The new Construction Act contains a default mechanism whereby a sum applied for would become irrevocably payable on an interim basis if no payment notice or pay less notice is served.
This was designed to give some teeth to the drive to improve the cashflow of contractors.
However, some contractors have started to try to enforce their rights to such an interim payment by filing winding-up petitions against their employer, rather than commencing an adjudication.
The effectiveness of this tactic was considered in the recent case of R&S Fire and Security Services Limited v Fire Defence plc.
The court held that because R&S had failed to serve a payment notice or a pay less notice in respect of Fire Defence’s application, it was bound to pay the sum applied for and the debt was not open to dispute.
“If payers fail to serve the required payment notice, they can still challenge winding up-petitions if they have genuine cross-claims”
It was irrelevant that R&S had disputed such sums in previous pay less notices.
However, simply because R&S was obliged to make an interim payment did not preclude them from challenging any disputed items at a later stage.
The court struck out the petition, as R&S had a genuine cross-claim due to alleged delays that exceeded the debt claimed.
This case illustrates that if payers fail to serve the required payment notice, they can still challenge winding up-petitions if they have genuine cross-claims – even if such cross-claims could not be raised in an adjudication, as the relevant payment notices had not been served.
“The courts regard the use of winding-up petitions as a brutal weapon and so they are not willing to allow a company that would otherwise have a genuine cross-claim to be wound up”
The courts acknowledge that these provisions underpin the Construction Act’s policy of ‘pay now, argue later’.
They are willing to allow payees to claim interim payments arising under this default mechanism through adjudication, judgment in the Technology and Construction Court and ultimately enforcement methods such as sending round the bailiffs.
However, the courts regard the use of winding-up petitions as a brutal weapon and so they are not willing to allow a company that would otherwise have a genuine cross-claim to be wound up.
A final word of warning: the insolvency courts will wind up a company for a failure to pay such debts if it cannot be shown that the cross-claim is genuine and serious – they want to see some proper evidence underpinning the cross-claim and that it is being progressed.
Of course, the lesson to be learnt from this is to get your notices in on time. Haven’t you heard that before!
Steven Carey is head of construction and engineering and James Worthington is a senior associate at Speechly Bircham