Case Comment: Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (In Liquidation) [2018] EWHC 2043 (TCC)

Can an adjudicator have jurisdiction over claims for sums owed to a referring party in liquidation? The TCC has decided in Lonsdale v Bresco that insolvency set-off precludes adjudication of such claims.

Background

Bresco had agreed to perform electrical installation works for Lonsdale in August 2014. Those works were not completed and both parties alleged wrongful termination. Bresco later became insolvent and entered into liquidation in March 2015.

The present case concerns a Part 8 claim brought by Lonsdale against Bresco seeking (i) an injunction to prevent the bringing of an adjudication and (ii) a declaration that Bresco’s liquidation extinguished the claims it relied upon in the adjudication.

The key issue, as framed by Fraser J at paragraph [22], was ‘whether a company in liquidation can refer a dispute to an adjudication when that dispute includes determination of a claim for further sums said to be due to the referring party from a responding party.’

Decision

Fraser J held in favour of Lonsdale and granted the injunction and declaration. It was held that an adjudication could not be brought because the claims relied upon by Bresco could not be capable of separate enforcement after liquidation.

This resulted from the operation of r 14.25 of the Insolvency Rules 1986 which provided for the automatic set-off of mutual dealings between a company and a creditor upon liquidation of the company. The effect of that set-off, following Stein v Blake [1996] AC 243, was that claims for sums due from Lonsdale to Bresco and vice versa were set aside by a new claim that arose for the net balance.

As Fraser J noted, it was unnecessary for him to determine the conceptual issue as to whether those claims were totally extinguished by the set-off or whether the underlying rights persisted. It was sufficient that the claims were no longer capable of separate enforcement.

As for the new claim that arose for the net balance, it did not fall under the jurisdiction of the adjudication. This was because the claim for the net balance did not result from a dispute arising under the contract but rather from a dispute arising in liquidation.

As noted in the case, ‘many 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 practical steps to determine disputes between the company in liquidation and its counter-party to construction contracts.’ Following the decision in Lonsdale, it is now well established that adjudicators should resign if called upon to determine claims subject to set-off.