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Wed December 01 2021

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Can’t pay, won’t pay

5 Dec 13 The interface between the Construction Act and insolvency law has produced several interesting cases. Now we have another one, as Mark Clinton explains.

Mark Clinton, a partner at Thomas Eggar LLP
Mark Clinton, a partner at Thomas Eggar LLP

Difficult economic times provide the perfect environment for payment disputes.Payers struggle to keep up while payees have a need to make sure that payments are made promptly. This has meant that creditors have resorted to more aggressive means of forcing payment. Some resort to the threat or taking of insolvency proceedings to push to the front of the queue. In many cases, such steps are effective.

Under the Construction Act, a contractor is entitled to serve a default notice if his client does not issue a payment notice when required under the contract. The contractor’s application for payment can stand as his default notice if the contract permits such applications.

If the client does not follow up with a pay less notice in good time, he is obliged to pay the amount claimed by the contractor in his default notice. If he does not pay up, the contractor can take the matter to adjudication. Although adjudication is relatively quick and inexpensive, in these difficult times it is not quick or inexpensive enough for some.

A quicker and less expensive result can sometimes be achieved by using insolvency procedures. That was the option taken by R&S Fire and Security Services Ltd in their case against Fire Defence plc.

R&S served a statutory demand but payment was not forthcoming. They therefore issued a petition to wind-up Fire Defence. Fire Defence applied for an injunction to stop the petition being advertised and applied to strike it out. The court will strike out a petition if there is a genuine dispute about the debt on which it is based or a genuine and serious cross claim for at least the same value as the debt.

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The court decided that there was no genuine dispute about the debt. The Construction Act requires payment of a sum due on a default notice and there is no room for arguing about it.  The same would apply to a sum due under a payment or pay less notice. Round one to R&S.

Having considered the evidence, the court decided that Fire Defence had done enough to show that there was a genuine and serious cross-claim which would have to be decided by an adjudicator or another court in the usual way. Accordingly, the petition was struck out.

In the event, the use of insolvency procedures did not save time or money. However, the case sounds a warning bell for clients who do not pay sums due to their contractors under contracts covered by the Construction Act. The relevant payment, pay less or default notice will be sufficient to put the debt beyond dispute leaving the client facing winding-up or similar proceedings unless he can come up with a sufficiently convincing and substantial counterclaim.

That should sort out the ‘can’t pays’ from the ‘won’t pays’.

About the author: Mark Clinton is a partner at Thomas Eggar LLP

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