This month’s contract clinic comes from an aggrieved subcontractor whose main contractor client is refusing to pay invoices. David Birne from Begbies Traynor explains whether a ‘winding-up’ petition is a sensible strategy.
Our client, a main contractor, is refusing to pay our invoices. I’ve heard that it’s possible to issue a ‘winding-up’ petition to force them to pay. Is that possible and how successful would it be?
With the current cash crisis in the construction industry, many employers, contractors and subcontractors are in arrears with agreed payment terms or negotiated time to pay arrangements. So what can suppliers do to elicit payment and move their claim to the top of the outstanding payables pile?
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There are limited formal routes available to collect an outstanding debt. Once the friendly approach through demand letters and telephone calls has been tried and has failed, a more robust route may be required.
In this situation, should a winding-up petition be issued?
It is common practice to issue a statutory demand to warn the debtor that you intend to issue a winding-up petition. However, this is not legally necessary if you have clear evidence of the debtor’s insolvency. It is hoped that a statutory demand brings the debtor to the table, as they are aware that a winding-up petition can be issued 21 days later.
Immediate effect
In 2022 the Caseboard.io website was launched and this provides near instant access to court records. As a result, when a petition is issued at the court this appears on Caseboard and the effect is immediate, potentially leading to the freezing of the debtor’s bank account/funding sources and potential reputational damage.
In some cases, the debtor only finds out about the petition from their bank or other creditors as it has not yet been served on them.
However, this may not produce the desired effect. Claimants may lose any leverage to get paid. This is because the Insolvency Act 1986 kicks in on issue of the petition, preventing debtors making payments without a court order.
The debtor may also very quickly find that any intentions they have to pay the petition debt are further derailed as other creditors quickly support the petition, making the prospect of payment or at least a payment plan unrealistic.
Costs and prospects of a dividend
The costs of issuing the petition should also be taken into account. In 2022 the deposit required for a petition increased from £1,600 to £2,600. Combined with the petition fee and solicitor’s costs, this results in a minimum outlay of £5,000- £6,000 plus VAT.
Although the petition costs are repaid by the liquidator out of first realisations, you may have to wait a long to time for this to happen and the underlying debt itself only ranks as an unsecured creditor equally with other suppliers.
In December 2020 HMRC regained its preferential status, meaning that VAT, PAYE/NI and CIS must be repaid in priority to unsecured creditors. As a result, the prospects of getting even a small dividend depend on the value of the debtor’s assets, the level of HMRC debt and any secured creditor obligations. As Companies House data is generally out of date it is very difficult to make a call on asset value and creditor levels.
Investigations
There may be other reasons to petition, including a concern that the debtor has moved assets or personally withdrawn significant monies.
In this case a liquidator has significant powers to investigate transactions and demand key stakeholders provide information and assistance. A liquidator is also able to access litigation funding to support the taking of legal action making a settlement more likely.
The decision whether to issue a petition or not is a difficult one. In some cases, it has the desired effect and payment is received. In others it will just result in wasted costs.
As each claim is individual, before making a decision please speak to your lawyer or an insolvency practitioner who may be able to guide you through the pros and cons, and allow an informed decision to be made.
David Birne is an insolvency director at Begbies Traynor.
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