How a CVA can affect a payment adjudication

12th Jul 2019

As more construction companies face struggles to recover payments and cash flow is king, more companies in the sector and on the High Street face insolvency, the case of Indigo Projects London Limited (IPL) is worth considering.

Corporate Restructuring and Insolvency

IPL entered a Company Voluntary Arrangement (CVA) on 28 February 2019 after benefitting from an adjudication award for the sum of £177,662.72 in January 2019.

IPL applied for summary judgment to enforce the Award.

IPL had obtained the award for payment of the sum stated in an interim payment application, where no pay less notice had been served in time (something we have advised on many occasions). The Defendant stated that any enforcement of the award would undermine the proper operation of the CVA.

The CVA specifically stated that only the balance of cross-claims between the Claimant and any of its creditors could be claimed by the Claimant or a creditor under the CVA. This accounting exercise was due to be undertaken by the CVA supervisors.

Indigo said that as the adjudication award pre-dated the CVA, the award should be enforced first, with the accounting exercise under the netting-off provisions to follow. Alternatively, the award could be enforced in part, as an initial step under the accounting exercise, to the extent that Defendants had not been able to reduce the sum due by reference to quantified alleged counterclaims.

The Defendants argued that enforcement would interfere with that accounting exercise, in circumstances where it was their position that the sum awarded by the adjudicator did not represent the true value of the work done and that they also had counterclaims for defective work and delay.

The key issue for the Judge was that the effect of the adjudicator’s decision, a debt was created that arose before the CVA was entered into and if it was paid prior to the CVA, would have to be taken into account as part of the netting-off exercise. Under the rules of the CVA, this was quite different from the effect of a payment of that sum to Indigo after the CVA had been entered into.

The latter would go into the general fund for the benefit of the creditors as a whole, rather than being taken into account as part of the exercise of drawing up the balance of the dealings between the parties involved.

The court dismissed Indigo’s application on the basis that the Adjudicator’s decision was not definitive in deciding the value of any particular claim. It also made no account of the Defendant’s cross-claims for set-off, so even if the award had been before Indigo entered into the CVA, it would have amounted to a payment on account.

Had the Award been enforced, the monies would not have been applied for sole benefit of the Defendants but rather for the body of creditors generally. This would be a distortion of the process of accounting under the CVA, which expressly required the supervisors to take account of sums claimed and counterclaimed between IPL and each of its creditors. To have enforced the award would have been to the detriment of the Defendants.

Our skilled and experienced Litigation team have a wide depth of knowledge relating to the construction industry – both non-contentious and contentious on projects of all sizes. If you are experiencing issues with enforcing a contract and a claim for monies, require a review of your contracts or wish to defend a claim, or you can contact us at ph@rogers-norton.co.uk.