After having have gone through and won an arduous Adjudication and enforcement of the Adjudicator’s decision in the TCC, Contractors often bemoan the fact that they have ended up empty handed because the non-paying Employer has since become insolvent and is unable to pay its debts.

A building Contractor can take steps of prevention against the Employer’s non-payment under the building contract by obtaining a payment guarantee or bond from them, at the time when the building contract is made. This “up front” security for payment under the contract before starting the work on site, is better protection for the Contractor than the attempted cure of Adjudication and enforcement in the Technology and Construction Court (TCC), if the Employer later becomes insolvent and is unable to pay the debt claimed.

When an Employer gets cross on service of a Statutory Demand

A Contractor that suspects the Employer is on the verge of insolvency, in the midst of an Adjudication, or on enforcement of an Adjudicator’s decision, can serve a Statutory Demand or a Winding Up petition on the Employer in an attempt to force them to pay up the debt owed to them.

The court will not allow a Winding-Up petition to be served on a company based on a Statutory Demand where the debtor has a genuine cross-claim or right of set-off against the creditor which is equal to or exceeds the amount claimed in the demand. 

The Winding Up procedure must not be an abuse of process

If the court agrees with the debtor Employer that the petition was not presented in good faith or for the legitimate purpose of obtaining a Winding Up order, but rather for other purposes, such as putting pressure on the debtor company it could be set aside, stayed or stopped by an injunction.

Is the debt disputed?

The court will wind up the debtor Employer if the debt is genuinely disputed by them on substantial grounds, namely where the debtor Employer has a genuine and serious cross-claim for an amount equalling, or exceeding, the debt owing to the creditor.

The crucial question is whether the Contractor genuinely wishes to wind up the Employer debtor or whether the issue of a Winding Up petition is an abuse of process. The debtor Employer would have to make an application to the court to set it aside or for an injunction and it would be for your creditor Contractor to defend the application in court.

Genuine cross claim on substantial grounds

The case of Medlock Products Limited -v- SCC Construction Limited [2006] CILL 2384 is relevant to circumstances where the Contractor seeks to stop the presentation of a Winding Up petition against them on the grounds that it has

genuine cross claims against the Sub-Contractor (or indeed against the Employer).  The principle is that if debts are disputed on bona fide substantial grounds, a cross claim is a bona fide set off and has genuine prospects of success then the court must not allow the Winding Up Petition to proceed to be presented. The legal

authorities supporting this principle are Bay Oil -v- Seawind [1998] BCC 908 in relation to cross claims and In Re A Company 685 of 1966 reported at [1977] BCC 830.

Cross claims in the absence of a payless notice

Medlock Products Limited -v- SCC Construction Limited [2006] CILL 2384 is therefore authority for the principle that failure to serve a valid withholding notice (now a payless notice) where required shows that there is no genuine cross claim.  In holding that construction contracts require a written withholding notice (payless notice) if monies are to be set off the Judge concluded:

In Guardi Shoes Limited -v- Datum Contracts [2002] CILL 1934 in an Adjudication Guidi alleged defects in Datum’s work but they had not issued a withholding notice. Datum obtained an Adjudicator’s decision in its favour and served a Statutory Demand on Guidi for the balance. A Winding Up petition was obtained. Guidi applied for and obtained an injunction. The court refused to grant Guidi a continuation of the injunction because they had not served a Section 111 withholding notice and in those circumstances they could not show that the presentation of the petition was an abuse of process.

However, a more recent decision that allowed a cross claim to defeat and to set aside a statutory demand is that of Shaw & Anor -v- MFP Foundation & Piling Limited [2010] EWHC (Ch). The Statutory Demand was issued by the Contractor after it had obtained summary judgment enforcement of the Adjudicator’s decision. The court said that it was not enough for the contractor to argue that the cross-claim should have been raised in the adjudication (the employer had taken no part in the adjudication) and the fact that the Adjudicator’s decision had been endorsed in the TCC was not relevant and was not a factor that would affect the court exercising its discretion where there was a genuine cross claim. The court therefore set aside the Statutory Demand.

Generally, even if the Adjudicator has decided in the Contractor’s favour and even if the Contractor has satisfactorily obtained summary judgment in enforcement of the Adjudicator’s decision, the Employer’s genuine cross claim in the insolvency will trump the Adjudicators’ decision or the TCC’s decision, if the Employer applies for an injunction to stop the insolvency.

A far better approach for the Contractor to take is to obtain “up front” security against non- payment, at the outset. Taking this preventative action is not only more cost effective than the attempted cure of the Adjudication process, it represents insurance against non- payment by an Employer, who is later found to be unable to pay its debts. It avoids the Contractor, after all legal action has been taken by them to recover sums owed to them, from ending up empty handed at the end of a hard- fought Adjudication, because of the Employer’s insolvency. In this way prevention can be far better than the cure.

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