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The CVA
The CVA
Although they were helpfully made, I do not propose to set out in this judgment the submissions that were made to me as to the general nature and process of a CVA which forms the backdrop to the parties’ respective submissions.
One matter that was common ground between the parties was that a CVA takes contractual effect “by statutory hypothesis” (Johnson v Davies [1999] Ch 117; IR Commissioners v Adam & Partners Ltd. [2000] BCC 513 at [18]).
It was also common ground that the contract is to be construed in accordance with normal contractual principles and there was no dispute about those principles. Ms Stubbs KC cited, in particular, Arnold v Britton [2015] AC 1619 at [15] per Lord Neuberger:
“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffman in Chartbrook v Persimmon Homes Ltd. [2009] AC 1101, para 14. And it does so by focussing on the meaning of the relevant words … in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause; (ii) any other relevant provisions …; (iii) the overall purpose of the clause and the [contract]; (iv) the facts and circumstances known or assumed by the parties at the time the document was executed; and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.”
ProMep’s position can be summarised as follows, starting with the statutory provisions that have the effect that CVA binds all creditors whether or not they were aware of the CVA or participated in and agreed to the arrangement (Insolvency Act 1986, section 4A, 5(2)).
There is no automatic set-off within a CVA, in contrast to a liquidation or administration. The default position is that the insolvency set-off does not apply but it may be provided for by the terms of the CVA.
In the present case, there was such provision in Appendix E but it was not relevant to the claim made in the present adjudication or in other adjudications that ProMep has pursued against Henry. Clause 8.3 expressly provided that all assets, other than those identified in the clause, were excluded from the CVA such that they fell outside the scope of the CVA. The concluding wording of clause 8.3 was inclusionary not exclusionary. It follows that any further claims that ProMep might have against Henry were excluded from the CVA in the sense that they were not subject to the operation of the CVA and irrelevant in terms of the operation of the insolvency rules.
If there was a conflict between (i) the terms of the CVA which effected this position and (ii) paragraph 29 of the standard terms in Appendix E, in that that paragraph incorporated the Insolvency Rules and the automatic set-off, the answer was to be found in the application of the provisions as to precedence of clauses which gave precedence to the clear words of clause 8.3. However, ProMep’s primary position was that there was no such conflict.
On ProMep’s case this construction of clause 8.3 gives effect to the commercial purpose of the CVA. The purpose of the CVA was to perform a “hard reset” on ProMep at a point where it had liquidity issues. For that reason, all its debts were to be dealt with in the CVA and a defined fund was identified to settle those debts. The benefit to creditors was that they would have the benefit of receiving some monies in respect of their debts reasonably promptly. The benefit to ProMep was that it would give the company a future.
Potential claims arising out of the termination of contracts with Henry were too complex and speculative to be taken account of in the CVA but it made commercial sense that ProMep might be able to pursue those claims in the future.
ProMep advanced a number of alternative arguments including (i) that it could be inferred that the supervisors had resolved this issue of construction in favour of ProMep’s construction as they were entitled to do under clause 7.3 and (ii) that there was no mutuality of debts. A further argument that Henry was estopped from arguing the contrary because of the common understanding of all those involved in the CVA was not in the event pursued.
Henry’s case can be summarised as follows. The CVA was a composition of the debts of ProMep, that is, it was intended to operate as a full and final settlement of all amounts due to the creditors of the company. It is common for CVA proposals to incorporate the Insolvency Rules 2016 so adopting the legal procedures and effects of the Rules, typically as they apply to a company voluntary liquidation. In this case, the proof of debt process for the CVA expressly incorporated the Insolvency Rules applicable to proof of debts in a voluntary liquidation. That procedure automatically applied the insolvency set-off process in rule 14.25.
The assets identified as being available to fund the dividend payable on the CVA are only relevant to the calculation of the dividend payable to creditors. They are irrelevant to the points above.
The set-off operates on a mandatory basis and is “self-executing” as a matter of law, so that even if no proof of debt is submitted, the claims and cross-claims are determined conclusively in the process and cease to exist as choses in action from the date of approval of the CVA (see Stein v Blake [1996] 1 AC 243 at 255). Henry referred to the summary of the operation of the set-off given by Lord Briggs in Bresco Electrical Services v Michael J Lonsdale (Electrical) Ltd. [2020] UKSC 25 at [29]-[30] as follows:
“[29] The legal and equitable rules for asserting set-off as a defence to the company’s claim by no means encompass every type of cross-claim, in relation to current, contingent and future liabilities. But the statutory regime for set-off in insolvency, now to be found in IR 14.25, operates upon an altogether more comprehensive and rigorous basis. First, it applies to every type of pre-liquidation mutual dealing, and also to secured, contingent and future debts: see IR 14.25(1), (2), (6) and (7). Secondly, whereas legal or equitable set-off is essentially optional, taking effect only if the cross-claim is pleaded as a defence to the claim, insolvency set-off is mandatory, and takes effect upon the commencement of the insolvency (the ‘cut-off date’). It is said to be self-executing, and for some purposes the original cross-claims are replaced by a single claim for the balance: see IR 14.25(3) and (4). Thus the separate cross-claims may no longer be assigned after the cut-off date: see Stein v Blake [1995] 2 All ER 961, [1996] AC 243. But the separate claims may survive for other purposes: see Wight v Eckhardt Marine GmbH [2003] UKPC 37, (2003) 62 WIR 42, [2004] 1 AC 147 (paras [26]–[27]) per Lord Hoffmann. One example is the balance of contingent or prospective claims under IR 14.25(5). Within the liquidation, a net balance owing to the creditor must be pursued by proof of debt in the ordinary way. The liquidator is entitled to be paid the full amount of any net balance owing by the creditor, and may exercise any available remedies for its quantification and recovery, including litigation, arbitration or ADR: see IR 14.25(4) and (5).
[30] The identification of the net balance is to be ascertained by the taking of an account: see IR 14.25(2). If there is no dispute as to the existence and amount of the claims and cross-claims this is in practice a matter of simple arithmetic, the net balance being the difference between the aggregate of the claims and the aggregate of the cross-claims. But if any of the claims and cross-claims are in dispute, then those disputes will need first to be resolved, by reference to the individual merits of each, before the arithmetic resumes: see again Stein v Blake [1995] 2 All ER 961 at 967–968, [1996] AC 243 at 255 per Lord Hoffmann.”
Mr Halkerston also relied heavily on the Australian case of Gye v McIntyre [1991] HCA 60. That case concerned a bankruptcy and like provisions as to set-off. The court identified the issue as whether a sum owed in damages by the appellants, Gye and Perkes, to the respondent, McIntyre, by reason of a judgment given before the composition could be set-off (under section 86 of the Bankruptcy Act 1966) against an amount owed in damages by McIntyre to Perkes and Gye by reason of a judgment obtained after the date of the composition but where the proceedings were pending at the time. The court concluded that, for there to be mutual debts, the respective claims did not have to be vested, liquidated or enforceable at the decisive date, being the special resolution accepting the composition. It was not necessary that the contingent claims against McIntyre had not passed to the trustee in bankruptcy under the composition. The insolvency set-off in section 86 still applied. Mr Halkerston submitted that there was a close analogy to the present case – the future claims against Henry did not form part of the funds available for distribution and did not pass to the Supervisors but, because clause 9.8 provided that creditors clams would be adjudicated upon according to the standard terms, they were nonetheless properly subject to the insolvency set-off.
Without seeking to do any disservice to counsel’s lengthy submissions, there are the following strands to Henry’s case:
Appendix F sets out the meaning of terms used in the proposals, unless the context otherwise demands. These include the definitions:
Distribution: “Any payment of Distribution Funds to Scheme Creditors by way of a dividend to reduce the Creditors’ Claims.”
Distribution Funds: “Those funds held by the Supervisor in respect of the Company in accordance with the Proposals that are available for distribution to Scheme creditors.”
Paragraph 59 of the standard terms in Appendix E gives the order in which the distribution funds are to be distributed.
The exclusion in clause 8.3 means only that the excluded assets are not to be included in the distribution funds and are not available to satisfy ProMep’s debts. It does not have the effect of excluding any assets from the effect of the CVA or excluding assets generally from that effect (see above). Further, in support of this proposition, Henry relies on the context provided by clause 8, that is that it is a “Statement of Affairs – comparative outcomes” which is focussed on explaining to creditors the assets which are to be utilised for the payment of dividends to the creditors. Henry also points to the use of the same phrase “excluded from the CVA” in clauses 5.15 and 5.24 where, it is submitted, it has the same meaning and effect.
The effect of the CVA includes the operation of Rule 14.25 so that any debts owed to ProMep from Henry must have been set-off against Henry’s claims against ProMep such that they are compromised by the CVA. That would have been the case even if Henry had submitted no proof of debt in the CVA. That is the clear meaning of paragraphs 29 and 31 of the standard terms in Appendix E which provide that Part 14 of the Insolvency Rules shall apply to the payment of a dividend in the CVA as if it were a creditors’ voluntary liquidation.
There are no express provisions of the Proposal that are in conflict with these standard terms and the provisions as to precedence are irrelevant. For the reasons above, clause 8.3 does not exclude any debts owed by Henry from the operation of the CVA but only from the distribution funds
Henry argues that ProMep’s literal interpretation of clause 8.3 renders clause 9.8 and the standard terms in Appendix E functionally meaningless since it means that there is no set-off to be adjudicated upon.
Henry submits that its construction is also consistent with commercial reality – it would, it is submitted, be absurd if the effect of the CVA was to compromise all of Henry’s claims against ProMep but preserve any claims the other way. Objectively, the parties cannot have intended the outcome to be that creditors received only a few pence in the pound when ProMep had assets in the form of claims potentially worth millions. That outcome would further be inconsistent with the Insolvency Rules Part 2 (which are concerned with a CVA). In accordance with rule 2.3(1) the Proposal must list the company’s assets and their values (sub-paragraph (a)) and which assets are to be “excluded from the CVA”. Rule 2.6 provides for the statement of affairs to list the company’s assets and estimated values. ProMep did not list any debt or damages due from Henry as an asset. On the contrary, the Proposal in clause 2.7 referred to the suspension notices being issued on “all projects” and either expressly or impliedly stated that all claims were the subject of the existing adjudications.
Accordingly, the result of the CVA is that any claims as between Henry and ProMep were replaced by a single net sum due to Henry, neither party has challenged that, and they are both bound by it.