CVA debts – can these be “set off”?

On 16 July 2024, Mrs Justice Jefford, sitting in the High Court, decided in Henry Construction Projects Ltd v ProMep Ltd [2024] EWHC 1825 (TCC,) that a CVA did not settle all current and future claims and debts. 

What is a CVA?

A Compulsory Voluntary Arrangement (“CVA”) is an insolvency process which allows a company to negotiate with unsecured creditors, whilst retaining some assets in order to enable the company to continue trading and pay off its debts over a fixed period of time. This means that a company is immediately relieved of historical liabilities, although they would likely be required to pay ongoing debts as and when they fall due. 

Background

Henry engaged ProMEP as a sub-contractor in relation to a project at Standbridge Earls, incorporating the JCT DBSub/C 2016 form with amendments. In around 2021, ProMep argued that Henry repudiated the contract and in doing so, ProMep accepted that the contract was terminated on the basis of that repudiation. 

Henry disputed that it committed a repudiatory breach and it disagreed that ProMep was entitled to terminate the contract, and therefore counterclaimed that ProMep had now committed a repudiatory breach. 

Subsequently, ProMep entered into a CVA and Henry proved for 3 debts totalling £3.457 million, which were accepted by the CVA supervisors. Henry only received £242,000 from the CVA in respect of those debts. 

In around November 2022, ProMep commenced an adjudication against Henry for around £800,000 in relation to the project at Sandbridge Earls. Henry argued that the claim was “set off” by the terms of the CVA as the agreement had set out which claims were included, and this one was not. Henry argued that ProMep were not entitled to anything and instead Henry counter-claimed for a similar amount. 

The adjudicator found in ProMep’s favour and determined that their claim was not part of the set off in the CVA, awarding them £90,000. 

Henry was unhappy with this decision and shortly after issued Part 8 proceedings. These proceedings are typically used when a party is seeking the court’s decision on a specific question and in this case, Henry was seeking a declaration that the previous CVA had settled all the claims between the parties (including any future claims). 

At the same time, ProMep issued Part 7 proceedings (for standard claims) and sought to enforce the adjudicator’s decision i.e. that they were entitled to £90,000.

Judgment

Mrs Justice Jefford agreed with the adjudicator’s decision and found in ProMep’s favour, enforcing the decision against Henry. The court determined that the CVA did not settle all current and future claims between the parties. Unless any potential future claims (even those unknown at the time), were included within the CVA, then they remained an asset of the company and Henry was unsuccessful in arguing that the CVA settled these debts.

Henry entered into administration shortly after the decision so it is not clear whether ProMep has received the £90,000. 

Analysis and considerations

There is no automatic set off within a CVA, in contrast to other insolvency procedures, such as liquidation. The adjudicator had decided that set off did not apply in this matter. The key takeaway is that a CVA does not prevent a company from pursuing claims against its creditors, or any debts previously settled under a CVA, and that these sums cannot be set off against other claims in the future. 

The purpose of a CVA can be described as a “hard reset”, so that all the company’s debts can be identified and funds can be ring-fenced to settle those debts. This case demonstrates the importance of reviewing any CVA proposal and shows how the courts are not willing to allow debts settled under a CVA to be set off against future claims. 

This article was written by Sarah Wilson and Samantha Ross.