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Cross-claims: When a business in a company voluntary agreement (CVA) is better than one in liquidation

The Court of Appeal unanimously confirmed that an adjudication won’t be an effective means for a company in liquidation to pursue a claim if there’s also a cross-claim, aside from in exceptional circumstances. 

The position may be different for a company in a company voluntary arrangement (CVA), even where it incorporates Insolvency Rule 14.25. In that case, adjudication won’t only be open to the company but may be an effective means to recover any sums claimed. 

The key points to take away from the cases of Bresco Electrical v Michael J Lonsdale [2019] EWCA Civ 27 and Primus Build Limited v Cannon Corporate Limited [2019] EWCA Civ 27 are:

  • Where a company is in liquidation or a CVA, it can still refer a dispute to adjudication, and an adjudicator can determine the claims. Even though the underlying debt is replaced by the net balance due under Insolvency Rule 14.25, an adjudicator still has jurisdiction for the underlying claims, in the same way as a court or arbitrator. The Court here overruled its previous indication in Enterprise Managed Services Limited v Tony McFadden Utilities Limited [2009] EWHC 3222 (TCC) that Insolvency Rule 14.25 creates a jurisdictional bar in respect of adjudication.
  • Even though the right to refer a dispute to adjudication is retained, an adjudication by a company in liquidation, where there is claim and cross-claim, will almost never be capable of enforcement. So, going down the adjudication route will likely be a futile and costly exercise. An attempt to do so is likely to be met with an injunction. The injunction in Bresco was upheld.
  • The court decided that insolvency and adjudication are, generally, two incompatible procedures. An adjudicator’s decision on an original insolvency claim isn't the same thing as a liquidator’s decision on the net balance under Insolvency Rule 14.25. 
  • In contrast to the position in liquidation, an adjudication by a company in a CVA where there is a supposed counterclaim doesn’t necessarily mean that there can’t be a summary judgment on the adjudicator’s decision. A company in a CVA may be very different to one where the claimant company is in insolvent liquidation. Therefore a summary judgment may be more widely available. The Court of Appeal upheld the summary judgment granted to Primus, who are in a CVA.
  • If a company is in a CVA and a summary judgment is granted, and they request a stay of execution, the court will exercise its discretion if it decides that they're responsible. This can be full, or in substantial part, for the claimant’s financial difficulties. The refusal of a stay in Primus was upheld.
  • The case doesn’t deal with administration. Insolvency Rule 14.24, which applies to administration, is similar to this rule (Rule 14.25) but the mutual set-off only arises when the administrator gives notice of an intention to declare a dividend. It's thought that prior to this, the position is likely to be similar to that applying in the case of a CVA and, after the notice, it’s likely to be similar to the position in liquidation.
  • Finally, where a party seeks to reserve the right to challenge an adjudicator’s jurisdiction, a clear and appropriate reservation must be made. A general reservation of a right to raise jurisdictional issues will probably be too vague. If specific jurisdictional issues are raised, it may decide to waive the right to raise any different jurisdictional issues in the future. Parties should be careful to ensure that any reservation made isn’t so vague as to be ineffective. It should also cover all issues they may wish to raise in the future. This may prove to be a tricky balancing exercise. 

Speak to us

Our Restructuring & Insolvency team can support your business on a range of issues, including business turnaround, CVAs, receivership, liquidation and commercial recoveries. To find out how we can help you with cross-claims, please contact Andrew Walker on +44 (0)370 900 2179. 

 

 

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Andrew Walker