REUTERS | Toby Melville

Adjudication versus a winding-up petition

We don’t often see cases where a party has issued a winding-up petition to get paid, rather than adjudicating its payment dispute. Perhaps it is because it is usually an unsuccessful way of getting paid, as was demonstrated recently in Breyer Group plc v RBK Engineering Ltdwhich was heard by Daniel Alexander QC in the Chancery Division.

Breyer Group v RBK

In May 2015, RBK entered into a sub-contract with Breyer Group to carry out the refurbishment of the kitchens and bathrooms at a project in Sutton (the 2015/2016 sub-contract). By early 2016, it was clear that there was more work for RBK to do (including electrical and boiler work). Although the parties never agreed the terms of a new contract, it seems they continued working into the 2016/2017 period on the same terms, at least as far as interim payments were concerned.

In December 2016, the parties entered into a settlement agreement to bring work to an end in early 2017.

Following RBK’s final application for payment (issued on 3 February 2017), a dispute arose over Breyer’s payment notice and whether it had been issued out of time.

Sub-contract payment terms

As is usual with construction contracts, the sub-contract contained detailed payment provisions (in clause 8), which the judge described as a:

“… complex structure of payments and interim payments with conditions to be satisfied before payments should be made.”

We don’t know if a standard form contract was used or if the provisions were bespoke. Either way, the sub-contract required:

  • RBK to submit its application for payment no later than three working days before the Payment Due Date. The application had to set out the gross value of the works to date, and had to include such details as Breyer “may reasonably require” to allow it to check and verify the amount in the payment application (clause 8(a)).
  • Breyer’s payment notice was due not later than five days after the Payment Due Date (clause 8(c)) and, subject to any pay less notice, Breyer had to pay the sum set out in the payment notice (clause 8(g)).
  • The sub-contract provided for a 5% retention, which was to be released after the certificate of making good defects.

Further details were provided in an Appendix, which the judge described as a “somewhat puzzling document”, possibly because:

“… some of the columns and the descriptions of them [were] not easy to reconcile with the payment structure provisions of clause 8.”

Looking at the detail of the Appendix, it’s easy to see why a Chancery judge, less familiar than a TCC judge with the intricacies of a construction contract’s payment provisions, might think this was puzzling. It certainly takes a bit of working out. One thing is clear (I think), and that is applications for payment were due “no later than the 20th of the month”.

However, the parties seemed to understand what was going on. It was common ground that RBK would be paid “by reference to the sums said to be due” in the payment notice. That said, I was somewhat puzzled myself by the judge’s suggestion that it was:

“… clearly implicit that a reasonable time would need to be provided to enable Breyer to check that the applications for payment were correct and issue a Payment Notice accordingly.”

The judge also said that this was particularly so in respect of the final payment, when Breyer would be “tying up loose ends” and ensuring RBK was paid only what it was entitled to “no more and no less”.

Back to the payment dispute

As I mentioned above, there was a dispute over Breyer’s payment/pay less notice, which it served on 1 March 2017, and whether it had been issued out of time. Although the court had to consider this question in the context of a winding-up application, RBK clearly felt that Breyer’s payment notice was late and this meant that the sum it had applied for had become the sum due. This gave rise to a “debt” of just under £260,000 and the winding-up petition that followed.

I’m not sure about anyone else, but I was surprised to see the judge’s suggestion that he was unable to accept that:

“… if Breyer was out of time in serving its Payment Notice, that would automatically mean that a debt arose at the point that the time expired for the whole sum claimed in the RBK’s application for payment.”

I appreciate that the judge added a caveat that, for the purpose of the winding-up application, he did “not consider the contrary to be unarguable”. However, this is certainly at odds with a number of TCC decisions over the last few years. For example, given what the court said in ISG Construction Ltd v Seevic College, it is certainly arguable that it was worth RBK trying the winding-up petition route. However, I’m sure not everyone will agree.

Either way, it is clear that the judge was persuaded that there was a substantial dispute concerning not only whether the relevant notices had been served on time, but also on the merits (Breyer alleged there were defective electrical works). These (plus Breyer’s financial position) were sufficient to strike out the winding-up petition. In doing so, the judge noted that insolvency proceedings were not the appropriate place for the payment/defects dispute to be aired, rather the parties should adjudicate or litigate.

I must agree with the judge that adjudication is the proper place for these sort of disputes. You only have to look at cases like Caledonian Modular Ltd v Mar City Developments Ltd, Jawaby Property Investment Ltd v The Interiors Group Ltd and Henia Investments Inc v Beck Interiors Ltd to see that substantial disputes can arise concerning payment notice and/or pay less notice issues.

Finally, while we’ve seen similar cases in the past where parties have issued winding-up petitions rather than adjudicating (like in Wilson and Sharp Investments Ltd v Harbour View Developments Ltd), I think this case is interesting because I’m not sure we’ve seen a party argue that a debt has arisen because of the other party’s failure to serve the relevant payment or pay less notices. I’m sure it will not be the last!

MCMS Ltd Jonathan Cope

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