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Can you wind-up a company for failure to serve a payment notice or pay less notice?

29 November 2013

The new Construction Act contains a default mechanism which means a sum applied for by a contractor will become irrevocably due on an interim basis if no payment notice or pay less notice is served. These provisions are designed to assist the cash flow of contractors and are intended to be enforced through adjudication. However, some contractors have started to try to enforce their rights to such an interim payment by filing winding up petitions against their employer, rather than commencing an adjudication.

The effectiveness of this tactic was considered in the recent case of R&S Fire and Security Services Limited v Fire Defence plc. [1]

Winding up petitions can generally be challenged on two grounds:

  1. the petition debt is genuinely disputed on substantial grounds, or
  2. the company has a genuine and serious cross-claim of an amount in excess of the otherwise undisputed petition debt.

The court held that as the employer had failed to serve a payment notice or a pay less notice in respect of the contractor's application, it was bound to pay the sum applied for - it was irrelevant that it had disputed such sums in previous valuations. The petition debt was therefore not open to dispute.

However, in respect of the second potential ground for challenge, the court held that there was a clear difference between enforcing an adjudicator's decision in the Technology and Construction Court (TCC) as a platform for normal enforcement proceedings and seeking to use that decision as a basis for insolvency proceedings. In addition, simply because an employer is obliged to make an interim payment, that does not preclude him from challenging the disputed items at a later stage.

The court found that the employer had a genuine cross-claim due to alleged delays that exceeded the petition debt and so the petition was struck out. 

Steven Carey, Partner in our Construction, Engineering & Projects team, commented:

"This case shows that if employers fail to serve the required payment notice in respect of a contractor's application, they can still defend insolvency proceedings if they have genuine cross-claims, such as for over-valuation, defective work or damages caused by delay - even if such cross-claims could not be raised in an adjudication as the relevant payment notices had not been served.

The courts acknowledge that the Construction Act is underpinned by a policy of 'pay now, argue later'. They are willing to allow contractors to claim interim payments arising under this default mechanism through adjudication, judgment in the TCC and ultimately enforcement methods such as sending round the bailiffs. However, due to the serious and irreversible consequences of placing a company in liquidation, they are not willing to allow this default mechanism to form the basis for winding up a company that would otherwise have a genuine cross-claim.

A final word of warning: the insolvency courts will wind up a company for a failure to pay such debts if it cannot be shown that the cross-claim is genuine and serious - they want to see some proper evidence underpinning the cross-claim and that it is being progressed."

[2013] EWHC 4222 (Ch)

For more information please contact James Worthington, Associate

T: +44 (0)20 7427 1070