Are winding up petitions an appropriate method to recover sums due under a construction contract?

25 Sep 2017 | Comment


The recent High Court decision in Breyer Group Plc (Breyer) v RBK Engineering Limited (RBK) [2017] EWHC 2196 (TCC) has confirmed that it is rarely appropriate for a party to issue a winding up petition to recover sums due under a construction contract. In particular, the court held that it was rarely appropriate to issue a winding up petition to recover sums that are disputed due to alleged defective works or other legitimate cross claims.

The Contract

In May 2015, RBK entered into a sub-contract with Breyer to carry out kitchen and bathroom refurbishment works at a project in Sutton (the Contract).  As is usual with construction contracts, the Contract contained detailed payment provisions which required:

  • RBK to submit its application for payment no later than three working days before the payment due date (“the Payment Due Date”).  The application had to set out the gross value of the works to date, and had to include such details as Breyer “may reasonable require” to allow it to check and verify the amount in the payment application.
  • Breyer’s payment notice was due not later than five days after the Payment Due Date and, subject to any pay less notice, Breyer has to pay the sum set out in the payment notice.

In addition, an appendix provided the timings for the applications and notices.

In early 2016, Breyer required RBK to undertake further work and although a draft contract was circulated the terms were never agreed. It would seem that both parties continued working on the same terms as the Contract, at least as far as interim payments was concerned.

The dispute

Following RBK’s final application for payment (2 February 2017) a dispute arose concerning Breyer’s payment notice (1 March 2017) and whether it had been issued out of time.

As a result of non-payment, RBK issued a winding-up petition claiming that Breyer was indebted to it in the sum of £257,729.16.  It claimed that Breyer has admitted it was unable to pay its debts as they fell due, specifically a number of instalments due under a valuation.  Breyer contended that it had the means to pay but had chosen not to, as it had a range of reasonable defences to the claim as well as a potential substantial counterclaim.

The decision

In striking out the winding up petition the court held that:

  • Breyer was ‘plainly not insolvent’ this situation was ‘not a case of can’t pay, but won’t pay’;
  • the court held that a ‘genuine dispute’ had arisen between the parties to which Breyer’s defence and counterclaim were fairly arguable.  Breyer’s position was predicated on its concerns regarding the quality of RBK’s work, together with a dispute about which contract terms were operative;
  • disputes of this nature are wholly unsuited for resolution in insolvency proceedings– the appropriate forum was either adjudication (under the Scheme for Construction Contracts) or ordinary civil proceedings; and
  • to allow RBK to continue these insolvency proceedings would be oppressive and constitute an abuse of process.

Comments

The court has acknowledged that winding-up petitions often pressure parties into paying in full, rather than facing the consequences of the petition being advertised.  It noted that this can operate as a form of ‘commercial oppression’, which can be a source of disproportionate injustice.

As such, a winding up petition should not be used to pressure a debtor into paying a debt which is the subject of a genuine dispute and specifically in relation to construction contracts where adjudication is designed to deal with these types of issues.

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