Out-Law / Your Daily Need-To-Know

Out-Law Legal Update 2 min. read

Court overturns CVA supervisors' decisions to reject creditors' proofs of debt

The High Court in England has overturned decisions made by supervisors of a company voluntary arrangement (CVA) to reject creditors' proof of debt for dividend purposes.

  • Creditors challenged decisions of CVA supervisors to reject four proofs of debt
  • JPF Clarke (Construction) Ltd; Maze Inns Ltd (In Liquidation) v Hunt [2019]

The court found in favour of four creditors who said that the CVA supervisors should not have rejected their claims that they were creditors of JPF Clarke (Construction) Ltd (JPF). Each creditor had submitted a proof  of debt to the supervisors with details of their claim against JPF but these proofs were rejected by the supervisors for dividend purposes. JPF, a construction company, had entered into a CVA on 7 June 2013 and was due to make a dividend payment to its creditors in 2017.

A CVA is a legally-binding arrangement, supervised by a licensed insolvency practitioner and entered into by a company in financial distress, which can vary existing contractual terms between the company and its creditors and typically involves certain debts being discounted. One aspect of the role of a CVA supervisor is to adjudicate on the value of claims submitted by creditors, which are submitted by way of proof of debt forms.

The supervisors of JPF's CVA rejected four proofs of debt submitted by creditors because they were said by the supervisors to be debtors, not creditors of JPF. This included a proof of debt submitted by Maze which already had the benefit of an adjudication award in its favour for £242,347. The supervisors also rejected two creditors' proofs of debt because they were said to be creditors of Maze, not of JPF because JPF had instructed those creditors in its capacity as Maze’s agent.

The court carried out a review of the evidence in support of the creditors' claims and JPF's counterclaims. Although the court accepted that an adjudicator's award is not final, it did recognise that adjudication is binding upon the parties until final determination of the dispute. The court also found that JPF had no cross-claim against Maze. As such, the court ordered the supervisors to accept Maze's claim in full. The court also found no evidence to suggest that JPF instructed any of the creditors as Maze's agent. The court ordered the three other creditors' claims to be accepted albeit reduced one claim by approximately £23,000.

The court said that it was for a creditor to prove its debt on the balance of probabilities. It was not for the court to review the decision of a supervisor or to determine whether or not the supervisor was right or wrong to reject the proof at the time it was considered. Instead, the court had to review the evidence and determine whether the claims should be admitted or rejected.

This case is a reminder of the importance of creditors proving their debts on the balance of probabilities. This will typically be done by way of contemporaneous documentary evidence and the court will place less reliance on oral evidence, particularly where significant time has passed since the debt arose. It is also a reminder that supervisors and other officeholders need to take care in properly adjudicating on claims, which may sometimes necessitate independent advice, in order to minimise a successful challenge to their decisions.

James Hillman is a restructuring expert at Pinsent Masons, the law firm behind Out-Law

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