Vol 13 (2016) - Issue 3

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Richard James Philpott & Mark Jeremy Orton (as Joint Liquidators of WGL Realisations 2010 Limited) v Lycee Francais Charles De Gaulle School [2015] EWHC 1065 (Ch)

Introduction
In this case HHJ Purle QC had to decide the appropriate method of resolution for a dispute between WGL Realisations 2010 Ltd ('the Company') and Lycee Francais Charles De Gaulle School ('the School'). While the School had submitted a proof of debt in relation to its claim against the Company, the joint liquidators of the Company ('the Liquidators') had not admitted or rejected this proof and maintained that they were unable to do so until an account had taken place under Rule 4.90 of the Insolvency Rules 1986 ('the Rules').
Since the construction contract to which the dispute pertained contained an arbitration clause, HHJ Purle QC held that any application to court by the Liquidators for directions for the taking of account required under Rule 4.90 could be stayed by the School under section 9 of the Arbitration Act 1996. Accordingly, the appropriate course was for the underlying dispute to be determined by arbitration, following which the taking of the account would be a simple matter of setting off the now-quantified claims and cross-claims.

Background
The Company and the School entered into a construction contract on 1 July 2008 ('the Contract'). The Contract contained an arbitration clause and also provided for adjudication. The Company later became insolvent and entered administration and, subsequently, voluntary liquidation.
The Liquidators’ position was that the net balance owed to the Company under the Contract was GBP 615,000. The School maintained that, in fact, it was owed a sum of just over GBP 270,000 and submitted a proof for this amount in the liquidation.
Where a company in liquidation and another party have mutual claims against each other, Rule 4.90 applies and, in broad terms, provides for an account to be taken of the amounts due from each party to the other. These amounts are then set-off leaving a net balance owing one way. Insolvency set-off is mandatory and self-executing as at the date of liquidation (MS Fashions Ltd International SA (No. 2) [1993] Ch 425). A consequence of insolvency set-off is that after the date of liquidation the claims and cross-claims no longer exist, save as a mechanism for calculating the net amount due; all that remains is a net balance owed by one party to the other (Stein v Blake [1996] AC 243). However, in order to take the account envisaged by Rule 4.90, it obviously remains necessary for the various claims and cross-claims to be quantified.
The School argued that the arbitration clause in the Contract remained effective and that the claims and cross-claims should therefore be determined by arbitration. Since the Liquidation was a voluntary liquidation, legal proceedings were not automatically stayed. This meant that arbitral proceedings could be brought by the School against the Company, although it would have been open to the Liquidators to apply to stay any such proceedings under section 112 of the Insolvency Act 1986. The Liquidators’ position appears to have been that the account should be taken in accordance with directions sought by them from the Court.