The judgment in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in Liquidation) concerned the issue over whether a company in liquidation may pursue adjudication proceedings in order to claim payment of monies alleged to be due.
Background
Bresco was Londsale’s electrical sub-contractor on an office refurbishment project.
The parties fell out and Bresco left the site. Both parties alleged the other was in repudiatory breach and claimed they were entitled to damages.
Soon afterwards, Bresco entered Voluntary Liquidation. The Liquidators later commenced adjudication proceedings, seeking payment for works done up to the date of termination and loss of profit on the incomplete element of Bresco’s works.
Lonsdale invited Bresco to discontinue the adjudication and requested that the adjudicator resign on the basis that the Insolvency Rules set-off provisions meant that the adjudicator did not have jurisdiction.
The adjudicator did not resign and issued a non-binding decision as to why he thought he had jurisdiction.
Londsale therefore sought a Part 8 Declaration and the adjudication proceedings were put on hold.
The Court summarised the issue for determination as follows: "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”.
The Insolvency Rules
Rule 14.25 of the Insolvency Rules 2016, concerning mutual dealings and set-off in liquidations, 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."
In essence, the rule provides that a debt owing by one party to another can be set-off against a debt owing in the other direction. This can be under the same contract or separate contracts.
The decision
The Court held that:
- The Insolvency Rules applied
- The Court did have jurisdiction to award an injunction to prevent adjudication proceedings continuing (although such power would only be exercised sparingly)
- Under 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"
- Adjudicators do not have the power to determine an account under Rule 14.25
- The right to adjudicate “at any time” did not take precedence over the Insolvency Rules
Consequently, the Liquidators were unable to pursue adjudication proceedings for determination of any net balance due.
Comment: The court’s decision makes it clear that companies in liquidation may not pursue adjudication proceedings where the claim is for “further sums said to be due to the referring party from the responding party”. The same position may apply to both administration and bankruptcy where the Insolvency Rules are drafted in similar terms.
Even where companies in liquidation may adjudicate for payment of “notified sums”, a favourable decision is likely to be stayed on enforcement, given the risk the insolvent party would be unable to repay the debt (if required to do so) upon final determination of the dispute (unless the non-payment is the primary reason for the insolvency).
Therefore, debt claims in insolvency situations must be determined by the Insolvency and Companies Court.
Read more on the case here.
