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Tue January 28 2020

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Court ruling puts viability of CVAs under question

3 Jan 14 A court has refused to enforce an award won by a contractor that was subject to a company voluntary arrangement (CVA). Laura Phoenix, associate at Thomas Eggar LLP, reports.

Laura Phoenix is an associate at Thomas Eggar LLP
Laura Phoenix is an associate at Thomas Eggar LLP

The case of Westshield Ltd v Whitehouse and another [2013] 3576 EWHC (TCC), in which a judge refused to enforce an award in favour of a contractor subject to a CVA, puts a question mark over the viability of a CVA for a cash-strapped contractor planning to collect debts through adjudication.

Adjudication is a ‘pay first, argue later’ statutory mechanism for resolving disputes in the construction industry. The court’s approach is generally to uphold adjudicators' decisions robustly unless there has been a serious breach of the rules of natural justice.

The company voluntary arrangement (CVA) is intended to allow companies to avoid liquidation by coming to an informal, but binding, agreement/compromise with their unsecured creditors.  It is a compromise, or other arrangement, between a company and its creditors under Part I of the Insolvency Act 1986 (IA 1986) and it is implemented under the supervision of an insolvency practitioner.

In the Westshield case, the court refused to grant summary judgement in respect of an otherwise enforceable adjudicator’s award. The court’s reason was that the claimant contractor was subject to a CVA and the defendant client was entitled to exercise a right of set-off in respect of a negligence claim under the terms of the CVA.

Background

Mr and Mrs Whitehouse had employed Westshield to carry out substructure work for a house. After finishing the work, Westshield submitted a claim in respect of variations and delay and incorporated it in an application for payment.

Mr and Mrs Whitehouse ignored that application for payment. Westshield got into financial difficulties and sought a CVA before they referred their claim to contractual adjudication.

The adjudicator decided that a six-figure sum was due to Westshield. As the Whitehouses did not pay, Westshield applied to the court for summary judgment.

At that point Westshield’s lawyers may have thought they could rely on a previous case (Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC)) in which the court enforced an adjudicator’s decision and refused a stay of execution, despite the claimant’s CVA.

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Mead appeared to have established that a claimant contractor’s CVA could not prevent judgment being entered against a non-paying client.

In the Westshield judgment, the court’s emphasis lay elsewhere; it lay on the fact that Mr and Mrs Whitehouse had advanced a counterclaim in the claimant's CVA, albeit late in the day. The judge’s reasons for declining to enforce the award turned on a term of the CVA providing for mutual set-off of debts.

The ‘mutual set-off’ term is standard and therefore likely to appear in most CVAs. It allows a creditor to set-off their own debts to the company which has sought a CVA against sums due to the creditor from that company. Pursuant to the CVA clause, only the balance of the account is claimable by the creditor.

The court held that, under the terms of the CVA, Mr and Mrs Whitehouse’s claim would need to be set-off against the amount due to the Weshshield pursuant to the adjudicator’s decision. Consequently, Westshield’s application to enforce the adjudication decision was dismissed.

Any contractor considering a CVA as an option for trading through financial difficulties now has one more question to consider: ‘Can we afford to drop adjudication from our debt collection artillery?’

 

 

 

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