Neutral Citation Number: [2013] EWHC 1898 (TCC)

Case No: HT 13 127

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

 

Royal Courts of Justice

Strand, London, WC2A 2LL

 

Date: 3 July 2013

 

Before :

 

THE HON MR JUSTICE RAMSEY

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Between :

 

 

FG Skerritt Ltd

Claimant

 

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Caledonian Building Systems Ltd

Defendant

 

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Mr William Webb (instructed by Wright Hassall LLP ) for the Claimant

Ms Lucy Garett (instructed by Brabners LLP ) for the Defendant

 

Hearing date: 5 June 2013

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Judgment

Mr Justice Ramsey :

Introduction

 

  1. This is an application by the Claimant (“FGS”) for summary judgment to enforce an Adjudicators’ decision. The Defendant (“Caledonian”) does not challenge summary judgment but seeks to stay enforcement of the judgment under RSC Order 47 Rule 1(1) on the basis that, as is common ground, FGS is insolvent.

 

  1. The Defendant seeks to rely on the situation which would arise if FGS were insolvent and rule 4.90 of the Insolvency Rules 1986 were to apply and also to rely on two other issues in relation to the application to stay. First there is a question of the basis on which Caledonian might seek to challenge the adjudicator’s decision in any further proceedings. FGS contends that the basis is limited so that this is a case where, despite FGS’ insolvency, the court should not exercise its discretion to stay enforcement. Secondly, if this is a case where the court would otherwise exercise its discretion to stay, whether the court should not in fact do so on the basis that FGS’s parent company, Melham Group Limited (“MGL”) has offered a guarantee.

 

Background

 

  1. Caledonian engaged FGS as a sub-contractor in a number of contracts between 2009 and 2010. In particular there was a sub-contract in writing dated 22 May 2009 under which FGS was to design and build the Mechanical and Electrical works on a project at HM Prison Eastwood Park. The contract was based on the DOM2 standard form with a contract price of over £1.8 million.

 

  1. On 31 December 2009 FGS submitted an invoice for the outstanding balance of the sub-contract sum, less half the retention. This was on the basis that practical completion had been achieved by 17 December 2009. Caledonian did not accept that practical completion had been achieved and did not pay that invoice.

 

  1. On 11 February 2010, FGS went into administrative receivership. The administrative receivers sold FGS’s book debts to Nathu Ram Puri Environmental Design Consultants (“EDC”) under an agreement dated 16 February 2010. EDC is owned and controlled by Mr Nathu Ram Puri who is also the ultimate owner and controller of FGS.

 

  1. It is common ground that the sale to EDC was ineffective in assigning FGS’s book debt relating to the project at HMP Eastwood Park because the DOM2 conditions include a prohibition on assignment. EDC is not therefore the owner of the relevant debt but, on the basis of the judgment of Rix LJ in Explora Group PLC v Hesco Bastion Limited [2005] EWCA Civ 646 at [104], with whom the other members of the Court of Appeal agreed, the assignment took effect by way of a trust, so that FGS holds the debt on trust for EDC.

 

  1. FGS ceased work on the project in 2010 following the administrative receivership. On 31 December 2010 FGS submitted an invoice for the remaining half of the retention, 12 months after it contended practical completion had been achieved.

 

  1. During 2010 and 2011, as appears to be common ground, another company owned and ultimately controlled by Mr Puri, Conder M&E Limited and/or EDC carried out various works rectifying defects in relation to FGS’s works at HMP Eastwood Park and were paid by Caledonian. Caledonian contends that it has paid these companies and therefore incurred costs in completing and/or rectifying the works as a consequence of FGS’s administration and so did not pay the invoice. Caledonian also contends that it has incurred and may incur further costs in relation to FGS’s defective work both on the project at HMP Eastwood Park and in relation to other projects on which FGS ceased work as a result of its insolvency.

 

  1. The administrative receivers ceased to act as such on 14 March 2011. FGS was not wound up but does not trade. It has not yet been struck off the register of companies.

 

  1. FGS issued a notice of adjudication on 14 December 2012, some 2 years after the last invoice. In the adjudication FGS claimed payment of £214,476.93 which it contended was due under invoices issued under the sub-contract. It also claimed interest.

 

  1. By a decision dated 14 February 2013 the adjudicator decided that FGS was entitled to full payment of two of the invoices, totalling £184,794 (plus VAT) on the basis that these were sums due under the sub-contract and Caledonian had not served a withholding notice. As a result Caledonian’s counterclaim relating to costs incurred in completing the sub-contract works and rectifying defects as a consequence of FGS’s administrative receivership could not be set-off against the invoiced sums. The Adjudicator also held that practical completion occurred on 17 December 2009. Caledonian says that in any final determination it will be able to rely on its counterclaim.

 

  1. FGS issued these proceedings on 5 April 2013. They were supported by a witness statement dated 28 March 2013 from Philip Harris of Wright Hassall LLP, solicitors acting for FGS. In response Caledonian served a witness statement dated 17 May 2013from Barry Goodall of Brabners LLP, solicitors acting on behalf of Caledonian. One of the issues raised by Mr Goodall concerned the financial status of MGL who had proffered a guarantee and Mr Goodall exhibited a report from Mattocks Grindley, Chartered Accountants, dated May 2013, which questioned the financial position of MGL.

 

  1. In reply FGS served a witness statement dated 24 May 2013 from Charles Harrison of Wright Hassall LLP. Mr Harrison’s witness statement exhibited a report dated 24 May 2013 from Grant Thornton who are auditors to MGL. This was then responded to by a second report from Mattocks Grindley dated 3 June 2013 which in turn was responded to by a further report from Grant Thornton dated 4 June 2013.

 

  1. At the hearing I was also provided, without objection, with further evidence by Caledonian in the form of an email and enclosure dated 29 January 2013 and a letter dated 7 February 2013 concerning alleged problems in the smoke-extract systems in prisons, including that designed and built by FGS at HMP Eastwood Park.

 

Rule 4.90 of the Insolvency Rules 1986

 

  1. On behalf of Caledonian Ms Lucy Garrett developed a submission that, given the insolvency of FGS, the court should apply the analogy of the position which would apply under rule 4.90 of the Insolvency Rules 1986 if FGS were in liquidation. That would lead, she submits, to a position where the court would not grant summary judgment. Here, she relies on that rule by way of analogy to support the application to stay.

 

  1. She relies on a passage in the judgment of Chadwick LJ, with which the other members of the court agreed, in Bouygues (UK) Limited v Dahl-Jensen (UK) Limited [2000] BLR 522 where he referred to the effect of rule 4.90 of the Insolvency Rules 1986 which apply where a company was in liquidation, as Dahl-Jensen was in that case:

 

“Part 24, rule 2 of the Civil Procedure Rules enables the court to give summary judgment on the whole of a claim, or on a particular issue, if it considers that the defendant has no real prospect of successfully defending the claim and there is no other reason why the case or issue should be disposed of at a trial. In circumstances such as the present, where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation, in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires.”

  1. She submits that there is thus a compelling reason to refuse summary judgment in that case and the situation here is similar and the court, by analogy, should grant a stay.

  1. Mr William Webb, who appears on behalf of FGS, submits that this is a case where the position arising because of FGS’s insolvency can be dealt with, if at all, by a guarantee from MGL.

 

  1. Whilst I accept that in cases where there is a company in liquidation rule 4.90 of the Insolvency Rules 1986 might prevent the court from giving summary judgment, for the reasons set out below in relation to Ms Garrett’s submissions on the scope of set off, I do not consider that it is appropriate to take into account the effect of rule 4.90 in the circumstances of this case. I therefore now turn to consider the other two matters raised in relation to the application by Caledonian to stay the enforcement of judgment in this case.

 

 

 

 

Grounds of challenge to the Adjudicator’s Decision

Submissions

  1. Mr William Webb submits that on the basis of the evidence of Mr Goodall, there is no challenge to FGS’s entitlement to be paid the sums which the adjudicator decided to be due, other than the sums which Mr Goodall refers to in paragraph 6 of his Witness Statement. There he says that Caledonian has prepared a summary of its claims against FGS in relation to a number of projects and says that Caledonian’s total cross-claims amount to £196,260, excluding VAT. He says that Caledonian has not pursued those claims because FGS is insolvent.

 

  1. By reference to that Schedule Mr Webb identifies a sum of £10,895.50 which is said to be money paid to Conder M&E Ltd for HMP Eastwood Park smoke extract investigation work relating to defective work by FGS and an estimated figure of £30,000 for smoke ventilation work to date. He submits that this would be the maximum extent of any challenge which Caledonian make or could make by way of equitable set-off. He says that the sum totals some £20,000 to £40,000. On that basis he submits that, if a stay were to be appropriate, it should only be limited to sums which could be set-off by way of equitable set-off.

 

  1. In relation to the other sums set out in the schedule to Mr Goodall’s witness statement, he submits that these are cross-claims arising from other contracts which cannot be set-off against sums due on this sub-contract by way of equitable set-off: see Geldof Metaalconstructie NV v Simon Carves Limited [2010] BLR 401 per Maurice Kay LJ at [43].

 

  1. Ms Garrett submits that this is a case where FGS is insolvent and, as set out by His Honour Judge Coulson QC (as he then was) in Wimbledon Construction Company 2000 Limited v Derek Vago [2005] BLR 374 at [26(e)], a stay of execution will usually be granted if the claimant is in insolvent liquidation or there is no dispute on the evidence that the claimant is insolvent. She refers to the Court of Appeal decision in Bouygues (UK) Limited v Dahl-Jensen (UK) Limited [2000] BLR 522 where Chadwick LJ referred to the fact that Dahl-Jensen was in liquidation and in those circumstances rule 4.90 of the Insolvency Rules 1986 took effect. This meant that where there have been mutual credits, mutual debts or other mutual dealings between the company in liquidation and any creditor of that company there was ability to set-off sums due from one party to the other, with the balance being provable in the liquidation.

 

  1. Chadwick LJ referred to the speech of Lord Hoffmann in Stein v Blake [1996] AC 43 at 251D-F where Lord Hoffmann explained the difference between bankruptcy set-off and legal set-off outside the bankruptcy in the following terms:

 

“Bankruptcy set-off, on the other hand, affects the substantive rights of the parties by enabling the bankrupt's creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set off pound for pound what he owes the bankrupt and prove for or pay only the balance. So in Forster v Wilson (1843) 12 M & W 191, 204, Parke B said that the purpose of insolvency set-off was "to do substantial justice between the parties". Although it is often said the justice of the rule is obvious, it is worth noticing that it is by no means universal. It has however been part of the English law of bankruptcy since at least the time of the first Queen Elizabeth.”

 

  1. Chadwick LJ then continued by saying at [33]:

 

“33. The importance of the rule is illustrated by the circumstances in the present case. If Bouygues is obliged to pay to Dahl-Jensen the amount awarded by the adjudicator, those monies, when received by the liquidator of Dahl-Jensen, will form part of the fund applicable for distribution amongst Dahl-Jensen's creditors. If Bouygues itself has a claim under the construction contract, as it currently asserts, and is required to prove for that claim in the liquidation of Dahl-Jensen, it will receive only a dividend pro rata to the amount of its claim. It will be deprived of the benefit of treating Dahl-Jensen's claim under the adjudicator's determination as security for its own cross-claim.”

 

  1. On that basis Ms Garrett submits that the Court should look at the reality of the position which is that FGS is insolvent, there have been moves to strike it off the register which have been opposed on the grounds, so it appears, of FGS’s obligations to EDC to pursue recovery of the invoices by way of adjudication and these proceedings but, in reality, FGS is bound for insolvent liquidation. She therefore submits that this is a case where it is appropriate for the court to take into account insolvency set-off so as to do substantial justice between the parties and, as set out above, not to grant summary judgment.

 

  1. In any event, Ms Garrett submits that, in this case, it is not appropriate to limit the scope of equitable set-off to the sum of £20,000 to £40,000 identified by Mr Webb. She submits that there are outstanding issues in relation to the smoke extract system at HMP Eastwood Park and that these may cost many thousand of pounds to remedy. She refers to an unpriced item in the schedule attached to Mr Goodall’s witness statement where he identifies future possible costs of smoke extract in the following terms: “ If the FGS design system is found to [be] at fault (this is a very complicated and costly issue) the costs could be many hundreds of thousands of pounds. ”

 

  1. She refers me to the second witness statement of Max Banbury of Caledonian which was submitted in the adjudication in which he refers to complaints from the Ministry of Justice in relation to the smoke extract system and a letter dated 4 October 2011 from Caledonian to FGS in which it is stated that the full cost was not then known but that initial indications were that the costs could exceed £200,000, excluding costs incurred to that date and VAT. She also refers to correspondence from the Ministry of Justice dated 29 January 2012 enclosing a report from Jacobs and stating that the Ministry of Justice had decided that it had no option but to carry out immediate remedial works to the smoke extraction system. In their response to that letter Caledonian challenged the findings of the Jacobs report and the need for remedial works. Ms Garrett also referred me to other potential claims made in correspondence concerning the size of the generators and oil storage capacity at HMP Eastwood Park.

 

Analysis

  1. As was stated in Wimbledon v Vago at [26(d) and (e)], if a claimant is insolvent then a stay of execution will usually be granted. That is on the basis of the inability of the claimant to repay the sum awarded by the adjudicator at the end of any substantive trial or arbitration hearing to determine, in a final manner, what has been temporarily determined in adjudication. If the party who has to pay the sum due on an adjudicator’s decision has no real grounds for challenging the adjudicator’s decision then even if the party is insolvent a stay would not be appropriate because it would deprive creditors of the opportunity of making some recovery from the insolvent company.

 

  1. In the present case whilst there is no challenge to the correctness of the adjudicator’s decision in relation to the sums due on the two invoices, there is a challenge by way of defence of equitable set-off both for the sums already expended in remedying defects in FGS’ work at HMP Eastwood Park and also arguable claims for future remedial work to those works. In my judgment those raise real grounds of equitable set-off amounting, on the documents before me, to a sum exceeding the sum awarded by the adjudicator. Whilst the current expenditure may be of the order of £20,000 to £40,000, the final cost could be well in excess of this. In such circumstances I consider that Caledonian have proper grounds for challenging whether the sums held to be due by the adjudicator will, in the end, be due to FGS. In such a case, the insolvency of FGS amounts to special circumstances which render it inexpedient to enforce the judgment.

 

  1. Whilst I accept that rule 4.90 of the Insolvency Rules 1986 acts to do substantial justice between the parties by allowing for mutual set-off of sums which are much wider than the ability to make an equitable set-off, I do not consider that at this stage, where FGS is insolvent but not in liquidation, that it is right to apply this right of set-off which has not yet arisen. Whilst the current position of FGS is that it is insolvent and not trading I do not consider that the fact that at some stage in the absence of financial support from the parent company it might go into liquidation it is appropriate at this stage to take account of what may occur and apply the consequences of rule 4.90 so as to conclude that there should not be summary judgment, as dealt with above, or to take account of the ability to make wider set-off under that rule. To do so would, in my judgment, be equivalent to applying rule 4.90 in circumstances where, as a matter of statute, it does not apply.

 

  1. In the circumstances this is a case where, subject to the matters below, I consider that it would be appropriate to grant a stay of execution of summary judgment on the adjudicator’s decision.

 

The Guarantee by MGL

 

  1. The purpose of a stay of enforcement is to ensure that, should Caledonian be held to be entitled to deduct money from the sum awarded by the adjudicator at some future date then it is not left in a position where the sums awarded by the adjudicator are no longer available to Caledonian.

 

  1. In McConnell Dowell Constructors (Aust) PTY Limited v National Grid Gas Plc [2007] BLR 92 Jackson J (as he then was) considered an application to stay execution under RSC Order 47 rule 1(1). In that case a bond was offered which Jackson J noted would protect the defendant’s position if the defendant subsequently obtained a judgment or arbitral award clawing back the money awarded by the adjudicator. He said at [52] and [53] that if a bond were provided that would be sufficient to meet the concerns of the defendants.

 

  1. In principle, a bond or guarantee provided by a party which provides sufficient security for the repayment of the judgment sum is an alternative way of overcoming the difficulties of recovering the judgment sum in cases where it would otherwise be appropriate for there to be a stay of execution under RSC Order 47 rule 1(1). By reference to the principle set out in [26(f)(i)] of Wimbledon v Vago , it was common ground in this case and I consider it to be correct in principle that a defendant is entitled to be provided with security which is equivalent to the security it would have had based on the claimant’s financial position at the time when the relevant contract was made.

 

  1. With those observations I now turn to the submissions of the parties as to the financial position of MGL which is offering a guarantee to Caledonian.

 

Submissions

  1. Ms Garrett provided an organogram which showed that the person behind FGS and MGL, Mr Puri, also had a controlling interest in a number of other companies. In the case of MGL that had a subsidiary Melham Holdings Limited which was a dormant company. That company had subsidiaries in the form of FGS which was now insolvent and Conder Structures Ltd which, in turn, had a subsidiary Conder M&E Limited. In relation to Conder Structures Limited Ms Garrett says that it traded at a loss of £235,777 in the last financial year and Conder M&E Limited, she submits was, effectively insolvent with net current liabilities of £2,440,790. She says that almost all of Mr Puri’s companies trade exclusively or substantially with each other and most of them are trading at a loss. As a result she submits that, despite what is said in the accounts of MGL that company is not one that would be able to meet liability on the guarantee.

 

  1. She relies on the reports put forward by Mattocks Grindley where they say that, as the guarantee is being provided in the short term, it should be backed by assets that are quickly convertible into liquid funds. Because of the significant volume of intergroup trading, they also say that the trading position of MGL should take account of the trading position of all the group companies. On that basis in the financial year ending 30 June 2012 MGL itself traded at a net loss of £1,192,195 and in the previous year at a loss of £1,919,816. Similarly in those periods the group companies as a whole traded, they say, at a net loss of £1,534,029 in the financial year ending 30 June 2012 and £4,338,585 in the 2011 financial year.

 

  1. Mattocks Grindley say that the current asset position of the group as a whole is only £159,072 and that MGL is the only company with significant assets and the majority of those assets, £3,951,975, consist of amounts owed by related companies. As a result Mattocks Grindley conclude that it is very unlikely that most of those sums would be recoverable in the short term and that once the accounts are adjusted to allow for sums which they consider are properly recoverable in the short term, they conclude that MGL has net current liabilities of £460,714 and that the group companies as a whole have net current liabilities of £2,932,422.

 

  1. In relation to evidence put forward by Grant Thornton on behalf of FGS, Ms. Garrett points out that the management accounts which were made available to Grant Thornton have not been made available to Caledonian and she submits that, in the absence of those documents, it is not possible to conclude that the overall group position or MGL’s position has improved. In addition she says that, as set out in Mattocks Grindley’s second report, Grant Thornton have placed reliance on the value of various fixed assets in asserting that the debts owed would be repaid. On the basis of the evidence of Mattocks Grindley the net book value of fixed assets which has been used by Grant Thornton is not designed to reflect the true market value or the value realizable on a sale.

 

  1. In addition she relies on Mattocks Grindley’s view that the fixed assets are essential for the businesses of those companies and the ability of MGL to provide the guarantee should not be dependent on liquidating the related companies to have access to those assets. She submits that investigations into each of the companies that owes debts to MGL confirms the financial position is parlous and is so parlous as to give rise to a probability that MGL would be unable to meet any call on the guarantee.

 

  1. She submits that the financial position of MGL is not the same or similar to that of FGS at the time of entering into the subcontract. She submits that at that time, as set out in the administrative receiver’s report dated 13 April 2010, FGS was a solvent, trading company which had historically been profitable and that FGS traded with outside entities and its turnover and profits were based on substantial payments by independent entities. She submits that, by contrast, MGL does not trade with outside entities but is purely a management company involved in managing the group and related companies which are themselves in a parlous financial position.

 

  1. Mr Webb refers to statutory accounts which have been provided by MGL and which show that from 2006 to date MGL has had substantial net current assets being recently £6,973,000 in 2009; £6,300,000 in 2010; £3,850,000 in 2011 and £2,630,780 in the financial year ending 30 June 2012. He refers to the reports from Grant Thornton, the independent auditors of MGL’s accounts, who have commented on what is said by Mattocks Grindley.

 

  1. In relation to the aggregated group position Grant Thornton say that Mattocks Grindley were in error in saying that the overall net current assets of the group were only £159,000. They say that within the accounts of Conder M&E Limited there are net current liabilities £2,395,000 including a sum of £2,012,000 owed to MGL. The remaining £383,000 is owed to Conder Structures Limited. By reference to the statutory accounts of MGL for the period to 30 June 2012 Grant Thornton refer to the amounts owed by related undertakings of £3,951,000 in note 12. From the breakdown of that figure in note 19 they point out that no sums are due from Conder M&E Limited.

 

  1. On this basis Grant Thornton say that, looking at the aggregated position, because there is no allowance for this sum in MGL’s account it is wrong to aggregate the sum owed in the accounts of Conder M&E Limited without allowing for its absence in MGL’s accounts. As a result they say that the aggregated position is some £2,012,000 better and so the net asset position is not properly reflected by the figure of £159,000, as Mattocks Grindley say, but by the figure of £2,171,000.

 

  1. Mr Webb also relies on Grant Thornton’s analysis of the position of MGL. Whilst Mattocks Grindley have concluded that the net current liability of MGL is £460,714, he says that this is based on various assumptions as to what sums would be properly recoverable in the short term as at 30 June 2012. In relation to the sum of £3,951,975 of current assets in MGL’s account to 30 June 2012, Mattocks Grindley have reduced that figure to £860,481 based on a view taken of the sums recoverable from three associated companies: Devon Valley Limited, Purico Paper Company Limited and Autoforge Limited.

 

  1. In relation to Devon Valley Limited the sum included in the current assets in MGL’s accounts is £2,954,846. Mattocks Grindley say that the appropriate sum recoverable in the short term is £600,000. Grant Thornton say that by reference to the audited accounts for Devon Valley Limited for the year ended 31 December 2012 that company remains an inter-company creditor for only some £1,502,000, showing that the sum paid was not £600,000 but some £1,452,000 a difference of £852,000. In addition by reference to the net current asset position of Devon Valley Limited as at 31 December 2012, £1,023,000 could be met from current assets and in addition there are fixed assets with a net book value of £1,102,000. As a result Grant Thornton considers that the full remaining sum of £1,502,000 as at 31 December 2012 would be recoverable in the short term. On this basis they say that the whole figure of £2,954,000 is properly treated as a net current asset available to meet the liability of MGL.

 

  1. In relation to Purico Paper Company Limited, the accounts of MGL to 30 June 2012 show a net current asset of £328,200. Mattocks Grindley have allowed no sum on the basis that for the year ended 31 December 2011 the accounts reported a loss after tax of £266,836 and net current liabilities of £187,079. Grant Thornton say that by reference to the draft statutory accounts for the year ended 31 December 2012 there are some £158,000 of current liabilities. There is an amount owed to MGL of £338,000 included within that figure of current liabilities and therefore Grant Thornton say that, based on the position as at December 2012, Purico Paper Company Limited could technically repay £180,000 of the amounts owed to MGL if it sold its fixed assets and used the cash at the bank and net current assets to make the payment. On this basis they consider that £180,000 rather than £nil should be allowed in relation to Purico Paper Company.

 

  1. In relation to Autoforge Limited, MGL’s accounts to 30 June 2012 show a net current asset of £408,000 whereas Mattocks Grindley have allowed no sum. Grant Thornton say that the accounts of Autoforge Limited for the year ended 30 June 2012 disclose a profit of £164,000 and net assets of £368,000. In addition the company has a property with a net book value of £4,851,000 with £2,222,000 of loan and overdraft borrowing. It says that the company has a history of profitability based on its prior statutory accounts and they consider that the figure of £408,000 is properly included within net current assets for the purpose of considering MGL’s financial status in relation to providing a guarantee.

 

  1. In addition Grant Thornton say that MGL has tangible fixed assets of £1,112,000 relating to plant and machinery. On the basis of their calculations Grant Thornton conclude that the reports of Mattocks Grindley significantly understate the net current assets position of MGL and, in their view, the group and the company net assets should be revised upwards to amounts in excess of £2,000,000 and £2,500,000 respectively. They say that they have been provided by the directors of MGL with management accounts for MGL for the nine months to 31 March 2013 which disclose a profit for the year to date indicating that the company has been profitable in the nine months to March 2013.

 

  1. Mr Webb submits that, by comparison with the financial position of FGS as set out in the statutory accounts to 31 December 2007 and in the report dated 13 April 2010 prepared by RSM Tenon on behalf of the joint administrative receivers, it is similar to that of MGL. He says that FGS had net current assets of £2.8 million as at 31 December 2007 and shareholder funds of some £3.3 million. This, he submits, shows that the financial position of MGL is the same or similar to that of FGS at the date of the contract and prior to FGS suffering large losses in the 18 months to 30 June 2009.

 

Analysis

  1. I bear in mind that I have not had cross-examination of the accountants either in relation to the reports by Mattocks Grindley on behalf of Caledonian or by Grant Thornton on behalf of FGS. However they have each responded to the other’s reports and I have been provided with the main documents on which they each express their views.

 

  1. The first question is the value of the group assets as at 30 June 2012. From the documents I am satisfied that Grant Thornton are correct in making the adjustment they do to the group net current assets. On that basis the appropriate figure for those assets is £2,171,000 and not £159,000 as identified by Mattocks Grindley.

 

  1. Secondly, in relation to the net assets of MGL, I consider that Mattocks Grindley’s assessment that MGL has no short-term recoverable net current assets but overall net current liabilities of £460,000 does not take account of matters which are now apparent from accounts for the years dated 31 December 2012 for Devon Valley Limited and Purico Paper Company Limited. On that basis I am persuaded that the overall net current assets of MGL are more closely represented by the figures put forward by Grant Thornton and are therefore in excess of £2,000,000.

 

  1. I therefore do not consider that the figures put forward by Mattocks Grindley properly reflect the financial status of MGL for the purpose of assessing its ability to provide a guarantee, based on the documents including the available accounts.

 

  1. However, it is clear that there are further management accounts which have been produced for the 9 months to 31 March 2013 and which have been made available to Grant Thornton but not to Caledonian or Mattocks Grindley. I consider that in cases where a party is seeking to put forward a form of guarantee from a parent company it is desirable that it provides all the necessary information as to the financial position of that company which is available at the relevant date. I therefore consider that this information should have been provided in the present case.

 

  1. Whilst Mr Webb relies on what I said in the case of Farrelly (M & E) Building Services v Byrne Brothers (Formwork) Limited [2013] EWHC 1186 (TCC) at [91] concerning an obligation of a party to disclose confidential financial information to another party so that other party can consider whether to apply for a stay, I do not consider that this is relevant to the position here. There is no general obligation for a party to provide confidential financial information to another party to allow that other party to investigate the solvency so as to seek to establish that the judgment should be stayed. However, when as here, a party is seeking to avoid a stay where it has been shown to be insolvent and where it is proffering a bank guarantee to avoid the stay, the position is quite different. Where it is proffering a guarantee it is only appropriate that it provides the necessary current financial information of the company proffering the guarantee so that the Court and the other party can properly assess the worth of that guarantee.

 

  1. As a result in the present case and on the present information I consider 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 admittedly insolvent.

 

  1. I do not consider that the fact that the money is held in trust by FGS for EDC and therefore has to be paid to EDC affects the general principle that an adjudicator’s decision is temporarily binding and should be enforced. In general there is no requirement for a party to show or establish that the money is to be used in one way or another in order to obtain enforcement of an adjudicator’s decision.

 

Conclusion

 

  1. In the present case there has been some exchange of views on the proposed terms of the guarantee but counsel were optimistic that these could be resolved. In addition, as stated above, I consider that FGS should make available to Caledonian the management accounts of MGL to the 31 March 2013 so that Caledonian can, if necessary, make any submissions on those accounts if they show a different position.

 

  1. Accordingly, to deal both with the need to finalise the terms of the guarantee and the need for the management accounts to be seen by Caledonian, I propose to Order that there should be summary judgment based on the sums in the adjudicator’s decision but to stay enforcement of that decision pending the production of a satisfactory guarantee and the production of the management accounts of MGL. Initially I fixed a further short hearing on 21 June 2013 in the event that there are any issues arising from either the guarantee or the management accounts. In the event counsel were not both available on that date.

 

  1. Following the production of the draft judgment FGS produced the management accounts and Caledonian’s solicitors set out comments in a letter dated 17 June 2013, enclosing a further report dated 15 June 2013 from Mattocks Grindley. This was responded to by a further report from Grant Thornton. On 24 June 2013 I was informed that the parties had been able to agree the terms of the Guarantee. In relation to the issues raised in respect of the management accounts, I agreed to deal with these in writing and incorporate them into this judgment so that it could be handed down when counsel were both next available on 3 July 2013.

 

  1. I have considered the reports of Mattocks Grindley and Grant Thornton. On their face the management accounts would indicate a profit to 31 March 2013 of £494,000 and net current assets of £3,552,000. Mattocks Grindley consider that adjustments should be made which would lead to the accounts indicating a loss of £434,000 and reduced net current assets of £2,327,000. This is based on four adjustments.

 

  1. Grant Thornton have investigated matters and explain why any adjustment for a corporation tax charge should be less than £195,000 as estimated by Mattocks Grindley. They also explain why a £297,000 loan balance appears to be recoverable based on the assets of Skerritts of Nottingham Limited of £2,182,000 which include a property with a net book value of £2,707,000. In relation to an adjustment of £644,000 proposed by Mattocks Grindley to account for a balance owed by Conder Allslade Limited, Grant Thornton explain that £450,000 has been repaid with further payments expected. They consider that any adjustment should be significantly lower than the full £644,000. Grant Thornton accept that an adjustment of £89,000 should be made as proposed by Mattocks Grindley for an amount owed by Conder M&E Limited.

 

  1. I consider that, for the reasons given by Grant Thornton, whilst the profit of £494,000 in the management accounts should be reduced, the overall position based on the adjusted management accounts would show a profit rather than a loss for MGL in the period to 31 March 2013. Equally, even on the basis of the adjustments by Mattocks Grindley MGL would still have net current assets of £2.3m and, on the basis of the position on tax, the £297,000 loan and the repayment from Conder Allslade Limited, the net asset position is likely to be higher and probably above £3m.

 

  1. On this basis, having now considered MGL’s management accounts to 31 March 2013, I consider that my conclusion set out above 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 admittedly insolvent.

 

Accordingly, I propose to Order that there should be summary judgment based on the sums in the adjudicator’s decision and that the stay enforcement should be lifted when the guarantee, in the terms agreed by the parties, is executed and delivered to Caledonian’s Solicitors. I will deal with any outstanding matters at the hearing fixed on 3 July 2013.