Insolvency

Question 1

What is Insolvency?

Answer 1

The financial state where an individual or an entity is unable to meet its financial obligations.

Question 2

Name 3 protections against Insolvency?

Answer 2

Parent Company Guarantee (PCG)
Performance Bond
Collateral Warranties

Question 3

What is Parent Company Guarantee (PCG)?

Answer 3

“guarantee” the works of the subsidiary. If the subsidiary fails, the parent company will fulfil contractual obligations for the term of the contract, including defects liability periods

Subsidiary (company owned and controlled by another company)

Question 4

What is Performance Bond?

Answer 4

Guarantee by a third party, covers contractor’s obligations.
Safer route than the PCG, as an independent company, is not financially linked to the contractor.
Performance bond is costly (est 10%), it is incorporated into contractor’s tender price.

Question 5

What is Collateral Warranties?

Answer 5

Provides a duty of care to contracting parties to a third party who is not a part of the original contract. i.e structural engineer designs uses materials fit for purposes, this design is used by the contractor, the materials used are deemed not fit for purpose and is considered negligent.
The client has the right to dispute with the structural engineer rather than the contractor.
 

Question 6

What short-term Insolvency actions should a CA take?

Answer 6

Cease payments immediately
Termination notice sent to all parties
Site secured, stopping unauthorised access. Materials and plant automatically pass to Employer - technically “attached to the land”
Determine already paid for materials
Check if project documentation is correct
Identify all financial agreements - Suppliers, plant hires,or temporary buildings.
Seek legal advice of insurance and Performance Bond / Parent Company Guarantee.
Parent Company Guarantee issued, to fulfill the obligations of the subsidiary.
Inspect collateral warranties

Question 7

What medium-term Insolvency actions should a CA take?

Answer 7

Meetings - discuss the situation and appropriate way to proceed.
Arrange completion contract. i.e new contractor, or an insolvency practitioner
Decisions communicated to administrator / liquidator.
BOQ reviewed, and if still compliant used to negotiate terms with adjustments made for works already completed. New contracts has allowance for remedial works or making good defects.

Question 8

What long-term Insolvency actions should a CA take?

Answer 8

Within 3 months of practical completion and certificate of making good, full account must be issued to the adminstraor, containing:
* Total costs that have incurred as a result of the insolvency and termination of the contractor.
* All payments to the contractor before termination
* Total agreed payment at contract awarded, plus total amounts for instructed variations.
if a performance bond evidence must be submitted to the bondsman.