REUTERS | Erik De Castro

Further clarification on the impact of a CVA on adjudication enforcement

In January, in the second of the two conjoined appeals of Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd, Cannon Corporate Ltd v Primus Build Ltd, the Court of Appeal upheld the first instance decision to enforce an adjudicator’s decision where the enforcing party was in a company voluntary arrangement (CVA).

In contrast, last week in Indigo Projects London Ltd v Razin and another, the court refused to enforce an adjudicator’s decision where the enforcing party was in a CVA. The reasoning was that enforcement of the decision would interfere with the accounting exercise to be carried out under the CVA. The court provided useful guidance on when this argument is likely to succeed. 

Cannon v Primus

Cannon engaged Primus to design and build a new hotel in London. Various disputes arose between the parties and, in March 2018, Primus referred to adjudication a claim for damages caused by Cannon’s alleged repudiatory breach of contract. In this adjudication, the adjudicator considered Primus’ claims in detail and also addressed Cannon’s cross-claims. Primus was awarded £2.182 million plus interest.

In May 2018, Primus commenced enforcement proceedings. Cannon argued that summary judgment should not be entered on the basis that to do so would interfere with the accounting exercise to be carried out under the CVA. Indeed, the CVA contained provisions to the effect that the CVA supervisors would take account of all Cannon’s and Primus’ claims and cross-claims to calculate the balance due. Cannon’s position was that the CVA supervisors should be left to perform this exercise. It relied on Westshield Ltd v Whitehouse and another, where Akenhead J had refused to enforce an adjudicator’s decision where the enforcing party’s CVA contained similar provisions.

HHJ Waksman QC rejected Cannon’s submissions. He considered that the adjudicator’s decision should be enforced because:

  • Cannon’s counterclaims had already been determined by the adjudicator and it was impossible in those circumstances to see how or why the CVA supervisor would wish to repeat this exercise.
  • The CVA supervisor had already adopted the adjudicator’s decision in that it had taken the view that Cannon was not a creditor.

HHJ Waksman QC also declined to order a stay of execution of the judgment because Cannon was responsible in significant part for Primus’ financial difficulties.

Indigo v Razin

In April 2017, Mr and Mrs Razin engaged Indigo under a JCT Standard Building Contract with Quantities, 2011 Edition, to construct a new house.

In June 2018, Indigo issued an interim payment notice claiming £202,000. No pay less notice was issued in response. Indigo referred the dispute to adjudication and, in a decision dated 10 January 2019, the adjudicator determined that the Razins were obliged to pay the payment notice sum less an amount that had previously been paid on account (some £30,000).

On 24 January 2019, Indigo issued an application for summary judgment to enforce the adjudicator’s decision. On 26 February 2019, the Razins discovered that Indigo had sent a CVA proposal to its creditors on 8 February 2019. The CVA was approved and came into effect on 28 February 2019. The CVA stated that the anticipated dividend to creditors was 62p in the pound.

On 4 March 2019, the Razins served evidence opposing enforcement of the adjudicator’s decision and made an application for a stay of execution of the judgment in the alternative.

The parties’ positions

Indigo’s CVA contained materially identical provisions to those in Westshield and Cannon v Primus to the effect that the CVA supervisors were to carry out an accounting exercise of all claims and cross-claims between Indigo and its creditors to calculate the balance due.

The Razins’ position was as follows:

  • They had substantial counterclaims against Indigo because Indigo’s work was seriously defective and was substantially delayed so they were entitled to recover liquidated damages.
  • Their counterclaims had not yet been determined so would be considered for the first time by the CVA supervisors.
  • In the circumstances, it would interfere with the CVA supervisors’ balancing exercise and would be unjust to the Razins for judgment to be entered, as they would almost certainly receive only pennies in the pound back under the CVA if it was determined that sums were due to them.

Indigo argued that the Razins’ reliance on the accounting provisions in the CVA was misplaced because the adjudicator’s decision pre-dated the CVA. Its position was that the adjudicator’s decision should be enforced first, with the accounting exercise by the CVA supervisors to follow. In the alternative, it stated that the award could be enforced in part, as an initial step under the accounting exercise, to the extent that the Razins had not been able to reduce the sum due by reference to quantified alleged counterclaims.

Judgment

Indigo’s application for summary judgment was dismissed.

In reaching his decision, Sir Anthony Edwards-Stuart first noted that there were two points that distinguished this case from previous authorities:

  • The CVA was entered into after the adjudicator’s decision. In all previous reported cases on this issue, the CVA had pre-dated the adjudicator’s decision.
  • The adjudicator’s decision was not a decision that determined the value of Indigo’s claims or the value of any particular claim but was, in effect, an order for an interim payment.

The reasoning behind the decision to dismiss Indigo’s application was twofold:

  • The Razins had arguable counterclaims against Indigo that had not been determined.
  • To order the Razins to pay the sums due pursuant to the adjudicator’s decision, after the CVA had been entered into, would distort the CVA accounting process because the money would be distributed among all Indigo’s creditors. If the CVA supervisors ultimately determined that sums were due to the Razins, they would have little or no prospect of recovering the amounts paid in full. This distortion would always operate in a way to the detriment of the Razins, so it would be wrong in principle to enforce the decision.

It was further determined that, if the decision had been enforced, a stay of execution would have been ordered on the basis of “limb d” in Wimbledon Construction Co 2000 Ltd v Derek Vago, namely the probable inability of Indigo to repay the judgment sum. Indigo had accepted that it would be unable to repay the sums to the Razins if it was eventually ordered to do so.

Discussion

The important distinction between the cases is that, in Indigo v Razin (as in Westshield), the defendants had arguable counterclaims that were yet to be determined. In those circumstances, enforcement of the adjudicator’s decision, which related only to some of the disputes between the parties, would have disrupted the CVA accounting exercise.

What does this mean for companies considering a CVA?  If the company has an adjudicator’s decision in its favour that has not yet been enforced, and that decision does not cover all the claims and counterclaims between the parties, entry into the CVA may preclude enforcement.

For companies already in a CVA who are considering adjudication, care should be taken to ensure that all claims and counterclaims are included within the scope of the dispute referred to the adjudicator. If all claims and counterclaims are referred, the adjudication will mirror rather than disrupt the CVA accounting process, and an application for enforcement is therefore likely to succeed.

Emma acted for the successful defendants.

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