BN RENDERING LTD v EVERWARM LTD
TECHNOLOGY AND CONSTRUCTION COURT
16 AUGUST 2018
Stay of execution granted in respect of the summary judgment enforcing the sums awarded by the adjudicator where the contractor’s director would have no compunction about organising its affairs to deprive the employer of those sums if ordered to repay them.
The contractor was a small company with limited assets controlled by a sole director and shareholder. The employer employed the contractor to carry out construction works and disputes arose over payment under two contracts. The disputes were referred to adjudication and the adjudicator awarded specified sums to the contractor which brought enforcement proceedings to enforce the decision. The employer unsuccessfully resisted the contractor’s application to enforce the decision by way of summary judgment but sought a stay of execution on the basis of uncertainty over the contractor’s cash flow and financial position.
O’Farrell J concluded in relation to the stay application that the contractor was entitled to immediate payment in accordance with well-established principles. However, the judge nevertheless imposed a stay of execution on the judgment until the contractor provided a guarantee bond or other form of guarantee so as to ensure that funds would be available if the contractor were to be ordered to repay the sums awarded due to the adjudicator’s decision being reversed.
The evidence showed that the director used the contractor as his own personal piggybank and that, despite the contractor’s financial position, borrowed money and took dividends, not all of which was repaid, thus moving money around regardless of the contractor’s needs. The employer knew at the time the contracts were entered into that the contractor was a small company with limited assets under the control of a sole director but it could not have known of the recent movements of large funds. As O’Farrell J put it “It is the movement of money that is new and is an indication, to my mind, that the claimant would have no compunction about organising its affairs in such a way that the defendant might be deprived of the adjudication sum or other assets of the company if the adjudication decisions were to be subsequently reversed and the claimant company required to repay the funds.”
THE FULL TEXT OF THE JUDGMENT OF O’FARRELL J
1. The matter before the court is the claimant's application for summary judgment to enforce two adjudication decisions of Jamie Lineker, the adjudicator, dated 16 November 2017 (“the Kirkcaldy decision”) and 26 January 2018 (“the Motherwell decision”).
2. The application is opposed by the defendant on the grounds that the claimant has insufficient assets available and would be unable to repay those sums if the adjudication decisions were to be subsequently reversed. That is, the defendant is not opposing the entering of summary judgment but is opposing the immediate enforcement of the judgment debt.
3. The facts can be summarised shortly. The defendant is a company who provides external insulation products and services. The claimant is a company which provides energy-efficient advice and related services including external building insulation. The claimant company is a relatively small company that is controlled by its sole director and shareholder, Mr Nemeth. That was the position from about 2014 when the claimant started to engage the defendant as a sub-contractor in relation to a number of residential property projects. The projects were all entered into between the claimant and the defendant on the claimant's standard sub-contract terms and conditions.
4. In 2016, the parties entered into the two contracts which are the subject of the current enforcement proceedings. On or around 23 September 2016, the parties entered into the Kirkcaldy contract for external wall insulation, labour only, at various addresses in Kirkcaldy. On 17 November 2016, the parties entered into a further sub-contract, the Motherwell contract, for external wall insulation, labour only, at various addresses in Motherwell. Each of those sub-contracts contained an agreement for decisions to be determined in adjudication and included at cl.8.3 the following provision:
"The decision of the adjudicator shall be binding on the parties until the dispute or differences finally determined by legal proceedings, arbitration agreed or by agreement in writing between the parties made after the decision of the adjudicator."
Clauses 8.4 and 8.5 of each sub-contract provided:
"8.4 The parties shall without prejudice to their under rights under the respective contract comply with the decision of the adjudicator and shall ensure that the decision of the adjudicator is given effect.
8.5. If either party fails to comply with the decision of the adjudicator, the other party is entitled to commence proceedings in court to enforce the adjudicator's decision."
Those sub-contracts were subject to English law and the jurisdiction of the English courts.
5. Disputes arose as to the amounts payable by the defendant to the claimant in respect of the works that it carried out under each of those sub-contracts. By notice of adjudication dated 4 October 2017, the claimant referred the dispute under the Kirkcaldy contract to adjudication. On 16 November 2017, the adjudicator issued the Kirkcaldy decision, in which she directed the defendant to pay the sum of £141,598.20 exclusive of VAT plus interest and the adjudicator's fees and expenses.
6. By notice of adjudication dated 5 December 2017, the claimant referred the dispute under the Motherwell contract to adjudication. On 26 January 2018, the adjudicator issued her decision in that dispute, the Motherwell decision, under which she ordered the defendant to pay to the claimant the sum of £46,051.27 exclusive of VAT plus interest and the adjudicator's fees and expenses.
7. It is common ground that the defendant has failed to pay those sums and, at least for today's purposes, that the claimant is entitled to enter judgment in respect of the sums claimed, namely, £169,917.84 plus interest under the Kirkcaldy decision and the sum of £55,261.42 plus interest under the Motherwell decision.
8. The sole issue that the court has to decide is whether a stay should be ordered as submitted by the defendant or whether, as the claimant submits, it should have the benefit of the judgment sum immediately.
9 CPR 83.7 provides that at the time that a judgment is made, the debtor may apply to the court for a stay of execution and the court has the power to make such a stay if it is satisfied that there are special circumstances which render it inexpedient to enforce the judgment or order.
10. There are a number of decisions in the TCC dealing with applications for a stay of execution in adjudication enforcement proceedings. The relevant principles are set out in the decision of Coulson J, as he then was, in Wimbledon Construction Company Ltd 2000 v Vago  EWHC 1086 (TCC) at para.26. I repeat them in full because they summarise the test that the court has to apply.
"In a number of the authorities which I have cited above the point has been made that each case must turn on its own facts. Whilst I respectfully agree with that, it does seem to me that there are a number of clear principles which should always govern the exercise of the court's discretion when it is considering a stay of execution in adjudication enforcement proceedings. Those principles can be set out as follows:
a) Adjudication (whether pursuant to the 1996 Act or the consequential amendments to the standard forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.
b) In consequence, adjudicators' decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money.
c) In an application to stay the execution of summary judgment arising out of an Adjudicator's decision, the Court must exercise its discretion under Order 47 with considerations a) and b) firmly in mind.
d) The probable inability of the claimant to repay the judgment sum (awarded by the Adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances within the meaning of Order 47 r.1(1)(a) rendering it appropriate to grant a stay.
e) If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted.
f) Even if the evidence of the claimant's present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:
(i) the claimant's financial position is the same or similar to its financial position at the time that the relevant contract was made; or
(ii) The claimant's financial position is due, either wholly, or in significant part, to the defendant's failure to pay those sums which were awarded by the adjudicator."
11. To that should be added Grosvenor London Ltd v Aygun Aluminium UK Ltd  EWHC 227 at paragraph 39:
“if the evidence demonstrates that there is a real risk that any judgment would go unsatisfied by reason of the claimant organising its financial affairs for the purpose of dissipating or disposing of the adjudication sum so that it would not be available to be repaid, then this would also justify the grant of a stay.”
12. As summarised by Mr Saunders in his helpful skeleton, the evidential burden lies with the party applying for the stay and the burden is high (see Total M&E Services Ltd v ABB Technologies  EWHC 248 (TCC) by His Honour Judge Wilcox QC at para.52). The party seeking the stay is not entitled to embark on a fishing expedition and demand access to confidential commercial information from the respondent (see Farrelly (M & E) Building Services Ltd v Byrne Brothers (Formwork) Ltd  EWHC 1186 (TCC) at para.91). The question that the court must ask is not as to the financial position now or in the past of the company but when any final determination is likely to be made and any sum repaid (see Berry Piling Systems Limited v Sheer Projects Limited  EWHC 241 (TCC) at paras.16-18).
13. To that should be added the principles helpfully set out by Mr Quirk in his skeleton argument. First of all, the exercise of the court's discretion is a balancing exercise (LXB RP (Crown Road) Ltd v Squibb Group Ltd  EWHC 2669 (TCC) at para.11). If the financial information made available by the claimant is unsatisfactory that may lead to a refusal to enforce the adjudication decisions (Equitix ESI CHP (Wrexham) Limited v Bester Generacion UK Limited  WHC 177 at para.61). In appropriate circumstances the court may order a guarantee or other form of security as a condition attached to enforcement of the adjudication decision (see FG Skerritt Ltd v Caledonian Building Systems Ltd  EWHC 1898 (TCC), Ramsey J at para.58).
14. Having dealt with the principles which are not in dispute, I then turn to the matters that are relied upon by Mr Quirk for the defendant in support of his application for a stay. The first point that he makes is that the claimant's last filed accounts for the year-ending 31 March 2017 show a substantial fall in assets and insufficient assets to cover the sums which the claimant is claiming by way of summary judgment.
15. The court has the filed accounts for the year-ending 31 March 2017 and it also has the benefit of draft unaudited management accounts for the period 1 April 2017 to 31 December 2017. Reference to those accounts shows that the claimant does not have sufficient assets if it were to be called upon to repay the adjudication sums immediately. As at 31 March 2017, it had in terms of its total assets, less current liabilities, £528,000, but making provision for its liabilities it had net assets of £79,000. As at 31 December 2017, its net assets were £122,700.
16. The second point made by the claimant is that although Mr Nemeth, the sole director and shareholder of the claimant has claimed that there has been a turnaround in the company affairs, that is not borne out by the evidence that is before the court. In his first witness statement dated 29 June 2018, Mr Nemeth states that:
"The financial and business stability of the company has improved since March 2017. In part due to my personal financial injections into the company and the sale of the company's property to ensure its survival until new clients and income were secured. And also, that in the financial year 2017/2018 the claimant secured significant contract with three major EWI installers across the Scottish region as well as other smaller private companies."
17. He has exhibited to his witness statement a table of new contracts obtained in 2017 which he says demonstrate the improvement in the company's financial position. Mr Quirk in his submissions has taken the court to the documents that are relied upon by the claimant in relation to each of those contracts. For entirely understandable reasons, the claimant has chosen to redact information that would identify the companies that had engaged the claimant and the further details of the projects because that is confidential information. It is a competitive industry and the claimant is entitled to refuse to give those details.
18. However, the submission by Mr Quirk is not in relation to the lack of identification of the details but more to the content of the documents. In relation to client A, although in the table Mr Nemeth claims that he has a contract or contracts worth some £894,000 in fact, when one looks at the documents that have been supplied, they show contracts to a value of around £344,000, a significant shortfall on that claim.
19. In relation to client B, Mr Nemeth’s claim is that there are contracts worth in excess of £600,000 but the documents which have been disclosed show contracts to a value of around £300,000, about half of that claim.
20 In relation to client C, it is claimed that there is a contract to the value of £800,000 but the contract document that has been supplied has had redacted from it any reference to the value of the contract. Therefore, there is nothing to support the claim by Mr Nemeth that this is a substantial contract.
21. In relation to client D, the claim is that there are contracts which are ongoing with a value of around £250,000. There is a document that shows a valuation as at 25 June 2018, showing an annual estimated turnover of just over £250,000. It is slightly curious because it forms part of a letter which is dated 16 May 2018, i.e. before the date of evaluation. However, it certainly does provide some indication that there is in some form an ongoing contract with a value of the sum claimed.
22. In response, it is submitted, correctly by Mr Saunders, that the claimant does not have to provide full details of its commercial dealings and, in particular, does not have to disclose confidential information. However, the defendant, quite properly requested evidence that there had been payments in line with the sums that were claimed by Mr Nemeth in his first witness statement and the claimant has declined to provide that evidence.
23. It seems to me that the state of this evidence is somewhat unsatisfactory but what I can draw from it is that the claimant company appears to be a going concern. It does appear to have ongoing contracts that would provide cash flow. However, I cannot accept that the value of the contracts is in the sums as set out in Mr Nemeth's statement because the documents which he has chosen to disclose simply do not support the figures he has claimed.
24. The third point relied on by the defendant concerns the second statement of Mr Garry Dunne, who is the claimant's accountant. He has identified sums that have been paid by Mr Nemeth into the company in order to support it. He states at paras.6, 7 and 8 the following:
"The property at 7 Occal Park was sold to Mr Nemeth initially by creating a balance on his director's loan accounts. Mr Nemeth paid off the entire sum owed in relation to the property in a number of lump-sum payments which provided working capital to the company. I exhibit the transport records for April 2017 to April 2018 showing these payments along with the other payments made by Mr Nemeth into the claimant's account in that period. In total sum, Mr Nemeth paid into the claimant during this period £280,000. Currently, Mr Nemeth does not owe the claimant any money."
25. The defendant points out that the Santander transaction documents show a transfer of sums of money amounting to about £280,000, but the accounts do not show how that money was treated for the purposes of the company's benefit and there are question marks raised as to where that money has gone. However, as Mr Saunders has submitted in response to this, it was intended that the payments into the company would provide working capital for the company. One can see from the accounts, in particular the balance sheet as at 31 December 2017, that there has been a significant increase in trade debtors between March (a figure of £36,000) and December (a figure of £282,000) which indicates that the claimant company is continuing to undertake substantial work and earning money. It seems a reasonable inference for Mr Saunders to invite the court to make that working capital would have been required in order to then carry out the work so as to generate future income for the company.
26. The fourth point raised by Mr Quirk is that the claimant owes money to HMRC. The accounts show sums owed to HMRC in excess of £200,000 and in relation to tax, social security and other taxes, a further £100,000 is said to be due. This total of £300,000 is very high given the size of the company and the volume of trading.
27. Mr Quirk relies upon the documents which have been supplied by the claimant as indicating yet further question marks over the standing of the claimant company. The email exchanges with HMRC do not shed a huge amount of light on the tax position of the company. They show that there was an investigation by HMRC into the company's affairs. As a result of those inquiries, outstanding liabilities to HMRC were identified. The company has, effectively, bought time in order to pay those monies. It relies on what are asserted to be under-payments by the defendant in the sum of just under £2 million as giving rise to the claimant's difficulties in meeting its tax liabilities.
28. I accept Mr Saunders' submission that looking at these documents, there is no suggestion in the text that I can see that there has been any wrongdoing on the part of the claimant. Outstanding liabilities to HMRC are reflected in the management accounts to the end of 2017. Anything that might have shed further light on the nature of the liabilities or their cause has been redacted. It does raise a question mark over the current financial position of the claimant, but it does not raise the prospect of any wrongdoing on the part of the claimant.
29. Turning then to the other matters that were referred to by Mr Dunne in his witness statement, namely the sums paid by Mr Nemeth into the company. Mr Quirk makes the submission that, in fact, Mr Nemeth has taken money out of the company and there are still outstanding sums that have not been repaid contrary to the evidence of Mr Dunne. One can see that by reference to the year-end accounts dated 31 March 2017 where it can be seen that directors' current accounts were £101,000 in addition to dividends that had been paid (and there is no suggestion that they were improperly paid) of £74,000.
30. This is addressed by Mr Steele in his witness statement. Mr Ian Steele is a chartered accountant and has looked at the issue of the accounts. At para.17 he has noted that Mr Nemeth took a dividend of £74,000 from the claimant in the year 31 March 2017. That means leaving aside any salary or other monies he may have received, which we cannot see from the financial statements, Mr Nemeth had the benefit of £176,807, that is the dividend, plus the net director's loan from the claimant in the year to 31 March 2017, the loan being the one I have referred to. He says:
"Whilst the claimant was on paper in a position to pay a dividend to Mr Nemeth, the removal of such sums does not, to my mind, sit particularly well with the assertion that this company was struggling financially in the same period due to the refusal of a major debtor to make payments."
31. What is perhaps of more concern to the court is that although Mr Dunne, the claimant's accountant, claims that all monies have been repaid in fact, when one looks at the balance sheet as at 31 December 2017, it is clear that there is still an outstanding loan owed by Mr Nemeth in the sum of £78,386. Therefore, in addition to the dividends and the earlier dividend of £101,000, although he has been paying money in, Mr Nemeth has either taken more money out or the money has been going elsewhere because it has not reduced the sums he currently owes to the company.
32. In addition, Mr Quirk relies upon the transfer of property which was the only significant fixed asset owned by the company and is the home at which Mr Nemeth lives. The explanation that has been given by the claimant as to exactly when the property was sold and how it was paid for is unsatisfactory. In Mr Dunne's second statement dated 16 July 2018 at para.6, he states:
"The property was sold by Mr Nemeth initially by creating a balance on his director's loan account. Mr Nemeth paid off the entire sum in a number of lump sum payments which provided working capital to the company."
33. The difficulty is that that does not sit well with the documentary evidence that has been produced by the claimant. In Mr Dunne's first witness statement at para.9 he said that the freehold property was sold on 28 June 2016 at its market value of £170,000. It was sold to provide working capital and it came off the balance sheet for the year-ending
31. March 2017, thus reducing the claimant's net assets for that year. But it then goes on to say that Mr Nemeth injected his own money into the company in early 2017 and refers to two payments amounting to £15,000 each. However, when one looks at the documents, those statements by Mr Dunne are simply not made out. The registry entries showing the sale of the property indicates that it was sold to Mr Nemeth on 30 November 2016, not in June 2016 as Mr Dunne claimed, and the consideration is not £170,000, as claimed by Mr Dunne but "certain good and onerous courses". What is shown in the registry is that at a later date on 25 August 2017, Mr Nemeth took out a mortgage on the property for the sum of £160,500. That then ties up with subsequent payments being made by Mr Nemeth into the company from August 2017 onwards which amounts to about £161,000 which is the amount of the mortgage.
34. Therefore it appears that Mr Nemeth paid to the company at least the sum obtained by way of mortgage, which is a little bit lower than the value of the property, but he did not start paying that until August 2017. It follows that he cannot have bought the property in order to inject working capital into the company during the relevant period, namely 2016 to 2017. It is therefore misleading for Mr Dunne and Mr Nemeth to claim that Mr Nemeth has been injecting funds into the company to keep it going or that the property was sold in June of 2016 for a value of £170,000 in order to provide working capital for the company. That simply did not happen.
35. What one can see from the accounts is that as at 31 March 2017, the value of the property is shown as a disposal. The purchase price is not shown as a loan to the director, Mr Nemeth, as claimed by Mr Dunne. There is a loan to the director but that is in the sum of £101,000 so it cannot be the loan for the property. I note in passing that, of course, dividends of £70,000 were paid which, together with the loan, amounts to £170,000. There is nothing to indicate that this was an arm's length transaction and it is worrying that in the Land Registry the property is shown as having been transferred for no commercial value. What one does see is Mr Nemeth making steady payments into the Santander account in relation to the property and that those sums do equate, roughly, to the amount of mortgage on the property and pretty much equal the value of the property, give or take £10,000.
36. That picture indicates that the claimant is a small company, owned and controlled by Mr Nemeth as its sole director and shareholder. It does operate as a going concern, it does have ongoing contracts which provide revenues into the company's accounts and it does appear to be just about paying its way. There are outstanding liabilities to HMRC, but I do not place any weight on those because there is nothing to suggest anything improper and it is not unusual for small companies to reach arrangements with HMRC in relation to VAT and tax.
37. What is of concern though is that Mr Nemeth appears to have been using the company as what I have described as his personal piggybank. The company has held, as its major assets, the home in which he lives. The property was transferred to the claimant initially for no value and although most of that sum has now been paid back, that was not the case for a number of months. For a company that is struggling to make ends meet this does not give confidence in Mr Nemeth’s management of the company affairs. The level of personal borrowing by Mr Nemeth from the company and the levels of dividends that he has continued to take despite the claimant struggling, indicates that this is a situation where the controller of the company feels able to move money in and out of the company as he sees fit regardless of the company's needs.
38. Mr Saunders on behalf of the company submits that the court should bear in mind the starting point in the Wimbledon case which is that adjudication decisions, by and large, should be enforced and the successful party should not generally be kept out of its money. Reliance is placed on the fact that the claimant's financial position is the same or similar to the position that it has been in throughout the relationship between the parties from 2014 to 2017. If he is right about that, then it follows that his submission, namely that the court should be careful not to reallocate the commercial risks as between the parties is a good one.
39. However, I do not accept that submission. The claimant was a small company which started in 2014 with very limited assets under the control of Mr Nemeth. That is something that, no doubt, the defendant was or must have been aware of when it entered into these contracts. However, the more recent movements of very large sums of money out of the company to provide personal loans for Mr Nemeth is not a situation that the defendant could have been taken to have known about or in respect of which it must be presumed to have taken a commercial risk. It is the movement of money that is new and is an indication, to my mind, that the claimant would have no compunction about organising its affairs in such a way that the defendant might be deprived of the adjudication sum or other assets of the company if the adjudication decisions were to be subsequently reversed and the claimant company required to repay the funds.
40. The second point relied upon by Mr Saunders is that the claimant's financial position is due either wholly or in significant part to the defendant's failure to pay those sums which were awarded by the adjudicator. Mr Saunders relies on the fact that the claimant claims that it has been underpaid by the defendant over a period of time but that is in relation to other contracts not the subject of the adjudications or the enforcement proceedings. In relation to the withholding of the sums to which the claimant has now established an entitlement, if the claimant or rather Mr Nemeth had not made the substantial withdrawals of cash, loans and property from the company, then the company would have sufficient assets to be in a position to say to the court today that it would be able to repay any adjudication sums if subsequently found not to be properly due and payable.
41. For those reasons, applying the Wimbledon test as set out and expanded by reference to the Grosvenor test, the claimant is entitled to judgment in respect of the adjudication sums today. I also consider that the claimant in principle is entitled to the fruits of the adjudication by way of payment. However, I accept the alternative submission of Mr Quirk that in this case, because of concerns regarding the more recent movement of sums in and out of the company, this would be an appropriate case in which to require Mr Nemeth as the sole director, shareholder and controller of the company to provide security for repayment of those sums in the event that they subsequently are reversed on a final determination of the merits.
42. Therefore, what I propose to do is to give summary judgment in the full sums awarded by the adjudicator but to stay enforcement of those sums pending the provision of a guarantee bond or other security satisfactory to the defendant to be provided by Mr Nemeth.