Beware of withholding payments to push contractors into insolvency as a way of saving money

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the consequence of insolvencyIn June 2018 a court awarded a contractor substantial settlements after it challenged the behaviour of a large customer that withheld payments in an attempt to force it into insolvency as a way of avoiding payment.
The Technology and Construction Court (TCC) ruled in favour of the contractor, Merit Merrell Technology Limited (MMT), after it challenged the Imperial Chemical Industries Ltd (ICI) repudiation of its contract with MMT on the ‘claimed’ grounds that its welding work was of very poor quality.
The ICI withholding of payments had a knock-on effect for MMT, which was also owed substantial sums by other clients such that its bank eventually withdrew lending facilities. Following professional advice from lawyers and an insolvency practitioner, MMT survived by agreeing a Company Voluntary Arrangement (CVA) with its creditors.
It was alleged that the CVA damaged its commercial reputation and it certainly encouraged one MMT client to take advantage of the situation to substantially reduce its final account by £1.3 million.
Unfortunately, the CVA did not survive with MMT eventually entering into voluntary liquidation three years after its difficulties with ICI began.
At a trial on liability issues, the court found that ICI had its own cost pressures and had made a spurious allegation as an excuse to push the contractor into insolvency, described by the court as “extraordinary thin, verging on factually non-existent”, of poor work by MMT.
MMT then began proceedings to force ICI to pay a withheld interim payment. However, although the court ruled in MMT’s favour, the lengthy process of several court cases, including one by ICI to try to recover payments already made, eventually pushed MMT into liquidation.
In addition to the adjudicated sum of £7 million awarded by the TCC, the court also awarded a number of other sums to MMT: £1.3 million in respect of the reduced final account settlement accepted from its client; £266,472 for wasted management time; £239,369 for the professional fees incurred in relation to the CVA; £168,599  for additional banking costs including bank advisor fees and £58,994 for a VAT loan that was necessary for cash flow reasons.
Regretfully the court’s decision made in June 2018 was too late to save MMT from entering liquidation in February 2017.

The moral of the tale

While arguably ICI achieved its objective of pushing MMT into insolvency, it came at a high financial cost following the various court proceedings and rulings.
Any business considering going down this route should be aware that it may face counterclaims from its target contractor and an exceedingly costly outcome if the courts rule in the latter’s favour.
It could also carry with it some reputational damage, making it harder to attract bids from other contractors and ultimately to end up with planned works not being carried out.