A permanent injunction restraining a building contractor from presenting a winding-up petition against its employer has been granted by the Court of Appeal.

Lawyers often use a statutory demand and winding-up petition as a tool for encouraging payment. Such proceedings can present a serious threat to a business.

In a recent decision[1], the Court of Appeal has given a broad interpretation to the JCT provisions dealing with suspension of payment following contractor insolvency.

The contractor was employed to carry out works at two sites in Bournemouth. The parties entered into a separate contract for each site[2].

In August and September 2013, the contract administrator issued 4 interim certificates with a total value of £1.2 million. Only one of the 4 interim certificates was paid. Payment of the remaining 3 certificates was not made until after the final dates for payment had stopped. The employer failed to issue pay less notices.

The contractor suspended its services for non-payment. The contract was subsequently terminated in late January 2014 when both parties served notice of termination. The contractor notified the employer of its intention to present winding up proceedings against the employer. When the employer’s application was heard in July 2014, the contractor had arranged a creditors’ meeting for the day after the hearing, with a view to appointing a liquidator for its winding up. The employer issued an application for an injunction to restrain the contractor’s winding up petition. The employer’s grounds for appeal were accepted:

  • The proposed petition was disputed on substantial grounds. Specifically, the building contract allowed the employer to avoid payment if the contractor became insolvent after the deadline for issuing a pay less notice had passed.
  • The employer had significant and genuine cross claims which exceeded the sums allegedly due under the outstanding interim certificates.

The scope of the paying party’s right to refuse payment arguably goes beyond what was anticipated when the law[3] was amended. The payer is allowed to avoid payment if the receiving party becomes insolvent after the deadline for giving a pay less notice had passed, but before the final date for payment[4]. However, this judgment suggests that the fact that the contractor had become insolvent sometime after the certificates were issued and after its employment under the building contract had been terminated, was irrelevant.

The contractor’s choice of forum was unusual. Interim payment disputes are usually addressed through adjudication and enforcement proceedings in the TCC. In the absence of any pay less notices in this case, the contractor may have found that adjudication presented an easier route to recovery of unpaid sums.

Notwithstanding the decision in this case, paying parties would do well to avoid creating a position where a statutory demand and subsequent winding up proceedings can be served. If the sum notified in a payment notice is disputed, the paying party should serve a pay less notice promptly. Failure to do so could amount to acceptance of the debt.

In formulating a cross claim, quantify the claim as quickly as possible and ensure that it is brought to the attention of the other side at the earliest opportunity.

It is important to note that there is a short window of 21 days within which to respond to a statutory demand. It is prudent to seek legal advice as early as possible to protect your position, even if settlement negotiations are ongoing.

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[1] Wilson and Sharp investments Limited –v- Harbour View Developments Limited [2015] EWCA Civ 1030

[2] both using the JCT ICD 2011

[3] Construction Act 1996

[4] Section 111

3 thoughts on “Failure to pay… are you winding me up?

  1. Deprived of legitimate payment for the work done is a great pain for the Contractor. Good to see that Court of Appeal has taken a right stand. Thanks for sharing this.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.