Stuart Pemble explains how a landmark House of Lords judgment has (correctly) resulted in the TCC stopping insolvent companies from commencing Construction Act adjudications
Key points
■The TCC has held that insolvency set-off effectively prohibits companies in liquidation from commencing adjudication against parties that might otherwise owe them money
■The judgment should have a significant effect on construction insolvency
Lord Hoffmann has had quite an influence on this author’s own legal life.
An occasionally controversial figure – type “Pinochet judgment” into your search engine of choice if you want to know more – his elevation to the House of Lords happened as my time at law school was coming to an end and my two-year training contract was just beginning.
The next 14 years (misadventures in a case involving the extradition of an infamous Chilean dictator notwithstanding) saw the judge produce erudite and influential judgments across a truly diverse range of legal issues.
Stein v Blake [1995] 2 All ER 961 was certainly both erudite and influential. It deals with the respective rights of two parties when one becomes bankrupt. Lord Hoffmann stressed that the Insolvency Rules (there is now a 2016 version, although the 1986 rules were in issue in Stein) affect the parties’ substantive rights by providing for a set-off of amounts owed against amounts owing, so that only a balance is payable from the party which owed the most money.
And, more importantly, once the Insolvency Rules apply, each party’s claims against each other are simply used to calculate that balance.
The only claim that can be enforced as a matter of law relates to the amount of the balance. The underlying claims that result in the balance can no longer be considered although (in what I admit is probably only of interest to any insolvency geeks reading this), there is judicial disagreement on the question of whether or not those underlying claims cease to exist in addition to ceasing to be enforceable.
The facts
In Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation) [2018] EWHC 2043 (TCC), Lonsdale asked Fraser J to grant an injunction preventing Bresco from commencing adjudication over sums allegedly due under a contract for electrical installation works at a corporate headquarters in Westminster that commenced in August 2014.
The contract did not progress smoothly. Bresco left the site in the December of the same year and, in March 2015, it entered into voluntary liquidation. Each side made various allegations of breaches of contract against the other and, in June 2018, Bresco served a notice of its intention to refer a dispute to adjudication on Lonsdale. That, in turn, prompted Lonsdale’s application for an injunction.
The main issue
Having first held that a court does have the power to grant injunctions to prevent or halt an adjudication (albeit a power that should be exercised sparingly), Fraser J had to decide which of two conflicting statutory principles took precedence.
Bresco relied on the right contained in section 108 of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) that a party to a construction contract as defined by the Act (and this contract was caught by that definition) can refer a dispute to adjudication “at any time”.
Lonsdale relied on insolvency set-off, as provided for in the Insolvency Rules and explained by Lord Hoffmann in Stein, to argue that, following Bresco’s insolvency, there was no actual claim that could be referred to adjudication.
And, with apologies for the over-simplification, Lord Hoffmann won that fight.
Although Stein related to individual bankruptcy rather than corporate insolvency, Fraser J noted that the underlying legal principles regarding these different insolvency regimes were exactly the same on this point.
Having overcome that hurdle, and taking comfort from the decision of the Court of Appeal in Bouygues (UK) v Dahl-Jensen (UK) [2000] EWCA Civ 507 and the leading textbook Derham on the Law of Set-Off, the judge had no difficulty in finding that “as at the date of the liquidation, and as a direct result of what occurs upon the appointment of the liquidator and the operation of the Insolvency Rules, the disputes between Lonsdale and Bresco that consist of claims and cross-claims between them become replaced with a single debt”.
The judge was also influenced by the decision of the House of Lords in Melville Dundas Ltd (in receivership) v George Wimpey UK Ltd [2007] UKHL 18, which (although only persuasive authority in this case because it relates to Scottish law) contains a number of passages (some from Lord Hoffmann) confirming that the doctrine of insolvency set-off “was not undermined, changed or watered down by the passing of the 1996 Act”.
Indeed, Fraser J also drew comfort from the general rule that primary legislation is presumed to be consistent with other primary legislation (the Insolvency Rules predate the Construction Act) and the fact that the Construction Act did not expressly grant powers to adjudicators to deal with disputes about the net balance due under insolvency set-off.
The judge therefore held that: “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.”
Consequences
The decision is of huge importance. It has been relatively common for liquidators to refer disputes to adjudication. Going forward, and unless overturned on appeal, it will now be difficult for liquidators to use adjudication to recover money from prospective respondents.
I think the judgment is correctly decided and, absent a change in the primary legislation, cannot think of any obvious way in which to challenge its conclusions.
And, if you (and he) will forgive the presumption, I hope Lord Hoffmann would agree with my conclusion. Stein has not lost any of its influence.
Stuart Pemble is partner at Mills & Reeve
