Restructuring & Insolvency

Assignment of net balance pursuant to Rule 4.90 of the Insolvency Rules 1986 cannot be adjudicated

Pursuant to Rule 4.90 of the Insolvency Rules 1986, where, before a company has gone into liquidation, there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of a company claiming a debt in the liquidation, an account is 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.

Where there have been mutual credits, mutual debts or other mutual dealings, the operation of Rule 4.90 of the Insolvency Rules 1986 means that any claim that a creditor had against the company ceases to exist and is replaced with a claim for the ‘net balance’. This new case development considers this rule in the context of assignment and also considers whether a claim for such a net balance can be the subject of adjudication.

Case

In Enterprise Managed Services Limited v McFadden Utilities Limited [2009] EWHC 3222 Thames Water Utilities Limited (“TWUL”) engaged Thames Water Services Limited, trading as Subterra (“Subterra”), to carry out the repair and maintenance works. Subterra engaged Tony McFadden Limited (“TML”) to carry out this work in the North London area (the “NLSDA Sub-Contract”). Enterprise Managed Services Limited (“Enterprise”) bought Subterra and by a Deed of Novation took over the rights and obligations of Subterra under the NLSDA Sub-Contract. Enterprise subsequently made payments to TML under the NLSDA Sub-Contract. TML then sent Enterprise the final account. Enterprise then terminated the NLSDA Sub-Contract as its employment under the main contract had been terminated. TML was then engaged by Enterprise on three other sub-contracts, one of them called the Lot 8 Sub-contract. The Lot 8 Sub-Contract contained a clause prohibiting assignment.

TML went into administration and as a consequence, the Lot 8 Sub-Contract was terminated. TML’s administrators sent a final account to Enterprise for the NLSDA Sub-Contract which alleged a balance due of £2.5 million. No sums were paid and TML went into liquidation. The liquidators of TML served a “Pre-action adjudication statement” on Enterprise setting out its claim under the NLSDA Sub-Contract and the Lot 8 Sub-Contract. Enterprise responded serving its own claim in respect of the Lot 8 Sub-Contract. Without Enterprise’s knowledge the liquidators of TML then entered into a Deed of Assignment with Tony McFadden Utilities Limited (“Utilities”) to assign the ‘net balance’ which had become due under Rule 4.90 to Utilities. Utilities wrote to Enterprise notifying them of the assignment and also enclosing a notice of adjudication for the sum of £2.5million by reference only to the NLSDA Sub-Contract. The first time that the Deed of Assignment was sent to Enterprise was within the enclosures to the Referral Notice.

Dispute

Enterprise issued proceedings seeking a number of declarations to be made in the adjudication proceedings.

Comment and advice

Coulsen J made a number of useful declarations in the judgement to include (but by no means limited to) the following points:

  1. Valid assignment: There was a valid assignment to Utilities of the net balance arising out of mutual dealings between Enterprise and TML.
  2. Prohibition on assignment: It did not matter that there was a prohibition on assignment within the Lot 8 Sub-Contract as what was being assigned was a separate claim for the net balance not a right to claim under one of the contracts.
  3. Right to adjudicate: Whilst it is possible to assign the right to adjudicate, in this case, only the right to claim for the net balance was assigned and not a claim under one of the contracts. A claim for a net balance was not a “construction contract” within the meaning of the Housing Grants, Construction and Regeneration Act 1996 (the “Act”) and therefore could not be the subject of an adjudication.
  4. Crystallised dispute: On the facts of this case, even if there was a right to adjudicate, because Enterprise was only notified of the assignment on the same day as service of the Notice of Adjudication, there was not a crystallised dispute capable of being referred to adjudication. Coulsen J rejected the arguments put forward by Utilities that the dispute had already crystallised between TML and Enterprise and that Utilities were simply standing in the shoes of TML. For a dispute to crystallise there must be a claim by the claiming party against the responding party, which the responding party has had an opportunity at least to consider.
  5. Appropriateness of adjudication: A large final account claim of the size in this case (£7million final account with 40 lever arch files of supporting documentation) may not have been appropriate for the statutory adjudication process. In such circumstances the adjudicator has to decide whether or not he can discharge his duty to reach a decision impartially and fairly within the time limit prescribed by the Act.
  6. Extensions of time in adjudication: Piecemeal extensions of time for the adjudicator to reach his decision in large and paper-heavy final account disputes is not what the Act was designed for. The enthusiasm on the part of some adjudicators to permit ‘creep’ in these cases should be curbed.
  7. Adjudicator’s view on jurisdiction: Whilst an adjudicator cannot make a binding decision on his own jurisdiction, it is always useful, and often important to the parties, for the adjudicator to consider and express his view as to jurisdiction at an early stage, even if only in outline.

Disclaimer: This article should not be relied upon or taken as factual statements of law. If necessary, professional legal advice should be taken.