Insolvency Flashcards
What does Insolvency mean?
An individuals or company’s inability to pay their
financial liability.
or
When assets becomes less than debts
How does the Insolvency of the Client affect the project?
Forces project to be abandoned until somebody purchases the site
How does the Insolvency of the Contractor affect the project?
Slows down work
Can force works to stop
Can place works at a pause
Can force termination of contract
What are the signs of Insolvency for a Contractor?
- Slow progress of work
- Fewer materials on site
- Plant and machinery being
removed - Sub-contractors not paid
- Site visit by senior
management / bank manager
What are the options, if a Contractor becomes Insolvent?
- Continue with original contractor
- Novation – forming a new agreement with a new contractor (not responsible for existing defective works and delays that has occurred) appointed by an administrator
- Assignment – transferring the contractual rights and obligations to a new contractor (appointed by an administrator)
- Terminate contract and appointment a new contractor – by employer
i. QS to prepare financial statement (see next slide)
ii. Any extra cost claimed back from original contractor
How is Insolvency treated in JCT and NEC?
JCT 05 – Section 8
NEC – Core Clause 9 (Termination)
What happens to the plants which were hired out by the Contractor?
The Client has the right to keep the plants.
What job roles can go into Liquidation?
Main Contractors Sub-Contractors Suppliers Employers Designers- Architect/QS/Engineers
What are the common causes for Insolvency?
Recession
Ease of creating construction company (e.g. small
capital)
Competitive tendering
Quality of management – compared to other industries
Late payments
Insolvency knock-on effects
Which law is Insolvency governed by? What does the law aim to achieve?
Insolvency Acts 1986 and 2000 (the Act)
The Act “aim to preserve a business in some form or other” AND Ensures fairer distribution of the scarce resources
Most standard forms of contract provides for dealing with insolvency
What are the types of Insolvency?
1.0 - Bankruptcy
- 0- Liquidation
- 1- Compulsory
- 2- Voluntary
3.0- Receivership
What should the CA do, if he/she suspects Insolvency of the Contractor?
Interim valuations carefully prepared to
avoid overpayment
Materials on site carefully checked –
properly stored, intended for incorporation into the
works, not brought to site pre-maturely
Note: Suspicion does not give QS right to undervalue work
What should the A/CA do if the Contractor becomes Insolvent?
Arrange insurances and inform bondsman (e.g. performance bond)
Stop payments including subcontractor’s
Secure the site – 24hr security
Establish communication with liquidator/receiver/administrator
Collect materials off-site (if paid for) and materials on site belong to employer if paid for
Arrange all insurances
Prepare financial statement - completed works, and inventory of plant and materials
What factors should be considered when the Contractor becomes insolvent?
- The stage of worked reached
- The scope and amount of work remaining
- Contractual basis and documentation for the contract
- Time available to carry out a new tender process
- The need to obtain competitive tenders
What is a Financial Statement?
Financial statements are written records that convey the business activities and the financial performance of a company.
Financial Statements can help calculate how much debt is owed to the Contractor/Client (usually the Contractor)
What can the Contractor do if he/she becomes Insolvent?
Contractor empowered to terminate his
employment – Cl. 8.10 (JCT)
What must the Contractor include when preparing a detailed accounts?
- Total value of work completed
- Loss and/or expenses claims
- Cost of moving temporal buildings, plant, etc
- Cost of materials and goods ordered and paid
for already - Difference between accounts and amounts be
paid to contractor
What if the Designer becomes Insolvent?
- JCT 2011 – Articles 3 & 4
- Employer must, within 21 days, nominate a
successor - Contractor can raise reasonable objection
- New firm unable to over-rule anything that has
been agreed and accepted by previous designer - Changes made by new firm constitute variations
What are the consequences when the Contractor terminates the Contract?
- Contractor to remove temporal buildings, plants etc. from site
- Contractor to provide client with 2 copies of
designs (e.g. D&B)
What is the Financial Statement calculation?
What if the Calculation is negative?
What if it is positive?
FS1 – (FS2+FS3+FS4)
If Negative – means contractor in debt by
that much
If Positive – means contractor should be
paid that much
What are 4 FS’
FS1:- Notional (hypothetical) Final Accounts i.e. The
expected Final Account had the insolvency not
occurred (say £10M)
- FS2:- Total Interim Payment made to main contractor
(say £4.5M) - FS3:- Final Accounts paid for completion by another
(£6.2M - FS4:- Total Expenses to Employer following
termination – fees, managing defective works, loss
and damages, temporal insurance, additional
tendering costs, etc. (£0.7M)
What is Bankruptcy and who does it apply to?
When an organisation is unable to honour its financial obligations or make payment to its creditors, it files for bankruptcy.
Applies to individuals, sole traders & partnerships
What is;
Liquidation
Compulsory
Voluntary
Liquidation is the process of bringing a business to an end and distributing its assets to claimants
Compulsary-
1.Applies to businesses
2.Ordered by courts because company unable
to pay its debts
Voluntary-
- Businesses
- Members want to stop
- Retirement
- Directors realise company can’t continue
What is Receivership?
A procedure that is available to and often used by secured creditors of a business, or by a court on behalf of a secured creditor, with a view to ensuring the payment of an outstanding debt.
- Applies to business
- Loan can’t be paid; or
- Loaner claims assets
