What happens when a party obtains an adjudicator’s decision in its favour but it is in a company voluntary arrangement (a “CVA”)? Will the courts enforce the decision?
The court considered this position in the case of Indigo Projects London Limited v Razin. In this case Mr. and Mrs. Razin entered into a JCT contract with Indigo, under which Indigo would construct their luxury house for them.
‘Smash & grab’ adjudication
Indigo submitted a payment notice. No payless notice was issued against it. Nor did the Razins pay the amount claimed. As a result, Indigo referred the dispute to adjudication on what is often called a “smash and grab” basis. That is, that the monies were due to them simply because no payment/pay less notice had been issued by the Razins.
Indigo was successful in the adjudication, but still the Razins did not pay. So Indigo issued court proceedings to enforce the adjudicator's decision in the usual way.
However, after Indigo had issued the proceedings, they sent out a CVA proposal to their creditors. Prior to the court hearing the CVA came into effect.
At court the Razins argued that the decision should not be enforced, or if it was enforced it should be stayed, because they had significant counterclaims against Indigo. These related to defects in their works and delays to completion giving rise to an entitlement to levy liquidated damages. None of those issues had been determined in the adjudication. This meant they would be determined for the first time in the CVA.
Effect of the CVA
The Razins said that the effect of the CVA was that the supervisor had to take account of the sums claimed and counterclaimed between the parties. This was in order to calculate the balance due, if any, to Indigo.
The judge considered the case law in this area. He decided that the adjudicator’s decision should not be enforced. A significant factor in this respect was that the decision of the adjudicator had been made before the CVA had been entered into. If the decision was enforced, this would mean that the monies paid by the Razins would not be available to them in the event of a successful final determination of their claims. That money would instead be made available for the benefit of the creditors of Indigo generally.
A further factor was that the adjudication did not involve a valuation of the monies due to Indigo on the merits, because it was a smash and grab adjudication. The decision of the adjudicator was simply in relation to an interim payment. It would have had no impact on the CVA supervisor’s assessment of the overall account.
The impact of this case is that it will be difficult for a company under a CVA to enforce an adjudicator’s decision in its favour in circumstances where the adjudication did not involve a valuation of the monies due. It will also be difficult to enforce in a CVA scenario where the adjudication did not resolve all the claims and cross claims of the parties, such as is likely to be found in a final account adjudication.
If you need any guidance, please contact our construction lawyers.