Breyer Group Plc v RBK Engineering Ltd

This is an application, made by notice dated 2 May 2017, for an order that the Respondent (RBK Engineering Ltd. – “RBK”) be restrained from proceeding further with a creditor’s petition to wind up the Applicant (Breyer Group PLC – “Breyer”) whether by advertising the same or otherwise and that the petition is removed from the file or struck out.

In view of the fact that those who do business with Breyer have expressed interest in the outcome, I will summarise my conclusions at the outset.

The application is supported by fairly extensive witness statement evidence mainly from senior executives of Breyer and certain ex-employees of RBK (for Breyer) and from Mr Louis O’Mahoney (director of RBK, for RBK) of which I will summarise the most salient parts under the relevant headings.

The principles upon which the court will act in striking out a winding up petition are well known and were not in dispute. In Angel Group v. British Gas [2012] EWHC 2702, they were summarized as follows by Mr Justice Norris at [22]:

“The principles to be applied in the exercise of this jurisdiction are familiar and may be summarised as follows:-

a)

A creditor's petition can only be presented by a creditor, and until a prospective petitioner is established as a creditor he is not entitled to present the petition and has no standing in the Companies Court: Mann v Goldstein [1968] 1WLR 1091.

b)

The company may challenge the petitioner's standing as a creditor by advancing in good faith a substantial dispute as to the entirety of the petition debt (or at least so much as will bring the indisputable part below £750):

c)

A dispute will not be "substantial" if it has really no rational prospect of success: in Re A Company No.0012209 [1992] 1WLR 351 at 354B.

d)

A dispute will not be put forward in good faith if the company is merely seeking to take for itself credit which it is not allowed under the contract: ibid. at 354F.

e)

There is thus no rule of practice that the petition will be struck out merely because the company alleges that the debt is disputed. The true rule is that it is not the practice of the Companies Court to allow a winding up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds, because the effect of presenting a winding up petition and advertising that petition is to put upon the company a pressure to pay (rather than to litigate) which is quite different in nature from the effect of an ordinary action: in Re A Company No.006685 [1997] BCC 830 at 832F.

f)

But the court will not allow this rule of practice itself to work injustice and will be alert to the risk that an unwilling debtor is raising a cloud of objections on affidavit in order to claim that a dispute exists which cannot be determined without cross-examination (ibid. at 841C).

g)

The court will therefore be prepared to consider the evidence in detail even if, in performing that task, the court may be engaged in much the same exercise as would be required of a court facing an application for summary judgment: (ibid at 837B).”

Breyer is an unlisted, company incorporated on 2 December 1963 with registered offices in Romford, Essex. According to the unchallenged evidence of its finance director, Mr Neil Fisher, Breyer had a ledger balance of £622,288.28 on 15 May 2017. Breyer currently has over 400 employees and is active in the construction industry. Its turnover in 2016 was approximately £92.4 million with profit before tax of c. £316,000. That was not an unusual level of turnover and profit over the last five years, with profits regularly in the several hundreds of thousands of pounds. A letter from Lloyds bank dated 18 November 2016 confirms that Breyer has access to an overdraft facility in the sum of £4,000,000.00 which has apparently not been used.

It is, in my judgment, clear that Breyer has at all material times had the financial means to pay the sum claimed in the petition. The whole of the disputed sum was transferred to its solicitors when it became apparent that the petition would not be voluntarily withdrawn. On the basis of the evidence before me, Breyer is plainly not insolvent in the sense of being unable to pay the alleged debt.

It is said on behalf of RBK that some of the payments due under the contract were late and it is true that some of them were by varying numbers of days and in some cases, more than a fortnight. However, as Mr John Walsh, the construction director of Breyer, points out, on one occasion they paid early at RBK’s request. None of that provides evidence that Breyer is or was unable to pay its debts as they fell due. I reject Mr Louis O’Mahoney’s statement in his evidence that Breyer was “wholly unable to pay its debts as they fell due” in the relevant period. There is nothing in the broader picture of evidence to justify that.

As Mr Fisher says, this is not a question of Breyer being unable to pay the sum claimed by RBK in the petition but a question of Breyer refusing to pay the sum claimed. It is in short, not a case of can’t pay, but won’t pay. It is against that background that the question of whether this petition which seeks to wind up Breyer for non-payment of this debt is an abuse of process falls to be assessed.

The dispute arises out of the non-payment by Breyer of a sum allegedly due in respect of work undertaken by RBK as a sub-contractor for Breyer in respect of a building project pursuant to a contract with Affinity Sutton Group.

RBK made a sub-contract with Breyer on 28 May 2015 (“the 2015/2016 Contract”) whereby RBK agreed to undertake to supply labour, plant and materials to carry out Kitchen, Bathroom, W/C and OT Shower Room refurbishments in accordance with the contractual terms.

The 2015/2016 Contract contained a number of standard terms and conditions of which the following are important.

The Appendix to the contract indicates that the First Payment Due Date pursuant to clause 8(b) of the agreement is set out in an “attached summary of valuation dates” and that clause provides that the Payment Due Dates thereafter until the Works are completed are the same date in each month as the date stated in the Appendix for the first Payment Due Date (unless otherwise stated in the Appendix).

The Appendix is a somewhat puzzling document since it contains not only what appears to be (but is not expressly described as) a Payment Due Date but also a number of other dates. For each period, RBK was to submit its application no later than the 20^th of the month; Breyer’s NOTICE TO SUB-CONTRACTOR OR PAYMENT AND DEDUCTION was due on the 23^rd or 24^th of the following month. There was a further column specifying a date some 6 weeks later in each case, described as the DUE DATE FOR SUB-CONTRACTOR FINAL PAYMENT WITHOLDING NOTICE. There was also a column a week after that described as the FINAL DATE FOR SUBCONTRACTOR PAYMENT. Some of these columns and the descriptions of them are not easy to reconcile with the payment structure provisions of clause 8 of the agreement. However, it is common ground, at least, that:

Again, quite how that meshes with the requirements of clause 8 is not wholly clear. However, it appears to be common ground that both parties operated as though these timings formed part of their contractual obligations and entitlements. In my judgment, regardless of whether in fact they were, they provide some evidence that the timings provided in the Appendix were regarded by the parties as providing a reasonable period for Breyer to respond to payment applications. That is particularly so in respect of the final payments where, inevitably, tying up all of the loose ends and ensuring that RBK was receiving exactly what it was entitled to (no more and no less) and that all of the documentation was in proper order may have been expected to take more than merely a few days.

In my judgment, it is at its lowest arguable that, even if not an express requirement of the contract, it was implicit in it that no obligation to pay would have arisen until the expiry of a reasonable period for Breyer to consider (and if necessary investigate) the claim for payment and that reasonable period was for the final payment at least no shorter than was required in the Appendix. If that is correct, Breyer would have well over a month to consider an application for payment and to provide its Notice of Payment by reference to which payment was to be made.

Moreover, it is important to bear in mind the distinction between the contractual requirements of dates for submitting applications and Payment Notices and the obligations to pay to which they may give rise. Even if either an application for payment or a Payment Notice was late that would neither extinguish the right of RBK to recover payment nor would it extinguish the right of Breyer to assert that it was not obliged to pay either because the conditions for payment had not been satisfied, or because there was a substantial counterclaim. At some points, it was suggested that under the contractual scheme, if Breyer was out of time in serving its Payment Notice, that would automatically mean that a debt arose at the point that the time expired for the whole sum claimed in the RBK’s application for payment. I am unable to accept that approach to these contractual terms taken as a whole; in any event, for the purpose of this application, I do not consider the contrary to be unarguable.

The 2015/2016 Contract also contained an express dispute resolution clause providing that either party may at any time, by written notice to the other, require that any dispute or difference arising between the parties under, out of or in connection with the Appointment as sub-contractor be referred for determination by adjudication in accordance with Part 1 of the Schedule to the Scheme for Construction Contracts (England and Wales) Regulations 1998.

That clause does not in terms require reference to adjudication or exclude the possibility of an ordinary debt claim but provides an alternative means for dispute resolution which I was told at the hearing is rapid and is normally undertaken by specialists in this area of law and practice.

The parties appear to have operated reasonably satisfactorily under that agreement and in particular, appear to have respected (or aimed to respect) the timings set out in the appendix albeit with the late payments mentioned above.

In early 2016, it became apparent that more work would be wanted from RBK. On 14 April 2016, Mr Baker of Breyer sent an e-mail to Mr Louis O’Mahoney of RBK which stated:

“As we move in through to the new works and financial year a note of clarity. We will be going through and discussing the works and terms over the next financial year shortly. However please note in the interim period all terms and conditions that under our existing agreement pertain.” [sic]

It is said in Mr Walsh’s evidence on behalf of Breyer that this was intended specifically to refer to the terms and conditions that RBK was to submit its interim payment applications by no later than the 20^th of each month and that Breyer had the right to treat any late applications as being carried forward to the following month’s payment regime.

That e-mail was followed some time later by Breyer sending RBK a draft agreement in August 2016, back dated to 1 April 2016, in similar form to that of the 2015/2016 contract albeit with certain of the terms altered and the scope of work expanded to cover electrical and boiler work (which was not expressly included in the scope of the 2015/2016 Contract). The document different from the 2015/2016 Contract in that it did not contain any appendix setting out the Payment Due Dates (or any of the other dates) although the draft referred to them.

On 5 August 2016, Mr O’Mahoney acknowledged receipt and said: “I will review and come back to you early next week”. In the event, this does not seem to have happened and on 9 November 2016, apparently in the context of another issue having arisen, he said in an e-mail on behalf of RBK:

“The terms are onerous and we have not signed your order”.

Nonetheless, work was undoubtedly carried out by RBK prior to the sending by Breyer of the draft 2016/2017 contract and, in my judgment, it is at least arguable that the work for the 2016/2017 period was undertaken on the terms of the 2015/2016 Contract which were treated as applicable to the continuing (and somewhat expanded) scope of works pending formalization of an agreement. Again, I do not think this issue is suitable for resolution on this application.

For the purpose of this application, it suffices to say that it is clear there is a genuine dispute as to the terms of work and a genuine dispute as a result as to what timing regime was either agreed or was reasonable for the exchange of documents giving rise to an obligation to pay the applications for payment submitted by RBK.

By late 2016, the sub-contracting arrangement was apparently proving onerous for both sides and the impression left by the evidence, at this stage, is that RBK may have been struggling somewhat to fulfil all of its obligations while on Breyer’s side, it was regularly late in paying. This was a source of friction according to Mr O’Mahoney’s evidence and I accept that this may have been one reason why they sought to bring the relationship to an end.

However, I am not persuaded that it was the only reason. According to the evidence of Mr Walsh, there had been several concerns and complaints raised by Breyer about RBK’s work. Some of these related to the safety of RBK’s working practices, some related to the nature of the gas upgrade work. In his evidence, he says that Breyer consistently raised concerns with RBK over the quality of its work and the content of its payment applications. He makes the point, which for the purpose of this application I accept, that defects and areas where work was not done are not always apparent and where the consequences may not be easy to determine at this stage. He gives a number of examples.

First, some of the electrical and plumbing work is hidden from a non-invasive inspection. A number of examples of problems with the work have come to light only relatively recently, including some which has been rectified by RBK suggesting that the claims that the work was originally not complete were not without foundation.

Second, the Affinity Sutton Group has appointed ARC to undertake an audit into work undertaken by RBK at the Affinity Sutton Project and has discovered at least some issues. Any work which was defective would have to be remedied by Breyer or at its cost and this is difficult to quantify at present. Breyer has recently received an e-mail from Affinity Sutton (11 May 2017) stating:

“Because of the number of failed audits during 2016 on works carried out by RBK we have discussed additional audits being carried out, only on RBK works, to ensure there wasn’t a trend throughout the works.”

This, in my judgment, suggests that a third party to this dispute considers that it is at least possible that an audit may reveal more systematic failings in work undertaken by RBK in 2016.

Third, evidence has been provided suggesting that the certification of electrical work by RBK was unsatisfactory. In particular:

Mr O’Mahoney has denied any wrong-doing in his evidence on behalf of RBK and suggested that Mr Bunston is not independent. This court cannot resolve these issues on this application and, again, it suffices to say that they support the contention advanced by Breyer that it has or may have substantial counterclaims against RBK as well as defences (since it is accepted on behalf of RBK that it would not be possible to demand payment in respect of electrical work where certificates had been submitted that, for whatever reason, were not correct). According to Mr Walsh’s evidence, Breyer has identified 20 Electrical Certificates and 6 Minor Works Certificates where Mr Brunston’s signature has been used apparently after he ceased to be employed at RBK. According to Breyer’s schedule justifying the non-payment pursuant to the final application for such, a significant proportion of the work for which claims for payment were made was electrical. Mr Walsh says although this is not accepted by RBK that if retesting of the electrical installations is required, the cost of the exercise including the management time will be vast and will “significantly exceed the sum claimed by RBK in the petition”. In my judgment, on any view, this is an area which requires thorough investigation. It does not bear the hall marks of an allegation simply cooked up to avoid payment.

Fourth, there is a significant dispute as to whether samples were properly taken and supplied to an external testing facility for the purpose of testing boiler systems for safety and other purposes. RBK contends that it undertook proper testing. The external testing facility has not been able to locate records of certain samples having been submitted to it at all. There is no evidence that RBK raised the issue of missing samples with the external testing facility. Again here, Mr O’Mahoney rejects any suggestion that RBK has acted in breach of its obligations. Nonetheless, in my judgment, this too is an area where the facts remain, at this stage, unclear and may give rise to further claims which are difficult to quantify.

By the end of 2016, both parties recognized that they should bring their relationship to an end and entered into a Settlement Agreement dated 14 December 2016. There is, again, dispute as to why this happened, which I cannot resolve.

The key terms of the Settlement Agreement for present purposes were that the parties would continue performing the contract (and the existing terms would apply) but it would (in essence) conclude early with a scheme of payments.

Clause 3.1 provided that Breyer would pay RBK a total sum “still to be agreed” but based on payment notices 7, 8, 9 and 10 (final account) and release of the year 1 retention and the year 2 retention divided into installments and payable by way of bank transfer. By the time the Settlement Agreement was made it was no longer in dispute what the sums due pursuant to Payment Notices 7 and 8 were. Specific sums with dates for payment were provided. However, payment notices 9 and 10 (the final account) had yet to be provided.

In relation to the final payment, the clause provided:

“3.1.10: 25% of Payment Notice 10 (Breyer Group PLC assume payment 10 will be based on an agreed and signed final account) (incl. CIS and any other Statutory Deductions to be paid 24/02/2017”.

The agreement provided for dates for payment of the remaining 75% in tranches until 17 March 2017. As noted, the clause also provided for payment of the retention less a discount. The Settlement Agreement provided that “In all other respects the full term of the Contract will continue to apply” but “Contract” was not defined in the Settlement Agreement.

As I have said, that gives rise to the dispute outlined above as to which terms applied (whether those of the 2015/2016 Contract or those of the 2016/2017 draft agreement). In my judgment, for the purpose of this application, that does not require resolution. It is common ground that Breyer was not obliged to pay whatever RBK applied for by the period 10 application but only that which appeared in the relevant Payment Notice. RBK supplied its application for the final period 10 on 3 February 2017 some 3 weeks before 24 February 2017, providing less time than would have been provided under the 2015/2016 Appendix schedule and which was at least arguably (see above) an unreasonably short period in which Breyer could make an assessment and issue a Payment Notice on this final account. It is arguable, for the reasons given above, that the agreement between the parties required that RBK provided its application by the 20^th of the month (which it was not and it acknowledged that it was late).

In any event, I reject the argument that Breyer’s Payment Notice was out of time or that even if it was that gave rise to a debt as at 24 February 2017 in the sum claimed in the application. At best, that gave rise to a claim against Breyer to which Breyer was entitled to respond by a Payment Notice including a Pay Less notice in a negative sum and by way of a claim against RBK under clause 8 of the 2015/2016 Contract (which applied whichever terms were in place). More strictly, it is arguable that such is the case.

Breyer’s Payment Notice (or rather Pay Less Notice) was served on 1 March 2017, within an arguably reasonable, or contractually applicable, time of service of RBK’s application, having regard to the terms referred to above. This showed that nothing was owed at that stage by Breyer and that, to the contrary, a small balance was due the other way. It contained a detailed analysis of the application and, in particular, pointed out that a large portion of the electrical work was “awaiting certificates”.

The e-mails sent at the time indicate that there had been a somewhat heated debate between the parties at the beginning of March 2017 but the documents show a real willingness to credit RBK and to pay against provision of properly conforming documentation. There is nothing, to my mind, that suggests that the Pay Less notice lacked bona fides or that the points advanced then as now by way of potential defence are not serious ones. They were consistent with some of the points raised previously and are consistent with the independent view referred to above as well as the evidence of former employees of RBK that (at the lowest) RBK’s attention to this project was less full than it might have been.

There are two other points. First, I should say, for completeness, that I do not accept the submission that Breyer has accepted that there is a debt due and owing greater than £750. In each of the documents in question, they accept that this may be the case but that this is subject to (in effect) a final audit and subject to cross-claims. To my mind, what they show is that Breyer has been willing to give credit to RBK where it was established properly to be due. Of course, it may turn out after full investigation that Breyer’s Pay Less notice was insufficiently favourable to RBK. It may turn out that, if there is a significant cross-claim, it may have been too favourable.

Second, as to the claim to the retention, in my view this is not separable from the claim to the other sums. The whole claim may be exceeded by a cross-claim. The retention is also expressed as a percentage of the final gross sum and, until that is known, which depends on the other matters referred to above, quantifying it is impossible. There is therefore no current properly formulated and quantified separate debt arising under the Settlement Agreement in respect of the retention. Moreover, a retention is provided partly to ensure that there can be final checks that the work has been properly completed. Since a number of issues have been identified, it would not be right to treat this as payable immediately and separately.

The winding up petition, dated 22 March 2017, claims that Breyer is indebted to RBK in the sum of £258,729.16 in respect of valuations for goods supplied and services rendered for electrical remedial works and other works and other associated charges supplied by the RBK to Breyer, at Breyer’s request. It also claims that Breyer has admitted that it is insolvent, unable to pay its debts as they fall due and specifically that it has failed to pay installments due under a Valuation 10 due on 4 February 2017.

As noted above, Breyer contends that it is not insolvent and that the debt in question is disputed. It also contends that there is a substantial counterclaim. Breyer says that the continuation of these winding up proceedings are likely to have an adverse impact on its business, both as a result of creating an adverse credit reference and because of the impact of such a petition (and knowledge of it) on other contracts as well as banking relationships.

For the reasons given above, and applying the principles summarized in Angel Group, I agree with Breyer’s submissions. Breyer is not unable to pay its debts, on the evidence before me. There is a range of reasonable potential defences to the claim (of which I have outlined some, but not all, of the elements above) as well as significant potential counterclaims whose value remains to be quantified.

I have undertaken the reasonably comprehensive analysis of the materials required by Angel Group to determine whether there are serious, albeit not necessarily winning, points to be made by Breyer and have concluded that there are. I therefore accept the submission made by counsel for Breyer that the petition debt is disputed on bona fide and substantial grounds and that Breyer has a potential substantial cross-claim.

I am therefore not satisfied that, at the date of the petition, RBK was a creditor of Breyer and that it had standing to present this petition. To the contrary, RBK appears to be in the position of a conventional claimant on an invoice where the liability to pay the bill is disputed and where the dispute is wholly unsuited to resolution in insolvency proceedings.

The courts have recognized on numerous occasions that such proceedings are not the place for resolving genuinely disputed debt claims which the court cannot properly determine, either as to merits or as to quantum, at this stage. I have in mind, in particular, the summary of authorities reviewed in Re a Company No 006685 of 1996 [1997] BCC 830 Chadwick J and the judgment of the Court of Appeal in Wilson and Sharp Investments Ltd v. Harbour View Developments Ltd [2015] EWCA Civ 1030, which related to a contract which was, in some respects, similar to the present one but where the facts were less clearly in favour of the applicant than here. In that case, the applicant had not raised the potential defences at an earlier stage. Nonetheless an injunction was granted to restrain further proceedings on the petition.

Such petitions also have the potential to create injustice because a company against whom a winding up petition is sought may feel pressurized into paying simply to avoid the petition being advertised which may itself have a range of serious commercial consequences on banking and other contractual relationships. In that way, such proceedings can operate as a form of commercial oppression, where the very existence of proceedings can be the source of disproportionate injustice. While the court must be astute to avoid having the wool pulled over its eyes by a debtor trying to escape its obligations, it must be equally astute to avoiding injustice being caused by a potential creditor using insolvency proceedings to make it less likely that a justified defence or counterclaim will be pursued because the alleged debtor will be pressurized into paying the claim in full before that can be done.

While in some cases, a debtor’s position may be self-evidently hopeless and it would be just to permit a petition to succeed, I do not think this is a case in that category. Despite the excellence of the fairly-presented argument advanced by Mr Bowles, I have no hesitation in striking this petition out as an abuse of process.

This petition has not been advertised but the proceedings have been identified by the name of the parties in the court list and I was told that at least one other undertaking is aware of them.

At the commencement of the hearing, the court sat in open court but during the course of the submissions an application was made by Breyer that the hearing should be in private so as to avoid the risk that publicity about the petition may cause the injustice that the application was intended to avoided. Both sides agreed to a temporary order sitting in private which I made but I said that I would consider the issue of confidentiality further in due course.

This is a case where allegations of insolvency have been made and may be the subject of speculation. It is right that the court should deliver its judgment dealing with them openly. I circulated a draft of this judgment to counsel for the parties confidentially, indicating that the judgment would be given in open court unless particularly strong reasons were given for why that should not be done, having regard to the requirements of open justice which have been emphasized in numerous cases (see, for example, the summary in Lilly Icos Ltd v Pfizer Ltd (2) [2001] EWCA Civ 2 at [25] stating, with reference to Scott v. Scott, that the court should start from the principle that very good reasons are required for departing from the normal rule of publicity). Breyer, which was concerned about confidentiality, indicated that it was content with this course and, in those circumstances, I consider that this judgment should be a public one.

I will hear counsel at a convenient point as to consequential matters.