Charles Edwin Edwards MSt(Cantab) MSc(Lond) FCInstCES Barrister
Charles Edwards, construction barrister and head of chambers at Gray’s Inn Construction Chambers, reviews the case of Breyer Group Plc v RBK Engineering Limited [2017] EWHC 1206 (Ch). This case will be of interest to the construction industry as more and more companies within the industry consider whether issuing a winding-up petition might be the right course of action to take due to non-payment for construction works carried out or whether to start adjudication proceedings or proceedings generally.
The Chancery Division of the High Court considered an application by a construction company to strike out a winding-up petition presented against the company by a Sub-contractor. The Applicant in this matter was Breyer Group Plc and RBK Engineering Ltd, was the Respondent. The Applicant made an application in the High Court by notice on 2 May 2017 for an order to restrain the Respondent (Sub-contractor) from proceeding further with a creditor’s petition to wind up the Applicant, whether by advertising the same or otherwise and that a petition was to be removed from the file or struck out.
The Applicant entered into a sub-contract with the Respondent on 28 May 2015 for the supply on a supply labour, plant and materials to carry out Kitchen, Bathroom, W/C and OT Shower Room refurbishments. A dispute arose between the Applicant and Respondent out of non-payment by the Applicant of a sum allegedly due in respect of work undertaken by Respondent as a sub-contractor for the Applicant.
The winding up petition claimed that the Applicant was indebted to Respondent in the sum of £258,729.16, in respect of valuations for goods supplied and services rendered for electrical remedial works and other works and other associated charges supplied by the Respondent to the Applicant, at the Applicant’s request. It was also claimed that the Applicant was unable to pay its debts as they fall due and specifically that it has failed to pay instalments due under Valuation 10 which were due on 4 February 2017. The Applicant contended that it was not insolvent and that the debt in question was disputed. It also contended that there was a substantial counterclaim. The Applicant stated that the continuation of these winding up proceedings were likely to have an adverse impact on its business, both as a result of creating an adverse credit reference and because of the impact of such a petition (and knowledge of it) on other contracts as well as banking relationships.
The Court, in the circumstances, agreed with the Applicant’s submissions and stated amongst other things that, the Applicant was not unable to pay its debts, on the evidence before the Court. There was a range of reasonable potential defences to the Respondent’s claim as well as significant potential counterclaims whose value remained to be quantified. The Court accepted that the petition debt was disputed by the Applicant on bona fide and substantial grounds and that the
Applicant had a potential substantial cross-claim. Further the Court was not satisfied that, at the date of the petition, the Respondent was a creditor of Applicant and that it had standing to present this petition. To the contrary, the Respondent appeared to the Court to be in the position of a conventional claimant on an invoice where the liability to pay the bill was disputed and where the dispute was wholly unsuited to resolution in insolvency proceedings. The Court was of the view that:
“…such petitions also have the potential to create injustice because a company against whom a winding up petition is sought may feel pressurised into paying simply to avoid the petition being advertised which may itself have a range of serious commercial consequences on banking and other contractual relationships. In that way, such proceedings can operate as a form of commercial oppression, where the very existence of proceedings can be the source of disproportionate injustice. While the court must be astute to avoid having the wool pulled over its eyes by a debtor trying to escape its obligations, it must be equally astute to avoiding injustice being caused by a potential creditor using insolvency proceedings to make it less likely that a justified defence or counterclaim will be pursued because the alleged debtor will be pressurized into paying the claim in full before that can be done.”
The Court provided guidance with regard to the principles to be considered with regard to striking out applications, such as the one being considered by the Court. These included:
“Striking out – principles
1. The principles upon which the court will act in striking out a winding up petition are well known and were not in dispute. In Angel Group v. British Gas [2012] EWHC 2702, they were summarized as follows by Mr Justice Norris at [22]:
“The principles to be applied in the exercise of this jurisdiction are familiar and may be summarised as follows:-
a) A creditor’s petition can only be presented by a creditor, and until a prospective petitioner is established as a creditor he is not entitled to present the petition and has no standing in the Companies Court: Mann v Goldstein [1968] 1WLR 1091.
b) The company may challenge the petitioner’s standing as a creditor by advancing in good faith a substantial dispute as to the entirety of the petition debt (or at least so much as will bring the indisputable part below £750):
c) A dispute will not be “substantial” if it has really no rational prospect of success: in Re A Company No.0012209 [1992] 1WLR 351 at 354B.
d) A dispute will not be put forward in good faith if the company is merely seeking to take for itself credit which it is not allowed under the contract: ibid. at 354F.
e) There is thus no rule of practice that the petition will be struck out merely because the company alleges that the debt is disputed. The true rule is that it is not the practice of the Companies Court to allow a winding up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds, because the effect of presenting a winding up petition and advertising that petition is to put upon the company a pressure to pay (rather than to litigate) which is quite different in nature from the effect of an ordinary action: in Re A Company No.006685 [1997] BCC 830 at 832F.
f) But the court will not allow this rule of practice itself to work injustice and will be alert to the risk that an unwilling debtor is raising a cloud of objections on affidavit in order to claim that a dispute exists which cannot be determined without cross-examination (ibid. at 841C).
g) The court will therefore be prepared to consider the evidence in detail even if, in performing that task, the court may be engaged in much the same exercise as would be required of a court facing an application for summary judgment: (ibid at 837B).”
The Court having considered the applicable law, evidence and submissions, decided amongst other things that:
“a. The Applicant is not unable to pay its debts. To the contrary, the Applicant appears, on the evidence provided to the court, to be solvent with cash in hand and a substantial unused credit facility.
b. The reason the Applicant has not paid the substantial sums claimed by Respondent under a sub-contract for work carried out by it is that it claims to have arguable defences to the Respondent’s claims as well as substantial cross-claims of its own. These defences and cross-claims are various and relate to
i. the terms on which the work was undertaken;
ii. the quality of work undertaken,
iii. the validity of certain certificates issued by RBK in respect of electrical work and the testing of certain apparatus.
These claims, some of which operate as defences and some of which are cross-claims, are fairly arguable, cannot be resolved by the court on this application and it is inappropriate to do so in insolvency proceedings. Some of the issues raised by the Applicant are already the subject of investigation by third parties.
c. The proper place for the dispute between the parties is either Adjudication under the scheme established under the Scheme for Construction Contracts or ordinary proceedings. The dispute could be readily resolved in either forum.
d. For Repondent to continue these insolvency proceedings would be oppressive and would constitute an abuse of process.
e. The petition to wind the Applicant up will therefore be struck out…”
Conclusion
It is essential for parties to a construction contract (including Contractors and Sub-contractors) with regard to non-payment to take legal advice and consider properly the best forum for the resolution of their disputes before presenting a winding-up petition and arguing that the other party is unable to pay its debts and is insolvent.
The Courts will consider amongst other things, whether there is a range of reasonable potential defences to such a claim and whether the petition debt is disputed on bona fide and substantial grounds, including whether the Applicant has a cross-claim. In this case, the Respondent appeared to
the Court to be in the position of a conventional claimant on an invoice where the liability to pay the bill was disputed and where the dispute was wholly unsuited to resolution in insolvency proceedings. In this instance, the Court was of the view that the proper place for the dispute between the parties to be resolved was either Adjudication under the scheme established under the Scheme for Construction Contracts or ordinary proceedings. Furthermore, the Court was of the view that for the Respondent to continue these insolvency proceedings would be oppressive and would constitute an abuse of process. The Court was also of the view that: such petitions also have the potential to create injustice because a company against whom a winding up petition is sought may feel pressurised into paying simply to avoid the petition being advertised which may itself have a range of serious commercial consequences on banking and other contractual relationships. In that way, such proceedings can operate as a form of commercial oppression, where the very existence of proceedings can be the source of disproportionate injustice.
The above is for general information only and to encourage discussion and does not constitute legal advice. The author does not assume any responsibility for the accuracy of any statements made and appropriate legal advice should be taken and relied upon before taking or omitting to take any action in respect of any specific matter. If the facts and matters referred to above are relevant to you or your organisation, then please do not hesitate to contact me in chambers to see how I can assist you or your organisation.
Charles Edwin Edwards MSt(Cantab) MSc(Lond) FCInstCES Barrister
(Head of Chambers)
Gray’s Inn Construction Chambers
344-354 Grays Inn Road
London
WC1X 8BP
E: [email protected]
