Practical Law

Can a dormant company enforce an adjudicator’s decision in its favour?

It may take an unusual set of facts to produce such a situation (in both cases where it has happened, there was a dispute as to who was the correct contracting party). However, the answer is yes. So long as it falls on the right side of the well-known principles for a stay of execution in Wimbledon v Vago, a dormant company can enforce an adjudicator’s decision and resist an application for a stay of execution.

In two cases that specifically dealt with this issue the key point was that, although the court accepted that the claimants would probably be unable to pay a subsequent judgment in the defendant’s favour, the claimants were always dormant. It followed that there was no change of position and the claimants’ financial positions were a risk the defendants had contracted for (see Westshield Civil Engineering Ltd v Buckingham Group Contracting Ltd and the recent case of WRB (NI) Ltd v Henry Construction Projects Ltd).

That is a relative standard application of principles (d) and (f) from Wimbledon v Vago:

“(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 … rendering it appropriate to grant a stay …

(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 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…”

Guarantees

A more interesting point arising from the cases involving dormant companies is the role that guarantees from parent companies or companies within the same group can play as a response to an application for a stay of execution of an adjudication enforcement:

• In Westshield, the group company had agreed to guarantee any of the dormant company’s liabilities arising out of any future proceedings.
• In WRB v Henry, WRB also offered a guarantee from WRB Energy Ltd, another company in the WRB Group, which was trading and had substantial assets. However, its primary position was that the guarantee was unnecessary. It was offered, as a fall-back, in the event that the judge was otherwise minded to grant a stay of execution. However, the judge decided that the guarantee was unnecessary, and WRB was entitled to enforce without providing it.

Of more note for practitioners acting for companies who are dormant or otherwise in a weak financial position, is the fact that the court accepted the principle that the guarantee (or at least a suitably worded guarantee) could allow a company in a poor financial position to successfully enforce an adjudicator’s decision where it would otherwise have failed the Wimbledon v Vago guidance.

Such a guarantee is, in many ways, equivalent to undertakings from administrators (and do on) to ringfence the adjudication sum in cases where the claimant is in administration or another formal insolvency procedure.

Terms of the guarantee

There is not (yet!) a Practical Law template for a parent or group company guarantee to cover the enforcement of an adjudicator’s decision.

The key point that needs to be considered in drafting such a guarantee is whether the terms offered provide sufficient security for the risk that the party seeking a guarantee would be unable to recover a future judgment or award in its favour. For example, see Styles and Wood Ltd (in administration) (S&W) v GE CIF Trustees Ltd, which was a judgment of HHJ Parfitt in the TCC List of the Central London County Court in September 2020.

Adopting the guidance provided in Meadowside Building Developments Ltd (In Liquidation) v 12-18 Hill Street Management Co Ltd and John Doyle Construction Ltd (In Liquidation) v Erith Contractors Ltd, such a guarantee would need to cover both:

• The sum due under the adjudicator’s decision (“the Adjudication Sum”). This should be framed as an amount up to the Adjudication Sum (to cover any claim by the other party up to that figure).
• To the extent future proceedings are in court or arbitration, the other party’s costs for any subsequent proceedings. This reflects the fact that if the adjudicator’s decision is enforced, one lasting impact is that the other party would be the claimant, not the defendant, in any legal proceedings seeking to recover the overpayment. The other party would, therefore, lose the opportunity to seek security for costs under CPR 25.12.

The other point that needs to be addressed is how long the guarantee will be in place. A sensible approach is to limit it to cover proceedings commenced within a certain period of time of the enforcement judgment. In WRB v Henry, the guarantee offered was for proceedings commenced within three months, but WRB stated that it would extend it to six months if the court considered it necessary.

Practical guidance

Notwithstanding the above, there are likely to be debates between parties as to whether the precise terms of any guarantee offered in such a situation are sufficient.

A claimant should bear in mind the cautionary words of the Court of Appeal in John Doyle v Erith when referring to analogous offers of an undertaking:

“… any undertakings or security being offered by a claimant company in liquidation need to be clear, evidenced and unequivocal. It is not for the judge to point out during the hearing potential inadequacies with the security offered, in order to give the claimant an opportunity to amend its offer on the hoof in the hope of making it more acceptable.”

A sensible course for a claimant is to include the text of the guarantee it is willing to provide as part of its evidence in response to an application for a stay (if not even earlier as part of its initial application for summary judgment) and to invite the defendant to comment in correspondence if it considers that it is inadequate.

Otherwise, in terms of practicalities such as arranging for a guarantee to be signed, the court in WRB v Henry accepted that these could be addressed following judgment, if it is decided that the guarantee should be provided, and the process for doing so accommodated within the court’s order.

Finally, the claimant must also remember that it will need to adduce evidence showing that the would-be guarantor is in a strong financial position and itself satisfies the Wimbledon v Vago guidance.

Concluding thoughts

The avenues by which a party can successfully resist the enforcement of an adjudicator’s decision against it are ever dwindling. Recent years have seen parties resorting to an application for a stay of execution rather than defending the enforceability of the decision itself.

Group or parent company guarantees are a potential answer for claimants in those situations. Perhaps a further principle could even be added to paragraph (f) of the Wimbledon v Vago guidance:

“(iii) an entity who probably would be able to repay the judgment sum is willing to provide a suitable guarantee for the judgment sum and the defendant’s costs of any subsequent court or arbitration proceedings.”

James Frampton acted for the successful claimant, WRB (NI) Ltd, instructed by James Sargeant at Quigg Golden.