The Technology and Construction Court (TCC) has delivered a significant judgment in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation)  EWHC 2043 (TCC) where the company seeking to refer a dispute to adjudication was in liquidation. The substance of the dispute related to the contractor's claim for payment allegedly due for work completed, and damages for loss of profits.
The contract and the facts
- Bresco Electrical Services Ltd (the "Referring Party" or "Bresco") was engaged by Michael J Lonsdale (Electrical) Ltd (the "Responding Party" or "Lonsdale") under a sub-subcontract for electrical installation works on an office refurbishment project in London dated 21 August 2014 (the "Contract"). The form of Contract was the JCT Construction Management Trade Contract, 2011 Edition (CM/TC 2011) with bespoke amendments.
- The Contract was a "construction contract" governed by the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the "Construction Act") meaning that the parties had a right to refer a dispute under the Contract to adjudication at any time.
- Bresco left the project in controversial circumstances, with each of the parties alleging wrongful termination of the other. After leaving the project, Bresco went into voluntary liquidation, with a liquidator appointed on 12 March 2015. Bresco then commenced an adjudication against Lonsdale alleging repudiatory breach and seeking a decision from the adjudicator that sums were due from Lonsdale, by way of payment for works completed prior to leaving the site and/or damages for loss of profits.
- Lonsdale invited Bresco to discontinue the adjudication and the adjudicator to resign on the basis that the adjudicator had no jurisdiction owing to the mandatory set off rule applicable where a company is in liquidation. The adjudicator refused to resign and issued a "non-binding decision" explaining why he rejected Lonsdale's arguments and declared that he did have jurisdiction to decide the dispute.
Lonsdale subsequently commenced proceedings under Part 8 of the Civil Procedure Rules (Part 8) seeking declarations and an injunction to prevent Bresco from bringing a claim to adjudication on the basis that the liquidation operated to extinguish the claim(s) relied upon by Bresco in that adjudication. The adjudication was stayed until the Part 8 claim was determined.
The parties were unable to agree how the Part 8 claim should be framed but considered that the most important elements of the dispute related to:
- the liquidation of Bresco;
- the effect of Rule 14.25 (Winding up: mutual dealings and set-off) of the Insolvency Rules 2016 upon the parties' rights; and
- the adjudicator's jurisdiction to deal with the dispute referred to him.
The TCC summarised the issue to be resolved as:
"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" (Paragraph 22).
The main issues
Mr Justice Fraser, identified five key issues:
- whether the Insolvency Rules 1986 or Insolvency Rules 2016 (which came into force on 6 April 2016) applied in this case;
- the applicable test of whether the TCC has power to grant injunctions preventing or halting adjudications commenced under the Construction Act;
- whether monetary claims and cross-claims are available to a party in liquidation;
- the correct legal characterisation of what happens to such claims and cross-claims when a liquidator is appointed;
- whether preventing adjudication in situations of insolvency contravenes the statutory right to adjudicate at any time.
Mandatory set-off in insolvency
This case turns around the provisions in the Insolvency Rules (in this case the 2016 Rules - to which see further below) in relation to mutual dealings and set off. As such, it is worth pausing before looking at the TCC decision to consider Rule 14.25 of the Insolvency Rules 2016, which deals with mutual dealings and set off in liquidations.
Rule 14.25(2) provides as follows:
"An account must be taken of what is due from the company and the 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."
Mutual dealings do not have to be amounts due in either direction under one contract - instead what is required is mutuality of the parties. So a debt owing under one contract in one direction can be set off against a debt owing under another contract in the opposite direction. As such, it was clear that the debts owing between Lonsdale and Bresco fell within the category of mutual dealings.
The TCC decision
The TCC found in favour of Lonsdale on the following basis:
Bresco entered voluntary liquidation in March 2015, but did not serve its Notice of Intention to Refer a Dispute to Adjudication until June 2018. In the meantime, the Insolvency Rules 1986 had been replaced (save for transitional provisions) by the Insolvency Rules 2016. Both parties to the current case agreed that it should be decided on the basis of the Insolvency Rules 2016, and the TCC accepted this and further noted that the 2016 Rules "were likely to be of wider application in other cases".
In any event, this was a relatively moot point, given the TCC's view that Rule 14.25 of the Insolvency Rules 2016 produced the same effect as its predecessor, Rule 4.90 of the Insolvency Rules 1986.
Bresco argued that it was inappropriate for the TCC to interfere with the ongoing adjudication proceedings.
The TCC rejected this argument stating that it does have the jurisdiction to grant an injunction in an ongoing adjudication but that such jurisdiction will "be exercised very sparingly". Injunctive relief is not usually sought under Part 8. The TCC did not want this case to open the floodgates to Part 8 claims seeking to interfere with the course of an adjudication and "it will only be appropriate in rare cases for the TCC to intervene in an ongoing adjudication" (Paragraph 17). This follows earlier case law.
The disputes between Lonsdale and Bresco in this case consisted of claims and cross-claims between them. The TCC decided that when a liquidator is appointed, as a result of Rule 14.25, "…claims and cross claims…cease to be capable of separate enforcement upon, or at, the date of the liquidation" and are "replaced by a single debt" (Paragraph 48, emphasis added).
On Bresco's liquidation, the only dispute that would remain would be that of taking the account required under the Insolvency Rules 2016. All Bresco could have is a claim to the balance following the taking of the account required by those Rules. The TCC confirmed that an adjudicator does not have the power to conduct such an account under the Insolvency Rules 2016.
Counsel for Bresco argued that the different claims and cross-claims of the parties could not cease to exist, as if there was only a single debt between the parties that would preclude any of the "closing out" transactions commonly seen in liquidation. This is because those all follow the exercise of contractual rights after liquidation. Counsel for Bresco referred in particular to closing out transactions following the Lehman and Carillion insolvencies.
The TCC rejected this argument stating that this case was concerned with an adjudication and "closing out" transactions are not determined by an adjudicator.
The TCC conceded that there is much disagreement over the correct legal characterisation of what happens to claims and cross-claims when a liquidator is appointed - however Mr Justice Fraser concluded that this did not matter in the current case. Bresco's claims under the Contract ceased to be capable of separate enforcement on the date of the liquidation.
Bresco argued that its statutory right to refer a dispute to adjudication "at any time" prevented the TCC from interfering in the adjudication. The TCC rejected this argument stating that the right to adjudicate did not take priority over the Insolvency Rules.
The only claim that could exist was one for the net balance in accordance with the Insolvency Rules 1986 or the Insolvency Rules 2016. Any dispute about that would be a dispute arising in the liquidation not under the Contract. The Construction Act did not give adjudicators the power to decide disputes relating to the net balance payable under the Insolvency Rules 1986 or Insolvency Rules 2016.
In very simple terms - this case is of particular significance for the construction industry and insolvency practitioners taking appointments in the sector as it confirms that a company in liquidation cannot refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of "any claim for further sums said to be due to the referring party from the responding party".
Given the substantive similarities between the mandatory set off rules for liquidation (Rule 14.25 of the Insolvency Rules 2016), administration (Rule 14.24 of the Insolvency Rules 2016) and bankruptcy (section 323 of the Insolvency Act 1986), this decision should be viewed as applicable in those processes also.
The authors fully agree with Mr Justice Fraser's comments at paragraph 48 of his judgment that "the practical behaviour of liquidators… cannot affect the correct legal characterisation of disputes and mutual dealings which are set down in the Insolvency Rules, which have statutory force". That said, the conclusion that the TCC has reached in this instance seems to provide an unsatisfactory position, in which technical questions about payments due under a construction contract will fall initially to liquidators to determine and subsequently, if challenged, to the Insolvency and Companies Court Judges. Could the future be that adjudicators will find themselves taking on a quasi-adjudication role as experts to help insolvency practitioners take the account required by mandatory set off rules?
If you have any queries on this or related topics, please contact Michael O'Shea, Lindsay Hammond or Pippa Hill.