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Adjudication or winding-up bankruptcy?

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Posted on 27 February 2019

Adjudication and the insolvency process are not always easy companions, based as they are on very different legislation. This can be seen from the following scenario.

Monies have been certified but not paid. There is no pay less notice. Can I simply issue a winding up petition rather than incurring the irrecoverable costs of adjudication?

A common scenario.

Although it might seem a tempting option, using the winding-up/bankruptcy route can be a high risk option where there is a genuine defence, set-off or cross-claim. 

The general rule under the insolvency legislation is that the insolvency courts will not allow a winding-up petition where there is a genuine dispute over the sums claimed, and/or a genuine set-off or cross-claim. 

This issue came before the courts in Breyer Group Plc v RBK Engineering Ltd[1]. RBK carried out electrical works for Breyer. A dispute arose as to payment. Rather than adjudicate, RBK issued a winding up petition, no doubt in the hope that would prompt Breyer to pay.

Instead, Breyer commenced court proceedings seeking an urgent injunction to prevent RBK from advertising its winding up petition, and for it to be struck out. It said it disputed the claim, was solvent, and had a substantial cross claim.

The Judgment

The judge looked at both party’s claims against the other. He accepted that Breyer had a genuine defence to RBK’s claim, and a substantial cross claim against RBK.

The judge stated “The courts have recognised on numerous occasions that such [insolvency] proceedings are not the place for resolving genuinely disputed debt claims which the [insolvency] court cannot properly determine, either as to merits or as to quantum…”

The court accordingly struck out RBK’s winding up petition. RBK would have been liable for Breyer’s costs, as well as its own. It would have been an expensive exercise for RBK, which achieved nothing. The court’s message is clear – insolvency courts are not the place to resolve genuine disputes over claims.

[1] [2017] EWHC 1206 (Ch)

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