When a company enters liquidation, one of the principles that has to be observed is that creditors of the same class have to be treated the same way. There is, however, an exception to the rule under the Insolvency Rules 2016. If a company in liquidation owes money to a person or organisation and is also owed money by them, then an automatic ‘set-off’ applies and only the net balance is taken into account in the liquidation. This applies by rule of law and cannot be legally overridden.
When a contract between an electrical company and a subcontractor ended in dispute, with each side claiming that the other had wrongly terminated it, this was followed by the subcontractor going into liquidation. The subcontractor invoked the adjudication provisions in the contract with regard to allegations of breach of contract. It also claimed damages.
The electrical company argued that the adjudicator did not have jurisdiction because the relationship between the companies was now governed by the Insolvency Rules. The court agreed, deciding that once a company enters liquidation, there will only be a single claim for the net balance and no separate enforcement proceedings can be taken. The adjudicator did not have jurisdiction to determine the balance.
When construction contracts get contentious, taking legal advice is important, especially where the finances of either party to the dispute are difficult. If you need advice, contact our Insolvency team on 020 7822 4000 or email firstname.lastname@example.org.