Wilson and Sharp Investments Ltd v Harbour View Developments Ltd

A court will restrain a winding-up petition founded on a debt genuinely disputed on substantial grounds. It will also ordinarily restrain a petition where the debtor establishes a serious and genuine cross-claim exceeding the petition debt.

A contractual insolvency clause may suspend payment of previously due interim certificates even though the building contract was terminated before the contractor became insolvent. Payment then awaits the contractual final account. Insolvency alone, however, creates no absolute rule against enforcing a provisional construction payment. Absent a contractual right to withhold, the court must consider all the circumstances, including the merits and mutuality of any cross-claim.

The appellant employer sought an injunction restraining the respondent contractor from presenting a winding-up petition based on £902,506 allegedly outstanding under interim certificates issued under two building contracts. His Honour Judge Hodge QC dismissed the application and ordered the appellant to pay the respondent’s costs.

The respondent subsequently entered creditors’ voluntary liquidation. The appeal concerned whether the certificate debt was disputed on substantial grounds under the contracts’ insolvency provisions, whether the contractor’s insolvency independently justified non-enforcement, and whether the appellant had serious and genuine cross-claims exceeding the debt.

1. Appeal allowed. The contractual provisions governing contractor insolvency applied even though the contracts had been terminated before the respondent entered creditors’ voluntary liquidation. Clause 8.5.3 expressly applied clause 8.7.3 from the date of insolvency whether or not the employer had served an insolvency-based termination notice. Nothing justified implying that those provisions ceased to operate following an earlier termination for repudiatory breach.

2. The contractual construction accorded with section 111(10) of the Housing Grants Construction Grants and Regeneration Act 1996. That subsection did not confine the permitted insolvency exception to contracts still capable of termination. Interim payments are provisional liabilities. Clause 8.7.3 suspended the obligation to make the interim payments but preserved liability for any balance ultimately found due when the contractual final account was taken.

3. Once the respondent entered creditors’ voluntary liquidation, the appellant had a bona fide dispute on substantial grounds concerning its obligation to pay the interim certificates. The respondent could therefore not establish the creditor standing required by section 124(1) of the Insolvency Act 1986. The judge should have adjourned the application pending the creditors’ meeting or restrained presentation of the petition in the meantime.

4. Insolvency does not, without more, require the Technology and Construction Court to refuse enforcement of a provisional payment obligation. Absent a contractual right to withhold payment, the result depends on all the circumstances. Relevant matters include the merits of the employer’s counterclaim and whether sufficient mutuality exists for compulsory insolvency set-off. The second ground of appeal therefore failed.

5. The judge also erred in rejecting the appellant’s cross-claims. Acknowledgment of the petition debt does not prevent reliance on a serious and genuine cross-claim. Nor does acceptance that an interim payment became due prevent a later challenge to the valuation. The independent valuations and supporting evidence raised substantial disputes unsuitable for determination in winding-up proceedings.

6. The court re-exercised the discretion and granted a permanent injunction restraining presentation of a petition founded on the interim certificates.

1. Court of Appeal (Civil Division): By [2015] EWCA Civ 1030, allowed the employer’s appeal and granted a permanent injunction restraining presentation of a winding-up petition based on the interim certificates.
2. High Court, Chancery Division: His Honour Judge Hodge QC dismissed the employer’s injunction application and summarily assessed costs against it at £28,196.98. No neutral citation is stated.