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Print articleInsolvency is Not Necessarily a Barrier to Enforcing an Adjudicator’s Decision
July, 2013 - Iain Drummond Kate Gillies
The insolvency of one or other of the parties to a dispute has become commonplace in recent times, particularly in construction related disputes. Practitioners are becoming increasingly knowledgeable about the implications of insolvency on procedure and the potential remedies available.
The recent Technology and Construction Court case FG Skerritt Ltd v Caledonian Building Systems Ltd [2013] EWHC 1898 (TCC) dealt with an interesting insolvency point in the context of enforcement of an adjudicator’s decision.
Facts of Case
The Defendant (“Caledonian”) entered into a number of contracts with the Claimant (“FGS”) between 2009 and 2010, including one for the design and build of mechanical and electrical works on a prison project. FGS submitted its invoice for that project following practical completion in December 2009. Practical completion was disputed by Caledonian and the invoice went unpaid. FGS promptly went into administrative receivership shortly afterwards. A further invoice was raised on behalf of FGS in December 2010 for the remaining retention. This also went unpaid. 2 years passed before FGS got round to serving a notice of adjudication in December 2012. The Adjudicator found that FGS was entitled to payment in full for both invoices on the basis that these were sums due under a sub-contract in respect of which Caledonian had not served a withholding notice.
Ramsey J. heard FGS’ application for summary judgment to enforce the Adjudicator’s decision in June 2013. Caledonian did not oppose this application but sought to stay enforcement of the award on the grounds that FGS was insolvent.
Ordinarily, it will be sufficient to persuade the court (in England) to exercise its discretion to grant a stay of execution if there is no dispute on the evidence that the claimant is insolvent and the defendant can demonstrate that there are legitimate grounds for challenging the adjudicator’s award.
In this case, FGS did not deny its precarious financial position but argued that nevertheless, the court ought not to delay enforcement of the Adjudicator’s award because FGS’ parent company had offered a guarantee as security in the event that final determination resulted in repayment being due to Caledonian.
Judgment
In considering the application, Ramsey J. heard submissions that although there was no challenge to the correctness of the Adjudicator’s decision, Caledonian had counter-claims in excess of the sum awarded that could be applied by way of equitable set-off in light of FGS’ insolvency. This was sufficient for the judge to find that, parent company guarantee aside, it would have been appropriate to grant a stay of execution in the circumstances. However, on the basis of multiple reports and supplementary reports regarding the financial covenant of FGS’ parent company, the parent company guarantee offered was held to be adequate security to guard against the risk of FGS being unable to repay the award should final determination require that. The stay of execution was consequently refused with Caledonian being required to make payment in full to insolvent FGS as soon as the parent company guarantee was in place.
Commentary
The use of a parent company guarantee to prevent the defendant from delaying payment of the adjudicator’s award was a successful tactic in this case and is one to bear in mind. However, in the current climate many companies in similar circumstances will not have the benefit of a financially stable parent company to provide a guarantee worth the paper it is written on, never mind worth the full value of the award. Those that do have this luxury will need to be prepared for the financial records of the parent company to be subject to meticulous scrutiny.
The recent Technology and Construction Court case FG Skerritt Ltd v Caledonian Building Systems Ltd [2013] EWHC 1898 (TCC) dealt with an interesting insolvency point in the context of enforcement of an adjudicator’s decision.
Facts of Case
The Defendant (“Caledonian”) entered into a number of contracts with the Claimant (“FGS”) between 2009 and 2010, including one for the design and build of mechanical and electrical works on a prison project. FGS submitted its invoice for that project following practical completion in December 2009. Practical completion was disputed by Caledonian and the invoice went unpaid. FGS promptly went into administrative receivership shortly afterwards. A further invoice was raised on behalf of FGS in December 2010 for the remaining retention. This also went unpaid. 2 years passed before FGS got round to serving a notice of adjudication in December 2012. The Adjudicator found that FGS was entitled to payment in full for both invoices on the basis that these were sums due under a sub-contract in respect of which Caledonian had not served a withholding notice.
Ramsey J. heard FGS’ application for summary judgment to enforce the Adjudicator’s decision in June 2013. Caledonian did not oppose this application but sought to stay enforcement of the award on the grounds that FGS was insolvent.
Ordinarily, it will be sufficient to persuade the court (in England) to exercise its discretion to grant a stay of execution if there is no dispute on the evidence that the claimant is insolvent and the defendant can demonstrate that there are legitimate grounds for challenging the adjudicator’s award.
In this case, FGS did not deny its precarious financial position but argued that nevertheless, the court ought not to delay enforcement of the Adjudicator’s award because FGS’ parent company had offered a guarantee as security in the event that final determination resulted in repayment being due to Caledonian.
Judgment
In considering the application, Ramsey J. heard submissions that although there was no challenge to the correctness of the Adjudicator’s decision, Caledonian had counter-claims in excess of the sum awarded that could be applied by way of equitable set-off in light of FGS’ insolvency. This was sufficient for the judge to find that, parent company guarantee aside, it would have been appropriate to grant a stay of execution in the circumstances. However, on the basis of multiple reports and supplementary reports regarding the financial covenant of FGS’ parent company, the parent company guarantee offered was held to be adequate security to guard against the risk of FGS being unable to repay the award should final determination require that. The stay of execution was consequently refused with Caledonian being required to make payment in full to insolvent FGS as soon as the parent company guarantee was in place.
Commentary
The use of a parent company guarantee to prevent the defendant from delaying payment of the adjudicator’s award was a successful tactic in this case and is one to bear in mind. However, in the current climate many companies in similar circumstances will not have the benefit of a financially stable parent company to provide a guarantee worth the paper it is written on, never mind worth the full value of the award. Those that do have this luxury will need to be prepared for the financial records of the parent company to be subject to meticulous scrutiny.
