Insolvent companies: Owing pains

In the recent case of Westshield Ltd vs Mr David Whitehouse and Mrs Lisa Whitehouse, the court reviewed what happens when one party is the subject of a company voluntary arrangement (CVA) and tries to enforce an adjudication decision in its favour. 

The Whitehouses employed Westshield to carry out work to their house. Issues arose between them regarding the works and, at the same time, Westshield found itself in financial difficulties.

Because of this, Westshield sought a CVA, which allowed them to carry on their business.  

Following the CVA, Westshield submitted a valuation which showed that a further £270,000 was due. The Whitehouses did not pay and, therefore, Westshield issued a notice of adjudication to recover these monies.

During the adjudication, the Whitehouses raised a potential counter-claim for defects in the house, although they did not do much to substantiate their claims in the adjudication proceedings.

The adjudicator decided that the Whitehouses owed Westshield £132,667.56. The Whitehouses refused to pay the amount stated in the decision and so Westshield issued proceedings for summary judgment to enforce it.

The court held that a CVA does not prevent a party from using adjudication and, therefore, as the adjudicator has jurisdiction, his decision is enforceable in principle. However, where there is a CVA in place, obtaining summary judgment to enforce the decision is not so straightforward.

Where a claim is made and there are counter-claims, these must be set out to the other party so they can be taken into account

The critical point is to look at the terms of the CVA. In Westshield’s CVA, there was a specific term stating the following:

“Where before the proposal is approved there have been mutual credits, mutual debts or other mutual dealings between the company and any person claiming to be a creditor of the company, an account shall be take of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other.

“Only the balance of the account owed by the company to the creditor shall be claimable by the creditor.”

The courts notes that this provision closely resembles the provisions of the Insolvency Rules 1986. The courts looked particularly at the Court of Appeal case of Bouygues (UK) Ltd vs Dahl-Jensen (UK) Ltd [2000], which dealt with an insolvent company.

The court recognised that in an insolvency situation, an adjudicator does have jurisdiction and, therefore, his award is enforceable. However, the award is only provisional and, therefore, it would be difficult to seek summary judgment to enforce it where there are claims and cross-claimsoutstanding between the parties.

Therefore, the court looked at whether there were any such dealings between Westshield and the Whitehouses, which clearly there were, given that the works were completed before the CVA.

As the CVA supervisor was aware of the defects claims put forward by the Whitehouses, it should have taken these into account to be set off against the amount in the adjudicator’s decision. Once this exercise had been done, if there was an amount owed to Westshield by the Whitehouses, Westshield could then expect payment.

The court made it clear that if Westshield had been allowed to summarily enforce the adjudicator’s decision, it would have led to a situation where the amount paid to Westshield would form part of the pool of funds available to be paid to all of its creditors. If the Whitehouses then pursued a
claim for defects, any amount they received would only be a dividend pro rata to the amount of the claim, which would not be fair.

The courts also said that the Whitehouses had not made any set-off or counterclaim at the time of the CVA or before the adjudication. Therefore, Westshield and the CVA supervisor could not be criticised for not actually taking into account the fact that there would be a counterclaim from the Whitehouses.

This case shows that where a claim is made and there are potential counter-claims, these must be set out to the other party so they can be taken into account. This is particularly vital where there is a CVA in place – it becomes essential for any potential claims to be notified to the CVA supervisor if any recovery is to be made.

It also shows that where such a situation exist, proper consideration needs to be given to whether it is worthwhile pursuing adjudication if it cannot be enforced.

Aine McCartney is a senior associate at Taylor Wessing