In Lonsdale v Bresco, Lonsdale applied for an injunction preventing Bresco (in liquidation) from pursuing an adjudication for sums owed under a contract for electrical works. Fraser J granted the injunction, because the Insolvency Rules (4.90 in the old rules, 14.25 in the new) required an account of dealings between the insolvent company and any given counterparty, such that the claims and cross-claims between the two would be merged into a single balance due in one direction. So, there was only one possible dispute remaining, being as to the net sum due to whichever party, and an adjudicator had no jurisdiction to hear that dispute. All other specific claims under various contracts ceased to exist or, at least, ceased to be capable of separate enforcement.
The judge offered some lengthy dicta on the “legally existential” point as to whether, on liquidation, claims and cross-claims ceased to exist or remained in existence but became unenforceable by application of the Insolvency Rules. Ultimately, he did not have to decide that issue, but was satisfied that in the circumstances the effect of the Rules was that he should prevent the adjudication from proceeding.
In finding that a company in liquidation could not commence an adjudication, Fraser J followed and developed the decision of Coulson J (as he then was) in Enterprise Managed Services Ltd v Tony McFadden Utilities that an adjudication decision would not be enforced because one party was in liquidation. The result is also consistent with the TCC’s established practice of not enforcing interim payment obligations in favour of insolvent contractors (noted in Wilson and Sharp Investments). As Fraser J commented, while in an insolvency situation the TCC retains a discretion to enforce, where a company has formally entered into liquidation, the Insolvency Rules dictate the position and it is no longer a matter of TCC practice.
The judge declined to follow a clear decision the other way in Philpott v Lycee Francais Charles de Gaulle School, which he thought was wrongly decided.
Is this a surprising decision? Legally not, but practically it might well be. Counsel for Bresco had made the point that liquidators across the country regularly refer disputes to adjudication, either as part of the exercise of taking an account under the Insolvency Rules, or in making financial claims outside that exercise. Equally, the case itself was evidence that certain adjudicators are happy to assume they have jurisdiction. Fraser J was unimpressed by the practice of liquidators and adjudicators, which, in his view, could not affect the correct legal analysis.
As this case and its forebears become more widely known, and it becomes more apparent that the courts are willing not only to refuse to enforce an adjudication decision involving a company in liquidation, but also to intervene to prevent or halt an adjudication, that practice will have to change. If it does not, liquidators may well be wasting considerable sums on commencing adjudications that resolve no issues and bring no money in.
Future role for adjudication
There may be a residual role for adjudication involving parties in liquidation. Fraser J stressed that Bresco’s referral notice sought a decision concerning sums due, and it is clear from his reasoning that the difficulty with the notice was that it was a claim for financial relief. That may be a hint that it is still open to liquidators to use adjudication to resolve pure disputes of principle, without any financial claim attached. For example, the judge accepted that it might be useful to these parties to know the answer to the question of which party had repudiated the contract. He said:
If the parties wish to agree a mechanism to resolve that issue, that is up to them… [but] adjudication against the will of the party not in liquidation is not such a mechanism.
The suggestion is that the parties may agree to use adjudication to resolve their disputes of principle, but a liquidator cannot use the statutory right to adjudication to obtain a financial decision in their favour.
A version of this blog post first appeared on Practical Law Construction on August 14, 2018.