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Introduction

Payment disputes remain a recurring challenge in the construction industry, often arising from defective workmanship, delays, or incomplete performance. When such disputes are not managed with clear documentation and procedural discipline, they can escalate into serious commercial risks long after project completion.

This matter centres on a construction company involved in converting an industrial building into residential flats. The project, completed in 2021, required a full structural overhaul to achieve wind and water tightness. Defects in the mastic and beading around the newly fitted windows led to the replacement of the original subcontractor being replaced and the withholding of approximately £40,000 in payment.

Four years later, in 2025, the subcontractor—by then in administration—pursued recovery of the outstanding sum through its insolvency practitioners. What began as a technical disagreement over workmanship developed into a winding-up petition against the Employer. The sequence of events highlights the commercial and legal exposure that can result from incomplete records, loss of corporate knowledge, and procedural missteps within construction businesses.

Background and Development of the Dispute

The Employer hired a subcontractor to install mastic and beading around the new windows. During the build, the subcontractor’s work proved defective and required replacement by another company. The main contractor, dissatisfied with the initial workmanship, withheld £40,000 of the subcontractor’s invoices pending rectification.

Shortly after performing the defective works, the subcontractor entered administration. For four years, no claim or correspondence was received. In mid-2025, the administrators—acting through a debt collection agency—demanded payment of the outstanding invoices, alleging the sum was due and undisputed.

The administrators had reportedly issued two letters to the client’s previous registered office, which had since changed, meaning the client had never received them. When the debt collection agency contacted the client’s accounts team, they gave only four days to respond before issuing a winding-up petition.

Legal Issues and Risks

Under the  Insolvency Act, a winding-up petition should not be used as a form of debt recovery for a disputed debt. Such petitions are appropriate only when there is a clear, undisputed, and legally recoverable sum. Using insolvency procedures as leverage in a commercial dispute constitutes an abuse of process.

However, the quick filing of the petition put the client at serious risk. Once filed, it becomes public, and creditors, banks, and suppliers may respond by limiting credit or withdrawing support. If advertised, it could breach finance agreements, trigger defaults, and lead to frozen bank accounts, effectively stopping the business from operating.

The client had experienced staff and organisational changes since the project, leaving it without quick access to key records. Many documents were archived or missing, and those who handled the original issue had left the company. Without these records, the client could not promptly show that the £40,000 was withheld because of defective work.

IMD Corporate’s Involvement and Resolution

Once instructed, IMD Corporate acted promptly to protect the client’s position. Within two weeks, the legal team prepared evidence establishing that the debt was genuinely disputed and that the subcontractor’s workmanship had been defective. The administrators’ representatives were notified that the claim could not properly support insolvency proceedings.

Following legal engagement and correspondence, the claimant’s representatives agreed to withdraw the petition shortly before it was due to be advertised. This outcome safeguarded the client from reputational and financial harm. However, the underlying dispute concerning the £40,000 remained unresolved and continues to pose a potential liability risk, pending negotiation or formal adjudication.

While the petition was successfully withdrawn, the client incurred £5,000 in irrecoverable costs to prevent escalation. The incident also caused a delay in refinancing arrangements and diverted significant management time from ongoing projects.

Analysis and Legal Commentary

The matter highlights a common problem in construction: poor record keeping and lack of clear documentation. Without full records explaining why payment was withheld, a company is less able to defend itself against later claims.

Under the Limitation Act 1980, contractual claims can generally be brought up to six years after breach. For construction-related defects, limitation periods may extend under collateral warranties or be further affected by the Building Safety Act 2022, which extends certain limitation periods in relation to building safety issues. Consequently, contractors must ensure their records remain accessible and securely stored for at least six years, if not longer.

Moreover, when withholding payment due to defective work, it is essential to provide the subcontractor with a written explanation specifying the defects and the reasons for non-payment. Clear contemporaneous records—such as site photographs, inspection reports, and correspondence—can decisively evidence the legitimacy of the withheld sum.

The matter further confirms that winding-up petitions should not be used to pressure payment of disputed debts. Courts have repeatedly criticised this practice, as it undermines the purpose of insolvency law. If the petition had been close  to being advertised, the client could have applied for an injunction to stop it, but such action is expensive and disruptive.

Key Takeaways for Construction Businesses

1. Maintain Comprehensive Records – Retain all project files, correspondence, and site reports for a minimum of six years (or longer if contractual terms or statutory provisions require).
2. Document Disputes in Writing – When withholding payment, clearly state the reasons in writing and retain evidence of defective performance.
3. Monitor Registered Office Addresses – Ensure Companies House and counterparties are notified promptly of any change in registered address to prevent missing vital correspondence.
4. Respond Promptly to Debt Collection Notices – Seek immediate legal advice if contacted by debt recovery agents or insolvency practitioners. Early engagement can prevent escalation to insolvency proceedings.
5. Avoid Misuse of Insolvency Procedures – Winding-up petitions are a last resort and should not be used to enforce disputed debts. Businesses faced with such petitions should act quickly to dispute them formally.

Conclusion

In this dispute, IMD Corporate’s prompt legal action was key to preventing a commercial risk to the client’s business. What began as a £40,000 disagreement over defective work developed into an arguably improper use of insolvency proceedings, with potential to interrupt trading and harm reputation. By acting quickly and providing clear evidence that the debt was disputed, IMD Corporate protected the client’s financial position and maintained its standing within the industry. For construction companies, the lesson is that effective dispute management and proper record keeping are essential parts of sound business practice.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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