Winding up petitions rarely appropriate to recover sums due under a construction contract

In the recent case of Breyer Group plc v RBK Engineering Ltd [2017] EWHC 1206 (Ch), the High Court confirmed that winding up proceedings will rarely be an appropriate forum to recover sums due under a construction contract, particularly in circumstances where the debtor is withholding payment due to defective works or a legitimate cross claim. This judgment follows the case of Wilson and Sharp Investments Ltd v Harbour View Developments [2015] EWCA Civ 1030 which we covered at our annual Construction Seminar in 2016.

To recap, in Wilson the contractor issued interim certificates for payment totalling £1.2m which the debtor failed to pay. The debtor alleged that it had cross-claims exceeding the value of the certificates issued, albeit the debtor had not issued ‘pay less notices’ to dispute the interim certificates. The Court of Appeal found that, although they had not been tested or explored in any depth, there were reasonably arguable cross-claims which could not be determined in the context of winding up proceedings. The fact that the debtor had accepted that interim payments had become due (by virtue of its failure to serve pay less notices) did not preclude it from later challenging items which it disputed.

In Breyer, RBK undertook construction works for the Breyer Group in 2015/2016 under the terms of an agreed contract. Further works outside the scope of the 2015/2016 contract were then carried out by RBK without an agreement as to the applicable contractual terms (a contract was drawn up after the works were carried out but had not been agreed). Due to the lack of a contract, a dispute arose as to the terms and quality of work and the period for payment of RBK.  Consequently, RBK issued a winding up petition against Breyer for unpaid sums relating to goods supplied and services rendered.

In striking out the petition against Breyer, the Court found that the presentation of a petition by RBK in such circumstances amounted to unfair commercial oppression and an abuse of process. The appropriate forum for resolution of the dispute was through adjudication (under the Scheme for Construction Contracts) or in ordinary civil proceedings. Breyer was not insolvent: due to the underlying dispute, this was “not a case of can’t pay, but won’t pay”.

Tim Carter, Partner and co-head of the Restructuring & Insolvency team commented: “This is a sensible outcome based on established principles in relation to winding up proceedings. A petition should not be used to pressurise a debtor into paying a debt which is the subject of a genuine dispute, and especially in relation to construction contracts where adjudication is designed to deal with precisely these types of issues”. Carter also added that “creditors who issue a petition for a disputed debt risk an application to restrain advertisement and an adverse costs order against them.”