England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
In the matter of the Insolvency Act 1986

		Royal Courts of Justice, Rolls Building, Fetter Lane, London EC4A 1NL
		27/10/2016

Mr Justice Nugee:

Introduction

1. This is an application for an injunction to restrain the respondent, St Lewis Design Ltd ("SLD"), from presenting a petition to wind up the applicant company, Cosmur Construction (London) Ltd ("Cosmur"). The application is in response to a statutory demand made by SLD on Cosmur for £100,484.42 plus VAT (all sums hereafter are exclusive of VAT), claimed as due for work carried out by SLD for Cosmur under a construction contract.

The law

2. The principles applicable to such an application are well established and were not the subject of any dispute before me. First, the practice of the Companies Court is not to allow the winding up procedure to be used where the petition is a creditor's petition and the company genuinely disputes the petition debt on substantial grounds. Such a dispute goes to the standing of the petitioner as a creditor and although the Companies Court could in theory try that issue, in practice it will not do so, for three reasons: (i) it is not the function of the Companies Court to try disputed claims; (ii) the threat of winding-up proceedings could otherwise be used to put improper pressure on a company to pay a disputed debt; and (iii) the delay in determining the issue is unacceptably damaging to the company whose freedom to carry on business may be severely curtailed once a petition has been issued (per David Richards J in Tallington Lakes Ltd v Ancasta International Boat Sales Ltd [2012] EWCA Civ 1712 at [5], cited by Gloster LJ in Wilson and Sharp Investments Ltd v Harbour View Developments Ltd [2015] EWCA Civ 1030 at [44]).
3. Second, even if the debt itself is not disputed, the Companies Court will not, in the absence of special circumstances, proceed to wind up a company where the company has a serious and genuine cross-claim in an amount exceeding the petition debt. In re Bayoil SA [1999] 1 WLR 147, the Court of Appeal said that there were three requirements before this principle applied, namely (i) that the cross-claim must be genuine and serious ("or, if you prefer, one of substance"); (ii) that it must be one which the company has been unable to litigate; and (iii) that it must be in an amount exceeding the amount of the petitioner's debt: see at 155F per Nourse LJ. In Dennis Rye Ltd v Bolsover DC [2009] EWCA Civ 372, however, the Court of Appeal held that the second of these was not in fact a necessary requirement. A company should not be prevented from raising a cross claim in winding up proceedings simply because it could have raised or litigated the claim before; the failure to litigate the cross claim was not necessarily fatal to a genuine and serious cross claim defeating a winding up petition, although the court could take into account the fact that the company had not even attempted to litigate the cross claim in assessing whether the claim was really genuine and serious: see at [19] per Mummery LJ.
4. I was referred to a number of cases where these well established principles had been applied to claims arising under construction contracts. The background to this (see Wilson and Sharp at [35f]) is that Part II of the Housing, Grants, Construction and Regeneration Act 1996 as amended ("HGCRA"), one of the aims of which was to improve cash flow within the construction industry, introduced two significant reforms which reflected a "pay now, litigate later" philosophy. One was that a party to a construction contract was in general entitled to payment by instalments, with mechanisms designed to ensure that a party could not withhold payment of such an instalment beyond the final date for payment unless it had served a valid notice to that effect (a "pay less notice"); the other was to give parties a statutory right (in s. 108 HGCRA) to refer disputes to adjudication, a procedure under which an adjudicator gives a speedy decision which is binding until the dispute is finally determined (and which may be looked upon as a method of providing a summary procedure for the enforcement of payment provisionally due under a construction contract: Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] Bldg LR 522 at [26] per Chadwick LJ).
5. The cases to which I was referred were the decisions of the High Court in Parke v The Fenton Gretton Partnership (2.8.2000, HHJ Boggis QC), Re a Company (No 1299 of 2001) [2001] CILL 1745 (Mr David Donaldson QC), Shaw v MFP Foundations & Piling Ltd [2010] EWHC 9 (Ch) (HHJ Stephen Davies) and R&S Fire and Security Services Ltd v Fire Defence plc [2013] EWHC 4222 (Ch) (Newey J), and of the Court of Appeal in Wilson and Sharp. Of these Parke and Shaw were cases of individual insolvency, and the others cases of corporate insolvency. In each case the courts have consistently held that although an adjudication award, or a valid application for payment which has not been the subject of a pay less notice, creates an immediately enforceable debt (and so gives the payee the status of a creditor who can petition), there is nothing in the philosophy of the HGCRA of "pay now litigate later" which displaces the ordinary position under which a serious and genuine cross claim can be relied on to prevent a petition going forward. In Wilson and Sharp Gloster LJ referred to the principle at [62] as follows:

"There was no dispute before us that, in order to resist presentation of a winding-up petition, the appellant had to establish that it had a serious and genuine cross-claim, and that, absent special circumstances, if such a claim was established on the evidence before the court, as a matter of principle, presentation of a winding up order [sic] should be restrained by injunction."

(The reference to "presentation of a winding up order" should no doubt be to presentation of a winding up petition or of a petition seeking a winding up order). Gloster LJ went on to explain at [66] that the fact that an employer accepts that interim payments have become due because of a failure to serve a pay less notice does not prejudice the employer when it seeks to raise a genuine and serious cross-claim, approving the statement of Newey J in R&S to that effect.

6. Those being the applicable principles, I must apply them to the facts.

The facts

7. In early 2015 SLD was engaged by Cosmur as sub-contractor to provide groundworks at Cosmur's site at Sutton's Lane in Hornchurch. It is not in dispute that SLD was initially contracted to provide certain works for a lump sum of £120,000, and subsequently to provide more extensive works at an increased price of £298,000.
8. There is a dispute as to whether the two orders were subject to Cosmur's standard terms and conditions. On 22 January 2015 Cosmur sent an e-mail to SLD confirming verbal instructions and asking SLD to treat the e-mail as a letter of intent to cover the groundworks package at an agreed value of £120,000, with payment terms being 30 days, and saying that a formal order would follow shortly. Later that same day however Cosmur sent another e-mail inviting SLD to undertake what was described as "the complete groundworks package" for £280,465, and by 18 February agreement had been reached in e-mails on a lump sum price of £298,000. Cosmur's case is that written orders expressly incorporating its standard terms and conditions were (i) in the case of the first order (dated 22 January 2015) handed by Ms Eleanor Holbrook, an assistant surveyor at Cosmur, to Mr Gerard Hodges, a director of SLD, on site on that date, and (ii) in the case of the second order (dated 27 February 2015) sent by Ms Holbrook by post to SLD. SLD's case, as set out in a witness statement of Mr Paul Dodge, also a director of SLD, is that the first order was not handed to him or Mr Hodges, that the second order was never received, and that the first time they were produced by Cosmur was in evidence in these proceedings on 6 September 2016.
9. I clearly cannot resolve who is right on an application like this, although it is fair to say that none of the e-mails which are in evidence refer to written orders having been given or sent to SLD, and Mr Wygas, who appeared for SLD, showed me correspondence from as early as November 2015 in which Mr Dodge said that SLD had no record of a formal sub-contract order, a point repeated by him in e-mails of April and May 2016 and which Cosmur does not at that stage seem to have taken issue with. I will proceed on the basis that it is doubtful whether Cosmur's standard terms and conditions were incorporated into the contract, but that I cannot determine that they were not. If they were not, the effect of the HGCRA is to incorporate into the contract the relevant provisions of the Scheme for Construction Contracts ("the Scheme"), a set of default terms which are set out in regulations, the Scheme for Construction Contracts (England and Wales) Regulations 1998 SI 1998/649.
10. SLD started on site on about 9 January 2015 and completed its works by about 22 April 2016. During the course of the contract, SLD made periodic applications for payment based on valuations of work carried out, and Cosmur made a number of payments as detailed on payment certificates. The last such payment certificate is dated 21 January 2016 and valued the work at a gross amount of £365,000 which, after deduction of a 5% retention of £18,250, brought the cumulative total payment to date of £346,750. On 8 March 2016 SLD e-mailed interim payment application 12 valuing the work to 26 February 2016 at £423,071.42 and asking for a net payment of £58,071.42; and on 27 April 2016 e-mailed a further valuation described as a "final account" valuing the work overall at £447,234.42 and asking for a net payment of £82,234.42.
11. On 28 June 2016 Mr Brent Hawtree, Managing Surveyor at Cosmur e-mailed SLD saying he had reviewed their account and attaching the latest revision for SLD to review. This (headed DFA or draft final account) valued the works at £410,517.89 and showed a net payment due of £45,517.89, although a note referred to a sum of £18,000 (6 weeks' liquidated damages for delays at £3000 per week) to be deducted from this. It can be seen by comparing SLD's valuation in this revision and Cosmur's that at that stage Cosmur valued the works at some £38,000 less than SLD.
12. The statutory demand is dated 11 July 2016. It is based on an invoice dated 1 July 2016 which calculates the difference between the valuation in SLD's final account (£447,234.42) and the cumulative payment shown on the last payment certificate (£346,750), amounting to £100,484.42 (plus £20,096.88 VAT). Cosmur deny ever having received this invoice.
13. On 18 July 2016 Cosmur served what was described as Payless Notice 13 valuing the work at £365,000 and showing nothing due.
14. In support of their application for an injunction, Cosmur rely on three matters. First there are numerous items where Cosmur assert that SLD have overvalued the work and Cosmur values the work at either a lesser sum or in some cases at nil; second they claim £18,000 liquidated damages for delay; and third, they assert a set-off in the sum of £40,000 in respect of another site at Dulwich where SLD refused to return to site until their account had been settled at Suttons Lane, and Cosmur engaged another contractor.

Application of principles

15. On these facts I received brief but complex arguments on a large number of points. The case is not made easier by the fact that at this stage it is unclear whether the contract was governed by Cosmur's standard terms and conditions or not.
16. The first question is whether there is any genuine and substantial dispute that there is a debt owing to SLD. Ms Stephens, for Cosmur, accepted that Cosmur had not served a timely pay less notice in relation to SLD's final account. She also accepted that in relation to interim payment applications, the position (whether under Cosmur's standard terms and conditions or under the HGCRA and the statutory Scheme) was that a failure by an employer (or here main contractor) to serve a timely pay less notice meant that the sum specified in the payment application became indisputably due. She said however that this was not the case in relation to a final account.
17. First, if Cosmur's terms and conditions applied, cl 7 dealt with payment; cl 7.2 to 7.6 dealt with interim payments, but final payments were dealt with under cl 7.7, which made it a condition precedent that

"the Sub-Contractor shall have delivered to Cosmur all documents and particulars necessary to enable Cosmur to ascertain and determine the Final Contract Sums."

The evidence of Mr Anthony Robertson of Cosmur was that when Cosmur issued payment notices to SLD it added comments which asked for substantiation, but the successive valuations by SLD did not give any further information and SLD had since failed to produce any further documentation. Ms Stephens therefore submitted that SLD had not satisfied the condition precedent. Mr Wygas said that that could not be right: the allegation lacked any substance and was inconsistent with the fact that Cosmur had itself been able to value the works, as it did on 28 June (and indeed later purported to serve Payless Notice 13 showing nothing due).

18. Second, if Cosmur's terms and conditions were not incorporated, Ms Stephens said that although the effect of the HCGRA, and the relevant provisions of the Scheme, was to make the sum applied for in an interim payment application indisputably due in the absence of a pay less notice, this was not the case with final accounts. For that she relied on Harding v Paice [2015] EWCA Civ 1231, particularly at [68]-[70] per Jackson LJ. Mr Wygas said that that was a misreading of the decision, and that under Part II of the Scheme, the pay less notice regime applied as much to a final account as to an interim payment application. Quite apart from that, Mr Wygas relied on SLD's interim payment application 12, which applied for payment of some £58,000 and which had not been the subject of any pay less notice.
19. I do not need, or propose, to deal with all the various points argued. On my reading of Harding v Paice, I tend to agree with Mr Wygas that it does not say that the pay less regime does not apply to final accounts: indeed in that case it appears that the contractor (Mr Harding) had successfully obtained a decision from an adjudicator (in fact the third adjudication) that the employers (Mr Paice and another) were obliged to pay some £397,000 on his final account precisely because they had not given any pay less notice: see at [30]. What however does seem to me apparent from the decision is that the fact that an employer may have become liable to pay a contractor by failing to give a pay less notice (whether on an interim account or a final account) does not prevent the employer subsequently challenging the true value of the works. In relation to an interim valuation and an interim payment, there may be difficulties doing this at a subsequent interim valuation (see the decisions of Edwards-Stuart J in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC)); but whether or not this is so I accept that the effect of s. 111 HCGRA (which is the provision that says that the payer must, in the absence of a timely pay less notice, pay the sum notified in a payment notice) is not such as to prevent the employer from reopening the question of the true value of the works, if necessary after the final account.
20. But it seems to me that in the circumstances of this case, there is a shorter answer to the question. I have already accepted that I cannot resolve the question whether Cosmur's terms and conditions were incorporated, however much one may harbour doubts about it. That means that there is a real question whether cl 7.7 of those terms applied to the contract. If so, I consider there is also a genuine and substantial dispute whether SLD had complied with the condition precedent entitling it to serve the final account. It is true that Cosmur had sufficient information to enable it to produce its own revised valuation on 28 June 2016 (and indeed to make numerous detailed points in the evidence on the valuation of the works) but I cannot it seems to me resolve on this application the question whether SLD had or had not complied with the condition precedent in cl 7.7, not least because some of the items queried in Mr Robertson's statement are queried on the basis of a lack of substantiation. It is well established that the threshold for a bona fide and substantial dispute is not a high one, and can be satisfied even if the defence is "shadowy", and I do not think I can reject this suggested defence as either not bona fide or as lacking in substance.
21. So far as Mr Wygas's reliance on payment application 12 is concerned, the point was taken in correspondence that the contract did not allow for applications to be submitted after 23 February 2016. Mr Wygas said that Cosmur has accepted applications on various dates and in doing so Cosmur has waived the requirement for strict compliance with the contractual dates (cf Leeds City Council v Waco UK Ltd [2015] EWHC 1400 (TCC) at [28]-[30]). That too seems to me to give rise to arguable issues which I cannot resolve on this application, not least because the evidence does not really address the point.
22. In these circumstances, it seems to me that whoever is right on the value of the works in fact carried out by SLD there is a real question over whether SLD has served a valid application for payment, either by way of payment application 12, or by way of its final account, and hence that there is a genuine and substantial dispute whether it is currently a creditor of Cosmur. Mr Wygas points out that on 28 June 2016 Cosmur's own revised draft final account showed SLD as being owed over £45,000, and characterised that as an admission that that much was due (subject to the £18,000 claim for liquidated damages). But it does not seem to me that Cosmur in seeking to agree what it describes as a draft final account is thereby to be regarded as accepting that those amounts were already due to SLD and that SLD was already a creditor with the standing to petition for winding up.
23. In these circumstances I conclude that there is indeed a bona fide and substantial dispute as to the petition debt, and that is sufficient for me to restrain the presentation of a petition.
24. In case I am wrong about that, I should deal briefly with the second question, namely whether when one takes the final account of what is due on the contract, it will be seen that there is nothing owing to SLD – indeed that SLD will owe Cosmur money. That depends on whether there is any genuine substance in Cosmur's various claims.
25. The first of these raises numerous queries on the value of the work carried out by SLD, mostly in relation to variations. These total (I was told by Ms Stephens) just short of £56,000. When one adds to that £18,000 for liquidated damages for delay and £40,000 on the set-off for the Dulwich site, the total of the cross-claim at some £113,000 is more than sufficient to exceed what SLD claims to be due.
26. Mr Wygas challenged whether there was any substance in the complaints of overvaluation. He pointed out that it was easy to start an adjudication, and that although Mr Robertson had asserted that it was Cosmur's intention to do so, there was no explanation as to why no such adjudication had not already been started. Moreover he referred to the revised draft final account sent by Cosmur on 28 June 2016 which accepted that there was a payment due of £45,517.89 (subject to the £18,000 claim for liquidated damages). Having accepted in June that that was what was due, it could not be said that there was a genuine and substantial claim that the true value of the works was less than that.
27. Second, he said that the suggested set-off of £40,000 lacked all substance. All that Mr Robertson says is that after SLD refused to return to the Dulwich site, CCL tried to obtain multiple quotations, but were forced to accept the one quotation received for £40,000. He does not exhibit the quotation, or any documentation in relation to the works, or even confirm the name of the sub-contractor.
28. Finally he said that even if one accepted that there might be substance in this £40,000 claim a calculation showed that there would still be sums owing to SLD. The calculation started with the £45,517.89 shown on Cosmur's revision of the final account, less the £18,000 liquidated damages, which came to £27,517.89. But the £45,517.89 was based on a valuation of the works (after adjustments) of £410,517.89 less the previous sum of £365,000, and the £365,000 was not in fact what had previously been paid. It was what the work had previously (in the payment certificate of 21 January 2016) been valued at, but the actual payment was reduced by a 5% retention of £18,250 leading to a cumulative payment of only £346,750. If one added back the £18,250 to the £27,517.89 the balance due was £45,767.89, so even after deducting the claimed £40,000 set-off there was a balance due to SLD. In response, Ms Stephens pointed to cl 7.8 of Cosmur's standard terms and conditions under which Cosmur could withhold half the retention for 3 months after the Overall Completion Date, and the other half for 18 months.
29. On the figures it seems to me that the deciding question is whether there is any substance in the £40,000 set-off. If there is not, then even if Cosmur is right on everything else, it does not seem to me that it has a case of any substance that SLD will end up owing it money. The amount shown as due on the revised draft final account in June was £45,517.89. That assumed an overvaluation of some £38,000. Cosmur now suggest that there was in fact an overvaluation of £56,000, but that is only a further £18,000 or so which means that if one reduces the £45,517 figure by a further £18,000, and also by the £18,000 liquidated damages, the final valuation would still show a balance in favour of SLD of some £9,500.
30. Conversely, if the claim to a £40,000 set-off is a good one, then I do not think it matters whether one starts, as Mr Wygas would have it, with the acceptance in June that there was some £45,517 payable, or, as Ms Stephens would have it, with the claim now put forward that the works have been overvalued by some £56,000. Even assuming Mr Wygas is right, the £18,000 liquidated damages and the £40,000 set off would exceed the figure of £45,517, which means he would need to succeed on the retention point as well. But in circumstances where I have accepted that I cannot resolve whether Cosmur's terms and conditions are incorporated or not, it seems to me that I must proceed on the basis that Ms Stephens may be right about the retention.
31. In those circumstances the critical question is whether the £40,000 claim is a genuine and substantial cross-claim. Mr Wygas pointed out that Mr Robertson's witness statement was served at the last possible moment – indeed served late – so Cosmur had as much time as possible to substantiate this claim, and yet the evidence in support of it is very thin. That I accept, and I do find it surprising that although Mr Robertson goes into the overvaluation questions on Suttons Lane in some detail, his evidence is so scanty in relation to the losses on the Dulwich site. Mr Wygas referred me by way of analogy to the recent decision of COD Hyde Ltd v Space Change Management Ltd [2016] EWHC 820 (Ch) where Warren J had refused to accept that the employer in that case had a counterclaim of any substance against the contractor. That of course turned on its own facts but it is noticeable that Warren J said (at [50]) that it was not possible on the material before him to form any view as to what quantum of loss the employer was said to have suffered, and again (at [52]) that he found himself unable to accept that the employer had even a shadowy counterclaim in any identifiable minimum amount.
32. By contrast here I do have a figure put forward in the evidence of Mr Robertson (of £40,000) and there is evidence that this was not plucked out of the air in answer to the statutory demand as the same figure is given in a letter from Cosmur to SLD of 27 June 2016 confirming that Cosmur had employed another sub-contractor to complete SLD's works, that the costs for completion would be approximately £40,000, and that they would be seeking full recovery for them (as well as loss and expense for delays caused). No doubt the evidence in support of this claim could have been rather fuller, but I do not feel able to say that it is not a genuine and substantial cross-claim. In those circumstances, even if I am wrong as to whether the petition debt itself is bona fide disputed, I would have granted an injunction as sought.

Conclusion

33. I will grant an injunction restraining the presentation of a petition as sought by the applicant.