Administration vs. Company Voluntary Arrangement – Differences in a construction context

UK Government figures show that the number of companies entering formal insolvency processes has increased to its highest level since the 2008 financial crisis. The construction industry is the most affected sector. There have been several high profile contractor insolvencies recently, in particular the summer has seen a raft of companies entering into administration – including Henry Construction Projects Limited – with Company Voluntary Arrangements (CVAs) seemingly having fallen out of favour.

Given the trend we are seeing towards companies entering administration, we provide what is hopefully a useful comparison of administration and CVAs.

There are a number of formal insolvency procedures in the UK. The process by which a company’s affairs are wound up, eventually resulting in the company’s dissolution, is liquidation. A company cannot trade while it is in liquidation.

Unlike liquidation however, administration and CVAs are (in theory) focused on rescuing the business. In each case, it is possible for the company to continue trading. We consider their unique features, particularly in the context of construction projects.

CVAs

Description: A CVA is a deal between an insolvent company and its unsecured creditors. It binds all unsecured creditors according to its terms, provided it is approved by a majority of unsecured creditors through a decision process. Although it takes contractual form, it is backed up and forced upon creditors by statute. Without the creditors’ consent, the CVA does not start.

CVAs are bespoke contractual arrangements as between the company and its creditors.  Typically, it differentiates between classes of creditors.  For example, suppliers of building materials may be treated as critical to the continued trading of the business and so may be treated under the CVA as having all its claims paid in full. 

The CVA may also single out some profitable contracts for completion, with obligations under less profitable contracts/projects being fully compromised/disregarded under the CVA.

Objective: A CVA is intended to provide a better outcome for unsecured creditors than immediate administration or liquidation and can only be proposed if, on its terms, it provides for such an outcome.

Control: The directors of the company remain in control after a CVA is approved and can continue to trade.

Can claims be pursued: The CVA binds all unsecured creditors and its terms invariably prevent unsecured creditors from enforcement action against the company. The CVA generally does not bind secured creditors who remain able to enforce their security. A creditor may challenge a CVA for being unfairly prejudicial (or on the grounds of material irregularity) but there are very strict timescales within which to do so.

Effect on construction contracts: Close attention needs to be paid to the terms of the individual contract however, approval of a CVA is usually treated as an insolvency event giving rise to a right to terminate construction contracts.  Some developers, particularly those towards the very end of the project, may prefer not to terminate the contract and have the company proceed to completion and carry out snagging.  Save in those limited cases, terminating the contract is likely to be appropriate.  

Administration

Description: A company usually places itself into administration (sometimes with court sanction) to provide (by default) 12 months’ breathing space from claims in order to do achieve one or more of three statutory objectives. Creditors have an opportunity to consider and approve the administrator’s proposals but an administrator is appointed without creditor consent.  This is normally done where administration is likely to provide a better outcome than liquidation.

Objectives: The statutory objectives are (1) rescue the business as a going concern; (2) achieve a better result for the company’s creditors as a whole than would be likely if the company entered liquidation immediately; (3) realise assets in order to make a distribution to secured or preferential creditors.

Control: The Administrator takes over control of the company once the company enters administration. The directors remain in office unless removed and can be permitted to run the company by the Administrator.

Can claims be pursued: Administration brings a statutory moratorium into effect, meaning claims cannot be pursued against the company without permission of the Administrator or the court, including enforcement action by security creditors. In a recent exceptional case, NHBC obtained default judgment against Mizen Properties Ltd; it is possible but very rare.

A creditor cannot challenge administration solely on the grounds of unfair prejudice, unlike a CVA, but it can challenge the appointment of the Administrator if sufficient creditors support such a course of action.

Effect on construction contracts: Entry into administration is almost always treated as an insolvency event giving rise to a right to terminate construction contracts.  That said, it is always vital to scrutinise the terms of the contract to ascertain the position.

CVAs and administration

A company in administration can propose a CVA, in which case the court can decide to bring the administration to an end. Similarly, a company in a CVA may enter administration, usually where the CVA fails.

Considerations for developers

Both these procedures focus on business recovery and/or limiting the damage that the company’s insolvency will have on creditors. However both these procedures often conclude in the long run, with liquidation.  This invariably means that developers need to take quick action and take steps to ensure successful delivery of affected projects.

This almost always involves considering whether it is in the best interests of the developer and the project as a whole to terminate the building contract, notwithstanding that the insolvent company can continue to trade during either process.  If that is a course of action the developer wishes to pursue, specific legal advice should be sought, and weighed alongside other commercial considerations.