Olivia Jenkins and Isobel Moorhouse explore the significance of a court ruling to enforce an adjudicator’s decision in favour of an insolvent company.
Last month, the court summarily enforced an adjudicator’s decision in favour of an insolvent company despite there being an existing claim against the company and the performance security given by the insolvent company in respect of that claim being inadequate, as it was given by a non-trading parent company.
An adjudication between contractors Alun Griffiths Limited and Carmarthenshire County Council regarding unpaid sums for works carried out was decided in favour of Griffiths, who was balance sheet insolvent at the time.
The Council did not accept that the adjudication decision reflected the true state of the parties’ account and intended to dispute the true value of the works carried out by Griffiths in a subsequent cross-claim.
While the Council accepted that Griffiths was entitled to summary enforcement of the adjudicator’s decision by the courts, it sought a stay of execution of that enforcement pending the outcome of the true value dispute on the grounds that:
(i) Griffiths was insolvent; and
(ii) The guarantee offered by its parent company for the disputed sum was inadequate to safeguard the Council’s position because the parent company was not trading.
The legal position
It has long been established that:
- Insolvent companies retain their entitlement to adjudicate;
- An adjudicator’s decision is intended to be enforced summarily on the basis that a successful party in adjudication should not generally be "kept out of its money" – this goes to the heart of the adjudication process;
- The court may exercise its discretion to stay the execution of a summarily enforced adjudicator’s decision only in “special circumstances”.
The courts have previously accepted that the potential inability of an insolvent company to repay the sum being enforced may constitute special circumstances, although those circumstances may be countered by the offering by the insolvent company of adequate security (in the form of a third-party bond or guarantee) for the sum in dispute. What form that bond or guarantee is required to take has been the subject of much debate in the courts.
Parent company guarantee
Here, Griffiths offered security in the form of a guarantee from its parent company; a holding company that was not trading but retained a positive net asset position (of £1.5bn) due to the value of investments in its around 200 subsidiaries.
Due to the holding company’s current liabilities, the Council argued that the holding company may be unable to repay the judgment sum being enforced if it was called upon to do so.
The court disagreed, noting the non-trading status of the holding company was immaterial. In doing so, it referred to the healthy financial position of the holding company and, further, the overall parent company, concluding that there were no proper grounds to stay execution of the enforced adjudicator’s decision simply on that basis.
Accordingly, the court granted summary enforcement of the adjudicator’s decision in favour of the insolvent company and declined the Council’s application to stay the execution of that judgment.
Why is this decision meaningful?
The court’s continued reluctance to stay the enforcement of adjudication decisions is perhaps unsurprising in this case given recent authority on the topic and speaks to the fundamentals of the statutory procedure as a "pay first, argue later" mechanism. It also reinforces the court’s reluctance to interfere with contractual arrangements between two well-advised commercial parties.
This decision will however be of interest to any organisation engaged in an adjudicated dispute with an insolvent entity, or where they themselves are involved in an insolvency procedure and provides useful guidance regarding the grounds for staying the execution of enforcement of an adjudicator’s decision in those circumstances.
It also emphasises the risks associated with parent company guarantees. A company does not necessarily need to be trading to show its ability to stand behind a guarantee – so long as its assets are sufficient. However, parties should question the value of such a guarantee where the assets are unliquidated as it would take time to turn such assets into cash with which to pay out any claim.
Olivia Jenkins is senior associate and Isobel Moorhouse associate at law firm Trowers & Hamlins.