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Court Rules on £12 Million Construction Contract Debt

SilosA construction company (the applicant) which claims that it is owed more than £12 million in respect of work it performed on the installation of a bio-ethanol processing plant may only recover four pence in the pound after the company with which it contracted (the respondent) went into liquidation with debts exceeding £290 million.

The applicant had sought leave to make an application for relief under section 423 of the Insolvency Act 1986 with the objective of compelling the respondent’s mother company to honour the respondent’s debts. It was argued that ‘letters of support’ given to the directors of the respondent by its mother company constituted a binding obligation on the latter to make good the respondent’s deficiencies.

It was submitted that it was at least partially on the basis of those letters of support that the respondent had been able to continue to trade throughout a period of more than three years despite growing losses. The respondent went into administration, and subsequently liquidation, after its mother company ultimately withdrew financial support.

Dismissing the application, however, the High Court noted that the letters of support had been addressed to the respondent’s directors and were intended to do no more than to reassure those directors that the respondent’s accounts could properly be prepared on the basis that it remained an on-going concern.

The letters did not constitute a binding contract between the mother company and the respondent which had given no valuable consideration in return for the assurances given to its directors. The court concluded that the applicant had no realistic prospect of establishing that there was any enforceable obligation on the mother company to cover the respondent’s debts.

The court noted that a statement of affairs signed by the respondent’s directors revealed an overall indebtedness of £292 million, £47 million of which was attributable to trade creditors. The respondent also owed more than £33 million to its pension fund and the liquidation was likely to result in a payment of no more than four pence in the pound for unsecured creditors.