Disputed debts under construction contracts and the inappropriate use of winding-up petitions

Breyer Group Plc v RBK Engineering Ltd

The High Court's recent judgment in Breyer Group Plc v RBK Engineering Limited [2017] EWHC 1206 provides a timely reminder for parties to construction contracts of the appropriate (and inappropriate) uses of winding-up petitions.

The case concerned a successful application made by Breyer Group PLC (Breyer) for an order preventing RBK Engineering Limited (RBK) from continuing with a petition to wind up Breyer on the basis of a disputed debt.

How did the dispute arise?

In summary:

• Breyer (a contractor) engaged RBK (a sub-contractor to provide labour and plant and material in respect of refurbishment works
• There were two distinct contracts over the course of the parties' relationship
• The first contract's payment structure provided for RBK to submit an application for payment and for Breyer to submit a payment notice of pay less notice
• The payment schedule appended to the first contract provided timings for applications and notices but wasn't wholly consistent with the position described in the body of the contract itself
• The first contract contained an adjudication clause
• The scope of work was subsequently extended
• Breyer notified RBK that revised terms and conditions would follow but that in the interim the first contract would continue
• Some months later, a back-dated, draft contract was circulated by Breyer. There was no payment schedule appended to this second contract. Although RBK did not formally accept the contract it did carry out works relating to it
• Breyer and RBK's relationship broke down. RBK was struggling to fulfil its obligations, whereas Breyer was routinely late in making payments
• The parties agreed to end their relationship and entered into a settlement agreement. This provided for a scheme of payments to be determined by reference to the contract but did not state which contract applied
• A dispute arose as to the payment terms and payments due from Breyer to RBK.

What happened next?

Ultimately, this dispute resulted in RBK presenting a winding-up petition against Breyer claiming that Breyer:

1. Was indebted to RBK in the sum of £258,729.16 in respect of unpaid valuations for goods supplied and services rendered.
2. Was therefore unable to pay its debts as and when they fell due.
3. Had admitted that it was insolvent. 

What happened in Court?

The Court disagreed, deciding that:

Breyer was not insolvent

Breyer was not insolvent in the sense of being unable to pay the alleged debt. Breyer was able to satisfy the Court that it was solvent, with cash in hand and a large unused overdraft.

It was "not a case of can't pay, but won't pay."

Breyer has not admitted that the alleged debt was due and owing. It was clear from its correspondence that Breyer was willing to give credit to RBK were sums were shown to be properly due.

Insolvency proceedings were not the appropriate procedure

Breyer had refused to pay RBK because it disputed the alleged debt and claimed that it was owed sums exceeding RBK's alleged debt.

A court will generally not make a winding-up order where:

• the petition debt is genuinely disputed by the company on substantial grounds
• the company has a genuine and serious cross claim or right of set-off for an amount equal to or exceeding the petition debt.

There must be sufficient evidence to persuade the court of the above, but threshold is not a high one.

Where a court agrees that there is a genuine despite it should not go on to decide that dispute, which should instead be dealt with in other proceedings.

In the case of Breyer, the Court regarded its disputes and counter-claims as "fairly arguable" and regarded RBK as being "in the position of a conventional claimant on an invoice where the liability to pay the bill is disputed and where the dispute is wholly unsuited to resolution in insolvency proceedings". The dispute would have been better dealt with either through ordinary civil proceedings, or adjudication under the Scheme for Construction Contracts.

Commercial oppression and disproportionate injustice

The presentation of a wining-up petition, in particular its advertisement, can be catastrophic for a company. As the Court put it: "[Winding up petitions] 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."

In all the circumstances, the Court had "no hesitation in striking this petition out as an abuse of process".

What can we learn?

• Although not a new principle, this case serves as a helpful reminder that winding-up petitions are insolvency processes. When used tactically as a means of debt enforcement to apply additional pressure when seeking to recover monies under construction contracts, particularly where the liability to pay is disputed, the petition is likely to be struck out when it comes before the court
• A petition can still be perilous for a company, and ultimately it to fail, even when inappropriately used
• A petition is a matter of public record and can lead to an adverse credit reference and can have a significant impact on other contracts as well as banking relationships
• A petition, even if inappropriately presented will likely lead to a company's bank accounts being frozen, preventing any payments being made, even where a company is entirely solvent
• It is therefore vital to act quickly when threatened with a winding-up petition or statutory demand (which often precede a petition) in order to prevent this damage being done.

Our Restructuring and Insolvency Team is experienced in dealing with a range of insolvency-related issues within the construction industry, acting:

• for creditors of insolvent counterparties
• for directors of companies in difficulty
• for administrators and liquidators of construction businesses
• in defending clients against inappropriate threats of winding up petitions, including obtaining injunctions preventing such petitions from being presented or and having inappropriately presented petitions struck out.

Should you require any assistance please speak to:

Newcastle: Julian Gill

Leeds: Andy Stirk

London: Tom Pringle