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Can an insolvent company refer a monetary dispute to adjudication?

08 February 2019

In 2018, the Technology and Construction Court concluded in Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited, that an insolvent company cannot refer a monetary dispute to adjudication because the adjudicator would not have jurisdiction to determine the dispute.  The basis of this conclusion was that, when a company enters liquidation, it ceases to have a financial claim under a contract and, instead, contractual rights are replaced by a single right to claim the balance (if any) arising out of the mutual dealings and set-off between the parties under the Insolvency (England & Wales) Rules 2016.  The insolvent company, Bresco, appealed that decision.

In a measured judgment, the Court of Appeal has reached largely the same conclusion, but for a different reason.  Approving the 2015 decision in Philpott v Lycee Francais Charles de Gaulle School, the Court of Appeal concluded that an adjudicator would have jurisdiction to consider a financial claim by an insolvent company, but that considering such a claim would be an exercise in futility because of the basic incompatibility between adjudication (a rough and ready process that may well result in injustice) and insolvency (in which a liquidator will take a detailed account and carry out a careful calculation of a net balance).  In such circumstances, the Court of Appeal concluded that it would only be in very exceptional circumstances that an adjudicator’s decision in favour of an insolvent company would be enforced by summary judgment in the TCC.  Because of this, the Court of Appeal considered that incurring the wasted costs which would be incurred in obtaining an unenforceable adjudicator’s award would be “wrong in principle”.

In the circumstances, the Court of Appeal upheld the High Court’s decision to grant an injunction to prevent Bresco from commencing an adjudication.