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Liquidation speculation and adjudication

Most involved in the construction industry will at some point have encountered insolvency. Institutionally tight margins and weighted risk-sharing regrettably have pushed and will continue to push companies, particularly on the contracting side, to the wall. Insolvency during live construction projects can be particularly problematic because replacement contractors need to be procured to complete the insolvent company’s works without causing delay to the project programme. This inevitably increases cost.

Post-insolvency, if a company heard from the administrator or liquidator at all, it would normally be to request information about its relationship with the insolvent company. The administrator/liquidator may also assert there were outstanding debts. We understand however that there could be a new wave of further action – specifically, agents of the liquidator taking over perceived debts due to the company and funding and prosecuting adjudications.

There appears to be some confusion amongst liquidators’ agents, and indeed adjudicators, as to whether adjudications in these circumstances are permitted. We were recently involved in such a matter which may serve as a guide as to why adjudication is not permitted.

Broadly, our client’s sub-sub-contractor (Company) went into liquidation in 2015. In 2017, the liquidator’s agent asserted that our client owed sums to the Company. In response, our client explained why sums were not due and moreover why the Company was liable to it (in essence because our client was compelled to engage another contractor to remediate and then complete the Company’s package of works).

The Company then commenced an adjudication against our client seeking recovery of various sums, including damages. We invited the adjudicator to resign on the basis that the only forum in which the “net account” of dealings between our client and the Company could be determined, in accordance with the Insolvency Rules 2016, was litigation, not adjudication. The adjudicator declined our invitation to resign.

Our client then applied to the Technology and Construction Court (TCC) for an injunction permanently restraining the adjudication. Mr Justice Fraser found in favour of our client, deciding that the adjudicator did not have jurisdiction to determine the dispute and the adjudication would therefore not continue.

He found that at the date of liquidation, and as a result of the operation of the Insolvency Rules, the disputes between the parties consisting of claims and cross-claims are replaced with a single debt. Accordingly, and in line with another TCC decision, Enterprise v Tony McFadden[1], the Company only had a claim to a net balance, which under the Insolvency Rules, an adjudicator cannot determine. This was held not to be a dispute arising under a construction contract and therefore the adjudicator had no jurisdiction.

We would suggest this decision has material importance, given the indications from the judge that adjudications commenced by companies in liquidation are becoming prevalent and that adjudicators may not appreciate the law on jurisdiction in these circumstances.

Michael J Lonsdale Ltd v Bresco Electrical Services Ltd (in Liquidation) [2018] EWHC 2043 (TCC)

[1] Enterprise Managed Services Limited v Tony McFadden Utilities Limited [2009] EWHC 3222 (TCC)

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