CASE REVIEW: Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (In Liquidation)  EWHC 2043 (TCC)
by Mark Woodward-Smith, Group Managing Director -
In a recent significant judgment for those who are a party to a construction contract, the Technology and Construction Court (“TCC”) has ruled that a company in liquidation cannot bring adjudication proceedings for a financial dispute. The adjudicator would not have jurisdiction to determine the dispute referred to him as the liquidation operates in law in such a way as to extinguish the claim(s) relied upon in that adjudication.
Case background and referral of dispute to adjudication
On 21 August 2014, Lonsdale (the “Claimant”) entered into a contract with Bresco (the “Defendant”) to perform electrical installation works. In December 2014, Bresco left the site in controversial circumstances with both parties alleging wrongful termination against the other.
On 12 March 2015, Bresco entered liquidation and thereafter the company was controlled by liquidators.
In late October 2017, Lonsdale indicated that a claim would be made against Bresco for the cost of engaging others to complete the works and wrongful termination of the contract.
On 18 June 2018, Lonsdale received a Notice of Intention to Refer a Dispute to Adjudication which requested that the adjudicator decide the following points:
- Whether there had been repudiatory breach of the sub-contract by Lonsdale by employing others to complete the works
- Bresco’s entitlement to payment for works executed prior to the breach and the value of such works
- Bresco’s entitlement to damages for loss of profit for non-completed work as a consequence of Lonsdale’s repudiatory breach
- What sums Lonsdale is entitled to deduct
- What interest Bresco is entitled to be paid
In essence, the adjudicator had to decide what particular sums are due to Bresco from Lonsdale, by way of payments under the contract for works done and/or damages for loss of profits.
Lonsdale invited the appointed adjudicator to resign claiming that he had no jurisdiction as a result of Bresco having become insolvent and placed into liquidation. Lonsdale also invited Bresco to discontinue with the adjudication. However, Bresco failed to discontinue the adjudication and the adjudicator failed to accept Lonsdale’s invitation to resign. Subsequently, Lonsdale issued proceedings on 26 June 2018. Lonsdale sought a declaration and a permanent injunction to prevent Bresco from bringing a claim to adjudication.
At paragraph 22 of the judgement, Fraser J framed the fundamental issue for resolution as;
“… 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?”
Fraser J agreed with the decision in Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd which held that once a company is in liquidation, the adjudicator does not have jurisdiction to deal with the dispute as the claim now existing between the parties is a claim under the relevant insolvency rules (Rule 4.90 of the Insolvency Rules 1986 or Rule 14.25 of the Insolvency Rules 2016).
Under the insolvency rules, the liquidator should consider the overall financial account between the parties to establish the net balance or single debt payable taking into account any party claims or cross claims (including both Bresco’s and Lonsdale’s claims and counterclaims).
Further, when a liquidator is appointed, claims and cross claims cease to be capable of separate enforcement. Therefore, due to the operation of the Insolvency Rules, the disputes between Lonsdale and Bresco that consist of claims and cross-claims between them became replaced with a single debt which thereafter became the dispute.
Significantly, this means that the adjudicator has no jurisdiction to deal with the dispute for financial matters which instead falls under the Insolvency Rules as per Fraser J at paragraph 48;
“In my judgment that is precisely what happens to claims and cross claims when a liquidator is appointed. They cease to be capable of separate enforcement upon, or at, the date of liquidation.”
In summing up, Fraser J stated at paragraph 76:
“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”
Impact of the decision
This ruling will have noteworthy implications for adjudicators who find they have no jurisdiction to commence or continue with an adjudication referral, for liquidators or third-party assignees seeking an adjudication decision for debt owing to companies in liquidation and for the wider contractual supply chain including contractors and subcontractors who may be bringing or defending an adjudication referral.
A company in liquidation is not prevented from pursuing non-monetary claims through adjudication however the Court award will no doubt obstruct a liquidator’s ability (or any third party assigned the debt by the liquidator) to achieve a prompt (within 28 days of referral unless otherwise agreed) and cost-effective collection of outstanding monies. On the contrary this obstruction may be seen as a positive for solvent parties who are defending a potential referral.
Referral of non-monetary claims could still allow an adjudicator to decide upon entitlement for time related disputes and quantum, however it appears that the adjudicator’s jurisdiction would not extend to the establishment of financial entitlement. Even if the adjudicator considers that a referral covers all disputed financial amounts between the parties to a contract, the ruling nonetheless holds that it is still beyond the adjudicator’s jurisdiction.
Whether an adjudicator should decide to commence or continue with a financial-based adjudication referral received from a company in liquidation is discussed by Fraser J at paragraph 48;
“I would be surprised if many, or indeed any, adjudicators would decline to resign if a responding party brought the relevant passages of…this case to his or her attention during an adjudication.”
An adjudicator should therefore be aware of its jurisdictional boundaries and obligation to refuse monetary based referrals from a company in liquidation. The solvent party receiving a referral notice from such a party should refuse based upon the grounds of this case.
The solvent party should also be aware of their potential liability for payment for the adjudicator’s costs including those from suspended referrals which cannot be paid by the company in liquidation and are therefore due for payment by the solvent party under joint and several liability.
1  EWHC 3222 (TCC)