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How to respond to the threat of winding-up proceedings

13 November 2014

The Construction Act1 contains a default mechanism whereby a sum applied for will be treated as due and payable in the absence of a pay-less notice. This pay now, litigate later philosophy has seen some contractors bypassing more traditional contractual dispute resolution procedures in favour of serving a statutory demand on employers with the threat of an ensuing winding-up petition being made unless the amount demanded is paid promptly. In this bulletin, we consider the effectiveness of such an approach.

Relevant background

There are only very limited grounds on which a statutory demand served on a company can be challenged. These include where:

  • the whole of the debt (or at least enough to reduce the debt to less than £750) alleged in the demand is genuinely disputed on substantial grounds; and/or
  • the company has a genuine cross-claim or right of set-off against the creditor which exceeds the amount claimed in the demand (or reduces it to less than £750).

Where either of the above grounds exist, the company which received a demand may apply for an injunction to restrain the presentation of a winding-up petition or, if a petition has already been presented, to restrain the advertisement of that petition. Where the debt is disputed in good faith and on substantial grounds the proposed petitioner will be treated as having no legal standing to present a winding-up petition in the first place. However, where the debt is undisputed but the company has a genuine cross-claim, the dismissal of a winding-up petition will be a matter for the discretion of the court.

In the context of construction contracts it is significant that, in the absence of a pay-less notice, only the existence of a genuine cross-claim can be used to restrain the presentation or advertisement of a petition. This is because there can be no dispute where the pay-less notice has not been properly served in accordance with established construction practices. In such circumstances, the exercise of the courts discretion is likely to be determinative of whether or not a winding-up petition will be made.

In Wilson and Sharp Investments Ltd v Harbourview Developments Ltd2 the High Court recently offered an insight into the situations in which the court will exercise its discretion.

The facts

Harbourview Developments Ltd (HDL) was employed by Wilson and Sharp Investments Limited (WSIL) in respect of two building contracts for the development of student accommodation in Bournemouth. HDL issued four interim certificates in respect of those works (the Certificates) which went unchallenged by WSIL. Following non-payment by WSIL, HDL served statutory demands on the directors of WSIL pursuant to personal guarantees given by them. WSIL and HDL came to an agreement to postpone the presentation of a winding-up petition against WSIL and to release WSILs directors from liability under their guarantees.

WSIL then made an application for an injunction restraining the presentation of a winding-up petition against it by HDL. In so doing, WSIL claimed that:

  1. the debt claimed by HDL was genuinely disputed on substantial grounds; and
  2. it had a genuine cross-claim which exceeded the debt claimed by HDL.

The decision

His Honour Judge Hodge QC swiftly rejected WSILs first argument on the basis that, where an employer has failed to serve a pay-less notice, there can be no dispute and it is bound to pay the sum demanded3.

Of more interest was the courts approach to assessing WSILs cross-claim and the extent to which the court could be expected to exercise its discretion to restrain presentation of a winding-up petition. In so doing, the court made clear that it will have regard to all relevant circumstances and its discretion will not be circumscribed even where, on the face of it, a genuine cross-claim exists.

In the present case, the genuineness of WSILs cross-claim was called into question by the circumstances giving rise to it. HHJ Hodge QC was not convinced that WSILs cross-claim was a genuine and serious prospect. Instead, he believed it was designed to prevent enforcement through winding-up proceedings. In reaching this conclusion, the court gave weight to the following factors:

  • there had been a significant delay in the formulation, articulation and assertion of WSILs cross-claim;
  • there had already been an admission of the accuracy of the Certificates; and
  • the debt claimed by HDL had been admitted as due and owing. Accordingly, WSILs application for an injunction was dismissed.


This case highlights the following key points:

  1. In order to avoid creating a position where a statutory demand can be served, where a party disputes a payment notice it should serve a pay-less notice promptly. Failure to do so will amount to acceptance of the debt.
  2. In formulating a cross-claim, a party should work as quickly as possible to quantify its claim and ensure it is brought to the attention of the other side without delay.
  3. Where a debt is disputed or subject to a cross-claim, care should be taken to ensure the debt is not admitted or acknowledged and that the partys rights are reserved throughout.As there is only a short window of opportunity (21 days) within which to respond to a statutory demand, legal advice should be taken as early as possible to protect your position even if it is anticipated that a settlement will be reached.

1 Part II of the Housing Grants, Construction and Regeneration Act 1996 as amended in 2011

2 [2014] EWHC 2875 (Ch)

3 See Shaw v MFP Foundations and Piling Ltd [2010] EWHC 9 (Ch) and R&S Fire and Security Services Ltd v Fire Defence plc [2013] EWHC 4222 (Ch)

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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