Cornerstone - Getting wound up by the Construction Act

07 July 2016

We explore The Housing Grants Construction and Regeneration Act 1996 as amended by Local Democracy Economic Development and Construction Act

It is now well established that where a contractor has correctly applied for monies under a building contract, in the absence of a timely payment notice and/or pay less notice, that application becomes payable in full irrespective of the underlying merits of the application. This has led to a flurry of “technical” adjudications where demands for payment are made solely on the basis that an unanswered application has become due.

The Housing Grants Construction and Regeneration Act 1996 as amended by the Local Democracy Economic Development and Construction Act 2009 (the Act) makes it clear that there is no defence to such a claim (albeit recent case law has also clarified that contractors must ensure that applications strictly comply with the contract terms in order to benefit from the Act). But is that enough to then issue a winding up petition against a company that does not pay?

The Companies Court (which deals with insolvency issues) will not permit a payee to issue a winding up petition against a payer in circumstances where, despite the fact that the payer had failed to issue a payment notice or pay less notice under the contract, the payer has a genuine and substantial crossclaim.

This month the Companies Court was faced with a further question: can a payee issue a winding up petition against a payer in circumstances where, not only has the payer failed to pay a certified sum, but also the payee has an Adjudicator’s Decision in their favour? The difficulty that the court faced was whether the payer could claim that it had a genuine and substantial cross-claim if an Adjudicator had already determined that the cross claim was (potentially) invalid.

In this (currently unreported) case, a main contractor had entered into four subcontracts with a sub-contractor. The contractor had certified sums due to the sub-contractor under those subcontracts. The contractor then terminated the subcontracts on the basis that the sub-contractor had abandoned works, following which the contractor refused to pay the certified sums to the sub-contractor because the contractor argued that it had a genuine and substantial cross claim arising not only from an overpayment to the subcontractor, but also from sums that the contractor had incurred in completing the sub-contractor’s incomplete and defective works.

The sub-contractor threatened to issue a winding up petition against the contractor, so the contractor applied to the Companies Court for an injunction preventing that petition. In the interim, the sub-contractor commenced four adjudications seeking declarations that the subcontracts had been invalidly terminated.

The Adjudicator held in all four cases that the subcontracts had been invalidly terminated and the sub-contractor relied upon this in Court. The contractor maintained that it had a genuine and substantial cross-claim against the sub-contractor that prevented the sub-contractor from issuing the winding up petition. The sub-contractor argued that, pursuant to the Act, the certified sum was payable without deduction and, following the Decisions in the Adjudications that the subcontracts had been invalidly terminated, the contractor could not rely on its cross claim.

The Companies Court held that, while it had sympathy for the sub-contractor in this situation, and was confident the Adjudicator’s findings were likely correct, Adjudicators’ Decisions only have temporary finality and in such circumstances, there remained a serious dispute between the parties as to the validity of the termination of the sub-contracts and the value of the cross claim, which was not appropriate for determination in the Companies Court. The Companies Court therefore granted the injunction sought, preventing the sub-contractor from issuing a winding up petition against the contractor.

This is a stark reminder that, whilst the consequences of not serving the right notices under the Act remain draconian, the non-payment of an interim application or interim certified sum does not give the unpaid party the right to issue a winding up petition against the payer in circumstances where there remains a genuine cross claim.

It remains to be seen whether the court’s finding in this case would have been different if the Adjudicator’s Decisions had been an award for monies to be paid rather than a declaration as to the validity of terminations.

The content of this article is for general information only. For further information regarding the Construction Act, please contact a member of our Construction and Engineering Team. Law covered as at July 2016.