Insolvency Update – Challenging proofs of debt in a CVA

04 Mar, 2022

Why is the case interesting?

The judgment in Re Farrar Construction Ltd is a welcome authority on the issue of the burden of proof in circumstances where one creditor challenges the admission of a proof of debt from another creditor.

Background to the case

The case was an application to court under Rule 4.83(2) of the Insolvency Rules 1986 by Levi Solicitors LLP, as a major creditor of Farrar Construction Limited for relief in relation to a proof of debt of JKR Property Development Ltd . The proof was admitted by David Wilson who was the supervisor of Farrar’s Company Voluntary Arrangement.

Under Rule 4.83(2), a creditor who is dissatisfied with a liquidator’s decision on another creditor’s proof may apply to the court for the decision to be reversed or varied. On such an application, the court conducts a re-hearing rather than a review of the liquidator’s decision. The court’s task is to examine all relevant evidence and decide whether, on balance, the claim against the company is established, and if so in what amount.

Levi sought directions from the court that JKR’s proof of debt should be rejected on the basis that it was not sufficiently established. 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 was no longer in issue. 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.

What did the court decide?

The court noted that, up until now, no authority had established where the burden of proof lies when 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 of a CVA. It was Levi’s position that the burden should lie on the creditor seeking to have their proof admitted establishing their claim.

The judge found that, in situations where the matter is considered in a re-hearing capacity rather than a review of the decision taken, it is for the creditor asserting the claim to prove it. 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.”

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