Under the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act 1996”), a party to a construction contract is entitled to payment by instalments1 and the parties are free to agree the amounts of the payments and intervals at which, or circumstances in which, they become due2. The resulting request for payment is made by way of issue of an “interim certificate”.
Whilst the parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment3, the payer must ensure that it pays the notified sum (to the extent not already paid) on or before the final date for payment4.
An employer’s failure to make payment to its contractor pursuant to an interim certificate by the final date for payment constitutes a debt which entitles the contractor to commence an insolvency process against the employer, which could lead to an order for the winding-up of the employer.
This briefing note considers the impact of a dispute on the ability to take such action. The comments below relate to debts of corporate entities. Different rules, provisions and considerations apply in relation to debts of individuals, and these are not addressed in this briefing note.
Winding-up for the non-payment of debts under interim certificates
A winding-up order may be made against a company by the court if it is satisfied that it is unable to pay its debts5. One way in which inability to pay can be demonstrated is by showing that the company has failed to comply with a written demand for payment (a statutory demand) 6.
Special considerations where the debt is disputed
However, where a debt is the subject of a bona fide dispute on substantial grounds or where it is the subject of a “genuine and serious”7 cross-claim which exceeds the value of the debt, the contractor may face an application by the company to restrain the presentation (or advertisement) of a winding-up petition. In considering such an application, the court will apply some well- established principles8:
- A petition can only be presented by a creditor and where the debt is substantially disputed, the petitioner cannot be considered a “creditor”.
- Even where it appears that the company is insolvent, if the debt is substantially disputed then the petitioner ought to be restrained from proceeding on their petition.
- To invoke the winding-up jurisdiction when a debt is disputed on substantial grounds, after it becomes clear that it is so disputed, is an abuse of the process of the court.
As such, a winding-up order will not be made on the basis of a debt which is disputed on bona fide substantial grounds9.
The court will also refuse to permit the presentation of a petition where the employer has a “genuine and serious cross- claim ...except in special circumstances” for an amount which exceeds the petition debt10.
In the recent case of Wilson and Sharp Investments Ltd v Harbourview Development Ltd11, Harbourview was employed by Wilson and Sharp in respect of two building contracts for the development of student accommodation in Bournemouth. The court was required to exercise its discretion in considering whether to restrain the presentation of a winding-up petition founded on four interim certificates totalling £1.2 million (of which some £902,500 remained outstanding) issued under the building contracts, where a cross-claim was alleged.
Supporting the reasoning in earlier cases12 the court declared that Harbourview’s claim on the interim certificates was not open to challenge, but went on to consider whether Wilson and Sharp had a substantial and genuine cross-claim, which was alleged to result from the works having been overvalued and Harbourview having been overpaid.
The court determined on the facts that Wilson and Sharp’s cross-claim was a “put- up job” designed to prevent Harbourview from presenting a winding-up petition for sums that were previously acknowledged to be due and owing.
Whilst on the facts of this case, the application to restrain presentation of the winding-up petition failed, the court recognised that in construction contracts there are often genuine and serious cross- claims that will justify the court exercising its discretion to grant injunctive relief.
Cross-claims could be founded on issues including the over-valuation of interim certificates or defective works that were the subject of interim certificates.
In any event, the courts will retain discretion as to whether to restrain the presentation of a petition in cases involving unchallenged interim certificates, “such discretion to be exercised by having regard to all the relevant circumstances”13.
If, as an employer, you genuinely dispute on bona fide substantial grounds a claim for payment by a contractor or have a genuine and substantial cross-claim, you should:
- Respond to a payment notice by serving a pay-less notice promptly, giving notice to the contractor of your intention to pay less than the notified sum. Failure to do so may amount to acceptance of the debt.
- In formulating a cross-claim, you should work as quickly as possible to quantify your claim and ensure it is brought to the attention of the contractor without delay.