In the recent court decision of Granada Architectural Glazing Ltd v RGB P&C Ltd [2019], the defendant’s application for a stay of execution (preventing enforcement of an adjudicator’s decision) failed even though the claimant was balance sheet insolvent. This article comments on the case and suggests practical considerations for applying for a stay of execution.
Background
Adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996. It was designed to provide a speedy and inexpensive mechanism for settling disputes in construction contracts. An adjudicator’s decision is binding and enforceable until it is finally determined by arbitration, litigation or agreement (“interim finality”).
Due to the “pay first and argue later” nature of adjudication, any successful party is expected to receive money awarded before the final determination. Should the successful party experience insolvency after receiving this money, the paying party is unlikely to be able to recover the sum paid should the adjudicator’s decision be reversed.
One of the options that a paying party may consider in these circumstances is to apply for a stay of execution, allowing time in which to challenge the adjudicator’s decision without having to pay in accordance with it.
Case Summary
In Granada Architectural Glazing Ltd v RGB P&C Ltd [2019], an adjudicator decided in favour of Granada Architectural Glazing Ltd (the Claimant) in relation to disputes arising from a hotel project. Subsequently, the Claimant applied for summary judgment to enforce the decision. RGB P&G Ltd (the Defendant) applied for a stay of execution on the basis of the balance sheet insolvency of the Claimant.
The Technology and Construction Court held that balance sheet insolvency itself did not justify a stay taking into consideration the Claimant’s track record on payments of its debts, its trading position and support from its parent company.
Grounds for a Stay of Execution
An application for a stay of execution of enforcement of an adjudicator’s decision will be considered in line with the following principles set out in Wimbledon Construction v Vago [2005] and Gosvenor London v Aygun Aluminium UK [2018]:
- A court may grant a stay of execution if there are special circumstances which render it inexpedient to enforce the judgment or the applicant is unable for any reason to pay the money.
- If the contractor is in insolvent liquidation, or it is not disputed that the contractor is insolvent, a stay will usually be granted.
- Even if the evidence suggests that the contractor would be unable to repay the judgment sum, it would not usually justify a stay if the contractor’s financial position is:
- the same or similar to its position at the time when the contract was made; or
- due, either wholly or significantly in part, to the employer’s failure to pay the sum awarded by the adjudicator;
- Alternatively, a court may grant a stay if the evidence demonstrates that there is a real risk that any judgment would go unsatisfied because of the claimant organising its financial affairs with the purpose of dissipating of the adjudication sum so that it would not be available to be repaid.
Assessment of Financial Capacity
When a company is ‘insolvent’ but not in liquidation or administration (similar to the Claimant in this case), the court will take a holistic approach to assessing the claimant’s financial position. A stand-alone balance sheet evidencing net liabilities is therefore unlikely to justify a stay.
In this case, the court considered the relevant financial information and concluded that the Claimant’s financial position was the same or similar to its position at the time when the contract was made. This took into account the Claimant’s
a. trading position;
b. ability to pay its debts as they fall due; and
c. support from a parent company.
In this case, five contracts with a value of £1.4 million evidenced a healthy trading position with no sign of suspending business operations and over the previous eighteen months, the Claimant discharged its debts falling due without default. Further, the Claimant was supported by its parent company by way of inter-company loans, which represented a significant part of current liabilities on the Claimant’s balance sheet.
Practical Considerations
This case gives rise to several practical considerations when looking to apply for a stay of execution of an adjudicator’s decision on the basis of the receiving party’s alleged insolvency.
Financial evaluation
It is essential to properly investigate the available accounts of the other party and in particular to evaluate any support that might be provided by its group members, directors or shareholders.
Generally, it is unlikely that a stay will be granted if the company has significant support from existing contracts or guarantees. If, however, the company is a special purpose vehicle or its sole director uses the company for a personal purpose, such support is unlikely to be given much weight by the court.
To try to avoid such issues from arising, a contracting party should consider asking for sufficient safeguards be put in place (by way of insisting on a guarantor, other forms of security or advance payments) when entering into contracts if the other party’s financial position is doubtful. With preventive measures in place, a party would be in a much better position than if relying on a stay as a last resort.
No disclosure obligations
Although evidence of the other party’s financial position is pivotal for a stay application, there is no general obligation on a party to provide confidential information about its financial and business position for the purposes of an application for a stay. (However, if the other party is supported by a parent company guarantee, the guarantor’s management accounts should be disclosed.)
Low success rate
It is well recognised that Technology and Construction Court is reluctant to award a stay of execution in respect of adjudication awards. This is based on the policy behind adjudication: adjudication is designed to provide “interim finality”. A successful party should therefore not generally be deprived of its money. This means that the risk of an application to stay the execution of the decision is very much with the applicant. If the application is dismissed, the applicant should expect to pay the respondent’s costs.
