A Company In Liquidation Cannot Refer A Money Claim To Adjudication

MJ Lonsdale Ltd v Bresco Ltd (In liquidation) – a Company in liquidation cannot refer a dispute to adjudication when that dispute included the determination of a claim for payment.

Facts

In Lonsdale Ltd v Bresco Ltd (in liquidation), each party alleged that it was entitled to payment as a result of the other party having wrongfully terminated the construction contract between them. Lonsdale sought a declaration and a permanent injunction to prevent Bresco from bringing a claim in adjudication. 

Insolvency Rules 2016

Lonsdale argued that the effect of Rule 14.25 of the Insolvency Rules 2016 was that Bresco’s claim could not be adjudicated. The rule applies where, before the company goes into liquidation, there have been mutual dealings between the company and a creditor proving or claiming to prove debt for liquidation. It states that any sums owed from one must be set-off against the sums owed by the other. The balance is then payable to either the creditor or the company. As a result, the claims and cross-claims between Lonsdale and Bresco were replaced with a single debt – that which was due as a result of the account under Rule 14.25. As has previously been determined in the House of Lords, the account is automatic and self-executing immediately upon liquidation. Can such an account be determined by an adjudicator, possibly in a series of separate adjudications dealing with different elements of it?

Is there a right to adjudicate?

Under Section 108 of the Housing Grants, Construction and Regeneration Act 1996 (‘Construction Act’), parties to a construction contract have a right to refer a dispute arising under the contract for adjudication at any time.

The process is one which produces temporarily binding decisions, meaning that the parties can subsequently have the same dispute decided in litigation or arbitration (depending on what their contract provides for).

It is generally only possible to refer a single dispute in any given adjudication. The underlying claims and cross-claims, in a case where Rule 14.25 applies, will often constitute separate disputes.

As is clear from the decision in this case, these features of adjudication mean it is not a process that is well-suited for the determination of an account under Rule 14.25.

The process is not only unsuitable, it is not available. Under Rule 14.25, upon the appointment of a liquidator, the claims between the parties are replaced by a single claim for the net balance between them in the form of the Rule 14.25 account. Any dispute about that, or any constituent financial claim forming part of it, is a claim in the liquidation and not a “dispute arising under the contract”.

The Judge therefore concluded:

‘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’.

Insolvency Rules 1986

The court held the same outcome would be reached if the 1986 Insolvency Rules applied.

Practical Consequences

One of the arguments that Bresco advanced was that liquidators regularly refer disputes to adjudication: separately to taking the account under the Insolvency Rules, as part of taking that account, or as practical steps to determine disputes between the company in liquidation and its counter-party to construction contracts. Adjudicators also, it was said, commonly decide those disputes.  However, as stated in the judgment, the ‘practical behaviour of liquidators’ cannot affect the ‘correct legal characteristics of disputes and mutual dealings as set down in the Insolvency Rules’.

Bresco were correct to say that such adjudications have been pursued in the past, although we have always challenged them on the basis that the adjudicator has no jurisdiction because of the effect of the Insolvency Rules.  It seems likely that the practice of commencing such adjudications will or should stop.  The case does not appear to rule out adjudicating issues related to the underlying claims between the parties.  However, because any decision on them will only be temporarily binding, there would usually be little to be gained by doing so.