Winding-Up Petition: Impact on Building Contracts Explained

Receiving a winding-up petition is one of the most serious events that can befall any business and for contractors in the construction industry, the consequences can be particularly far-reaching. A winding-up petition does not merely threaten a company’s solvency; it immediately calls into question the status of every live building contract that contractor is a party to. Employers, subcontractors, and funders are left asking the same urgent question: what happens to the building contract now?

This article explains the legal position under English law when a building contractor becomes the subject of a winding-up petition, the rights that arise for each party, and the steps that should be taken without delay. If your contractor has been served with a petition, or if you are a contractor facing one, specialist legal advice is essential. Our insolvency solicitors and barristers at LEXLAW act for parties on both sides of these disputes and can advise you quickly.

Does a Winding-Up Petition Automatically Terminate a Building Contract?

Not necessarily and this is a critical distinction. The presentation of a winding-up petition does not, of itself, bring a building contract to an end. The legal effect depends on the wording of the contract itself and whether any termination rights are triggered.

Most standard form building contracts including the JCT (Joint Contracts Tribunal) suite, NEC4, and FIDIC contain express provisions that allow an employer to terminate the contractor’s employment upon the occurrence of specified insolvency events. A winding-up petition will typically satisfy the definition of an “insolvency event” in modern construction contracts, thereby engaging those termination provisions.

However, it is important to distinguish between the contract being terminated and the contractor’s employment under the contract being terminated. Under JCT contracts, for example, clause 8.5 provides for termination of the contractor’s employment without bringing the contract itself to an end the contractual framework survives for the purposes of ascertaining the final financial position. This distinction has significant practical consequences for how the parties must proceed.

JCT Contracts: What the Standard Provisions Say

The JCT Design and Build Contract 2016 and the JCT Standard Building Contract 2016 both contain detailed insolvency provisions. Under clause 8.1, insolvency is broadly defined to include the making of a winding-up order, the appointment of a provisional liquidator, and, crucially, the presentation of a petition for winding up.

Once an insolvency event occurs, the employer is entitled, under clause 8.5.1, to terminate the contractor’s employment by giving notice. Importantly, clause 8.5.3 provides an automatic suspension mechanism: if the contractor becomes insolvent, the contractor’s employment is automatically suspended even before any notice is given. This means that upon the presentation of a winding-up petition, work on site may effectively freeze pending the employer’s decision on how to proceed.

Following termination, the financial consequences are addressed in clause 8.7. The employer is entitled to engage another contractor to complete the works, and the resulting additional costs, delay damages, and other losses are set off against sums otherwise due to the original contractor. The final balance is then assessed a process that can be contentious and protracted, particularly in complex building projects.

The Position Under NEC4 Contracts

Under NEC4 contracts, insolvency is dealt with under clause 91. A party may terminate the contract if the other party becomes insolvent, and the presentation of a winding-up petition is listed as one of the grounds for termination (clause 91.1). The NEC4 approach is more prescriptive than JCT in terms of the financial settlement upon termination: the procedures set out in clause 92 and the applicable termination table govern the amounts due.

One of the key features of NEC4 insolvency termination is that the employer does not have an unfettered discretion to terminate; the contract requires proper notice and the application of the stated procedures. Failure to follow those procedures correctly can expose an employer to claims for wrongful termination, even where the contractor is insolvent.

The Validation Order Problem: Why Bank Accounts Freeze

One of the most immediate and practically disruptive consequences of a winding-up petition is its effect on the contractor’s bank accounts. Under section 127 of the Insolvency Act 1986, any disposition of property made after the commencement of a winding-up, which, for a compulsory winding up, is deemed to commence when the petition is presented is void unless the court validates it.

This means that once a winding-up petition has been presented against a contractor, any payment into or out of that contractor’s bank account is potentially void. Banks routinely freeze the accounts of companies against whom a petition has been advertised in the London Gazette. This can bring a construction project to a sudden halt: wages cannot be paid, materials cannot be procured, and subcontractors stop receiving payment.

A contractor in this position will typically need to apply urgently for a validation order, which the court may grant to permit ongoing trading in the ordinary course of business. Our specialist insolvency lawyers have extensive experience in obtaining validation orders at short notice.

Can the Employer Continue to Pay the Contractor After a Petition is Presented?

This is a question that concerns employers deeply. Continuing to make payments to a contractor after a winding-up petition has been presented carries legal risk. Under section 127 of the Insolvency Act 1986, those payments may be void meaning that if the company is subsequently wound up, the liquidator could seek to recover those sums from the employer, who would then rank as an unsecured creditor for the same amount.

Employers should therefore seek urgent legal advice before making any further payment to a contractor against whom a petition has been presented. The correct course may be to withhold further payments, seek a validation order, or engage with the contractor’s insolvency practitioner to understand the position. Our insolvency solicitors at LEXLAW can advise on the specific steps appropriate to your circumstances.

Key Case Law: Bouygues and Beyond

The courts have considered the intersection of construction contracts and insolvency in a number of important decisions.

In Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18, the House of Lords held that a contractor’s insolvency entitled the employer to exercise its termination rights even though this meant the contractor (and its administrators) lost its entitlement to sums that would otherwise have been due. The court declined to imply any obligation on the employer to refrain from exercising express contractual rights simply because the contractor was insolvent.

More recently, in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, the Supreme Court confirmed that a company in liquidation retains the right to refer a dispute to adjudication under a construction contract a significant and often overlooked right for insolvent contractors and their liquidators. This decision opens the door to recovery of construction sums even after a winding-up order is made.

What Happens to Subcontractors?

For subcontractors, the insolvency of the main contractor is acutely serious. The subcontract will typically contain its own termination provisions, and those provisions will be engaged by the same insolvency events. However, a subcontractor’s primary concern is often not the legal position on termination but the practical reality of unpaid invoices and work completed but not certified.

Subcontractors should be aware of the following key points:

• The right to suspend performance for non-payment under section 112 of the Housing Grants, Construction and Regeneration Act 1996 continues to be available even where insolvency proceedings have been presented, subject to proper notice.
• Any sums owed by the main contractor at the date of insolvency will rank as unsecured debts in any subsequent liquidation, meaning full recovery is unlikely.
• Project bank accounts and retention trust arrangements, where they exist, may offer protection for sums held on trust, which should fall outside the general estate of the insolvent contractor.
• Adjudication rights, as confirmed in Bresco, remain available and should be considered as part of any recovery strategy.

If you are a subcontractor facing the insolvency of your main contractor, our insolvency and litigation lawyers can advise on your recovery options and help you protect your position as a matter of urgency.

Retention Money: A Frequently Overlooked Risk

Retention funds held by an employer under a building contract do not automatically constitute a trust in favour of the contractor. Unless the contract expressly creates a retention trust or the parties have established a separate retention account retention money forms part of the employer’s general assets. If the employer becomes insolvent, those funds may be lost.

Conversely, where a contractor is insolvent, any retention held by the employer can be applied against sums due on account of additional completion costs and losses, in accordance with the contractual set-off provisions. Contractors and subcontractors alike should consider the legal structure of any retention arrangements before insolvency arises. Specialist advice from our solicitors at LEXLAW can help establish whether a retention trust exists and how it can be enforced.

Steps to Take Immediately If Your Contractor Has Received a Winding-Up Petition

If you are an employer or a project funder who has discovered that your main contractor is the subject of a winding-up petition, the steps to take immediately are:

• Do not make any further payment to the contractor without legal advice.
• Obtain a copy of the petition and establish its current status (has it been advertised in the London Gazette?).
• Review the building contract to identify the exact termination triggers and procedures.
• Secure the site and document the state of the works.
• Notify your funder, surety bond provider, and insurers as required.
• Consider whether a validation order is required to permit continuing payments.
• Take specialist legal advice on whether to terminate the contractor’s employment and, if so, how to do so correctly.

How LEXLAW Can Help

LEXLAW is a City of London firm of dual-qualified solicitors and barristers specialising in insolvency, winding-up petitions, and complex commercial litigation. Our lawyers operate from 4 Middle Temple Lane in the heart of London’s legal district and appear regularly in the High Court and Business and Property Courts.

We advise both employers and contractors on all aspects of insolvency in construction, including:

• Advising on termination rights and procedures under JCT, NEC4, and bespoke contracts.
• Obtaining urgent injunctions and validation orders to protect cash flow.
• Representing companies facing winding-up petitions, including urgent applications to dismiss or adjourn.
• Advising subcontractors on adjudication, retention recovery, and proof of debt in liquidation.
• Bringing and defending professional negligence claims arising from construction and insolvency matters.
• Advising on HMRC disputes in the context of construction company insolvency, including through our specialist tax disputes practice.

Time is critical in every insolvency scenario. The earlier specialist legal advice is obtained, the greater the range of options available to protect your position.