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Monday, 3 September 2018

Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (In Liquidation)

[2018] EWHC 2043 (TCC)

Lonsdale and Bresco entered into a sub-contract for electrical installation works. Bresco left the site in December 2014. Both Bresco and Lonsdale alleged wrongful termination against the other. In late October 2017, Lonsdale intimated a claim against Bresco claiming the direct costs of completing the works said to have been caused by this termination. Bresco, on the other hand, maintained that it was Lonsdale who owed Bresco money. However, on 12 March 2015, Bresco went into liquidation. On 18 June 2018, Bresco initiated an adjudication against Lonsdale in relation to a dispute under a contract for electrical installation works. Lonsdale invited the adjudicator to resign on the basis that he had no jurisdiction as a result of Bresco having become insolvent and placed into liquidation. The consequence of this, Lonsdale said, was that the relationship between the parties was now governed by the Insolvency Rules. The adjudicator declined to resign. 

Lonsdale therefore issued Part 8 proceedings which led to Mr Justice Fraser having to consider the following question:

Can a company in liquidation refer a dispute to adjudication when that dispute includes ( in whole or in part) determination of a claim for further sums said to be due to the referring party from the responding party? 

In considering this question, the Judge considered the Insolvency (England and Wales) Rules 2016. Rule 14.25 of the 2016 Rules states that: 

“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.” 

The 2016 Rules define “mutual dealings” as: 

“mutual credits, mutual debts or other mutual dealings between the company and a creditor proving or claiming to prove for a debt in the winding up” 

The Judge considered that the sums claimed to be due from Lonsdale to Bresco, and the sums claimed from Bresco to be due to Lonsdale, fell within the definition of “mutual dealings” and were therefore caught by the requirement under the Rule. They were plainly mutual credits and/or mutual debts between the company in liquidation (Bresco) and the creditor (Lonsdale). Upon liquidation, the Insolvency Rules (which have statutory force) required that an account must be taken of those dealings in each direction to arrive at a single balance due either to, or from, the company in liquidation. Such categorisation of these sums included the sums that were the subject matter of the dispute referred to adjudication in this case. The Judge concluded that:

“as at the date of the liquidation, and as a direct result of what occurs upon the appointment of the liquidator and the operation of the Insolvency Rules, the disputes between Lonsdale and Bresco that consist of claims and cross-claims between them become replaced with a single debt. That is thereafter the dispute, namely the result of the account that the 2016 Rules require to be taken to determine the balance payable in which direction.”

The only dispute that remained in law was that of taking the account under the 2016 Rules (or the 1986 Rules before that). All Bresco can have is a claim to the balance following the taking of the account required by the Rules. An adjudicator cannot conduct such an account under the Insolvency Rules. 

This dispute was not a dispute arising “under the contract”. Upon the appointment of the liquidator, any number of disputes between the parties to a construction contract becomes a single one, namely a dispute relating to the account under the Insolvency Rules. It becomes a claim for the net balance under Rule 14.25(2) of the 2016 Rules. A dispute in relation to the taking of an Insolvency Rules’ account is not “a dispute arising under the contract”: it is a dispute arising in the liquidation. This meant that the adjudicator here did not have jurisdiction to determine the dispute referred to him. The dispute referred to him included both money claims and cross-claims, and an analysis of how much was owed to Bresco. 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.

Bresco noted that liquidators across the country regularly refer disputes to adjudication either separately to taking the account under the Insolvency Rules, as part of taking that account, or as what were termed practical steps to determine disputes between the company in liquidation and its counter-party to construction contracts. However, Mr Justice Fraser was clear that this could not affect the correct legal characterisation of disputes and mutual dealings which are set down in the Insolvency Rules, which have statutory force. 

Companies in liquidation will no longer be able to use or threaten to use adjudication proceedings to pursue money claims, if, as inevitably on any construction project, there are claims and counterclaims between the parties. 

Decision upheld, though for different reasons, on appeal. See Issue 224.

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