Many of us in the construction industry seem to be hearing the same old bed time story over and over again: A instructs B to do the work; B does the work; A does not pay B; for months the parties dispute the level of payment due; B becomes fed up waiting for payment and takes steps to wind up A.

Is this the most appropriate way to deal with a disputed debt?

From an economical point of view, it is preferred if parties can correspond with one another to resolve a disputed debt. After all, they may have a good working relationship which they will be keen to preserve and do have the most knowledge of the contract at the centre of the dispute. Relationships can deteriorate rapidly in the event that parties fail to fulfil their contractual obligations regarding payment timeously.

That having been said, you can only listen to the words, “the person dealing with this is in a meeting” or “a cheque is on its way” for so long. Soon, parties become paranoid and what could be genuine comments are considered to be stalling tactics. With those in the construction industry still feeling the raw effects of the recession, it is perfectly conceivable that the promised cheque may never arrive.

But can the non-paying party relax in the knowledge that a court is unlikely to grant a winding-up order if the debt is genuinely disputed? The recent case of Lachonta Foundation v GBI Investments Limited [2010] EWHC 37 (Ch) would suggest not. In most cases, a court will dismiss a winding-up petition if there is a genuine dispute between the debtor and the petitioning creditor about whether the debt is due. In this English case however, the High Court placed a company into compulsory liquidation, even although the company had legitimate grounds to dispute the debt that the winding-up petition was based on.

Through case law, it has been accepted that, in exceptional circumstances, the court has discretion to place a company into compulsory liquidation, despite there being a dispute about whether the debt is due. This court decision is the first to consider the specific factors that the court should take into account when deciding if the circumstances of a case are exceptional. The following factors are relevant:-

  1. Does the petitioning creditor have an adequate alternative remedy to compulsory liquidation?
  2. Would the debtor company be solvent, if the court were to discount the petition debt?
  3. What prejudice, if any, would the debtor company suffer if the court made the winding-up order?

In this case, the court granted the winding-up order. So debtors be warned: if your balance sheet is not looking too healthy, you may be at risk of being wound up. A court needs to consider what the most appropriate course of action for both a debtor and creditor is. It would be wrong to regard winding up a company as an idle threat. Nowadays, creditors are increasingly aware of their options to recover a debt and will not hesitate to pursue them. Lachonta confirms that courts will not hesitate to support them.

If you have outstanding debts, don’t bury your head in the sand – seek legal advice.