Repay your debts: Company Voluntary Arrangements and construction disputes

Company Voluntary Arrangement (CVAs) allow businesses in financial difficulty to pay off (some) of its debts over a set time period – all whilst continuing to trade. 

In this article, Sarah Farish and Gillian Scribbins, associates in our restructuring and dispute resolution teams respectively, examine the judgment of a recent construction dispute that involved a CVA.  

Facts

Promep Ltd (Promep) was a subcontractor to Henry Construction Projects Ltd (Henry) on a series of construction projects. Promep and Henry entered into a JCT contract. 

Under this agreement, Henry appointed Promep as the subcontractor to handle the design, supply, installation, testing, and commissioning of mechanical and electrical works for a project located at Stanbridge Earls, Stanbridge Lane, Romsey (Stanbridge Contract). 

The contractual relationship deteriorated, with both parties accusing each other of repudiatory breaches of the Stanbridge Contract. In October 2021, Promep entered into a Company Voluntary Arrangement (CVA), which was concluded in July 2022.

Subsequently, in November 2022, Promep referred its claim of repudiatory breach by Henry to adjudication.

Henry rejected Promep's claim and filed a counterclaim in respect of its claim for repudiatory breach.  Promep contended that Henry’s claim had been settled as part of the CVA. 

The adjudicator found in favour of Promep, awarding approximately £90,000. Henry then issued a Part 8 claim seeking a final determination on which claims were settled under the CVA. In response, Promep sought to enforce the adjudicator’s decision.

There were a number of legal issues to be dealt with within the Part 8 claim, but we will look to consider:

1. Scope of the CVA: whether Henry's counterclaim had been settled under the CVA.
   
   
2. Insolvency set-off rules: whether the mandatory insolvency set-off provisions of Rule 14.25 of the Insolvency (England and Wales) Rules 2016 applied. 

 Judgment

The court held that the adjudicator's decision was made within jurisdiction, and Henry’s defence to enforcement was dismissed. 

The key points of the judgment are as follows:

1. CVA impact on claims
   Henry argued that the judge held that the CVA had effectively "wiped out" Promep's pre-CVA debts, allowing the company to continue trading and pursue claims, including the one that led to the adjudication.
   
   
2. Insolvency set-off rules
   The court rejected Henry’s arguments in respect of the insolvency set off rules.  Henry argued that the automatic insolvency set-off rules (Rule 14.25 of the Insolvency Rules which is mandatory in a liquidation) applied, which would have resulted in a net sum owed to Henry. The adjudicator had determined that these rules did not apply in the context of the CVA, which did not operate to create a single net sum due. 

 The judge agreed with the adjudicator's decision, noting that:

1. Promep's CVA allowed it to restructure and address liquidity issues, rather than merely consolidating debts, and
2. as above, Henry’s claim against Promep had been dealt with within the CVA.

Outcome

The judge:

1. declined to grant the declarations sought by Henry regarding the scope of the CVA and enforced the adjudicator’s decision; and
2. Henry's Part 8 claim was dismissed. 

The case demonstrates the challenges posed to claimants where defendants enter into insolvency procedures, particularly CVAs.

Furthermore, it shows the distinction in respect of application of set-off rules (particularly Rule 14.25 of the Insolvency Rules).

Mandatory application in liquidations focuses on the equitable distribution of the company's assets among creditors versus optional nature in CVAs. 

CVAs are inherently flexible and are designed to accommodate varied commercial arrangements and priorities, rather than strictly adhering to insolvency distribution principles. 

The terms of a CVA can include or exclude provisions for set-off as agreed by the parties but the provision is not automatically implied in case of CVA. 

Henry later entered into administration, and although the judgment does not provide details of the administration proceedings, it is clear that Henry was significantly affected by Promep’s failure to pay and the CVA, having only recovered £242,000 against a proof of debt for £3.46 million.

Key takeaways and commentary

1. The court is reluctant to go against jurisdictional decisions made by adjudicators unless there is clear procedural unfairness.
   
   
2. Insolvency procedures like CVAs can have significant impacts on construction disputes and enforcement of adjudicator awards and parties should ensure that they are aware of the others financial position as well as being cautious of its own cashflow and contingent payments.
   
   
3. Rule 14.25 of the Insolvency Rules does not apply to CVAs in the same way it applies in liquidations. Setting off claims is not automatic.

 Should you have any issues in respect of client, supplier or provider insolvency or find your company under financial pressure, please contact Sarah on 0191 211 7898 or [email protected] or Gillian on 0191 211 7955 or [email protected].