In January 2019, we reported on the Court of Appeal judgment on the two conjoined appeals of Bresco Services Ltd v Michael J Lonsdale (Electrical) Ltd and Cannon Corporate Ltd v Primus Build Ltd. In the Cannon appeal, 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). The court refused to stay enforcement of the adjudication award due to the CVA.
A few months later, the Technology and Construction Court has decided another enforcement case where the company is subject to a CVA in Indigo Projects London Ltd v Razin and another. This time the court came up with a different answer - the stay was granted. But why?
What is a CVA?
A CVA is a statutory process where a compromise or arrangement is made by the company with its unsecured creditors. That can typically include varying or rescheduling the amount of any outstanding debts owed to unsecured creditors, and may form part of a wider group restructuring proposal.
If CVA proposals are duly approved by the required majorities at the requisite creditor/shareholder meetings, then they will be binding on all unsecured creditors. However, CVAs do not affect the rights of secured creditors (or preferential creditors), unless they also agree to the CVA proposals. We discuss this and other types of insolvency in our 'Insolvency in construction' series.
The history of the Cannon appeal
Cannon engaged Primus to design and build a new hotel in London. Disputes arose between the parties and both sides alleged that the other were in repudiatory breach of contract. Primus made a claim in adjudication for damages as a result of Cannon's repudiatory breach of contract. The court considered Cannon's cross-claims and awarded Primus over £2 million plus interest. Cannon failed to pay up.
Primus commenced enforcement proceedings and made an application for summary judgment. Cannon accepted the summary judgment could be entered against it, but sought a stay of execution.
The Court of Appeal upheld the first instance decision of HHJ Waksman QC, who, in reaching his decision, had considered previous authorities and refused to grant a stay on the basis that Cannon's counterclaims had already been determined and Cannon had contributed significantly to Primus' financial difficulties.
Indigo v Razin
Mr and Mrs Razin engaged Indigo under a JCT Standard Building Contract with Quantities 2011 dated 26 April 2017, to construct a new four-storey house in Kingston-Upon-Thames. Although Mr and Mrs Razin were residential occupiers for the purpose of s106 of the Housing Grants, Construction and Regeneration Act 1996 as amended (which would ordinarily mean that they were excluded from the statutory right to adjudicate the dispute), the parties had agreed a contractual adjudication procedure.
In June 2018, notwithstanding defects the Razins had found in the workmanship and an apparent delay to practical completion, Indigo issued an interim payment notice in the sum of £202,036.05. Mr and Mrs Razin failed to serve a Pay Less Notice in response. Under construction contracts, where an application for payment is validly served by a payee and the payer fails to issue a Pay Less Notice (setting out the sum it considers due at the date of the notice and the basis on which that sum is calculated), the amount stated in the application for payment becomes due. Mr and Mrs Razin made a payment on account in the sum of £30,000 but could not pay the full sum demanded. The dispute was subsequently referred to adjudication and the adjudicator decided that Mr and Mrs Razin were obliged to pay the full sum claimed less any amount that had already been paid on account. Mr and Mrs Razin failed to pay on the adjudicator's award.
In January 2019, Indigo issued an application for summary judgment to enforce the adjudicator's decision. After the proceedings commenced, Indigo entered into a CVA with its creditors but no notice was given to Mr and Mrs Razin.
Mr and Mrs Razin subsequently sought to oppose enforcement of the adjudicator's decision and made an application for a stay of execution of the judgment on the basis that Indigo may be unable to repay any sum that was ultimately found to be due to Mr and Mrs Razin.
The judge granted the stay on enforcement of the adjudication decision, and Indigo's application for summary judgment was dismissed. In reaching his decision, Sir Anthony Edwards-Stuart distinguished this case from the Cannon Appeal on the following basis:
(a) Timing of CVA
Indigo entered into the CVA after the adjudicator's decision and the application to enforce it. In Cannon, the CVA had been entered into prior to the enforcement of the adjudicator's decision.
Mr and Mrs Razin argued that it was an express term of the CVA that all claims and counterclaims between Indigo and its creditors should be taken into account as part of the accounting exercise under the netting-off provisions to calculate the balance due. Mr and Mrs Razin expected to have significant counterclaims against Indigo for defective work and delays which would entitle them to liquidated and ascertained damages.
The court considered that to order Mr and Mrs Razin to pay the sum after the CVA had been entered into would almost certainly have meant that they would only receive pennies in the pound back under the CVA and would "…distort the process of accounting that is required under the CVA because the money would not be applied for the sole benefit of the Defendants [Mr and Mrs Razin] but for the benefit of the creditors generally".
(b)Type of claim
The sums due in the Cannon appeal related to the payment of damages. In contrast, the sum due in Indigo was an order for a default sum due based solely on the technicality of a missed pay less notice (a so called "smash and grab" adjudication). As such it was effectively an interim payment with the true value of the parties' claims against one another to be determined in due course.
What does this case mean?
This case is of particular significance for the construction sector as it gives useful guidance on the impact of a CVA on the enforcement of adjudication awards.
For construction companies considering a CVA, there is a real risk that an unsatisfied adjudicator's monetary award prior to entering into the CVA may not be not enforced as this may interfere with the accounting exercise to be completed under the CVA.
The case also highlights again the court's dim view of "smash and grab adjudications" (which have been the subject of some judicial criticism of late) in stating that the adjudicator's decision was "nothing more than an order for a payment on account. It was not a valuation of the work carried out by Indigo or an assessment of the account between the parties, but a statement of a sum that had become due by default…" [paragraph 33]