The High Court has provided useful guidance on the interplay between the JCT regime for payment and claims in insolvency proceedings, in the recent case of Levi Solicitors LLP v Wilson and another  EWHC 24 (Ch).
The case concerned a claim made by JKR Property Development Ltd (JKR) under an un-amended JCT Minor Works Building Contract (2011 edition) (the JCT Contract) in the insolvency of Farrar Construction Limited (the Company). Under the JCT Contract, JKR had instructed the Company to act as a contractor and carry out construction works. JKR claimed that it had substantially overpaid the Company during the course of the works and was also entitled to liquidated damages for delayed completion of the works. JKR made a claim in the company voluntary arrangement (CVA) of the Company on that basis, which was admitted by the CVA supervisor.
The major creditor of the Company, Levi Solicitors (Levi) issued an application to challenge the admission of the claim.
The JCT Contract
Levi asserted that JKR was only entitled to claim repayment of sums paid to the Company if it followed the procedure in clause 6.7 of the JCT Contract.
In summary, the procedure under clause 6.7 determines the consequences of termination of the JCT Contract. These consequences apply if the employer terminates the contract and this termination is based on certain grounds. Importantly for the present case, the procedure determines what an employer needs to do if the contract is terminated due to the contractor becoming insolvent. Under clause 6.7, the employer is entitled to recover the costs of getting a new contractor to complete the works and is entitled to pay no further sums to the original contractor even if the sums have become due. However, the employer must prepare a statement (or the contract administrator must prepare a certificate) within three months of the works being complete. The statement or certificate must detail:
- the expenses incurred by the employer in getting a new contractor to complete the works,
- any direct losses the employer has incurred due to the termination,
- the amounts paid to the contractor by the employer, and
- the total amount which would have been payable under the contract if the contract had not been terminated.
If the employer doesn’t produce the statement, or the contract administrator doesn’t produce a certificate, the employer is not entitled to recover the costs of a new contractor or to pay no further sums under the contract.
As the relevant procedure was not followed, the Levi claimed that JKR had no claim for repayment.
In the alternative, Levi argued that JKR did not have a claim as it had failed to issue a valid final certificate as required under clause 4.8 of the JCT Contract. To be a valid final certificate under Clause 4.8, the certificate must:
- be issued no later than five days from the "due date". The "due date" is 28 days from the date on which the contract administrator receives the documents needed to calculate the final payment from the Contractor. This means the final certificate must be issued within 33 days of receiving the documents; and
- state the basis for the calculation of the final sum.
The Court found that the interim payments regime set out in clauses 4.3 – 4.8 of the JCT Contract automatically no longer applied upon the insolvency of the Company. Instead, the payment provisions in clauses 6.5 and 6.7 of the JCT Contract would automatically apply to provide a substituted means of determining the amounts payable between the parties.
Under clause 6.7, a certificate ought to have been issued within three months of completion of the works setting out the final sum payable, resulting in the final balance becoming due between the parties. However, the judge considered that the timescale for issuing the certificate was not strict, and a certificate could be issued (and sums pursued) after the three month period had expired, so long as it was issued within the relevant contractual limitation period.
Consequently, JKR was not barred from pursuing the final balance owed from the Company, notwithstanding that a valid certificate had not been issued within three months. The CVA supervisor was therefore correct to admit JKR’s proof of debt in the CVA.
Challenging proofs of debt
One further point of interest in this case is the comment provided by the judge on the burden of proof where a creditor makes an application to challenge a proof of debt. In those circumstances, the onus is on the creditor who submitted the original claim to establish its basis, rather than on the challenging creditor (irrespective of whether the claim has been accepted by the officeholder). This is a novel point on which there has been no previous authority and will provide useful guidance (and, no doubt, support) for creditors seeking to challenge the admission of a proof of debt.
David Steinberg, partner and co-head of Stevens & Bolton’s restructuring and insolvency practice, commented: “the learned judge’s observation that, when a creditor challenges another creditor’s proof of debt, the burden of rebutting that challenge falls upon the proving creditor, is surprising and may well lead to opportunistic challenges by creditors seeking to deploy ‘spoiling’ tactics in order to disrupt the expeditious resolution of insolvent estates. It will be important that judges who determine such challenges are robust in imposing adverse costs orders against creditors who challenge other creditors’ proofs of debt without any apparent basis for doing so.”