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What happens to a construction contract when a party goes into liquidation?

In the last article (CN 8 July) we looked at what you can do if you believe that you are owed money by a company in liquidation.

If both parties consider that they are owed money the liquidator must carry out a net balancing exercise under Rule 4.90 of the Insolvency Rules 1986.  However, what can you do if you dispute the liquidator’s calculation of the net balance?

Until recently it had been assumed that, as long as you had had a construction contract with the company in liquidation, you could simply refer a disputed net balance to adjudication so that the adjudicator could determine the value of the net balance.

However, the recent High Court case of Enterprise Managed Services Limited v Tony McFadden Utilities Limited means that the only way to determine the value of the net balance is to commence court proceedings.

The Court reached this decision for two main reasons. Firstly, Rule 4.90 envisages that the net balance will be ascertained by way of final and binding proceedings. An adjudication decision would only ever be temporarily binding, as either party would be able to commence court proceedings for a final determination.

The judge noted that there is a “fundamental clash between the certainty and finality envisaged by the full Rule 4.90 process and … the temporary, quick-fix solution offered by construction adjudication”.

Secondly, if there were multiple contracts between the parties, each of those contracts would have to be considered in order for an overall net balance to be determined. However, unless the parties agree otherwise, an adjudication can only ever deal with one contract. This would therefore necessitate a series of separate adjudications to determine the value of each contract, before the overall net balance could be established.

In fact, if there were multiple contracts, some may not even be construction contracts and would not therefore even be capable of being referred to adjudication.

As a result of this decision, adjudication will no longer be a suitable forum to determine the value of the net balance between the parties.  Instead, court proceedings should be commenced as these will be able to ascertain the overall value of the net balance between the parties in a single, final and binding process. Although not mentioned in the judgment, it may still be possible to use arbitration as an alternative to court proceedings, as an arbitrator’s decision would also be binding.

If, therefore, you believe that you are owed money by a company which goes into liquidation, the liquidator will have to carry out a net balancing exercise to arrive at the overall sum owed either to you or from you. If you dispute the value of this net balance, you cannot refer it to adjudication.  Instead the only course of action open to you will be to commence court or arbitration proceedings.  In effect, this decision means that once a company enters liquidation, adjudication is no longer on option.

Andrew Jones is a partner in the construction unit at HBJ Gateley Wareing