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Serving a winding up can be a quick and relatively cheap way of encouraging a debtor to pay. However, can a failure to pay following the issue of an interim certificate really result in debtor insolvency, despite the possibility of there being arguments as to the validity of the sums included in the certificate?
Interim certificates are the mechanism whereby the contractor is due payment throughout the lifetime of the works. Generally speaking the sums included in interim certificates reflect the value of the work completed in the relevant time period.
Interim certificates are not designed to be a final determination of what is owed to the contractor, but assist with the contractor’s cash flow during the project.
In the majority of building contracts, the contract administrator will decide what sums are due to the contractor and the employer must pay such sums in the time period stipulated in the contract. If the employer disagrees with such sums, he can serve a pay less notice.
If he does so, he is only obliged to pay the sum specified in the pay less notice.
If the employer fails to pay the required sums to the contractor in the stipulated time period, the sums are due as a debt.
The starting point is that the courts will not prevent insolvency proceedings against a party refusing to pay an indisputable debt. On the other hand, courts will generally strike out a winding up petition if the debt is disputed on genuine grounds.
Difficulties arise due to the differing approaches between construction and insolvency legislation. The position under the Insolvency Act 1986 is that all disputes have to be taken into account when deciding if a debtor is insolvent, except in ‘special circumstances’.
Conversely, it could be argued that not allowing a winding up petition in the case of a debt arising from an unpaid interim certificate might undermine the position under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act), that such debts are ‘indisputable’ and are due without question.
Perhaps unsurprisingly given that interim certificates are not finally determined; the insolvency courts have shown an unwillingness to consider them as amounting to ‘special circumstances’. The courts have held that the ‘indisputable’ nature of an unpaid interim certificate will not automatically render them ‘indisputable’ under insolvency law.
However, in an effort not to allow the Insolvency Act to entirely trump the Construction Act in such cases, the courts have applied an important qualification. Rather than just accepting the debtor’s word that he disagrees with the interim certificate, judges have insisted he demonstrates he has a genuine dispute and is serious about pursuing it, usually by starting his own adjudication against the certificate.
For example, where a debtor has foregone a ‘reasonable opportunity’ to adjudicate, the court would usually allow a winding up petition to succeed.
The courts’ approach has been recently upheld in Wilson. In this case, a petition was founded on four interim certificates with over £900,000 outstanding. To avoid insolvency, the debtor had to demonstrate that he had a ‘substantial and genuine’ cross claim.
On the facts, it was found that as he had previously acknowledged the interim certificate sum was due, the debtor’s cross claim was a ‘put up job’ rather than a genuine dispute. The injunction to prevent the winding up petition was therefore refused.
So what should you do if you are presented with a statutory demand or a winding up petition for sums arising from an unpaid interim certificate?
What is clear from the case law is that just because a debt is indisputably due under the wording of the Construction Act, it does not mean it is given special weight under insolvency legislation.
However, the burden of proof on the debtor is high – you must show that there is a good prospect that the debt will eventually be found not to be due and that you are taking steps to bring that outcome about (eg adjudication).
In any case, it would be prudent to raise your concerns about the disputed sum as early as possible, to see if an agreement can be reached before commencing proceedings.
In other words, proactivity is key. The courts have shown that they will be unwilling to offer protection from insolvency proceedings to a debtor who has not challenged an unpaid interim certificate.
  EWHC 2875 (CH)
This article was written by Rob Easton.
For more information please contact Rob on +44 (0)1483 252622 or email@example.com.