• news-banner

    Expert Insights

Adjudication v Insolvency Set-Off

It is an unfortunate reality that the number of insolvencies in the construction sector seems certain to rise in coming months as the economic impact of COVID-19 takes effect.  In this context, the recent Supreme Court decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 is particularly relevant.

This case concerned important questions regarding the compatibility of two statutory regimes:

  • the adjudication of construction disputes pursuant to section 108 of the Housing Grants, Construction and Regeneration Act 1996, (Construction Act); and
  • the operation insolvency set-off pursuant to Rule 14.24 and 14.25 of the Insolvency (England & Wales) Rules 2016 (Insolvency Rules).

While adjudication was intended to resolve disputes on an interim basis for cashflow purposes on a “pay now, argue later” basis, it has quickly become the default method of dispute resolution in the construction industry.

The Insolvency Rules provide that an account be taken of all claims and cross-claims between an insolvent company and each creditor, which has the effect of producing a “net balance” due to the either the insolvent company or the creditor.

The Court of Appeal described adjudication as “a method of obtaining cashflow quickly”, whereas the regime under the Insolvency Rules is “an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors”. On a literal reading of the individual regimes, both are valid descriptions and stark in their application. In this case the Supreme Court was required to untangle them.

Background

The facts were not in themselves unusual.  In 2014, Bresco Electrical Services Ltd (Bresco) was employed to perform electrical installation works by Michael J Lonsdale (Electrical) Ltd (Lonsdale). Having ceased to attend the site in December 2014, Bresco entered creditor’s voluntary liquidation in March 2015. Bresco and Lonsdale made various claims against each other for damages.

In June 2018, Bresco served Lonsdale with notice of intention to refer a dispute to adjudication. Faced with the unappealing prospect of defending an adjudication brought by an insolvent company, Lonsdale sought an injunction from the Technology and Construction Court (TCC). 

Lonsdale argued that:

  • Bresco’s claim and Lonsdale’s cross-claim had cancelled each other out by the process of insolvency set-off. This meant there was no longer any claim, or therefore any dispute under the contract, so adjudication was unavailable (jurisdiction point).
  • The adjudication was pointless as the adjudicator’s decision would not be enforced until the liquidator calculated the net balance (futility point).

Bresco appealed to the Court of Appeal, which upheld the injunction on the basis for the futility point, but rejected the jurisdiction point.  Bresco appealed again to the Supreme Court. Lonsdale cross-appealed on the jurisdiction point.

The decision

  1. The jurisdiction point

The Supreme Court found that the adjudicator did have jurisdiction: the right to refer a dispute under the Construction Act was not extinguished by operation of the Insolvency Rules.

The Supreme Court rejected Lonsdale’s argument that claims subject to insolvency set-off lose their separate identity when amalgamated into the final net balance. When a liquidator pursues a claim, it “…remains one based upon the underlying contract, even if an undisputed set-off is acknowledged, or a disputed set-off is raised by way of defence”. It similarly made no difference as to whether the cross-claim was less (or significantly less) than the claim of the insolvent company, or whether it exceeded it. The only limitation on the adjudicator’s jurisdiction was that, in the event the cross-claim was greater, the balance could not be awarded to the creditor by the adjudicator, although a declaration could be made as to its value.

  1. The futility point

The Court of Appeal had decided that adjudications brought by insolvent companies would be a waste of time and money for all parties, as the awards could not be enforced other than in “exceptional circumstances” (see Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC)).

The Supreme Court rejected this view: it would be inappropriate for the court to enforce injunctive relief over a party’s attempt to “enforce a contractual right, still less a statutory right”.

In any event, adjudication, as a mainstream form of alternative dispute resolution, is a tool that can (and should) be utilised in its own right “…even where summary enforcement may be inappropriate or for some reason unavailable”. The Supreme Court therefore considered that there may be a practical utility in allowing insolvent companies to adjudicate, despite the potential enforceability enforcement challenges, which could be dealt with on a case by case basis.

As doubtless many companies face the squeeze of the upcoming recession, the ability to adjudicate could potentially become a key tool for insolvency practitioners seeking to efficiently determine claims and cross-claims. Their next challenge will be to overcome the requirement to provide adequate security to the solvent defendant – it is likely that the courts will be asked to consider some creative solutions to this funding challenge in the coming months. 

Our thinking

  • IBA Annual Conference 2025

    Simon Ridpath

    Events

  • Alumni Drinks Reception

    Events

  • London International Disputes Week: Trusts hurt: the fraud lawyer, the trust, and the avenues of attack (and defence)

    Tamasin Perkins

    Events

  • London International Disputes Week: Navigating International M&A Disputes: Insights and Strategies for 2025

    Stephen Burns

    Events

  • UK Real Estate Opportunities for Asia Capital

    Simon Green

    Events

  • Maximising flexibility through subletting – key considerations for office occupiers

    Pippa Clifford

    Insights

  • People Management quotes Owen Chan on the UK government's plans to raise English language requirements on migrants

    Owen Chan

    In the Press

  • The Law Commission: Modernising Wills Law Report - a disputes perspective

    Lydia Kember

    Quick Reads

  • Retrospectively changing Indefinite Leave to Remain rules for those currently on the 5 year route to a 10 year route is unlawful and unfair

    Paul McCarthy

    Quick Reads

  • World Intellectual Property Review quotes Olivia Gray on the post-Brexit treatment of design rights

    Olivia Gray

    In the Press

  • Charles Russell Speechlys advises the shareholders of Stow Healthcare Group Limited on the sale of the company to CGEN Care Group

    David Coates

    News

  • Relief from Forfeiture: A recent High Court decision serves as reminder of key principles

    Andrew Ross

    Insights

  • The Lawyer cites our Firm in a podcast on AI and Innovation in the legal sector

    Joe Cohen

    In the Press

  • Bloomberg quotes Dominic Lawrance on the appeal of Italy for non-dom individuals considering relocating from the UK

    Dominic Lawrance

    In the Press

  • The FCA's PS25/4: Extending Investment Research Payment Optionality to Fund Managers

    Charlotte Hill

    Insights

  • Unravelling the Global Single Family Offices Tapestry

    James Carter

    Insights

  • Navigating IHT Concerns in Land Promotion: Hope Value and Some Innovative Solutions for Landowners and Developers

    Sam Jelley

    Quick Reads

  • A Boost for Water Quality? The Pickering Case 2025

    Kevin Gibbs

    Quick Reads

  • UK Immigration Reform – deeper restrictions on the horizon

    Paul McCarthy

    Quick Reads

  • The Court of Arbitration for Sport Appeals Procedure

    Benoît Pasquier

    Insights

Back to top