Don’t fall for Redmond’s wind-up

John Redmond has been encouraging subcontractors to use winding-up petitions as a way of chasing debts (2 July and 13 August).

This troubles me. Insolvency proceedings should not be used simply to try to make debtors pay up where debts are disputed – and they often are in our industry. If you’re a subcontractor, you need to think carefully before issuing insolvency proceedings. And if you’re a main contractor, what do you do if a subcontractor tries to pull a fast one with one of Redmond’s draft winding-up petitions?

The court can only wind up a company in certain specific circumstances – normally because it is unable to pay its debts as they fall due. Because the easiest way to demonstrate this is to show that a statutory demand has been issued and not paid, the statutory demand is often the first step. If the debtor doesn’t get the demand set aside, that’s the point at which a winding-up petition is likely to be issued.

Before you issue insolvency proceedings, you need to be satisfied the debt is not disputed. Do not, I repeat, do not issue a statutory demand or winding-up petition unless you are sure the debt is not disputed. And when I say “disputed”, I don’t mean you don’t think there’s a dispute, but that a third party won’t. A statutory demand will be set aside if “the debt is disputed on grounds that appear to the court to be substantial”.

But let us say you are a main contractor. Redmond has been encouraging your subcontractors to issue draft winding-up petitions against you and one of them does. What to do? Fire a letter back to the subcontractor telling them that you dispute the debt. It doesn’t matter why you dispute it, provided the reason is substantial. Just make sure you say why.

What if the subcontractor has issued a statutory demand instead? Apply to get it set aside. You have 18 days to do so from the date you receive the demand. If you do not, the subcontractor will be able to issue a petition to wind up your company. But don’t be alarmed.

All you need do to get the demand set aside is demonstrate on the evidence that there’s a genuine triable issue.

Triable issues would include whether there is a contract, disputes about its terms, or whether the subcontractor’s works were defective. If you can show that there’s a question like this, the demand will be set aside and the subcontractor will have to pay your costs. One point to watch is that a demand will not be set aside simply because the amount is disputed.

The court in Kellar vs BBR Graphics (2002) observed that the threshold of proof that an applicant must get across to have a demand set aside is lower than that required to defend a summary judgment application. And an application to set aside a demand can take several months to come on for hearing, with exchanges of evidence, and all the rigmarole and cost. The cost of emergency injunction proceedings can be just as high.

The process of trying to wind a company up can therefore prove an expensive and lengthy business, and it may not get creditors any closer to payment. And, of course, if a demand is set aside or petition injuncted, the party who issued it will be liable to pay the other side’s costs. And after all that, there are appeal processes, and neither party needs leave to appeal a decision on an application to set aside a demand …

So, while all you subcontractors out there might like to consider using insolvency proceedings to chase debts, don’t rush off and do it on Redmond’s say-so. When you start considering the nuclear option, imagine you’re the one with the second key, the one needed to prime the bomb – do you or don’t you? If you issue a statutory demand or winding-up petition in the wrong circumstances it can blow up in your own face.

Nick Lane is a lawyer in London-based solicitor Winward Fearon’s construction department