REUTERS | Neil Hall

Parent company guarantee stops stay of adjudication – now that’s magic!

It was Paul Daniels who made the phrase, “You’ll like this… not a lot, but you’ll like it” famous. Perhaps that would have been apt last week when the IMF revised its 2013 growth forecast for the UK from 0.7% to 0.9%. Not great, but it’s a start.

However, there is no doubt that it will be a long road to recovery and we will still see the effects of the recession for some years to come. I’m not an insolvency expert, but I realised the other day that insolvency is a factor in much of my current workload. For example, I’m acting as adjudicator where one party is in financial difficulties, acting as expert in matters where developers have gone pop, and so on. MCMS is even acting as PQS where the previous PQS succumbed to its heavy financial burdens.

Insolvency is never far from the law reports either. In fact, Ramsey J had to deal with some interesting insolvency points in the adjudication enforcement case, FG Skerritt v Caledonian Building Systems.

FGS v Caledonian

It was common ground that FGS was insolvent, so you might well ask why it proceeded to adjudication in the first place given the well-established principle that a stay of execution will usually be granted against an insolvent claimant. Well, it appears that Caledonian’s defence was based on set-off for defective works, and FGS argued that these set-offs were minimal (circa £20,000 to £40,000) compared to the sum the adjudicator awarded (circa £187,000).

Ramsey J did not agree and stated that the defects:

“…raise real grounds of equitable set-off amounting, on the documents before me, to a sum exceeding the sum awarded by the adjudicator…”

As a result, Ramey J was of the view that it would be appropriate to grant a stay of the enforcement of the adjudicator’s decision. However, that wasn’t the end of the story because FGS had another trick up its sleeve…

For my next trick…

FGS argued that there was no need to grant a stay because its parent company, Melham Group Ltd, had offered a guarantee. Ramsey J accepted that, in principle, a parent company guarantee is an alternative way of overcoming the difficulties of recovering a judgment sum in cases where it would otherwise by appropriate to grant a stay.

However, the company offering the guarantee must be financially secure, so there then followed much debate about MGL’s financial position. After referring to a number of reports by the parties’ accountants, Ramsey J was persuaded that MGL had sufficient assets to discharge its liabilities under the guarantee if required to do so. He therefore decided that:

“… an appropriate guarantee from MGL in relation to the sums due under the adjudicator’s decision would be an appropriate way of providing security for repayment of that sum, given that FGS is insolvent…”

Will we see a rise in guarantees and bonds to avoid stays?

As far as I’m aware, this is the first time that a guarantee has been used to avoid a stay of an adjudicator’s decision. So will we see a rise in the use of guarantees, or even bonds, in such circumstances?

In my view, it’s unlikely because:

  • Parent company guarantees will only be available in certain circumstances, namely where there is a parent company with sufficient financial standing to give a guarantee. Many contractors and sub-contractors don’t have parent companies.
  • I can’t see many directors and/or shareholders being prepared to give personal guarantees.
  • The cost of a bond to cover the judgment debt may well be prohibitive.

So, while it appears that there may be a “new” remedy available where an insolvent party is trying to enforce an adjudicator’s decision, in practice the incidence of its availability might be rare. Even so, I bet FGS thinks it’s magic!

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