Farrar Out

Following the insolvency of Farrar Construction Ltd (“Farrar”), one of Farrar’s major creditors – Levi Solicitors LLP (“Levi”) – sought direction from the Court that a contingent creditor’s proof of debt should have been rejected. The contingent creditor, JKR Property Development Limited (“JKR”), had employed Farrar as contractor under a JCT Minor Works 2011 Contract (the “Contract”). JKR claimed it had overpaid for the works following the issuing of a final certificate under the Contract and their proof of debt was accepted by the company voluntary agreement (CVA) supervisor.

Bringing an application under the Insolvency Rules 1986, Levi argued that JKR’s proof of debt should not have been accepted as it had not been established. Specifically, Levi contended that JKR could not claim repayment of sums paid to the Contractor because the procedure set out in clause 6.7 (relating to the consequences of termination for insolvency or corruption) had not been followed. In the alternative, Levi claimed that JKR’s failure to issue a valid Final Certificate was fatal to their claim.

To decide the case, the Court was required to both:

1. Establish which of the Contractor’s creditors possessed the burden of proof in the case (JKR in seeking to establish their claim, or Levi in seeking to disrupt the supervisors’ decision); and
2. Interpret the provisions of the Contract from which the proof of debt had been derived.

On the first issue, the Court said that it was not the correctness of the supervisor’s decision which was at issue, but rather whether the disputed claim had been established. As such, the case constituted a “re-hearing” of the issue and so “the proving creditor should have to make good their claim” to ensure the “legal and evidential burden” were able to coincide.  Accordingly, the court held that the burden of proof lay with JKR..

On the second issue, the Court interpreted the payment provisions of the Contract with reference to the relevant provisions of the Construction Act and in accordance with ordinary principles of contractual interpretation. In a judgment which will be of interest to many in the construction industry, the Court held:

• That the JCT regime for interim and final certificate at clauses 4.3 – 4.8 of the Contract fell away post-insolvency (regardless of whether the Employer had terminated the Contractor’s engagement) and the contractual regimes governing termination for insolvency took their place as the means of determining the sums which were due; and
• That the three-month time limit for the Architect/Contract Administrator to issue a certificate setting out the balance payable between the parties is not a strict time limit and so a certificate could be issued at any time before the expiry of the limitation period.

On interpretation of the Contract, the Court held that JKR’s proof of debt should be accepted by the supervisor of the CVA (albeit for a marginally revised sum as agreed by the parties).

This case clarified that where one creditor to an insolvent contractor disputes another creditor’s proof of debt, the burden of proof lies with the creditor seeking to establish its debt.

For JCT employers who suffer the misfortune of having to deal with an insolvent contractor, this case should provide clarification that the relevant termination provisions will apply automatically upon insolvency, replacing the operation of the ordinary interim payment process in clauses 4.3 – 4.8.  In addition, the Court’s conclusion that the three-month time limit for setting out the balance payable between the parties following Contractor insolvency is not a strict time limit is likely to reassure employers. For those in a similar position, this case may provide confidence that a claim will not be time-barred if that timescale is not complied with.

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