CVAs, Contractors and Sub-Contractors (Part 2)

My last article talked about the financial benefits available to construction companies that choose to enter Company Voluntary Arrangements (CVAs) as a way of rescuing a troubled construction company. But what happens if clients of that same company then seek to use the very existence of a CVA as an excuse to avoid payment?
 

The Courts of England & Wales have now been called upon to deal with a number of adjudication cases involving companies operating under a CVA and it is interesting to see how they have approached such situations.

 

In the case of Absolute Rentals v Gencor Enterprises Limited 2000, the Judge clearly, and quite properly in my view, stated that it is simply not enough for a Defendant to suggest that a successful Referring Party in an adjudication might, because of financial difficulty, be unable to repay a Decision at a later date, as a ground for resisting enforcement of an Adjudicator’s Decision. It is for the Defendant to bring evidence to the Court to show that the Claimant’s financial status is sufficient grounds for refusing to enforce a Decision or to order a stay in the execution of the judgement if the application is successful. It is for the Defendant to prove, on the balance of probabilities, that the claimant would be unable to repay the sum decided by an Adjudicator in subsequent legal proceedings if so ordered. Even then, this may not be sufficient grounds for refusing to order enforcement of an Adjudicator’s Decision.

 

Even if a Party resisting enforcement of an Adjudicator’s Decision can show that there is a real risk of a claimant being unable to repay the award at a later date, if the Claimant’s financial position has not changed from when the original contract was formed, from the position at the time of the enforcement proceedings, this fact in itself should encourage the court to enforce the Decision.

 

These principles are confirmed in the case of Wimbledon Construction Co 2000 v Derek Vago (2008) when at paragraph 26 his Honour Judge Peter Coulson QC said:-

 

“a) Adjudication (whether pursuant to the 1996 Act or the consequential amendments to the standard forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.

 

b) In consequence, adjudicators’ decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money.

 

c) In an application to stay the execution of summary judgment arising out of an Adjudicator’s decision, the Court must exercise its discretion under Order 47 with considerations a) and b) firmly in mind (see AWG).

 

d) The probable inability of the claimant to repay the judgment sum (awarded by the Adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances within the meaning of Order 47 rule 1(1)(a) rendering it appropriate to grant a stay (see Herschell).


e) If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues and Rainford House).

 

f) Even if the evidence of the claimant’s present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:


(i) the claimant’s financial position is the same or similar to its financial position at the time that the relevant contract was made (see Herschell); or


(ii) The claimant’s financial position is due, either wholly, or in significant part, to the defendant’s failure to pay those sums which were awarded by the adjudicator (see Absolute Rentals).”

 

These guiding principles were revisited in the recent case of Berry Piling Systems v Shar Projects Ltd (2012).

 

Following a successful adjudication when substantial sums were awarded in its favour, Berry applied for enforcement of the Adjudicator’s Decision. Enforcement was resisted on the basis of a breach of natural justice by the Adjudicator and secondly that reinforcement should be stayed due to Berry’s financial difficulty evidenced by the CVA it had entered into with its creditors.

 

Mr Justice Edwards-Stewart addressed and dismissed the defendant’s breach of natural justice defence and, in addressing the financial difficulties of Berry, made the following observations:

 

1. The party’s (Berry) ability to repay a sum awarded in Summary Judgement must be considered at the time the award will have to be paid. This will be some date in the future not at the time the application is made. A judge might have to use his or her experience to estimate when an award may be made, be that by arbitration or litigation.

 

2. A balancing exercise between the differing financial information relied upon by the Parties may need to be undertaken.

 

The Judge preferred to consider the current trading position and the future trading prospects of the Claimant rather than out of date information to a party’s detriment.

 

In other words, provided a Claimant can show that it has a viable future business (supported and evidenced by the CVA) a Court should be very wary to allow a Defendant to resist payment due a Claimant simply because of the existence of the CVA.

 

Conclusion

 

So in addition to the obvious financial advantages to be obtained from an approved CVA it does appear, that as general proposition, the Courts will be supportive of a company that is in CVA and is being deprived of monies due to it under a contract simply because of the very existence of a CVA.

 

Peter Vinden is a practising adjudicator, arbitrator, mediator, expert and corporate re-structuring advisor to the construction industry. He is Managing Director of Vinden and can be contacted by email at pvinden@vinden.co.uk

 
Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations. 

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