Bresco – Liquidators can adjudicate

Summary

Liquidators can bring adjudications when the insolvency set off regime is engaged. In Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd the Supreme Court held that the statutory regimes governing adjudication and insolvency set off are not incompatible, as lower courts had held to be the case.

Adjudication

• Parties to a construction contract (as defined) have a right to refer disputes arising under that contract to adjudication (s. 108 of the Housing Grants, Construction and Regeneration Act 1996 - the 1996 Act), even absent an express adjudication provision. If a construction contract is not compliant with the 1996 Act the provisions of the Scheme for Construction Contract automatically apply as implied terms.
• Adjudication is a swift process; absent any extensions of time, an adjudicator is required to reach a decision within 28 days of receipt of the Referral.
• The adjudicator’s decision is temporarily binding on the parties. The parties must comply with the decision (so pay now, argue later), but are free later to litigate, arbitrate or otherwise seek to compromise the underlying dispute.

Insolvency set off

• Rules made under the Insolvency Act 1986 provide for automatic set-off of cross-claims between a company in liquidation and each of its creditors, giving rise to a single net balance between them, to be ascertained by the liquidator.

  Insolvency vs. Adjudication.

• The argument in Bresco was that netting off the various claims and cross-claims for insolvency set-off meant that the dispute no longer fell under a construction contract, meaning that it fell outside of the 1996 Act and the statutory adjudication regime. Although the 1996 Act does not deny the right of a company to refer disputes to adjudication merely because it is in liquidation, the Court of Appeal held that there was an incompatibility between adjudication and the insolvency set off regime.

• The Supreme Court, however, disagreed; construction adjudication is not incompatible with the insolvency process.

  • Where insolvency set-off is engaged under the Insolvency Rules 2016, leaving the dispute concerned with a net balance, the underlying individual claims still subsist and maintain their separate identity. A dispute under the construction contract therefore remains, for the purposes of the 1996 Act.

  • The insolvent company has a statutory and contractual right to pursue adjudication to resolve any dispute arising under a construction contract to which it is a part. It would “ordinarily be entirely inappropriate for the court to interfere with the exercise of that statutory and contractual right”.

  • The existence of cross-claims does not render adjudication futile. Adjudication has the advantages of speed, simplicity and efficiency.

  • Any cross-claims outside of the remit of the construction contract (such as personal injury claims) may need to be resolved separately, but nonetheless “the adjudicator’s resolution of the construction dispute referred by the liquidator may be of real utility to the conduct of the process of set-off within the insolvency process as a whole.”

As the UK emerges from several months of strict lockdown, economic conditions remain difficult. As a result, we expect to see an increase in adjudications involving insolvent companies, so this clear guidance from the Supreme Court is welcome. As liquidators can still arrive at their own determination of the value of claims in the insolvency, an adjudicator’s decision may not always mark the end of the dispute. However, we expect circumstances where a liquidator does not follow the adjudicator’s decision to be rare.