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Overview Of Construction Creditor Claim Challenge

General Rule On Burden Of Proof

Before we go to the case about the construction company creditor claim (gratuitous alliteration?!) – remember the general rule in litigation?

Reminder!

Well, it was recited by Chief Insolvency and Companies Court Judge Briggs in one of the judgments arising from a claim launched by our CEO, Elliot Green in the matter of Nosnehpetsj Ltd v Watersheds Capital Partners Ltd & Anor [2020] EWHC 1938 (Ch) that is referred to in the article in this Blog called How To Win A Weak Case:

he who asserts must prove

Of course, there are many variations of this theme like:

the applicant has to prove their case

or:

the burden is on the applicant

OR, if you are stretching for something a little different and want to flip it the other way by affording the defendant a little pseudo-firepower and add a bit of drama, how about taking a leaf out of one of Christopher Hitchen’s books where he said:

That which can be asserted without evidence, can be dismissed without evidence

When The Burden Of Proof Flips

However, there appear to be certain instances in which you might be able to turn the Christopher Hitchen’s vantage point on its head. For example, you might not necessarily need evidence to prove your position if legislation has come along to afford you a trump card, such as assistance in the form of a ‘statutory presumption’.

Connected Party Presumption of Desire To Prefer

A well-known one in insolvency circles is that of the statutory presumption of the desire to prefer in matters of Preference claims pursuant to Section 239(6) of the Insolvency Act 1986.

Case Hot Off The Press

Getting back on track here, this article is about the matter of Levi Solicitors LLP v Wilson [2022] EWHC 24 (Ch), a case of a construction company creditor claim in a CVA challenged by another creditor. It was a case heard by Mr Justice Fancourt Vice-Chancellor of the County Palatine of Lancaster.

The interesting discussion, in this case, that we have now been served with was who bears the burden of proof ie. given the Supervisor of the CVA accepted the claim but another creditor sought to challenge the same, would it not be the job of the challenging creditor to prove the position? NO – it seems!!

What Was The Court Application Of The Construction Creditor Claim?

This was application by Levi Solicitors LLP (“Levi”), as creditor of the company Farrar Construction Limited (“the Company”), for relief in relation to a proof of debt of the Second Respondent, JKR Property Development Limited (“JKR”). The proof was admitted by the First Respondent, David Wilson, who is the supervisor of the Company’s Company Voluntary Arrangement (“CVA”).

The Proof of Debt of JKR relates to a JCT minor works fixed price building contract signed on 20 June 2014, under which JKR was the employer and the Company was the contractor.

JKR claimed that it substantially overpaid the Company and that, following the issue of a final certificate by the contract administrator (in the form of “Interim Report No 8 – Final” dated 20 December 2019), a sum of £125,921.70 was repayable to JKR, and, further, that the Company owed JKR £30,000 in liquidated damages for delayed completion of the works.

Levi is the major creditor of the Company and submitted a proof of over £760,000 as long ago as 30 August 2016.

Levi’s case is that the Supervisor, Mr Wilson, was wrong to have admitted the proof of JKR in the sum of £185,921.07, as he did. By the application, it seeks a direction from the court that JKR’s proof should be rejected on the ground that it is not sufficiently established, and further directions to the Supervisor in that regard.

The reason for the delay in the progress of the CVA is that in January 2017 the Company and its principal director, Mr Farrar, issued proceedings against JKR claiming that JKR held the property to which the minor works contract related on trust for itself and the Company equally. The claim was rejected by HHJ Raeside QC in November 2017 and the Company’s appeal against that decision was rejected by the Court of Appeal in November 2019.

The Legal Question At Large

The Court summarised the legal framework of matters as follows:

Under Rule 4.83(2) of the Insolvency Rules 1986, a creditor who is dissatisfied with a liquidator’s decision on another creditor’s proof may apply to the court for the decision to be reversed or varied. On such an application, the court conducts a rehearing rather than a review of the liquidator’s decision. The court is not confined to addressing the matter on the basis of the evidence that the liquidator had. The court’s task is to examine all relevant evidence and decide whether, on balance, the claim against the company is established, and if so in what amount: Re a Company (no. 004539 of 1993) [1995] BCC 116 at 120, per Blackburne J.

Where the challenge is made by the creditor whose proof has been rejected, it is clearly established that the burden of proving that the claim is established lies on that creditor: McCarthy v Tann [2015] EWHC 2049 (Ch) at [13]; Re JPF Clarke (Construction) Limited [2020] BPIR 194 at [24]. No authority has established on whom the burden of proof lies where one creditor challenges the admission of the proof of another creditor. Ms Toman said that the burden should lie on the applicant who makes the application, which is seeking to disturb a decision taken by a supervisor in a quasi-judicial capacity; Mr Berragan submitted that the burden lies on the creditor seeking to have their proof admitted to establish their claim.

In my judgment, Mr Berragan must be right. The rationale for a re-hearing on such an application is that the matter should be considered afresh in the light of any fuller evidence available to the court. The correctness of the supervisor’s decision is not the issue: the issue is whether the disputed proof is established and the amount of the proof. If the matter is considered afresh, it must logically be for the creditor asserting the claim to prove it. I do not see why the fact that the claim was admitted by the supervisor and challenged by a rival creditor makes a difference if there is a re-hearing of the relevant creditor’s claim. Any abuse of the procedure by a rival creditor can be controlled by the court by summary disposal of an improper application. If there is a bona fide challenge to the admission of a proof and a re-hearing in consequence, the proving creditor should have to make good their claim. The legal burden and the evidential burden will then coincide.

Construction Certification Principles For Insolvency

The Court assessed the principles governing how certification of works statements would operate in the context of insolvent estates:

i) It is a question of construction of the contract whether provision of a certificate (or statement) in accordance with its express terms is a condition precedent to liability.

ii) The amount so certified must be paid but is not conclusive and can be challenged later by arbitration or in court proceedings – but that does not mean that liability exists irrespective of certification, where it is required by the contract.

iii) If a certificate or statement is a condition precedent, the payer cannot in an arbitration or proceedings to establish the true amount of liability rely on the absence of a certificate or statement that should have been but was not provided.

iv) Subject to s.111 of the 1996 Act, the parties to a construction contract are free to agree that, in the event of insolvency of the contractor, a payment otherwise due to the contractor will not be payable. Full effect is to be given to such a provision according to its terms.

v) There can therefore be no objection to the parties agreeing that, upon insolvency, payments that have not yet become due will not be payable and that instead an account will be taken at the conclusion of the works — whether they have effectually done so is a question of interpretation of their contract.

vi) The purpose of the standard insolvency terms in the relevant JCT 2011 forms is to provide a separate procedure to determine the balance of account between the employer and the insolvent contractor following termination of the contract and completion of the works.

Dispute Disposal Of The Construction Company Creditor Claim

The Proof of Debt was revised somewhat and after the legal arguments which focused on construction procedural issues had been developed, the Court said:

What is no longer in issue is that the amount for which the proof was admitted by Mr Wilson is on any view wrong. Mr Wilson now accepts that the proof was overstated by £30,000. Further, Levi and JKR now agree that only one month’s liquidated damages, at £3,000, can be claimed on the true interpretation of the contract. So the amount in which JKR contends that the proof should have been admitted is now £128,921.70…What is no longer in issue is that the amount for which the proof was admitted by Mr Wilson is on any view wrong. Mr Wilson now accepts that the proof was overstated by £30,000. Further, Levi and JKR now agree that only one month’s liquidated damages, at £3,000, can be claimed on the true interpretation of the contract. So the amount in which JKR contends that the proof should have been admitted is now £128,921.70.

What Next?

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Disclaimer: Construction Company Creditor Claim Upheld

This page Construction Company Creditor Claim In CVA Upheld Notwithstanding Creditor Challenge is not legal advice and should not be relied upon as such. This article Construction Company Creditor Claim In CVA Upheld Notwithstanding Creditor Challenge is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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