claims and cross-claims were replaced by a claim to a net balance following the taking of an account under the Insolvency Rules. The dispute was therefore no longer a dispute under the contract, and as such, the statutory right to adjudicate did not apply.
Impact on debt recovery
The decision in MJL v Bresco will undoubtedly have a significant impact on companies in liquidation and those who are tasked with recovering debts on their behalf, namely liquidators and their agents.
The judgement appears to preclude companies in liquidation from pursuing financial claims through adjudication where claims and cross-claims exist between the parties. Equally, the judgement may also preclude creditors from commencing adjudications to recover sums from companies in liquidation.
It remains to be seen whether there is still a place for adjudication involving companies in liquidation. It may, for example, still be possible for liquidators, their agents or creditors to adopt adjudication as a means of resolving ‘non-monetary’ disputes on points of principle.
In attempting to provide certainty, has MJL v Bresco ultimately raised more questions than it has answered? Only time will tell, but the rights of an insolvent company to use adjudication appear to have been severely curtailed.
Oliver Tobin is an associate at Fladgate