Is the winding up route a viable solution for non-payment?

Cash flow is the life blood of every construction company. Failure to manage cash flow could lead to the demise of the company, which makes getting paid quickly by clients crucial. When faced with non-payment of an interim certificate, there are a variety of recovery options that are available. However the burning question is: what is the best way to enforce interim payments?

The recent Court of Appeal case of Wilson and Sharp Investments Ltd v Harbour View Developments Ltd [2015] EWCA Civ 1030 answered this and has highlighted the implications of choosing potentially the wrong forum when pursuing an employer for payment of interim payments due under a construction contract.

Events

In this case, Wilson & Sharp Investments Ltd (the employer) engaged Harbour View Developments Ltd (the building contractor) to carry out works under an unamended version of the JCT Intermediate Building Contract with contractor’s design, 2011 Edition. The employer refused to pay three interim certificates amounting to approximately £1 million when the project was running late and over-budget without explanation from the contractor or contract administrator. The employer however, failed to serve pay less notices as they were not properly advised. Accordingly, the sums certified became due and payable.

Rather than commencing adjudication to recover the sums certified, the contractor threatened to present a winding-up petition, as an unsecured creditor, against the employer based on the non-payment of the sums due. Issuing a winding-up petition is the most serious action that a creditor can take in response to non-payment of a debt.

The employer applied for an injunction to prevent the contractor presenting the petition, on the grounds that the interim certificates had grossly overvalued the contractor’s works. Alternatively, the employer relied upon the fact that the contractor had by then become insolvent and was likely to enter into liquidation imminently. In such circumstances the interim payment obligations should not be enforced and/or under the terms of the JCT contract, the employer was no longer required to make any further payments, even though pay less notices had not been issued.

Decision

The Court of Appeal unanimously decided that because the contractor was insolvent, pursuant to the terms of the JCT Intermediate Building Contract with contractor’s design, 2011 Edition agreed by the parties, the employer no longer had to fulfil its interim payment obligations. It did not matter that the contract had been terminated for other reasons six months prior to insolvency.

The employer may have had to later pay a balancing payment once a final account was prepared but based on re-valuations by a new contract administrator there were “substantial disputes” between the parties that could not be appropriately determined at that stage. The fact that the debts were due and no pay less notices were served did not prevent the employer from raising a cross-claim for over-valuation and damages for repudiatory breach. The later re-valuations were adequate to establish a good enough claim for the purposes of an injunction. The effect of this decision is that it is no longer the law that a debtor is not entitled to an injunction where he has not litigated his cross-claims.

The Court of Appeal ultimately decided that winding-up proceedings by their very nature were not the correct forum to examine the substantial disputes between the parties and so a permanent injunction restraining the contractor from presenting a winding-up petition was granted.

Comment

The key lesson of this case is that a winding-up petition should not be used to enforce an interim payment obligation, where the employer challenges the valuation or has a genuine cross-claim. In determining this issue, the employer will not be prejudiced by the absence of a pay less notice or the fact that it has not started adjudication or other proceedings against the contractor, if it has reasons for not doing so.

With the benefit of hindsight it would have been more effective for the contractor if it had addressed its interim payment dispute to adjudication – the very mechanism designed for quick interim decisions in the construction industry. On the basis that the employer had failed to serve a pay less notice the contractor would have been likely to get an adjudication decision in its favour. If it acted quickly it could then have enforced the decision in the TCC prior to its insolvency, leaving the employer subject to a court order to pay the interim payments due and having to rely on later interim certificates or the final certificate as a basis to recover any overpayment.

In conclusion it is evident that this brief insight into the most recent position in relation to the routes of recovery in construction interim payment disputes highlights the importance of adjudicating instead of issuing a winding-up petition in circumstances where the debt is known to be disputed.