The liquidation of developers, contractors and sub-contractors are a regular occurrence in both large and small scale construction projects, with the insolvent company often left with claims against other firms involved in the development.  The right to adjudicate and then make use of the summary judgment route to enforce the adjudicator’s decision has long been the most powerful tool at the disposal of the creditor company.

The recent decision handed down in Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd [2018] EWHC 2043 explains what rights the company in liquidation has to pursue sums owed to it.

Background

The two parties had entered into a contract in August 2014 whereby Bresco had agreed to perform electrical installation works for Lonsdale. Bresco left the site in December 2014 in controversial circumstances with each party alleging wrongful termination against the other. Bresco subsequently became insolvent and entered into voluntary liquidation on 12 March 2015.

In October 2017, Lonsdale brought a claim against Bresco alleging that Bresco had wrongfully terminated the contract and claimed the direct costs of instructing another contractor to complete the remaining works. In response, Bresco alleged that it was Lonsdale who had wrongfully terminated the contract and that it was Lonsdale who owed Bresco money.

Adjudication

In June 2018, Lonsdale received a Notice of Intention to Refer a Dispute to Adjudication. The Construction Act 1996 gives a party to a construction contract the right to refer a dispute to adjudication at any time. An adjudicator’s decision is binding until the final dispute between the parties is determined by legal proceedings, arbitration or agreement. An adjudicator’s decision is usually enforced by the successful party obtaining a judgment for the adjudicated debt in the Technology and Construction Court (TCC).

Bresco were seeking to appoint an adjudicator to decide some of the following issues:

a) Whether Lonsdale committed a repudiatory breach of contract by employing other contractors to complete the works;

b) Whether Bresco is entitled to be paid for the work that it had completed prior to Lonsdale’s repudiatory breach;

c) Whether Bresco is entitled to be paid for the works it had completed, but for which it has not been paid, pursuant to the contract; and

d) Whether Lonsdale is entitled to deduct, from sums due to Bresco, any completion costs or other sums due to it.
Lonsdale took the view that the adjudicator did not have jurisdiction to determine these issues since the relationship between the parties was now governed by the set-off provisions of the Insolvency Rules. As a result, Lonsdale sought an injunction to restrain any adjudication proceedings.

The Insolvency (England and Wales) Rules 2016

The Insolvency Rules affect the substantive rights of the parties by providing for set-off of amounts owed against amounts owing, so that only the balance is paid.

In particular, Rule 14.25 provides for an account to be taken of what is due from the company in liquidation and its creditor to each other in respect of their ‘mutual dealings’ and the sums due from one must be set off against the sums due from the other.

Judgment

The court was satisfied that the sums claimed by both parties from the other fell within the definition of ‘mutual dealings’ and were therefore caught by Rule 14.25. When this happens, the parties’ various individual claims are simply part of a process of calculation because the only claim that exists between the parties is the claim for the net balance. The court also rejected Bresco’s argument that the right to adjudicate trumped the Insolvency Rules.

In simple terms, the TCC confirmed that, the adjudicator did not have jurisdiction. The Insolvency Rules had trumped the Construction Act.

Implications

In summary, the liquidation of a developer, a contractor or a sub-contractor removes the right of that company to pursue an adjudication. The calculation of the balance due as between the parties is an exercise for the liquidator alone to determine.

Until now, liquidators have often referred disputes to adjudication, usually as part of the exercise of taking an account of money owed and owing under the Insolvency Rules.  This practice will need to change.

As a result, companies with potential solvency issues may want to consider whether they can assign or sell their rights to bring a claim for fees due to them. This could enable these claims to be pursued through third party companies without the Insolvency Rules effectively thwarting their right to adjudicate.

If you require any further information on the above then please contact Navinder Grover and Lee Donoghue of our Insolvency Team.

This article is part of a series of legal update articles from our quarterly newsletter, to receive all future quarterly newsletters, please subscribe below:

E-zine Subscription