Previously I have commented upon the position relating to Architect’s Certificates in Construction Contracts: an Architect’s Certificate, stating that money is due under the Contract, is binding upon the parties and is effectively as good as a cheque.
Several commentators have suggested that another way to recover sums due (if you have the benefit of a certificate) is to issue a Winding-Up Petition against the payer. Winding-Up Petitions, or Statutory Demands, can be very effective in extracting payments from companies. Obviously the threat of being wound-up is a serious one, prompting most companies to react. Usually, if the debt is due, the best course of action for a company which is the subject of a Winding-Up Petition, is simply to pay. Winding-Up Petitions should therefore be treated with great caution by those receiving it, but also by those issuing. Because of the serious consequences, a wrongly issued petition may result in an Injunction against the issuer and a hefty Order for Costs.
It has long been the law that a petition founded on a disputed debt should be dismissed by the Court. The test on whether it should be dismissed rests on whether the defence to a petition has a real (as opposed to a fanciful or illusionary) prospect of success. The test often applied is whether the debt is disputed in good faith and on substantial grounds. If this is the case, the petition will be dismissed as of right because the petitioner will not be a creditor with the standing to present a petition.
Further if there is a cross claim of substance which exceeds the petitioner’s debt, it is the practice not to allow winding-up except in exceptional circumstances.
If a company in receipt of a Winding-Up Petition considers that either there is a dispute in good faith about the debt owed, or else is itself owed more than is claimed by the petitioner, then it would be well advised to seek immediate legal advice in order to get the petition dismissed. The usual course is to seek an injunction to prevent it being advertised followed by an application for it to be dismissed. A party considering issuing a Winding-Up Petition should think carefully before doing so. It is an extremely effective way of extracting payment, but can be counterproductive. It may lead to the actual winding-up of the company which is not necessarily the best or desired result; alternatively it may lead to an application against a party and a large Costs Order. In summary, in the right circumstances issuing a Winding-Up Petition can be extremely effective and result in payment quicker than in any other debt recovery method. In the wrong circumstances it can be counter-productive.
For more information, please contact Philip Harris
This article first appeared in the Construction Newsletter - Spring 2005
