FG Skerritt Ltd v Caledonian Building Systems Ltd [2013] EWHC 1898

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

summary

(1) If a claimant in adjudication enforcement proceedings is insolvent, a defendant will normally be entitled to a stay of execution if he has real grounds for a counterclaim that could be raised as a defence by way of equitable set-off in respect of the sum awarded by the Adjudicator. (2) In principle, a bond or guarantee provided by a third party which provides sufficient security for the repayment of the judgment sum is an acceptable way for an insolvent claimant to avoid a stay of execution. In such a case, the 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.

Technology and Construction Court, Mr Justice Ramsey

Background

Caledonian Building Systems Limited (“Caledonian”) engaged FG Skerritt Limited (“FGS”) as a sub-contractor under a number of sub-contracts between 2009 and 2010. One of these was a sub-contract to design and build the Mechanical and Electrical works on a project at HM Prison Eastwood Park.

On 31 December 2009, FGS submitted an invoice for the outstanding balance of the sub-contract sum under this sub-contract, less half the retention. Caledonian did not accept that practical completion had been achieved and did not pay the invoice.

On 11 February 2010, FGS went into administrative receivership. The receivers sold FGS’ book debts to Nathu Ram Puri Environmental Design Consultants (“EDC”) on 16 February 2010.

EDC was owned and controlled by Mr Nathu Ram Puri who was also the ultimate owner and controller of FGS.

The sale to EDC was ineffective in assigning FGS’s book debts because the sub-contract included a prohibition on assignment. It was, however accepted that the assignment took effect by way of a trust, so that FGS held the debts on trust for EDC.

FGS ceased work on the Eastwood Park project in 2010 and on 31 December of the same year, submitted an invoice for the remaining half of the retention.

However, during 2010 and 2011, another company owned by Mr Puri carried out various works rectifying defects in relation to FGS’s works and was paid by Caledonian. As a consequence, Caledonian did not pay FGS’ invoice on the grounds that it had incurred and would incur costs in completing and/or rectifying FGS’s works both on the Eastwood Park project and in relation to other projects on which FGS ceased work as a result of its insolvency.

The administrative receivers ceased to act as such on 14 March 2011. FGS was not wound up but did not trade. At the date of the hearing it had not been struck off the register of companies.

On 14 December 2012, FGS issued a notice of adjudication claiming the payment of £214,476.93 due under the invoices issued under the Eastwood Park sub-contract.

The Adjudicator decided on February 14 2013 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 could not be set-off against the invoiced sums.

FGS commenced proceedings on 5 April 2013 and sought summary judgment for the amounts ordered by the Adjudicator. Caledonian did not challenge the correctness of the Adjudicator’s decision but asked the Court to grant a stay of enforcement on the ground that FGS would be unable to repay the judgment sum if ordered to do as at the end of a substantive trial or arbitration hearing leading to a final determination. It also asked the Court to take into account the rules relating to insolvency set-off so as to do substantial justice between the parties by granting a stay. Finally, it raised concerns about the financial status of MGL (another company controlled by Mr Puri) who had proffered a guarantee on behalf of FGS in order to avoid a stay.

issues

Whether the court should stay enforcement of the judgment under RSC Order 47 Rule 1(1).

decision

The Court held that:

  • On the evidence, Caledonian had shown that there were real grounds for a defence of equitable set-off both for the sums already expended in remedying defects in FGS' work at Eastwood Park and arguable claims for future remedial work to those works. These were proper grounds for challenging whether the sums held to be due by the Adjudicator would, in the end, be due to FGS.
  • FGS was insolvent but not in liquidation. Therefore the rules of insolvency set-off should not be applied to this case.
  • In principle, a bond or guarantee provided by a third party which provides sufficient security for the repayment of the judgment sum is an acceptable way for an insolvent claimant to avoid a stay of execution. In such a case, the 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.
  • On the facts of this case, an appropriate guarantee from MGL in relation to the sums due under the Adjudicator’s decision was an appropriate way of providing security for repayment of that sum.
  • And so it was ordered there should be summary judgment based on the sums in the Adjudicator’s decision; that there should be a stay of enforcement of the judgment but that the stay should be lifted when the guarantee, in the terms agreed by the parties, was executed by MGL and delivered to Caledonian’s solicitors.

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

 

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