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Contract Management > Insolvency > Flashcards

Insolvency Flashcards

1
Q

What does Insolvency mean?

A

An individuals or company’s inability to pay their
financial liability.

or

When assets becomes less than debts

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2
Q

How does the Insolvency of the Client affect the project?

A

Forces project to be abandoned until somebody purchases the site

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3
Q

How does the Insolvency of the Contractor affect the project?

A

Slows down work
Can force works to stop
Can place works at a pause
Can force termination of contract

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4
Q

What are the signs of Insolvency for a Contractor?

A
  1. Slow progress of work
  2. Fewer materials on site
  3. Plant and machinery being
    removed
  4. Sub-contractors not paid
  5. Site visit by senior
    management / bank manager
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5
Q

What are the options, if a Contractor becomes Insolvent?

A
  1. Continue with original contractor
  2. Novation – forming a new agreement with a new contractor (not responsible for existing defective works and delays that has occurred) appointed by an administrator
  3. Assignment – transferring the contractual rights and obligations to a new contractor (appointed by an administrator)
  4. 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
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6
Q

How is Insolvency treated in JCT and NEC?

A

JCT 05 – Section 8

NEC – Core Clause 9 (Termination)

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7
Q

What happens to the plants which were hired out by the Contractor?

A

The Client has the right to keep the plants.

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8
Q

What job roles can go into Liquidation?

A 
Main Contractors
Sub-Contractors
Suppliers
Employers
Designers- Architect/QS/Engineers
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9
Q

What are the common causes for Insolvency?

A

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

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10
Q

Which law is Insolvency governed by? What does the law aim to achieve?

A

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

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11
Q

What are the types of Insolvency?

A

1.0 - Bankruptcy

  1. 0- Liquidation
  2. 1- Compulsory
  3. 2- Voluntary

3.0- Receivership

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12
Q

What should the CA do, if he/she suspects Insolvency of the Contractor?

A

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

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13
Q

What should the A/CA do if the Contractor becomes Insolvent?

A

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

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14
Q

What factors should be considered when the Contractor becomes insolvent?

A
  1. The stage of worked reached
  2. The scope and amount of work remaining
  3. Contractual basis and documentation for the contract
  4. Time available to carry out a new tender process
  5. The need to obtain competitive tenders
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15
Q

What is a Financial Statement?

A

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)

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16
Q

What can the Contractor do if he/she becomes Insolvent?

A

Contractor empowered to terminate his

employment – Cl. 8.10 (JCT)

17
Q

What must the Contractor include when preparing a detailed accounts?

A
  1. Total value of work completed
  2. Loss and/or expenses claims
  3. Cost of moving temporal buildings, plant, etc
  4. Cost of materials and goods ordered and paid
    for already
  5. Difference between accounts and amounts be
    paid to contractor
18
Q

What if the Designer becomes Insolvent?

A
  1. JCT 2011 – Articles 3 & 4
  2. Employer must, within 21 days, nominate a
    successor
  3. Contractor can raise reasonable objection
  4. New firm unable to over-rule anything that has
    been agreed and accepted by previous designer
  5. Changes made by new firm constitute variations
19
Q

What are the consequences when the Contractor terminates the Contract?

A
  1. Contractor to remove temporal buildings, plants etc. from site
  2. Contractor to provide client with 2 copies of
    designs (e.g. D&B)
20
Q

What is the Financial Statement calculation?

What if the Calculation is negative?
What if it is positive?

A

FS1 – (FS2+FS3+FS4)

If Negative – means contractor in debt by
that much

If Positive – means contractor should be
paid that much

21
Q

What are 4 FS’

A

FS1:- Notional (hypothetical) Final Accounts i.e. The
expected Final Account had the insolvency not
occurred (say £10M)

  1. FS2:- Total Interim Payment made to main contractor
    (say £4.5M)
  2. FS3:- Final Accounts paid for completion by another
    (£6.2M
  3. FS4:- Total Expenses to Employer following
    termination – fees, managing defective works, loss
    and damages, temporal insurance, additional
    tendering costs, etc. (£0.7M)
22
Q

What is Bankruptcy and who does it apply to?

A

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

23
Q

What is;

Liquidation
Compulsory
Voluntary

A

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-

  1. Businesses
  2. Members want to stop
  3. Retirement
  4. Directors realise company can’t continue
24
Q

What is Receivership?

A

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.

  1. Applies to business
  2. Loan can’t be paid; or
  3. Loaner claims assets
25
Q

What must the QS not do if he is suspicious of the contractors insolvency,

A

Suspicion does NOT give QS right to

undervalue work

26
Q

What is the process when a designer becomes insolvent JCT? What are the rights of the employer and contractor

A

Article 3 and 4

  1. Employer must, within 21 days, nominate a
    successor
  2. Contractor can raise reasonable objection
  3. New firm unable to over-rule anything that has
    been agreed and accepted by previous designer
  4. Changes made by new firm constitute variations
27
Q

You are the Consulting Contract Administrator for a building contract for the refurbishment of
a four storey office block. The project was let using JCT 2011 Standard Building Contract with Quantities (SBC/Q). The contract was awarded to the lowest bidder – Dan Construction (UK) Ltd. Approximately half-way through the contract, you made the following observations: slow progress of work; fewer materials on site; Plant and machinery being removed site and
some named and domestic Sub-contractors not being paid.

You made an unofficially visit to the site last week and meet some senior management from DCL and their bank managers

• Discuss any FIVE of the immediate actions necessary to safeguard the safety, security and financial viability of the project. Just few days ago it became apparent that liquidators have been appointed to look after DCL who are in serious cash flow problems.

You are required to:-
• Critically examine the various options of procuring the remaining work to complete the project
• Provide detailed overview of the assessment of the financial status of the project and agreeing accounts with the liquidator and/or bond provider.

A

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Contract Management (16 decks)

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