MICHAEL J LONSDALE (ELECTRICAL) LTD v BRESCO ELECTRICAL SERVICES LTD

 

MICHAEL J LONSDALE (ELECTRICAL) LTD v BRESCO ELECTRICAL SERVICES LTD

Technology and Construction Court

Fraser J

31 July 2018

The adjudicator did not have jurisdiction to determine the dispute referred to him by the sub-sub-contractor company in liquidation which included money claims and cross claims and an analysis of how much was owed to the sub-sub-contractor

 

Fraser J, in deciding that the adjudicator did not have jurisdiction, held that declarations should be made in the Part 8 proceedings brought by the sub-contractor and an injunction should be ordered preventing the adjudication from continuing.

 

The judge in giving his reasons for this decision stated that a company in liquidation, such as the sub-sub-contractor, 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. Claims and cross claims cease to be capable of separate enforcement when a liquidator is appointed. As at the date of the sub-sub-contractor’s liquidation and as a direct result of what occurs upon the appointment of the liquidator and of the operation of the Insolvency Rules (i) The disputes between the sub-contractor and the sub-sub-contractor consisting of claims and cross-claims between them became replaced with a single debt and (ii) Thereafter the dispute was as to the result of the account that the Insolvency (England and Wales) Rules 2016 2016 require to be taken to determine the balance payable and in which direction. As to which insolvency rules should be applied (i) The same crystallisation of this different dispute would also occur on the date of the liquidation under the 1986 Insolvency Rules (ii) The agreement of the parties that the 2016 Rules applied did not therefore have any effect upon the outcome of these proceedings and (iii) It did not matter that this crystallisation occurred when the 1986 Rules were in force.

 

Upon liquidation, the Insolvency Rules (which have statutory force) require that an account must be taken of those dealings in each direction to arrive at a single balance due to or from the company in liquidation. Such categorisation of these sums includes the sums the subject matter of the dispute referred to adjudication in this case. For a company, it occurs upon the date of liquidation. The range of claims and cross-claims between companies such as the sub-contractor and the sub-sub-contractor are all merged into one single balance being due in one direction. Those claims and cross-claims need not arise under a single contract. The "mutual dealings" between them can (and very often do) arise under a whole number of different contracts. However, the effect is the same, whether the mutual dealings arise from a single contract or multiple contracts.

 

THE FULL TEXT OF THE JUDGMENT OF FRASER J

 

  1. This is a claim brought in proceedings under CPR Part 8 by Michael J Lonsdale (Electrical) Ltd, the Claimant ("Lonsdale"), against Bresco Electrical Services Ltd (in Liquidation), the Defendant ("Bresco"). As can be gathered from the title of the Defendant company, it is in liquidation, a liquidator having been appointed on 12 March 2015. It is the liquidation that is at the heart of this dispute. The claim by Lonsdale is for declarations and a permanent injunction to prevent Bresco from bringing a claim to adjudication, on the basis that the liquidation operates in law in such a way as to extinguish the claim(s) relied upon by Bresco in that adjudication.

 

  1. The two parties had entered into a contract (actually a sub-sub-contract) dated 21 August 2014 whereby Bresco agreed to perform electrical installation works for Lonsdale. The works were at premises occupied by Rio Tinto, a major conglomerate, situated at 6 St James Square, London SW1 (which also have the address Apple Tree Yard, which was the delivery or site address). Bresco became insolvent and entered into voluntary liquidation on 12 March 2015, with one Mr Ailyan of Abbot Fielding Ltd being appointed as the liquidator.

 

  1. The precise terms of the contract between the parties are not material to this Part 8 claim, other than to say it is a construction contract governed by the Housing Grants Construction and Regeneration Act 1996, as amended by later enactments. This means, as is well known, that the adjudication provisions of those statutes either have to be expressly included by the parties into the construction contract, or if not, they will be statutorily imposed upon the parties, and the terms of The Scheme for Construction Contracts (England and Wales) Regulations (SI 1998 No. 649) ("the Scheme") will apply. Whether expressly included by the parties, or imposed by the Scheme, adjudication is a mandatory requirement of such contracts. In this case, Lonsdale was a sub-contractor on the JCT 2011 CM/TC form with certain amendments, which is a standard form of building contract, and the contract between Lonsdale and Bresco was on the standard order form of Lonsdale and was given Order No. SC/162048/EE1251/1301. The contract sum was £360,000.

 

  1. The chronological sequence of the parties' dealings need not be considered in any great detail, as it does not have any material impact upon the issues to be decided. Bresco left the site in December 2014 in controversial circumstances, with each of Bresco and Lonsdale alleging wrongful termination against the other. On 12 March 2015 Bresco, the company, became controlled by the liquidator as a result of the liquidation. He performed his duties under the relevant legislation and prepared three annual reports on Bresco's affairs, as required by the Insolvency Act 1986. In late October 2017, Lonsdale intimated a claim against Bresco alleging that Bresco had wrongfully terminated the contract, and claiming the direct costs of completing the works said to have been caused by this termination, those works having been performed by GSV Electrical Ltd. GSV Electrical had been appointed by Lonsdale, it was said, to complete works left undone by Bresco. Bresco, on the other hand, maintained in response that it was Lonsdale who had wrongfully terminated Bresco's employment under the contract, and that it was Lonsdale who owed Bresco money. At about this point an entity called Pythagoras Capital Ltd commenced writing letters, said to be for and on behalf of the liquidator.

 

  1. On 18 June 2018 Lonsdale received a Notice of Intention to Refer a Dispute to Adjudication ("the Notice"). That was signed by Mr Greg McMahon, described as a Director of Pythagoras Capital Ltd, for and on behalf of Bresco. There was some controversy between the parties about what the role of Pythagoras was, and whether the necessary authority had been granted by the liquidator to Pythagoras to act on Bresco's behalf. I do not need to resolve that for this reason; in these proceedings Bresco was represented by both solicitors and leading and junior counsel, the legal nature of the matters under consideration does not depend upon the status of Pythagoras and the extent of its authority or otherwise, and I was not asked to consider this point at all. No issue arises in these proceedings regarding the validity of the Notice due to any lack of authority to issue or serve such a document. The matter has proceeded on the basis that it was a valid Notice in the sense that (absent Lonsdale's legal objections which I will determine) Bresco initiated an adjudication against Lonsdale in relation to a dispute under the contract to which I have referred in [2] above.

 

  1. The Notice defined this dispute in the following way in paragraph 7:

 

"A dispute has arisen between the parties under the Contract. Bresco seeks the appointment of an Adjudicator to make the following decisions:

 

  1. Whether Lonsdale committed a repudiatory breach on 8 December 2014 by employing others to complete the Works.

 

  1. Whether Bresco is entitled to be paid for the work that it had completed prior to Lonsdale's repudiatory breach.

 

  1. Whether Bresco had completed works to the value of £219,884.80, £193,067.80 or such other sum as the Adjudicator may decide prior to Lonsdale's repudiatory breach.

 

  1. Whether Bresco is entitled to be paid for the works that it had completed, but for which it has not been paid, pursuant to the Contract, as a matter of quantum meruit or otherwise.

 

  1. Whether Bresco is also entitled to damages for loss of profits for Works that it had not completed as a consequence of Lonsdale's repudiatory breach.

 

  1. Whether Lonsdale is not entitled to deduct, from the sums that it owes Bresco, any completion costs or other sums. Alternatively, what sums is Lonsdale entitled to deduct.

 

  1. What interest is Bresco entitled to be paid pursuant to the Contract, the Late Payment of Commercial Debts (Interest) Act 1998 or otherwise."

 

  1. This Notice arguably seeks to refer more than one dispute to the adjudicator. Indeed, there are potentially at least four disputes contained in paragraph 7 of the Notice. They are whether Lonsdale committed a repudiatory breach of contract; whether Bresco completed works to a particular value; whether Bresco is entitled to be paid for work it had completed, and what amount it had in fact been paid in respect of work it had performed; and also whether Bresco was entitled to damages for loss of profits (and potentially, how much those damages were). There is no further reference at all within the Referral Notice ("the Referral") itself further to identify with precision (or at all) what "the dispute" is, so the Notice is the only relevant document that permits one to construe what was being referred. All the Referral did was to reproduce paragraph 7 of the Notice.

 

  1. However, both parties before me maintained that this Notice referred a single dispute to adjudication. Given that the nature of the issues that arise on this Part 8 claim require resolution in any event, I proceed on that basis. However, Mr Sears QC accepted that at least three of the decisions sought from the adjudicator were in relation to a decision that a particular money sum was due to Bresco from Lonsdale. That is clearly right – and the Notice does indeed do this, whether the matters referred to the adjudicator are properly seen as being one dispute, or a greater number than that. The relevance of seeking a decision (or decisions) concerning sums due will be seen in due course. It is therefore the case that the dispute (if there is only one), however it is framed, seeks a decision from the adjudicator that particular sums are due to Bresco from Lonsdale, by way of payments under the contract for works done and/or damages for loss of profits.

 

Procedural history

 

  1. There is no substantial dispute of fact between the parties, which is a requirement for proceedings to be commenced under CPR Part 8. I had witness statements from Mr Digby Hebberd of Lonsdale's solicitors, and Mr Gregory McMahon of Pythagoras for Bresco, but these together simply provided the necessary background facts, none of which are controversial.

 

  1. In Merit Holdings Ltd v Michael J Lonsdale Ltd [2017] EWHC 2450 (TCC) Jefford J at [17] to [28] made certain comments about the appropriateness (or more accurately in that case, the inappropriateness) of the Part 8 procedure being seen by parties to adjudication business in the Technology and Construction Court as constituting a convenient short-cut for them to avoid the usual waiting times for litigants. Part 8 proceedings are also seen (by some parties) as a way of keeping the interval between the two components of the "pay now, argue later" ethos of adjudication as short as humanly possible. The comments of Jefford J were then repeated in Victory House General Partner Ltd v RGB P&C Ltd [2018] EWHC 102 (TCC) by Ms Joanna Smith QC sitting as a Deputy High Court Judge, who found herself facing a party whose counsel submitted (as explained in the judgment at [6]):

 

"that issues could be resolved in the Part 8 proceedings on the basis of assumed facts, but that in the event of the decision being unfavourable to his client, he would then be in a position to challenge any disputed matters of fact at a later time in further substantive proceedings."

 

  1. This inventive creation of an entirely new ad hoc procedure by counsel was correctly rejected in Victory House. Proceedings under CPR Part 8 will only be entertained by the court where there is no substantive dispute on the facts, and also should not be seen as a means for parties to obtain favourable treatment in terms of having resolution by the court performed more quickly, and to a preferential timetable, than other litigants. Having said that, the court will always seek to list matters that are properly urgent as soon as is practicable, taking into account the relevant circumstances.

 

  1. Injunctive relief is not usually sought under CPR Part 8, although it may be a consequence of the declarations made by the court that a party is enjoined (as a matter of law) not to take certain steps. Mr Sears QC for Bresco submitted that it was inappropriate for the court to consider injunctive relief to interfere in an ongoing adjudication. This argument has been dismissed before in other cases. Coulson J (as he then was) stated in The Dorchester Hotel Ltd v Vivid Interiors Ltd [2009] EWHC 70 (TCC) the following:

 

"15. In developing his jurisdiction argument Mr Buckingham, on behalf of the Defendant, argued that the declarations sought by the Claimant in this case were akin to an injunction and that, by reference to the decision of HHJ Wilcox in Workplace Technologies plc v E Squared Ltd [2000] CILL 1607, the Court did not have the necessary jurisdiction to grant such an injunction. I am not persuaded that the declarations sought here are akin to an injunction, but even if it was, I am clear that in Workplace Technologies HHJ Wilcox did not say that the Court did not have the jurisdiction to grant an injunction. What he properly emphasised was that such an injunction would only rarely be granted, which is a very different thing.

 

  1. Mr Buckingham's other submission was that, since the declarations sought went to the Adjudicator's discretion to fix his own timetable and to conduct the adjudication in a manner which he saw fit, the Court should not entertain an application which would interfere with that discretion. In my judgment, that submission has greater force, but it does again seem to me to be a matter of fact and degree, rather than a matter of principle. Again, I would conclude that, if the Court decided that this was one of those very rare cases where the Adjudicator's exercise of his discretion was in some way fundamentally wrong in law, the Court should not sit idly by until the adjudication is finished and contested enforcement proceedings are in train.

 

  1. Accordingly, for these reasons, I have concluded that the TCC does have the jurisdiction to consider the application for a declaration in this case. But I make it clear, as I hope I made clear in argument, that such a jurisdiction will be exercised very sparingly. It will only be appropriate in rare cases for the TCC to intervene in an ongoing adjudication. It is important that, wherever possible, the adjudication process is allowed to operate free from the intervention of the Court. Applications of this sort will be very much the exception rather than the rule. They will only be granted in clear-cut cases such as (I venture to suggest) those that existed in CJP Builders."

 

(emphasis added)

 

  1. I fully agree with that dicta. To be clear therefore, the court undoubtedly has jurisdiction to grant an injunction in an ongoing adjudication. This is clear from the passages above in Dorchester Hotel v Vivid Interiors, and also from other statements by the same judge in Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd [2009] EWHC 3222 (TCC). In that case (which is addressed in some detail below) the decision of the judge at [104] was that "the adjudicator does not have the requisite jurisdiction and the present adjudication must be aborted." This is akin to an injunction, as argued in Dorchester. There is no doubt that the court does have the necessary jurisdiction to grant an injunction in an ongoing adjudication.

 

  1. What these cases make clear is that although the court has the necessary jurisdiction to grant an injunction in respect of an ongoing adjudication, it will only do so very rarely and in very clear cut cases. It must therefore follow that it has jurisdiction to make declarations that may have the same effect as the grant of an injunction. However the relief is expressed, the usual approach where a party challenges the jurisdiction of an adjudicator is for that matter to be raised at the enforcement stage.

 

  1. The jurisdiction of the court to grant such relief, however, must be exercised with very great care, and I must repeat that it will only be in extremely rare cases that the court will ever interfere in an ongoing adjudication. There are some isolated cases in which it has been done, such as Twintec Ltd v Volker Fitzpatrick Ltd [2014] EWHC 10 (TCC). In that case, Edwards-Stuart J stated the following, in relation to a submission that the adjudication should proceed because the appropriate time for the court to intervene would be at the enforcement stage. This is similar to the submissions made by Mr Sears QC in this case.

 

"[63] I do not accept this submission. By section 37 of the Senior Courts Act 1981, the court may grant an injunction in all cases in which it appears to the court to be just and convenient to do so. In Mentmore Towers Ltd v Packman Lucas Ltd [2010] EWHC 457 (TCC), I held that the court had jurisdiction to restrain the pursuit of an adjudication under section 37, and neither party has challenged that conclusion. I am unable to see how it would be either just or convenient to permit an adjudication to continue in circumstances where the decision of the adjudicator will be incapable of enforcement. In the present case if the adjudication went ahead and the adjudicator purported to give a decision in Twintec's favour, that decision would not be binding on VFL. Precisely the same issue would still have to be resolved in the litigation."

 

  1. I do not wish parties to adjudications generally to read any element of this judgment and conclude that CPR Part 8 represents a short cut available to them in conventional cases, or as any encouragement to seek injunctions to restrain ongoing adjudications. Such proceedings will only be considered suitable or even arguable in very rare cases.

 

  1. Here, the Notice was issued on Bresco's behalf on 18 June 2018 and on 21 June 2018 the RICS, one of the industry appointing bodies, notified the parties that Mr Tony Bingham had been appointed as the adjudicator. In the circumstances I explain at [18] to [20] the adjudication continued after the issue of these Part 8 proceedings by Lonsdale.

 

  1. The adjudicator, Mr Bingham, was invited to resign by the solicitors acting for Lonsdale, and Bresco was also (in the sense that the letter was sent to Pythagoras, acting for Bresco) invited to discontinue with the adjudication. The basis for both of these requests was that the adjudicator had no jurisdiction as a result of Bresco having become insolvent and placed into liquidation, together with other associated matters (such as the liquidator's different reports not referring to any debt owed to Bresco by Lonsdale). However, Bresco was not prepared to discontinue the adjudication, and the adjudicator did not resign. He proposed a timetable that would have led to a decision being issued by him on 16 August 2018.

 

  1. He also issued what he described as a "non-binding decision" on the points raised by Lonsdale, in particular the insolvency/liquidation issues, and rejected them, declaring that he did have jurisdiction to determine the dispute. Lonsdale therefore issued these Part 8 proceedings on 26 June 2018 and an order was made by me on 2 July 2018, including setting down a hearing for 4 July 2018 for directions and consideration of what, if any, orders ought to be made in relation to the then-ongoing adjudication pending hearing of the Part 8 claim. That could not be heard until the following week. The earliest possible date (taking into account the court's availability to accommodate such a hearing with a time estimate of half a day) was 11 July 2018. As matters transpired, the hearing on 4 July 2018 was not necessary because the parties agreed between themselves the following:

 

"that the Adjudication be stayed with neither party nor the Adjudicator taking any further step therein pending the determination of the Claimant's claim for declarations and a permanent injunction and with the Adjudicator having an extension to the date for issuing his decision corresponding with the period of the stay".

 

This was contained in a consent order approved by the court and sealed on 4 July 2018.

 

  1. The benefits of this entirely sensible step were potentially undermined when the adjudicator, having been notified of the stay (and somewhat in advance of the timetable he had originally suggested) wrote to the parties on 5 July 2018 stating that he had reached a decision, could give his answers to the issues raised immediately, with a reasoned decision to be produced the following day. It was pointed out to him that this would be in breach both of the parties' agreement and also the consent order approved by the court, and that the parties did not consider the court would necessarily be assisted by his reasoned (or indeed any) decision in any event. The adjudication therefore remains stayed by consent, awaiting this judgment.

 

The issues for resolution

 

  1. The parties could not agree on how the issue for resolution in these Part 8 proceedings should be framed. They both agreed it related to the liquidation of Bresco, the effect of the Insolvency Rules 2016 upon the parties' rights, and therefore the jurisdiction of the adjudicator to deal with the dispute referred to him. There is no doubt that these are the most important and relevant component parts of the issue before the court.

 

  1. In my judgment, the issue can be framed as follows. It is whether a company in liquidation can refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of a claim for further sums said to be due to the referring party from the responding party?

 

  1. The correct starting point is the Insolvency (England and Wales) Rules 2016 themselves ("the 2016 Rules"). These are contained in secondary legislation in SI 2016/1024. They give effect to Parts 1 to 11 of the Insolvency Act 1986 and to the EC Regulation. The parties both proceeded on the basis that these rules were the ones that applied, even though the liquidator was appointed (and hence the liquidation commenced) on 12 March 2015, and hence prior to the coming into force of the 2016 Rules on 6 April 2017. The parties expressly agreed that the issue should be determined on the basis of the 2016 Rules. However, I invited and received written submissions on this point after the hearing. This is a point to which I will return at [75] below.

 

  1. In any event, although the 2016 Rules replaced an earlier version, namely the Insolvency Rules 1986 ("the 1986 Rules"), the basic arguments relevant to the issue in this case are the same on both versions of the Rules. I will analyse the issue by reference to the 2016 Rules, both because of the agreement of the parties to which I have referred, and because these are likely to be of wider application in other cases.

 

  1. Rule 14.25 provides as follows:

 

"Winding up: mutual dealings and set-off

 

(1) This rule applies in a winding up where, before the company goes into liquidation, there have been mutual dealings between the company and a creditor of the company proving or claiming to prove for a debt in the liquidation.

 

(2) An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings and the sums due from the one must be set off against the sums due from the other.

 

(3) If there is a balance owed to the creditor then only that balance is provable in the winding up.

 

(4) If there is a balance owed to the company then that must be paid to the liquidator as part of the assets.

 

(5) However if all or part of the balance owed to the company results from a contingent or prospective debt owed by the creditor then the balance (or that part of it which results from the contingent or prospective debt) must be paid in full (without being discounted under rule 14.44) if and when that debt becomes due and payable.

 

(6) In this rule—

 

"obligation" means an obligation however arising, whether by virtue of an agreement, rule of law or otherwise; and

 

"mutual dealings" means mutual credits, mutual debts or other mutual dealings between the company and a creditor proving or claiming to prove for a debt in the winding up but does not include any of the following—

 

(a) a debt arising out of an obligation incurred at a time when the creditor had notice that—

 

(i) a decision had been sought from creditors on the nomination of a liquidator under section 100, or

 

(ii) a petition for the winding up of the company was pending;

 

(b) a debt arising out of an obligation where—

 

(i) the liquidation was immediately preceded by an administration, and

 

(ii) at the time the obligation was incurred the creditor had notice that an application for an administration order was pending or a person had delivered notice of intention to appoint an administrator; and

 

(c) a debt arising out of an obligation incurred during an administration which immediately preceded the liquidation;

 

(d) a debt which has been acquired by a creditor by assignment or otherwise, under an agreement between the creditor and another party where that agreement was entered into—

 

(i) after the company went into liquidation,

 

(ii) at a time when the creditor had notice that a decision had been sought from creditors under section 100 on the nomination of a liquidator,

 

(iii) at a time when the creditor had notice that a winding-up petition was pending,

 

(iv) where the winding up was immediately preceded by an administration at a time when the creditor had notice that an application for an administration order was pending or a person had delivered notice of intention to appoint an administrator, or

 

(v) during an administration which immediately preceded the winding up.

 

(7) A sum must be treated as being due to or from the company for the purposes of paragraph (2) whether—

 

(a) it is payable at present or in the future;

 

(b) the obligation by virtue of which it is payable is certain or contingent; or

 

(c) its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion.

 

(8) For the purposes of this rule—

 

(a) rule 14.14 applies to an obligation which, by reason of its being subject to a contingency or for any other reason, does not bear a certain value;

 

(b) rules 14.21 to 14.23 apply to sums due to the company which—

 

(i) are payable in a currency other than sterling,

 

(ii) are of a periodical nature, or

 

(iii) bear interest; and

 

(c) rule 14.44 applies to a sum due to or from the company which is payable in the future."

 

  1. The previous incarnation of Rule 14.25 in the Insolvency Rules 1986 was rule 4.90. That rule had stated:

 

"(1) This rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.

 

(2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other.

 

(3) ...

 

(4) Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets."

 

  1. This rule was the subject of judicial consideration at the highest level by the House of Lords in Stein v Blake [1996] AC 243. Lord Hoffman was considering in that case an individual bankrupt, and the provisions of section 323 of the Insolvency Act 1986, which are the ones applicable in bankruptcy (which is the insolvency of an individual, and not a company). However, the provisions of section 323 of the Insolvency Act 1986 and Rule 4.90 of the Rules are indistinguishable. The 1986 Act incorporated into corporate insolvency, provisions which had been part of the law in relation to individual bankruptcy. A company in insolvent liquidation is, for these purposes, not distinguishable from an individual in bankruptcy, although in terms of legal personality there are of course differences. A liquidator controls the company rather than the board of directors; the company remains as a legal entity. A liquidator is not therefore in precisely the same position as a trustee in bankruptcy, who acts in place of the bankrupt, a different natural legal person. However, for present purposes that does not in my judgment matter. This case concerns a company in liquidation.

 

  1. Lord Hoffman considered the effect of the insolvency provisions upon what is called bankruptcy set-off, which is distinct from legal set-off. He stated at 251D-F the following:

 

"Bankruptcy set-off, on the other hand, affects the substantive rights of the parties by enabling the bankrupt's creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set off pound for pound what he owes the bankrupt and prove for or pay only the balance. So in Forster v Wilson (1843) 12 M & W. 191, 204, Parke B said that the purpose of insolvency set-off was 'to do substantial justice between the parties'. Although it is often said the justice of the rule is obvious, it is worth noticing that it is by no means universal. It has however been part of the English law of bankruptcy since at least the time of the first Queen Elizabeth."

 

(emphasis added)

 

  1. The well-known text book Derham on the Law of Set Off (4th ed. 2010 Oxford Univ. Press) states at 6-123 that the same analysis that applies to personal bankruptcy "is equally applicable in company liquidation, with set-offs taking place automatically on the date of the liquidation".

 

  1. There are some minor differences in the wording between Rule 4.90 of the 1986 Rules and Rule 14.25 of the 2016 Rules. The former states that:

 

"An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other"

 

The latter states:

 

"An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings and the sums due from the one must be set off against the sums due from the other."

 

  1. I do not consider that these minor differences in wording make any difference to the issue before the court in these Part 8 proceedings. Even if they did, the use of the expression in the 2016 Rules "an account must be taken" makes it clear that the provisions are mandatory. That account includes, and consists of, analysis of the parties' "mutual dealings" with set off of the different sums due in each direction to arrive at a single balance.

 

  1. Concentrating on the 2016 Rules, "mutual dealings" are defined thus:

 

"mutual dealings" means mutual credits, mutual debts or other mutual dealings between the company and a creditor proving or claiming to prove for a debt in the winding up but does not include any of the following"

 

and exceptions then follow at Rule 14.25(6)(a) to (d). None of those exceptions apply here.

 

  1. I consider that sums claimed to be due from Lonsdale to Bresco, and sums claimed from Bresco to be due to Lonsdale, clearly fall within the definition of "mutual dealings" and are therefore caught by the requirement under the Rule. They are plainly mutual credits and/or mutual debts between the company in liquidation (Bresco) and the creditor (Lonsdale). Upon liquidation, the Insolvency Rules (which have statutory force) require that an account must be taken of those dealings in each direction to arrive at a single balance due either to, or from, the company in liquidation. Such categorisation of these sums includes the sums the subject matter of the dispute referred to adjudication in this case.

 

  1. This is the essence of what bankruptcy set-off in law consists of, and is. For a company, it occurs upon the date of liquidation. The range of claims and cross-claims between companies such as Lonsdale and Bresco are all merged into one single balance being due in one direction. Those claims and cross-claims need not arise under a single contract; the "mutual dealings" between them can (and very often do) arise under a whole number of different contracts. However, the effect is the same, whether the mutual dealings arise from a single contract, or multiple contracts. A creditor of a company in insolvent liquidation with claims against him (or her) from that company, finds themselves in a different position to creditors of such a company with no such claims. Under the principle of bankruptcy set-off, the creditor in the former situation can set off, pound for pound, the amount he (or she) owes the company and only either pay to the liquidator (if the balance is in the company's direction) or prove for (if the balance is in his or her favour) the single resulting balance. An ordinary creditor with no such debts owed from the company proves for the debt in the liquidation with all the other creditors, but will not receive pound for pound relief on any part of it. Whatever dividend is available (if any) is paid out to all unsecured creditors equally.

 

  1. That exercise of discerning or calculating the balance due, and in which direction, is performed by taking the account to which the Rules refer, and which is imposed upon the parties by the legal operation of those Rules.

 

  1. Within the sphere of adjudication, the operation of the Insolvency Rules and the abilities of companies in liquidation to enforce the decisions of adjudicators have been considered before. In Bouygues v Dahl-Jensen [2000] EWCA Civ 507 the Court of Appeal considered an appeal against the grant of summary judgment by Dyson J (as he then was) where there was an error of arithmetic on the face of an adjudicator's decision. The clear error concerned how retention was dealt with in the calculation of the account, and the error meant that the conclusion of the decision was a payment to Dahl-Jensen from Bouygues of approximately £200,000. Absent the error, the correct calculation dealing with retention correctly should have led to a payment in the other direction to Bouygues from Dahl-Jensen of approximately £140,000. The judge at first instance granted Dahl-Jensen summary judgment despite the error, and the case is usually cited as authority for the proposition that an adjudicator's decision will be enforced by the court regardless of whether it is correct in fact or in law. It plainly is authority for that proposition. On this issue the case went on appeal. The grant of summary judgment was upheld, and the appeal dismissed. Whether faulty arithmetic is an error of fact, or law (as it also contravenes the laws of mathematics) was neither explored nor relevant. A stay of execution was however imposed.

 

  1. At [33] to [35] Chadwick LJ stated the following, having explained the operation of the principle of bankruptcy set-off and referring to the speech of Lord Hoffman in Stein v Blake set out above:

 

"[33] The importance of the rule is illustrated by the circumstances in the present case. If Bouygues is obliged to pay to Dahl-Jensen the amount awarded by the adjudicator, those monies, when received by the liquidator of Dahl-Jensen, will form part of the fund applicable for distribution amongst Dahl-Jensen's creditors. If Bouygues itself has a claim under the construction contract, as it currently asserts, and is required to prove for that claim in the liquidation of Dahl-Jensen, it will receive only a dividend pro rata to the amount of its claim. It will be deprived of the benefit of treating Dahl-Jensen's claim under the adjudicator's determination as security for its own cross-claim.

 

[34] Lord Hoffman pointed out, at page 252 in Stein v Blake that the bankruptcy set-off requires an account to be taken of liabilities which at the time of the bankruptcy may be due but not yet payable, or which may be unascertained in amount or subject to contingency. Nevertheless, the insolvency code requires that the account shall be deemed to have been taken, and the sums due from one party shall be set off against the other, as at the date of insolvency order. Lord Hoffman pointed out also that it was an incident of the rule that claims and cross-claims merge and are extinguished; so that, as between the insolvent and the other party, there is only a single claim - represented by the balance of the account between them. In those circumstances it is difficult to see how a summary judgment can be of any advantage to either party where, as the 1996 Act and paragraph 31 of the Model Adjudication Procedure make clear, the account can be reopened at some stage; and has to be reopened in the insolvency of Dahl-Jensen.

 

[35] Part 24, rule 2 of the Civil Procedure Rules enables the court to give summary judgment on the whole of a claim, or on a particular issue, if it considers that the defendant has no real prospect of successfully defending the claim and there is no other reason why the case or issue should be disposed of at a trial. In circumstances such as the present, where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation, in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires."

 

(emphasis added)

 

  1. At [29] Chadwick LJ had made clear that Dahl-Jensen was in liquidation at the date of the application for summary judgment, and indeed at the date of the reference to adjudication. He concluded:

 

"[36] It seems to me that those matters ought to have been considered on the application for summary judgment. But the point was not taken before the judge and his attention was not, it seems, drawn to the provisions of the Insolvency Rules 1986. Nor was the point taken in the notice of appeal. Nor was it embraced by counsel for the appellant with any enthusiasm when it was drawn to his attention by this Court. In those circumstances - and in the circumstances that the effect of the summary judgment is substantially negated by the stay of execution which this court will impose - I do not think it right to set aside an order made by the judge in the exercise of his discretion. I too would dismiss this appeal."

 

(Emphasis added)

 

  1. Accordingly, the outcome on that appeal was that the appeal against the grant of summary judgment was dismissed, but a stay of execution was granted which "substantially negated" the effect of the summary judgment. The judgment makes clear that even when the Court of Appeal itself raised the insolvency point (and the effect of that upon the claims and cross-claims) with the parties during the appeal, it was not "embraced…. with any enthusiasm". The effect of the liquidation was plainly relevant to the outcome of the appeal. However, that particular point was not fully argued before the Court of Appeal. Mr Sears QC relies upon the fact that Chadwick LJ expressly did not state that the liquidation went to the jurisdiction of the adjudicator as justifying his submission to like effect in this case. However, I reject that submission. Chadwick LJ did not come to a final conclusion regarding the effect of the liquidation upon the legal nature of the dispute between the parties in terms of the jurisdiction of the adjudicator, because the point was not fully argued and there was no need for him to do so. He did however make clear what the effect of the Insolvency Rules – then, the 1986 Rules – was upon the claims and cross-claims.

 

  1. The next case relied upon by both parties is that of Coulson J (as he then was) in Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd [2009] EWHC 3222 (TCC).

 

  1. At [2], the issue in that case described by the judge as being "of potentially wide application" was as follows:

 

"It is this: to what extent, if at all, does an adjudicator appointed under the Housing Grants (Construction and Regeneration) Act 1996 ("the Act") have the jurisdiction to take an account and identify a net balance due arising out of mutual dealings between the parties pursuant to Rule 4.90 of the Insolvency Rules 1986?"

 

  1. That case had some marked differences to the instant one. In 1998 Thames Water Utilities Ltd had engaged Thames Water Services Ltd, trading as Subterra ("Subterra"), to carry out the repair and maintenance of mains, service pipes, and other fittings in connection with water supply. By a Sub-Contract entered into in November 2002 Subterra had engaged Tony McFadden Limited ("TML") to carry out this work in the North London area. This was known as the NLSDA Sub-Contract and was a construction contract within the meaning of the 1996 Act. In August 2003 Enterprise agreed to buy the business of, and the assets owned by, Subterra. In April 2004 Enterprise terminated the engagement of TML. Subsequently in 2005 and 2006 Enterprise engaged TML on another Sub-Contract referred to as "The Lot 8 Sub-Contract", and also agreed two other smaller Sub-Contracts, one being called the Three Valleys Sub-Contract and the other a more informal van hire Sub-Contract. In May 2006 TML went into administration and, in consequence, the Lot 8 Sub-Contract was terminated. In September 2007, TML's administrators submitted a Final Account to Enterprise in relation to the NLSDA Sub-Contract seeking an alleged balance due of about £2.5 million. No sums were paid. On 19 November 2007 joint liquidators of TML were appointed. Thereafter, TML's liquidators served what was called a 'Pre- Action Adjudication Statement' on Enterprise, which set out their detailed claim in respect of the NLSDA Sub-Contract. Similar claim documents were also served in relation to the Lot 8 Sub-Contract. TML's claim was for some £2.6 million. In October 2008, Enterprise served their own claim against TML in relation to the Lot 8 Sub-Contract, based on alleged overpayments. On the basis of Enterprise's analysis, a sum in excess of £3 million was then said to have been overpaid to TML in respect of the Lot 8 works. On 29 December 2008 Enterprise confirmed their intention to prove in the liquidation. In June 2009 (although Enterprise were not aware of it) the liquidators assigned to Tony McFadden Utilities Ltd ("Utilities") what was called "the Net EMSL Balance", "EMSL" being the shorthand description of Enterprise. On 21 September 2009, Utilities' solicitors wrote to Enterprise notifying it of their appointment and the assignment. It also stated that there was "a dispute with regard to the valuation of the final account submitted by Tony McFadden Limited to you in relation to this Contract and, accordingly, we enclose Notice of Intention to Adjudicate" The letter also served an Adjudication Notice, which sought payment of approximately £2.5 million said to be due by reference only to the NLSDA Sub-Contract. Utilities then served the Referral Notice in the adjudication. Thereafter Enterprise issued Part 8 proceedings against Utilities, seeking a total of 12 declarations.

 

  1. The issues are at [16] in the judgment and were as follows:

 

(a) Was the NLSDA Sub-Contract between Subterra and TML novated in favour of Enterprise?

 

(b) What rights and liabilities were the subject of the Deed of Assignment of 15th June 2009 between TML and Utilities?

 

(c) Was the Deed a valid assignment?

 

(d) Can Utilities as assignees adjudicate the NLSDA claim against Enterprise?

 

(e) Does the Adjudicator have the necessary jurisdiction to undertake this adjudication?

 

  1. It is only necessary to consider the last two of those five issues above, and the penultimate one only in part. Despite the arguments in each direction about the validity of the assignment, the judgment inevitably considered the nature of the underlying dispute which had been referred to adjudication. The relevant passages of the judgment are as follows:

 

"65. In my analysis, Utilities have not sought to refer to adjudication the dispute as to their right to an account and a balance due under Rule 4.90. Instead, they have purported to refer to adjudication TML's disputed claim against Enterprise under the novated NLSDA Sub-Contract. That is the only claim identified in the Adjudication Notice which is, of course, the document from which the Adjudicator derives his jurisdiction: see Griffin v. Midas Homes [2000] 78 Con LR 152. Moreover, one of the decisions sought by Utilities is to the effect that Enterprise cannot in the adjudication rely on their Lot 8 claim, which is entirely consistent with their stance that only the NLSDA dispute has been referred. However, for the reasons set out below, I am in no doubt that Utilities did not have the right to refer to adjudication, or seek to ringfence within that adjudication, the dispute under the NLSDA Sub-Contract, which is just one element of the Rule 4.90 mechanism.

 

  1. First, I conclude that, as a matter of law, the claim for sums due under the NLSDA Sub-Contract has, in the unequivocal words of Lord Hoffmann in Stein v. Blake, "ceased to exist". Following the liquidation of TML and the assignment of the right under Rule 4.90, as he put it, "the only chose in action which continued to exist as an assignable item of property was the claim to a net balance". Thus the claim under the NLSDA Sub-Contract could not be and was not assigned to Utilities. Because it was no longer extant, it was incapable of assignment under the Law of Property Act 1925.

 

  1. Miss Barwise argued that the claim under the NLSDA Sub-Contract did continue to exist because that was the way in which the balance could be ascertained under Rule 4.90. It seems to me that that suggestion was roundly rejected by Lord Hoffmann in Stein v. Blake at page 255F of the report, where he said in terms that such a claim was "merely part of the process of retrospective calculation" and repeated that the only claim which could now exist was the claim to the net balance.

 

  1. Accordingly, I find that the only chose in action which TML's liquidators could assign, and did assign, was the claim to a net balance which arose out of the mutual dealings on four separate Sub-Contracts, at least one of which was not even a construction contract. That claim could not be referred to adjudication for the reasons noted at paragraphs 61-64 above.

 

  1. Secondly, in the absence of any agreement between the parties, it would not be in accordance with the Insolvency Rules for the calculation of the net balance under Rule 4.90 to be performed in what might be described as a piecemeal or hobbled fashion. Even if the original claim under the NLSDA Sub-Contract somehow continued to exist, it was only as one part of the mechanism for the arriving at a net balance arising from the mutual dealings. Absent agreement between the parties, there is nothing in Rule 4.90 which would justify subjecting this mechanism to the piecemeal, element-by-element approach encompassed in multiple adjudications, particularly in circumstances where, such as here, not all the relevant parties could be joined in to the adjudication in any event. I consider that that conclusion, to the effect that Rule 4.90 envisaged a single and final ascertainment process, is consistent with the clear words of the Rule; consistent with Lord Hoffmann's reference to "a single account" in Stein v. Blake; and consistent both with the earlier decision of the Court of Appeal in MS Fashions v. BCCI [1993] 1 Ch 425 and the subsequent decision of the House of Lords in Secretary of State for Trade and Industry v. Frid [2004] 2 AC 506. In none of those authorities is a piecemeal, slice-by-slice approach suggested as being in any way appropriate for the taking of the account under Rule 4.90.

 

  1. Thirdly, there is what I perceive to be a fundamental clash between the certainty and finality envisaged by the full Rule 4.90 process and, to use the vernacular, the temporary, quick-fix solution offered by construction adjudication under the Act. How can a decision that, if challenged, is of a temporary nature only, and would relate just to an element of the chose in action, have any role in or relevance to the taking of a final account under the Insolvency Rules?

 

  1. This fundamental difference of approach was highlighted by the Court of Appeal in Bouygues (UK) Limited v. Dahl-Jensen (UK) Limited [2000] BLR 522, the only reported case of which I am aware which considered adjudication in the context of the Insolvency Rules. In that case Dahl-Jensen were in liquidation and thus were not, as a matter of law, entitled to summary judgment in respect of an amount found due by the adjudicator. Chadwick LJ referred to Stein v. Blake and he said this:

 

"34. Lord Hoffman pointed out, at page 252 in Stein v Blake that the bankruptcy set-off requires an account to be taken of liabilities which at the time of the bankruptcy may be due but not yet payable, or which may be unascertained in amount or subject to contingency. Nevertheless, the insolvency code requires that the account shall be deemed to have been taken, and the sums due from one party shall be set off against the other, as at the date of insolvency order. Lord Hoffman pointed out also that it was an incident of the rule that claims and cross-claims merge and are extinguished; so that, as between the insolvent and the other party, there is only a single claim - represented by the balance of the account between them. In those circumstances it is difficult to see how a summary judgment can be of any advantage to either party where, as the 1996 Act and paragraph 31 of the Model Adjudication Procedure make clear, the account can be reopened at some stage; and has to be reopened in the insolvency of Dahl-Jensen.

 

  1. Part 24, rule 2 of the Civil Procedure Rules enables the court to give summary judgment on the whole of a claim, or on a particular issue, if it considers that the defendant has no real prospect of successfully defending the claim and there is no other reason why the case or issue should be disposed of at a trial. In circumstances such as the present, where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation, in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires."

 

  1. In my judgment Bouygues highlights the fundamental discrepancy between the pursuit of the only dispute that can now arise between the parties, namely, in respect of the balance of the account between them to be identified as part of the final and certain process under Rule 4.90, and the purported reference to adjudication of a dispute in respect of one element only of that balance, pursuant to a process which can, in any event, be opened up as of right thereafter. This is a third reason why, in my judgment, Utilities have not sought to and cannot adjudicate their claim to the balance of the account arising out of the mutual dealings between the parties.

 

  1. Miss Barwise's only answer to Bouygues was to say that it was of no application because Utilities were solvent and not in liquidation. But, so it seems to me, that does not get round the difficulty that the only claim that Utilities can pursue as assignees is the claim under Rule 4.90 that was previously available to TML's liquidators. Therefore the incompatibility of adjudication in this context is, in my view, an insurmountable jurisdictional hurdle to Utilities, just as it would have been to TML's liquidators."

 

(emphasis added)

 

  1. This analysis, in my judgment, is undoubtedly correct and I adopt it. Although not strictly binding upon me, I bear in mind what Lord Neuberger said in Willers v Joyce (No.2) [2016] UKSC 44 at [9]:

 

"So far as the High Court is concerned, puisne judges are not technically bound by decisions of their peers, but they should generally follow a decision of a court of co-ordinate jurisdiction unless there is a powerful reason for not doing so."

 

In this case, not only is there no such powerful reason for me to disagree with those passages from Enterprise that I have reproduced in [44], but on the contrary there is every reason to agree with the analysis in that case. Mr Sears sought to distinguish the authority as it involved multiple contracts, and an assignment. Those are doubtless features of the facts in that case, but they are not features that mean the analysis which I adopt is or should be different if there were only one contract, and/or no assignment. The analysis is of the nature of the character and existence of both claim and cross claim, or to use the language of both the 1986 Rules and 2016 Rules, the "mutual dealings and the sums due from" one party to the other following the taking of the account. Mutual dealings and sums due between the two parties can arise under one, or more than one, contract.

 

  1. Given the very close wording of both versions of the Rules, therefore, I consider that the analysis of Coulson J (as he then was) applies equally to an account under the 2016 Rules as it did to one conducted under the 1986 Rules, which was the version in force at the time of Enterprise.

 

  1. I therefore entirely agree with that particular part of the judgment in Enterprise where the conclusion to this part of the analysis is provided in the following terms:

 

"79. It follows from my analysis in Section 7 above that the adjudicator does not have the necessary jurisdiction to deal with this dispute. The only claim now extant between the parties is the claim by Utilities as assignees for the net balance under Rule 4.90. That is not a claim which could be referred to adjudication and it is not the claim that has been purportedly referred to this adjudicator. The claim which has been purportedly referred to the adjudicator no longer exists. Further, for the reasons noted above, Rule 4.90 does not contemplate that the account process would be taken in a piecemeal or slice-by-slice fashion, by reference to potentially different tribunals, including adjudicators who could, at most, make a decision that is only of temporary effect."

 

(emphasis added)

 

  1. In my judgment that is precisely what happens to claims and cross claims when a liquidator is appointed. They cease to be capable of separate enforcement upon, or at, the date of liquidation. When precisely that date is, depends upon the type of liquidation, but is provided for in the Insolvency Act itself. Mr Sears made a number of what he termed practical points in favour of his legal submissions justifying the opposite conclusion on the issue in this case. These are that liquidators across the country regularly refer disputes to adjudication either separately to taking the account under the Insolvency Rules, as part of taking that account, or as practical steps to determine disputes between the company in liquidation and its counter-party to construction contracts. That may very well be the case; some liquidators may do that. The court can only address such disputes that come before it, and the practical behaviour of liquidators (and parties against whom companies in liquidation adjudicate, and the adjudicators themselves) cannot affect the correct legal characterisation of disputes and mutual dealings which are set down in the Insolvency Rules, which have statutory force. I would be surprised if many, or indeed any, adjudicators would decline to resign if a responding party brought the relevant passages of Bouygues, Enterprise or indeed this case to his or her attention during an adjudication. This case is sufficient to demonstrate that not all tribunals react the same way, however, and the practical behaviour of liquidators (and adjudicators) does not outweigh what I consider to be the correct legal analysis. Mr Sears also suggested that it might be useful to the parties to know the answer to the repudiation issue, as that would have an impact upon the taking of the account under the 2016 Rules. Again, I agree that this might be useful. If the parties wish to agree a mechanism to resolve that issue, that is up to them. Again, such a point of utility cannot affect the correct legal characterisation of what occurs to claims and cross claims upon the company being placed in liquidation. In my judgment, adjudication against the will of the party not in liquidation is not such a mechanism.

 

  1. Mr Sears also relied upon Philpott v Lycee Francais Charles de Gaulle School [2015] EWHC 1065 (Ch). In this case HHJ Purle QC (sitting as a Deputy Judge of the High Court) was asked by the liquidators of a company in voluntary liquidation to consider, in the context of cross claims under a construction contract, whether the arbitration clause applied and whether adjudication was still available. He answered both questions in the affirmative. As regards adjudication, he noted the following at [17]:

 

"The issue in that case [Enterprise Managed Services v Tony McFadden Utilities Ltd [2009] EWHC 3222 (TCC)] was whether or not adjudication was an appropriate process in the case of an assigned debt involving several contracts. We are only concerned here with one contract and there is no assignment."

 

  1. He went on to state at [30] as follows:

 

"An issue has also been raised as to whether or not adjudication is available. It seems to me that in the particular circumstances of this case, under the terms of the contract, adjudication is an available process which it is open to the liquidators to pursue. Whether it makes any sense to invoke adjudication must be a matter of commercial judgment, because the adjudication will not, as I have said, without more, result in the ascertainment of the net balance. The adjudication will produce at most a temporary obligation, more in the nature of an interim payment. However the contractual right to an adjudication is there. Whether or not the court would enforce any order against the company seems inconceivable, as this would defeat the requirement of pari passu distribution, and it may therefore be that were the school to make an adjudication application, that might be met by an application for a stay by the liquidators on conventional insolvency grounds"

 

(emphasis added)

 

  1. With respect to the Deputy High Court Judge in that case, I consider those passages concerning adjudication where a company is in liquidation simply to be wrong. This is for the following reasons:

 

  1. It ignores the analysis of Coulson J (as he then was) in [72] of Enterprise when he stated that

 

"Bouygues highlights the fundamental discrepancy between the pursuit of the only dispute that can now arise between the parties, namely, in respect of the balance of the account between them to be identified as part of the final and certain process under Rule 4.90, and the purported reference to adjudication of a dispute in respect of one element only of that balance, pursuant to a process which can, in any event, be opened up as of right thereafter."

 

This was the "third reason" relied upon by the judge in Enterprise, and applies regardless of how many contracts there are between the parties.

 

  1. The presence of an assignmen