Creditor v creditor on challenging proofs of debt (Re Farrar Construction Ltd; Levi Solicitors LLP v Wilson)

January 31, 2022

Amie Boothman

This article was first published in LexisNexis, view on their website here.

Restructuring & Insolvency analysis: This was an application pursuant to the Insolvency Rules 1986 (IR 1986), rule 4.83(2), by Levi Solicitors LLP (‘Levi’) as a major creditor of Farrar Construction Ltd (‘Farrar’) for relief in relation to a proof of debt submitted by JKR Property Development Limited (‘JKR’) on the basis that the supervisor of Farrar’s company voluntary arrangement (CVA), Mr Wilson, was wrong to have admitted the proof of JKR in the sum of £185,921.70.

By its application, Levi sought directions from the court that JKR’s proof should be rejected on the basis that it was not sufficiently established and, thereafter, further directions to the supervisor in relation to the same. Prior to the hearing, a list of issues was agreed between the parties and the amount for which the proof was admitted by Mr Wilson (£185,921.07) was no longer in issue, on the basis that Mr Wilson accepted that the proof was overstated by £30,000. The amount in which JKR contended the proof should have been admitted was adjusted to £128,921.70.

In respect of the list of issues, the court was tasked with the question of who had the burden of proof on the application; Levi as applicant or JKR as second respondent, as well as the issues in dispute regarding the interpretation of the JCT contract to which the proof derived from. Upon consideration of the same, as considered below, the judge found that JKR’s proof should be accepted by Mr Wilson in the revised sum of £128,921.70. Written by Amie Boothman, a commercial barrister at Exchange Chambers who was instructed by Carrick Read Solicitors LLP on behalf of the first respondent.

Re Farrar Construction Ltd; Levi Solicitors LLP v Wilson and another [2022] EWHC 24 (Ch)

What are the practical implications of this case?

This judgment is a welcomed authority on the issue of the burden of proof in the circumstances where one creditor challenges the admission of a proof of debt from another creditor. Further, the judgment provides a useful summary of the principles relating to how certifications of works operate in construction contracts in the context of insolvency.

What was the background?

The application derived from the proof of debt JKR submitted to Farrar in connection with a JCT minor works building contract entered in 2014 (‘the JCT contract’) in respect of which JKR was the employer and Farrar, the contractor. The fixed price sum of the JCT contract, as specified in the Articles of Agreement, was £305,000 (excluding VAT).

JKR claimed it had overpaid Farrar and, following the issuing of a final certificate by the contract administrator, dated 20 December 2019, a sum of £125,921.70 was payable to JKR from Farrar, plus a payment in respect of liquidated damages for delayed completion of the works, pursuant to the JCT contract (originally claimed at £30,000 but, as set out above, later revised to £3,000 on a true interpretation of the JCT contract).

In respect of the proof submitted by JKR, Levi asserted:

  • JKR can only claim repayment of sums paid to Farrar if the procedure in clause 6.7 of the standard terms of the JCT contract was followed, but as it was not followed no sum was due from Farrar to JKR
  • in the alternative, JKR failed to satisfy the contractual requirement of clause 4.8 of the standard term on the basis that a final certificate is a strict condition of liability under clause 4.8 and no valid certificate had been issued

JKR contended that:

  • clause 4.8 does apply and was complied with. Additionally, JKR asserted it had a statutory right to payment pursuant to section 110 of Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) following a payment notice (in the form of the proof of debt)
  • in the alternative, it has a claim on the basis of a valid notice under HGCRA 1996, s 110B(2) which it can serve at any time and therefore is to be treated as a creditor of Farrar in respect of the adjusted sum claimed

By way of the quasi-judicial capacity upon which the supervisor operates, Mr Wilson, the first respondent, adopted a neutral position in respect of the application.

Accordingly, ten issues arose, from the issue of who bears the burden of proof, to whether JKR has a statutory right pursuant to HGCRA 1996 and specific issues in relation to the interpretation of the JCT contract.

What did the court decide?

Burden of proof

Dealing with the issue of who had the burden of proof on the application, the court noted that no authority has established on whom the burden of proof lies where one creditor challenges the admission of the proof of another. It was JKR’s position that the burden should lie on the applicant who seeks to disturb a decision taken by a supervisor. It was Levi’s position that the burden should lie on the creditor seeking to have their proof admitted to establish their claim.

The judge found that, on the basis that the correctness of the supervisor’s decision is not in issue and instead the matter is considered afresh in a re-hearing capacity rather than a review of the decision taken, it must follow that it is for the creditor asserting the claim to prove it. Specifically, in his judgment Mr Justice Fancourt stated:

‘…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.’ para [20]

Interpretation of the contract

On the issue of the interpretation of the JCT contract, Fancourt J summarised the legal principles that emerged from the relevant authorities, as follows:

  • it is a question of construction of the contract whether provision of a certificate in accordance with its express terms is a condition precedent to liability
  • the amount so certified must be paid but is not conclusive and can be challenged later by arbitration or court proceedings but that does not mean liability exists irrespective of certification, where it is required by the contract
  • if a certificate is a condition precedent, the payer cannot, in 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
  • subsect to HGCRA 1996, s 111, 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
  • 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 instead an account will be taken at the conclusion of the works
  • 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

Further, the judge found that the payment provisions in clause 6.7 of the JCT contract applied automatically upon Farrar becoming insolvent, and replaced the operation of the interim payment process set out in clauses 4.3–4.8. Under clause 6.7, the contract administrator was required to issue a certificate within three months of the completion of the works setting out the final sum payable under the contract, which would result in a debt due by one of the parties to the other. However, the judge found that the three-month timescale specified in clause 6.7 was not ‘strict’—ie the provision of a certificate within that timescale was not a condition precedent to a debt arising under clause 6.7. This meant that JKR could arrange for the issue of the certificate and pursue Farrar for any sum due by it, at any time before the expiry of the relevant limitation period.

Based on those principles from the authorities, coupled with submissions relating to the interpretation of the relevant provisions in the JCT contract, the Court held that JKR’s proof should be accepted by the supervisor of the CVA, Mr Wilson, in the revised sum of £128,921.70.

Case details

  • Court: Insolvency and Companies List (ChD), Business and Property Courts in Leeds, High Court of Justice
  • Judge: The Honourable Mr Justice Fancourt
  • Date of judgment: 14 January 2021