GRANADA ARCHITECTURAL GLAZING LTD v RGB P&C LTD

GRANADA ARCHITECTURAL GLAZING LTD v RGB P&C LTD

There should be no stay of execution of the summary judgment entered to enforce the adjudicator’s decision when the defendant’s financial poor position was not significantly different from when it entered into the contract and it was probable that it would continue to receive financial support from its parent company
 

Technology and Construction Court
Nicholas Vineall QC
19 November 2019

There should be no stay of execution of the summary judgment entered to enforce the adjudicator’s decision when the defendant’s financial poor position was not significantly different from when it entered into the contract and it was probable that it would continue to receive financial support from its parent company

Summary judgment was ordered to enforce the adjudicator's decision. The defendant applied for a stay of execution of the judgment. The claimant was entitled to summary judgment for £102,089 including the adjudicator's fees plus interest. There was no suggestion that the defendant could not pay that sum. The issue for determination was whether there were "special circumstances which rendered it inexpedient to enforce the judgment". The case law establishes that the court’s discretion to grant a stay is to be exercised in accordance with established principles

Nicholas Vineall QC held that there should be no stay of execution. Even if the evidence of the claimant's present financial position suggested that it was probable that it would be unable to repay the judgment sum, that would not usually justify the grant of a stay if the claimant's financial position was the same or similar to its financial position at the time that the subcontract was made. In the instant case it appeared that the claimant was balance-sheet insolvent, but was supported by intercompany loans from its parent. It was thus able to pay its debts as they fell due and to continue as a going concern. That was likely to have been the position when the contract was entered into. There were no recorded county court judgments against the claimant and trade invoices were paid as they fell due. It appeared to be trading profitably and was involved in a number of ongoing contracts. It was more likely than not that it would continue to receive parental support. That likelihood had not changed since the contract was entered into. The claimant's tender was the lowest and the defendant had chosen to accept it. There should be no stay of execution. The judge was not attracted to the half-way house of a payment into court. The purpose of the adjudication scheme was to mitigate cash flow difficulties by making payments. Where the debtor was able to pay, special circumstances were required to stay execution. It would be wrong to allow the defendant to provide security rather than cash, against the double contingency that its action succeeded and the claimant was unable to repay.

THE FULL TEXT OF THE JUDGMENT OF NICHOLAS VINEALL QC

1. The issue on this application is whether or not I should grant a stay of execution of a judgment obtained in an action brought to enforce an adjudication award.

2. The claimant and the judgment creditor is Granada Architectural Glazing Limited (”Granada”). It is a wholly owned subsidiary of Glass Umbrella Limited. The defendant and judgment debtor is RGB P&C Limited (defined as “RGB”).

3. On or about 17 September 2018, Granada was retained by RGB to provide the design, supply and installation of curtain walling, windows and doors on a project involving a hotel construction at Heathrow. Disputes arose, and on 14 May 2019 Granada served a notice of adjudication under part 1 of the Housing Grants Construction and Regeneration Act 1996 (as amended). Mr Keith Blizzard FRICS was appointed and on 26 June 2019 he decided that RGB was liable to pay £85,089 as damages for wrongful termination plus interest; and he assessed his costs at 22,000 and directed Granada to pay £5,000 and RGB to pay £17,000 (in each case plus VAT).

4. RGB did not comply with the adjudication award, and on 19 October 2019 Granada commenced proceedings seeking to enforce the adjudication award, and thereafter sought summary judgment.

5. RGB did not defend the proceedings nor oppose the application for summary judgment, and accordingly I entered judgment this morning against RGB in the sum of £102,089 plus interest. The judgment sum exceeds the £85,089 award by way of damages by Mr Blizzard because RGB failed to pay its proportion of the adjudicator’s costs and in the event Granada paid them and now claims that sum from RGB.

6. RGB is dissatisfied with the result of the adjudication and by proceedings issued on 3 October 2019, RGB sued Granada seeking a declaration that RGB had validly terminated the sub-contract and seeking damages of just over £161,000. Granada is defending that claim and raises its own counterclaim.

7. Meanwhile, RGB by application issued on 18 October 2019 sought a stay of execution of the judgment on the arbitration award pursuant to CPR83.7(4) and in the alternative seeks an order pursuant to CPR83.7(4) that enforcement be stayed on condition RGB pay the judgment sum into court pending final determination.

8. I have said nothing about the basis of or the merits of the underlying claims because, as both parties rightly accept, those issues are irrelevant to what I have to decide today.

9. The parties agree that the question which arises is governed by CPR83.7(1) and (4) which provide so far as material as follows:

(1) At the time that a judgment or order for payment of money is made or granted, or at any time thereafter, the debtor … may apply to the court for a stay of execution.

(…)

(4) If the court is satisfied that—

(a) there are special circumstances which render it inexpedient to enforce the judgment [debt] or order; or

(b) the applicant is unable from any reason to pay the money, then notwithstanding anything in paragraph (5) or (6), the court may by order stay the execution of the judgment or order, either absolutely or for such period and subject to such conditions as the court thinks fit.

10. It is not suggested that this is a case in which the applicant is unable to pay the money demanded by the judgment order, but it is suggested that there are special circumstances which render it inexpedient to enforce the judgment or order.So it follows that the question of whether or not to grant a stay of execution is a question of discretion.

11. The parties also agree that the principles to be applied are those summarised by His Honour Judge Coulson QC (as he then was) in Wimbledon v Vago [2005] BL Rep 374 at 26, as supplemented by Mr Justice Fraser in Gosvenor London Ltd & Aygun Aluminium UK Limited [2018] EWHC 227 (TCC) at paras.39, 60 and 61.

12. On the basis of those two authorities, the principles which I must bear in mind when I come to exercise my discretion can be summarised 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 rule 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.

(g) 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 with 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.”

13. This case engages paragraphs (e) and (f)(i) of that guidance. For reasons which I shall go on to explain, this is a case in which the receiving party (Granada) was balance sheet insolvent at the date of the contract, and is balance sheet insolvent now, but has always paid its debts as they fall due, and has been able to do so because of support by way of inter-company loans from the group of which it is a party.

14. Counsel are unable to identify any previous case on similar facts, nor any discussion in previous cases of the right approach in a case where the claimant is solvent on a going concern basis, but balance sheet insolvent.

The parties’ contentions

15. RGB, represented by Mr Thompson, contends that there is a strong likelihood that if at the end of the day RGB is successful in its claim, RGB will be unable to recover from Granada money which it pays now in response to satisfaction of the judgment. He says that the financial position of Granada is materially worse now than it was at the time of contracting.

16. Granada, represented by Mr Sliwinski, contends that RGB cannot demonstrate that it is probable that Granada would be unable to repay, and says that in any event Granada’s financial position now is not materially different from its position at the time the contract was entered into.

The evidence

17. Mr Chambers is Commercial Director of RGB. His evidence is that as part of the tender review process RGB,

”carried out the credit and related financial checks that we would usually perform when seeking to engage with a sub-contractor”,

but he does not give any details as to what checks were in fact done. He records that Granada’s price was by far the lowest of the three contractors who tendered for the sub-contract works.

18. RGB has since obtained two documents:

19. The first is a credit check report dated 7 October 2019 from Creditsafe. It records Credit Safe’s assessment of the financial riskiness of Granada both at that date and at various earlier dates.

20. The second document is Granada’s financial statements for the year ended 31 March 2019 as filed at Companies House. Those financial statements give a snapshot of Granada’s position on 31 March 2019, and also because they record the prior year figures 12 months earlier on 31 March 2018. Those dates are therefore roughly six months before and six months after the date on which RGB contracted with Granada.

21. Finally, Granada has produced management accounts as of 31 October 2019.

22. I think it is helpful to collate the available financial information in chronology order and in doing so I shall round figures to the nearest thousand.

23. As of 2 February 2018 the credit rating history from Creditsafe records a rating of 15, characterised as very high risk

24. As of 31 March 2018 the financial statements show that Granada’s position was as follows:

• assets of £1,279k of which £137k was cash at bank, and £1,142k was debtors;

• of the debtors figure, £742k was trade debtors falling due within a year;

• creditors totalling £1,762k of which the great bulk, £1,553k, was amounts due to group undertakings – in other words, indebtedness to either the parent or to other group companies;

• that produce a net balance sheet showing a deficit of £383k.

25. As of 20 August 2018, the credit rating history from Creditsafe records a rating of 24, characterised as high risk.

26. The contract was entered into on 17 September 2018.

27. As of 31 March 2019, the accounts show that Granada’s position was as follows: assets of £1,658k of which £25k was cash at bank and £1,634k was debtors. Of the debtors figure, £1,209k was trade debtors falling due within a year. Creditors totalled£2,764k of which the great bulk, £2,403k, was amounts due to group undertakings, again, in other words, indebtedness to either the parent or to other group companies. That produced a net balance sheet showing a deficit of £1,105k.

28. The financial statements for year ended 31 March 2019 record as follows:

”As at the balance sheet date, the company had net liabilities of £1,105,318. The company is reliant on the continued support of the group and it [that must mean the group] has expressed its intention to support the company. On that basis the financial statements have been prepared on a going concern basis”.

29. On 1 August 2019 the Creditsafe rating was 33, characterised as moderate risk (and therefore rather better than the rating of 24 which is closest in time to the date of the contract).

30. As of 31 October 2019, so, very recently, the management accounts show

• a net balance sheet of deficit £940k;

• cash at the bank of £93k

• a surplus on trading since 31 March 2019 of £165k

31. Both counsel addressed me on the significance of the cash at bank figure of £93k. In my view, the precise figure available at the bank is less important than the trading position and overall asset position. Cash at bank will inevitably fluctuate on a daily basis. Here, the assets include trade debtors of £643k and retentions of £245k which, combined with the cash at bank and work in progress, give current assets of just over £1m.

32. Current liabilities are only £67k and the reason there is an overall negative balance sheet is entirely due to substantial net inter-company indebtedness of nearly £2m.

33. Finally, I note there is a witness statement from Mr Morris, a director of Granada, which identifies five contracts with which Granada is presently involved and which have a total contract value in the region of 1.4m.

Discussion

34. In March 2018, six months before the contract in question was entered into, Granada was balance sheet insolvent but was being supported by its parent. In March 2019, six months after the contract was entered into, and about eight months ago, Granada was balance sheet insolvent but was being supported by its parent. I infer that it is highly likely that that was also the position when the contract was entered into.

35. Mr Morris says that Granada pays its debts as they fall due. There is no evidence that Granada has failed to meet its debts as they fall due; and what Mr Morris says is supported by the fact that there are no recorded CCJs against Granada and the Creditsafe report suggests that trade invoices are paid as they fall due.

36. I find on the balance of probabilities that Granada has over the last 18 months paid its debts as they fall due.That means that, both now and when the contract was entered into, Granada was balance sheet insolvent but was trading with the support of its parent and was discharging its debts as they fall due.

37. How likely is it that Granada will fail to repay RGB if required to do so? There is obviously a risk that it will fail to repay. How likely that is depends, in my view, on three factors: when it is called on to repay; how successful Granada has been in the interim; and whether the group wishes to continue to support Granada.

This therefore requires a prediction to be made as to what will happen in the future.

38. Doing the best I can, I consider that there is a reasonable likelihood that Granada will be unable to repay if and when required to do so, but on the basis of all the available evidence I do not consider that a future inability to repay is more likely than not.

39. I take into account in particular the fact that the group has so far supported Granada; that Granada is continuing to trade; and that Granada is apparently continuing to trade successfully.

40. What then of ground (e) in the Guidance? Although there is no dispute on the evidence that Granada is insolvent in the sense of being balance sheet insolvent, in this case and for the reasons I have explained I do not think it follows that Granada will probably be unable to repay.

41. I turn to consider ground (f). Even if I had decided that it was probable that Granada would be unable to repay I would have found that Granada’s financial position was similar to its position when the contract was made. I do not consider that fine gradations in financial position matter for the purposes of ground (f). Here, the nub of the point is that – both at the time of contracting and now – Granada’s ability to repay depends on its having the support of its parent. I can see no grounds to believe that the likelihood of parental support has changed. The position therefore seems to me to be materially similar now to the position at the date of contract.

42. It is important to remember that the price paid for services will often be affected by the financial strength of the provider of those services. A financially weak counter-party is unlikely to command as good a price as a financially solid counter-party. Here, Granada was financially weak at the time of the contract, and its price was the lowest of any of the tenders received by RGB.

43. RGB chose to contract with Granada. In the absence of a material change in the financial position of Granada, it seems to me that it would be unfair and contrary to the spirit of the adjudication regime to allow RGB to escape its liability to meet an adjudication award on the basis of the essentially unchanged financial position of Granada. Accordingly, I decline to order a straightforward and unconditional stay of execution.

44. Mr Thompson sought in the alternative a stay of execution on condition that RGB brought into court the judgment sum. I am not attracted by this halfway house. The purpose of the adjudication regime is to mitigate cash flow difficulties by requiring payment actually to be made following an adjudication award. It is a risk inherent in that regime, and in the construction industry more generally, that monies paid to someone may not be repaid if they are called upon to do so; but the course that Mr Thompson urges on me effectively substitutes security for actual cash flow.

45. I accept that there may be cases where such a course is appropriate, and Mr Thompson told me that he had been involved in one unreported case where that route was taken. But I remind myself that in cases such as this, where the debtor is able to pay, I only have power to order a stay (even on terms) if there are, in the words of CPR83.7(4):

”… special circumstances which render it inexpedient to enforce the judgment”.

46. In this case, for the reasons I have endeavoured to explain, it seems to me that the proper approach is to permit enforcement to proceed. That is what is expedient here.

47. Given my findings as to Granada’s financial position, I do not consider it would be appropriate to allow RGB to protect itself against the double contingency that it both succeeds in establishing the adjudication award was wrong, and that it then turns out that Granada is unable to repay, by permitting RGB to provide security rather than cash, and for those reasons I dismiss the application.