Serving a winding up can be a quick and relatively cheap way of frightening a debtor into paying. However, can a failure to pay following the issue of an interim certificate really result in debtor insolvency, despite the possibility of there being arguments as to the validity of the sums included in the certificate?
Interim certificates are the mechanism whereby the contractor is due payment throughout the lifetime of the works. Generally speaking the sums included in interim certificates reflect the value of the work completed in the relevant time period. Interim certificates are not designed to be a final determination of what is owed to the contractor, but assist with the contractor's cash flow during the project.
In the majority of building contracts, the contract administrator will decide what sums are due to the contractor and the employer must pay such sums in the time period stipulated in the contract. If the employer disagrees with such sums, he can serve a pay less notice. If he does so, he is only obliged to pay the sum specified in the pay less notice.
If the employer fails to pay the required sums to the contractor in the stipulated time period, the sums are due as a debt.
THE COURTS' APPROACH
The starting point is that the courts will not prevent insolvency proceedings against a party refusing to pay an indisputable debt. On the other hand, courts will generally strike out a winding up petition if the debt is disputed on genuine grounds.
Difficulties arise due to the differing approaches between construction and insolvency legislation. The position under the Insolvency Act 1986 is that all disputes have to be taken into account when deciding if a debtor is insolvent, except in 'special circumstances'. Conversely, it could be argued that not allowing a winding up petition in the case of a debt arising from an unpaid interim certificate might undermine the position under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act), that such debts are 'indisputable' and are due without question.
Perhaps unsurprisingly given that interim certificates are not finally determined; the insolvency courts have shown an unwillingness to consider them as amounting to 'special circumstances'. The courts have held that the 'indisputable' nature of an unpaid interim certificate will not automatically render them 'indisputable' under insolvency law.
However, in an effort not to allow the Insolvency Act...