It is not uncommon for liquidators of an insolvent company to launch an adjudication to recover monies owed to the stricken business, particularly in construction.
The underlying question, which until very recently remained unclear in certain circles, was whether an adjudicator had jurisdiction to determine such a claim.
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This came to a head in the recent judgement Michael Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (In Liquidation) [2018] EWHC 2043 (TCC).
Bresco had commenced an adjudication against Lonsdale claiming, among other matters, payment for work carried out and that Lonsdale committed a repudiatory breach of contract by employing others to complete its works.
Lonsdale said the adjudicator did not have jurisdiction to determine the dispute because of Bresco’s insolvency and liquidation.
The adjudicator nevertheless continued, taking the non-binding view that he did have jurisdiction in such circumstances.
As a result, Lonsdale issued court proceedings. It sought an urgent injunction to permanently prevent Bresco from bringing a claim in adjudication, on the basis that Bresco’s liquidation had extinguished the claim which Bresco had brought. The parties agreed to stay the adjudication pending the outcome of those court proceedings.
The judge, Mr Justice Fraser, reviewed relevant case law. The issue was whether the court had jurisdiction to grant an injunction to prevent an ongoing adjudication, and if it did, whether it should do so in this case in light of Bresco being in liquidation.
This involved consideration of the Insolvency Rules and their relationship to the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”).
“When a liquidator is appointed, all claims and cross-claims between the parties in relation to their mutual dealings cease to be capable of separate enforcement.”
Bresco had argued that its rights under the Construction Act to refer a dispute to adjudication at any time meant the courts could not prevent it from doing so.
As a result, the firm contended, the courts should not grant an injunction and interfere with the ongoing adjudication. The judge disagreed. He made it clear, by reference to existing case law, that the courts do have jurisdiction to grant an injunction in relation to an ongoing adjudication, though they will do so only rarely.
Referencing the Insolvency Rules, the judge held that in an insolvency, when a liquidator is appointed, all claims and cross-claims between the parties in relation to their mutual dealings “cease to be capable of separate enforcement”.
Such claims and cross-claims are merged under the Insolvency Rules into a single balance due to one party or the other. To arrive at that balance involves taking account of the mutual dealings between the parties. As the judge explained, it is not possible to adjudicate a claim for these dealings.
In this case, there was no conflict with the Construction Act, which was never intended to supersede the Insolvency Rules.
There were other reasons given by the judge as to why a company in liquidation cannot adjudicate over a claim for payment to it, but the judgement is clear: a company in liquidation cannot commence an adjudication for monies claimed to be owed to it.
Indeed, the judge seemed rather scathing of insolvent companies and adjudicators who felt they could attempt to do so. Bresco’s QC had told the court that “liquidators across the country regularly refer disputes to adjudication”.
But the judge said: “I would be surprised if many, or indeed any, adjudicators would decline to resign if a responding party brought the relevant passages of Bouygues, Enterprise [cases referred to in his judgement] or indeed this case to his or her attention during an adjudication.”
However, there is a caveat – the prohibition on liquidators commencing an adjudication only applied to claims for payment to a company in liquidation. Whether there is a loophole there that some liquidators may try to exploit remains to be seen.
Stuart Thwaites is legal director at Wright Hassall
