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The Proposal and the CVA
The Proposal and the CVA
By a proposal dated 7 October 2021, the directors of ProMep proposed that it enter a company voluntary arrangement (CVA). The proposal was approved in a slightly modified form and came into effect on 25 October 2021. Christopher Stevens and Philip Harris of FRP Advisory Trading Ltd. (“FRP”) were appointed as Supervisors of the CVA.
The Proposal stated that it was to be a composition in satisfaction of the Company’s debts (clause 1.2) and that the proposals were to be read with Appendices A to F which formed part of the Proposal. Clause 1.5 provided:
“Standard terms of proposals are attached at Appendix E. These specific proposals are to be read with the standard terms of proposals, which form part of the proposals put to creditors. If there is any conflict between the proposals and the standard terms, these proposals shall prevail.
Section 2 was headed “Circumstances giving rise to the proposed CVA”. This section included a brief summary of ProMep’s history with Henry and stated that, since 2018, ProMep had entered into a number of projects/ contracts with Henry. Clause 2.7 stated that ProMep had ultimately issued 7 day suspension notices on “all projects” because of non-payment but Henry had still not paid and had instead excluded ProMep from the sites. At paragraph 2.9 the Proposal recited that ProMep had issued 9 claims in adjudication against Henry with a combined value in the region of £1 million and that those claims were based on Henry’s failure to pay its Payment Notices. Further details of the adjudications were included in Section 5, the last being commenced in September 2021.
Section 3 headed “What is the effect of a CVA?” included:
In order for a CVA to become binding on creditors, it must be approved by 75% or more in value of creditors voting on the decision to accept or reject the CVA (in person or by proxy). If the Arrangement is approved, it will bind all creditors whether or not they received notice of the decision procedure and regardless of whether they voted for or against the CVA or did not vote at all. ….
A CVA will affect all creditors whose claims are not payable as expenses of the CVA. Typically, creditors will be required to write off and/or defer some part of their claim as part of the compromise where the monies received through the CVA are accepted in full and final settlement of the amount outstanding to the creditors. Once the CVA is approved creditors shall not be entitled to take any proceedings against the Company or its assets to enforce its debts.”
Section 5 was principally concerned with monies due to ProMep:
Clauses 5.1 to 5.15 referred to the 9 adjudications which ProMep had commenced against Henry, summarising the background to the adjudications, setting out the amounts so far won in adjudication (£644,955), and setting out the amount paid (£115,000). Clause 5.7 stated that that amount received had been “ringfenced for the benefit of CVA creditors”.
Clauses 5.12 and 5.13 addressed the prospect of enforcement of the decisions:
In a CVA there is a good prospect that the Court would order payment on an enforcement. However, in liquidation or administration there is virtually no possibility of payment as the likely outcome is a stay on payment pending final resolution in litigation.
For the purposes of the estimated outcome statement realisations in respect of the adjudications in a liquidation scenario have been estimated at 10% of the headline value. It is not considered likely that these claims would be capable of being pursued in liquidation due to protracted litigation and costs.”
Clause 5.15 provided that any adjudication monies received from 1 January 2022 onwards “will be excluded from the CVA”. That date was later modified.
Clauses 5.16 to 5.24 addressed retentions totalling £323,500. It was recorded that £57,000 had been received and was ringfenced for the benefit of CVA creditors. Again it was provided (clause 5.24) that any retention monies received after from 1 January 2022 “will be excluded from the CVA”.
Clauses 5.25 to 5.28 dealt with refunds from HMRC and:
At present the net realisation to the CVA is estimated to be £217k after set-off and it is intended that this refund is paid directly to the CVA upon receipt.
…
The HMRC refunds will be available to the CVA irrespective of the time it takes for the funds to be received by the Company and the CVA shall not conclude until the refunds have been collected.”
Clause 5.32 stated that the company intended to seek further work in the future. Then:
For the avoidance of doubt, in the event the CVA is still active when the Company undertakes new contracts it is not proposed that any receipts received by the Company from 1 January 2022 onwards will be paid over to the CVA, with the exception of the HMRC refunds detailed in the proposals.
This is on the basis that any future activity undertaken from that date will be funded separately by the directors.
The trade-off for creditors is that the ongoing survival of the Company facilitates enforcement of the adjudications and allows it to maintain warranties/relationships with contractors, which is anticipated to maximise retention realisations.”
Clause 5.36 provided that the ring-fenced amounts would be paid over immediately to creditors upon the CVA being accepted by creditors.
The following clauses were also referred to in argument:
It is anticipated that the period of the CVA will be up to 6 months, although may be extended at the discretion of the Joint Supervisors … in order to facilitate the agreement of creditor claims, distribution of funds to the creditors and the statutory requirements to finalise the CVA.
Any unexpected windfalls received by or becoming available to the Company during the course of the CVA will be immediately advised by the Supervisors and will be included in the CVA to be available for Arrangement creditors.”
Section 7 was headed “The duties and responsibilities of the Supervisors:
Under clause 7.1 their role included “(e) to determine whether any other assets form part of the CVA funds, and if so, arrange for their realisation accordingly”.
Clause 7.3 provided “In the event that any clauses under the CVA appear to be in conflict, unclear or ambiguous, the Supervisors will, at their absolute discretion, be entitled to resolve their priority, interpretation or application, acting in what they believe to be the interests of the creditors.”
Section 8 contained the “Statement of Affairs – comparative outcomes”:
Clause 8.2 stated that professional valuers had carried out a desktop valuation of the Company’s assets “being Computer Equipment and Motor Vehicles”.
Clause 8.3, which is central to the argument before me and before the adjudicator, was in the following terms:
“All of the Company’s assets, other than the net proceeds of the HMRC refunds until such time as they are fully received and Retentions and Adjudication Funds received prior to 1 January 2022 which will form the voluntary contributions, are excluded from the Arrangement. The excluded assets will be utilised to deal with the successful implementation of the arrangement and potential future trading of the Company. For the avoidance of doubt this includes but is not limited to:
Cash at bank
Chattel assets
Overdrawn directors’ loan account
Company Records
Intellectual property rights
Clauses 8.4 and 8.5 provided:
Appendix D provides a comparison of estimated outcomes between the CVA and the liquidation of the Company. It can be seen that, based on currently available information, a dividend of between 11.7p/£ and 15.4p/£ would be paid to unsecured creditors from the CVA. By contrast, a dividend of up to 4.8 pence in the pound is estimated to be available to unsecured creditors in the event that the Company went into liquidation. This is the result of the likely reduced realisations in respect of the adjudication claims and retentions in the event of a liquidation and the limited value of the chattel assets.
The main reason for the anticipated improved dividend in the CVA is that the Company will be better able to deal with the collection of the outstanding retentions and deal with the adjudication process while remaining under the control of the directors with the protection of a CVA, as dealing with the adjudication enforcement action in a liquidation would be considerably more difficult.”
Clause 9.8 then provided:
“The Company’s creditors are set out in the statement of affairs. All creditors must submit a statement of claim within 28 days of the Supervisors’ request. Thereafter the Supervisors shall not be obliged to request, invite or otherwise advertise for the submission of claims. The adjudication of each claim will be in accordance with the standard terms and conditions attached at Appendix E.”
Appendix C contained the Estimated Statement of Affairs setting out the company’s creditors (not including Henry).
Appendix D, as referred to in clause 8.4, set out a “Comparison of Estimated Outcomes Between CVA and Liquidation of the Company”. In short, under the heading Assets Subject to Floating Charge, there was reference to the adjudications, retentions and so on. There was no reference to any other debts due to or claims by ProMep.
Appendix E repeated at paragraph 1 that “in the event of a conflict between the terms of the company’s proposals and these standard terms then the terms of the proposals shall be given priority”. Material to the arguments before me were the provisions under the heading “Creditors’ Claims and the Calculation and Payment of Dividends” which included the following:
The Supervisor will assess and agree the claims of preferential and unsecured creditors based on information in the company’s books and records, and the proofs of debt submitted by the preferential and unsecured creditors, together with the advice of the directors as considered appropriate by the Supervisors.
…
When assessing and agreeing claims from scheme creditors, the Supervisor will follow those rules of the Insolvency Rules and those sections of the Insolvency Act 1986 that apply to the agreement of creditors’ claims by a liquidator. These include debts in foreign currency, set off and interest accruing after appointment. References to the winding up shall be interpreted as reference to the CVA. Court directions may be sought by the Supervisor if appropriate
Subject to the above, dividends shall be calculated on the amount for which that creditor’s claim would be accepted to rank for dividend had the company gone into creditors’ voluntary liquidation on the Decision date on which the proposals were approved.
The Rules relevant to the payment of a dividend to unsecured creditors (Part 14 of the Insolvency Rules) shall apply to the CVA, excluding any Rules relating to the advertisement of a dividend, and dividends to secure creditors. References to the winding up shall be interpreted as references to the CVA.”
…”
The Insolvency Rules, Part 14 include the following:
– (1) This rule applies in a winding up where, before the company goes into liquidation, there have been mutual dealings between the company and a creditor of the company proving or claiming to prove for a debt in the liquidation.
An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings and the sums due from the one must be set off against the sums due from the other.
If there is a balance owed to the creditor then only that balance is provable in the winding up.
If there is a balance owed to the Company then that must be paid to the liquidator as part of the assets.
…”
By a proof of debt form dated 28 March 2022, Henry proved for 3 debts arising out of projects known as Makerfield, Scaperfield and 2-6 Pelham Terrace. Importantly, there was no mention of Stanbridge. By e-mail dated 13 June 2022, the Supervisors confirmed that that claim “is accepted”.
On 27 July 2022, the Supervisors gave notice (form CVA4) that theCVA had been successfully completed.
On 18 November 2022, ProMep commenced an adjudication and Rowan Planterose was nominated as adjudicator by the RICS. It is relevant to note that Mr Planterose is a highly experienced barrister and solicitor in the field of construction law and that both parties were legally represented in the adjudication.
The Referral Notice was dated 23 November 2022. In short summary, ProMep’s claim was that Henry was in repudiatory breach of contract, which ProMep had accepted as terminating the contract, and ProMep claimed payment for work done and damages for breach in a total sum of £887,545.80.
On 5 December 2022 Henry served its Response. In that Response, Henry expressed itself to be “astounded” that ProMep had commenced this adjudication. One reason given was that it was ProMep that was in repudiatory breach and had wrongfully terminated the contract. Henry advanced a counterclaim for £825,208 in damages. The other reason was the background in which ProMep had owed Henry a significant sum when ProMep entered into a CVA. Henry’s claim for £3.457 million had been accepted by the Supervisors but Henry had only been paid £242k. As counsel for ProMep pointed out, Henry did not advance any argument that ProMep’s claim in the adjudication had also been settled by the CVA.
On 12 December 2022, ProMep served its Reply which did advance the argument that Henry’s counterclaim was settled by the CVA. The Reply included the following:
HCPL submitted its proof of debt in the CVA after the CVA had been agreed to by the creditors. HCPL was not involved in that agreement because it did not claim to be a creditor until later. The directors objected to the Supervisors’ decision to accept HCPL’s claims in full and suggested that the CVA be altered so that those claims would fall outside the CVA. The position between the parties could then be addressed after the CVA. HCPL refused that suggestion and maintained that its claims should be included for dividend. Under the terms of the CVA all claims by HCPL have been compromised in return for this windfall.
…
ProMEP does not comment further on the invalidity of HCPL’s claims because they have been compromised in the CVA. In considering this point it is important to understand that the CVA is a contractual agreement between ProMEP and all its creditors, the effect of which is entirely dependent on the terms of the CVA. In this regard see Wright & Anor (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd [2018] EWHC 402 (Ch) (06 March 2018) at the end of paragraph 20 …
Promep’s claim against HCPL is an asset of the company. Whether any company assets are included in the CVA is a question of construction of the agreement. Clause 8.3 of the CVA provides that only limited assets are included in the CVA as follows:
“All of the Company's assets, other than the net proceeds of the HMRC refunds until such time as they are fully received and Retentions and Adjudication Funds received prior to 1 January 2022 which will form the voluntary contributions, are excluded from the Arrangement. The excluded assets will be utilised to deal with the successful implementation of the arrangement and potential future trading of the Company. For the avoidance of doubt this includes, but is not limited to:
• Cash at bank
• Chattel assets
• Overdrawn directors' loan account
• Company records
• Intellectual Property Rights”
The claim against HCPL does not fall into any of these categories and is part of “all of the Company’s assets, other than the …. voluntary contributions”, which are excluded from the arrangement under this clause.”
On 19 December, Henry served its Rejoinder. Henry contended that ProMep was wrong to say that Henry’s claim had been settled in the CVA. That contention appears to have been based simply on the fact that it was not one of the debts for which Henry gave proof of debt in the CVA. On the other hand, Henry now said that it was ProMep’s claim that was compromised. In summary, that was said to be because the CVA was intended to function in a manner that mirrored a liquidation where set-off was mandatory so that the creditor ended up with a final position and the creditor could not later be pursued for further monies. Henry included within the documents submitted to the adjudicator an Advice from counsel to that effect. I observe that Henry did not explain how pursuit of its own claim was consistent with the contention that the CVA should end up with a final position.
On 21 December 2022, ProMep served its Surrejoinder. The Surrejoinder stated that ProMep had previously received advice from counsel as to the effect of the CVA. Her Chambers had been contacted with a request that she respond to “the Henry Advice” but she was now on maternity leave and unable to respond, as she would have been had the Henry Advice been provided earlier. In the circumstances, ProMep provided a summary of counsel’s advice. ProMep said: “For obvious reasons this has not been approved by her. However, it does set out ProMep’s understanding of her view on the legal position”. The adjudicator was asked to note in particular the summary in paragraphs 8, 9 and 12. That advice was said to be that ProMep’s claims against Henry were excluded from the CVA (paragraph 8); that insolvency set-off does not apply (the reference was to paragraph 9 but it appears that it should have been to paragraph 10); and that if Henry’s claims are admitted in full (as they were) then they were extinguished (paragraph 12).
I do not set out the entirety of the summary but it included the following:
Under the heading “Overview of Conclusions”:
It is necessary to ascertain whether Promep’s Claims are assets of the CVA. Promep’s Claims could either be (1) excluded from the CVA under clause 8.3 of the Proposal or (2) included in the CVA under clause 5.44 of the Proposal. This is a question of construction of the Proposal to be determined by the Supervisor to determine (sic) under clause 7.1(e) of the Proposal.
If Promep’s Claims are excluded from the CVA, they belong to Promep. In this case, admission of Henry’s Counterclaims in the CVA would not prevent Promep pursuing Promep’s Claims later (and set-off would no longer apply as Henry’s Counterclaims will have been settled in the CVA) and insolvency set-off likely does not apply, although this would be a matter for the Supervisor to determine.
A decision that ProMep’s Claims are not CVA assets would be the simplest solution from Promep’s perspective. However it should be noted that determination by the Supervisor admitting Henry’s Counterlcaims but excluding Promep’s Claims may be unacceptable either to Henry (who would be receiving only a dividend in respect of its liability, but still exposed to the full amount of Promep’s Claims) to other creditors (who would potentially receive less than they would in a liquidation …..). Either Henry or another creditor might challenge such a decision on this basis.”
Under the heading “Are Promep’s Claims against Henry assets of the CVA?”:
ProMep’s Claims are assets. If the CVA did not exist they would certainly be assets of the Company.
Whether any Company assets are included in the CVA is a question of construction of the Proposal (perhaps subject to the Supervisor’s discretion under clause 5.44). In this case there are two relevant clauses: cl. 5.44 and cl. 8.3.
[The terms of clause 8.3 were then set out]
…. Assuming the Promep Claims existed at the time the Proposal was entered into, they will have been part of “all the Company’s assets, other than the …. voluntary contributions” – which are excluded from the arrangement under this clause.”
Under the heading “If ProMep’s Claims are excluded from the CVA”:
If the Supervisor determines that Promep’s Claims are not CVA assets then they are owned legally and beneficially by Promep.
Clause 31 of the Standard Terms applies Part 14 of the Insolvency Rules 2016 on the calculation of dividends, Rules 14.24 and 14.25 deal with insolvency set-off – and so these principles are applied to the CVA. Insolvency set-off nets off mutual debts between creditor and insolvent company upon insolvency, with the result that only the balance that is owing to be claimed by way of dividend in the insolvency ….
As Henry’s Counterclaims are claims against Promep to be settled in the CVA, if Promep’s Claims are excluded from the CVA, then it is likely there is no mutuality of debts (a condition for insolvency set-off …..)
If this is right, Henry’s Counterclaims should be admitted for dividend in full, without set-off. They would thereby be extinguished by the dividend received. Meanwhile Promep’s claims would remain alive, and they would not be subject to any defence of set-off because Henry’s Counterlcaims would no longer exist to be setoff against them.”
In the body of the Surrejoinder, ProMep also made submissions on the Henry Advice.
On 5 January 2023, the adjudicator gave his decision. He found in ProMep’s favour that Henry had repudiated the contract and decided that ProMep was entitled to be paid a total of £90,380.49.
Dealing with the arguments in relation to the CVA, the adjudicator set out what he considered to be material terms of the Proposal. He noted that:
A CVA is essentially a contract which binds all creditors whether or not they have participated or indeed agreed to its terms. Its precise terms are therefore of importance to the issue as to what has been included (and settled) and what has not. Interpretation follows normal rules. There is (as Counsel notes), no automatic statutory set off of debts.”
He then summarised the respective positions of ProMep and Henry, including a summary of the respective advices of counsel and a note from Henry dated 21 December 2022, as follows:
…. HCPL say:
IR14.25(2) refers to mutual dealings, not debts. There is a clear requirement to apply insolvency set-off;
The question that needs to be asked is: does the definition of assets in the CVA trump the reference to set-off in the conditions?
In response ProMEP referred me to HCPL’s counsel’s Advice. He noted that, unlike in administration or liquidation, there is no automatic statutory set off of debts owed to and by the Company.
In my view
Paragraph 8.33 (sic) of the Proposal clearly excludes the claims now made from the arrangement;
I disagree with Counsel’s view as [to] the “old” contracts. As ProMEP say in their Surrejoinder, the list of included assets is confined to “the net proceeds of the HMRC refunds until such time as they are fully received” and Retentions and Adjudication Funds received prior to 1 January 2022.
Automatic set-off does not apply to a CVA;
The application of set-off would negate the effect of Paragraph 8.33 (sic).
It follows that the answer to the question posed in HCPL’s note of 21 December 2021: “does the definition of assets in the CVA trump the reference to set-off in the conditions?” is “Yes, it does”. ProMEP’s claims remain alive.”
On 19 January 2023, Henry issued a Part 8 claim seeking a final determination of the issue as to whether the CVA settled all claims as between ProMep and Henry. Henry sought declarations (i) both that ProMep’s claim in the adjudication was settled by the CVA and that all other claims that ProMep had against Henry, prior to the inception of the CVA, were settled by the CVA and (ii) that Henry’s claims against ProMep were not settled by the CVA other than those for which proof of debt was submitted.By the time of the May hearing, Henry had served Particulars of Claim in which they did not pursue (ii).
On 26 January 2023, ProMep issued Part 7 proceedings to enforce the adjudicator’s decision by summary judgment in the usual way. In short, subject to one matter which I refer to below, Henry’s only ground for resisting summary judgment was its contention that the CVA had settled all claims between these two parties.