Adjudication Enforcement & Insolvency: To stay or not to stay?

Problems in enforcing adjudicators’ decisions can arise when insolvency intervenes. Two recent cases demonstrate how fine the line is between events that will justify a stay and those that will not.

The courts are reluctant to enforce adjudicators’ decisions if it is arguable that a sum awarded by an adjudicator would have to be repaid by a claimant at a later date in final proceedings but there is significant doubt that the claimant would be able to do this. The courts will (and are required to) stay the enforcement of a decision if the claimant is in liquidation, but in other cases they have a discretion to order a stay. In exercising that discretion, the courts are less likely to order a stay of execution where the claimant is merely in financial difficulties, especially if the claimant’s financial position is (i) the same or similar to its financial position at the time that the relevant contract was made or (ii) due, either wholly, or in significant part, to the defendant’s failure to pay those sums which were awarded by the adjudicator.

The two cases described below illustrate the balancing act that the courts have to carry out in deciding whether to grant a stay in these circumstances (a possible effect of which is that the claimant will not survive).

JPA Design and Build Limited v Sentosa (UK) Limited

In this case, JPA commenced enforcement proceedings for £300,000. When considering Sentosa’s claim for a stay the court had to decide whether JPA’s financial position had changed since the contract was let and, if so, whether Sentosa was responsible for this.

The court observed that JPA’s accounts for the financial year ending shortly after the contract was let showed a net profit of £53,237 on a turnover of just under £500,000. By contrast, its account the following year (filed just before the enforcement proceedings) showed a loss of £307,124 on a turnover of almost £3million. JPA owed about £700,000 to creditors and was the subject of an unsatisfied county court judgment and winding-up petition. The court therefore concluded that JPA’s financial position had altered significantly.

However, the court held that despite not paying JPA the sum awarded by the adjudicator, Sentosa was not responsible for JPA’s deteriorating financial position because:

• JPA had not mentioned its claim for £300,000 for over a year and had failed to issue a claim in that amount until after the contract had been terminated.
• If Sentosa had paid JPA the £300,000 awarded by the adjudicator, JPA’s indebtedness to its creditors would only be reduced to £400,000.

The court concluded that the financial position of JPA would justify a stay on these bases.

SG South Limited v King’s Head Cirencester LLP

In this case, SG South sought the enforcement of two adjudicators’ decisions, the cumulative outcome of which was a net payment of some £90,000 plus interest to SG South.

Having reviewed the evidence provided by the parties, the court concluded that SG South was undoubtedly in some financial difficulty. Amongst other things:

• There were no up to date management accounts. The latest draft account showed a modest profit after tax of £130,000 on a turnover of £1.6million. Cash at the bank was said to be less than £2,000 and the company had more than £90,000 of unpaid tax.
• The other contracts or work which SG South said that it had were fairly minor or illusory. There was also evidence that another company had been set up with a similar name, which it was said by King’s Head suggested that SG South would be allowed to slip into dissolution.
• There were two unsatisfied judgments against SG South, the largest of which was for £6,662 and was being repaid at only £100 per month.

However, the court said that the financial position of SG South was the same or very similar to its financial position at the time the relevant contract was made.

The court also held that the financial difficulties faced were due, either wholly, or in significant part, to the failure of King’s Head to pay the sums awarded by the adjudicators without justification for not doing so. Having regard to all of the facts, the court said that the injection of some £90,000 plus whatever it had paid to its solicitors in relation to the enforcement proceedings into the cash flow would give a much greater chance of continuing with its business.

In comparison to the JPA case, the court therefore concluded that this was not a case where it was appropriate for a stay. It said that whilst SG South was primarily by reason of cash flow in difficulties at the moment, it was certainly no worse off than when King’s Head took the risk of entering into the contract with it and it was more likely than not that its current financial difficulties had been significantly caused or contributed to by the unjustified non-payment by King’s Head.

In summary, it is clear from these two cases that the court will carry out a detailed financial analysis of all of the circumstances when deciding whether to grant a stay. They will not look kindly on payers who unjustifiably withhold amounts awarded by adjudicators which may provide valuable lifelines for contractors and subcontractors in these troubled times.

Reference: JPA Design and Build Limited v Sentosa (UK) Limited (other aspects of this case were discussed in a separate Law-Now article) and SG South Limited v King’s Head Cirencester LLP