Insolvency

Question 1

What signs might be there that a Contractor had financial difficulty?

Answer 1

• Industry rumours
• Over valued applications
• Less labour on site
• Slow progress of works

Question 2

How might a cashflow show the problem?

Answer 2

If monthly payment applications were way above pre-estimated cashflow

Question 3

What could have been done to prevent contractor insolvency at tender stage?

Answer 3

• Thoroughly check financial accounts

- Check for front loading

Question 4

During your interim valuation, a subcontractor told you that the Contractor is in financial difficulties. What do you do?

Answer 4

• Value the works carefully (as normal).
• Check materials on site are for the job in question.
• Arranging a meeting with the Contractor to discuss the situation

Question 5

Contractor has gone into administration receivership, what do you do?

Answer 5

a) Go to site, secure site and materials
b) Get in touch with administrative receiver
c) Withhold any payments
d) Start contacting suppliers and sub-contractors to try and continue works
e) Keep record of all time spent.

Question 6

The interim payment was due say on the 14th and the client did not make the payment on time and the Contractor went bust on the 16th. Would you advise the client to make the payment?

Answer 6

No. At the moment of insolvency, the Employer should pay no more to the Contractor.

Question 7

What is insolvency?

Answer 7

• Insolvency is concerned with the inability to pay debts.

- Debenture: A security given to lenders against borrowings.

Question 8

What causes insolvency?

Answer 8

• Minimum amount of capital needed to start a contracting business, fragile arrangements created, also boom-bust cycle of construction industry.

Question 9

What are the consequences of insolvency?

Answer 9

• Cost, quality and duration can all be detrimentally affected.
• Solvency of sub-contract and suppliers can also be damaged.

Question 10

What checks should be made pre-contract?

Answer 10

• Ensure contractors, S/Cs are financially stable
• Bank refs, credit checking agencies, companies house, annual accounts, previous references.
• Prudent to make formal and informal checks

Question 11

What are the different types of insolvency?

Answer 11

1 Liquidation- voluntary and compulsory
2 Administrative Receivership- not used much any more
3 Administrative Order- debenture holders can use
4 Voluntary arrangement.

Question 12

What is liquidation?

Answer 12

• Winding up of a company because it cannot pay its debts
• Trading ceases, assets are collected and used to offset liabilities
• Two tests: cash flow: cannot pay debts as they become due.
  Balance sheet: liabilities are higher than assets.

Question 13

Where does the client fall in relation to receiving monies after liquidation?

Answer 13

• Very low on the scale!
  1. Fixed charge holders- Bank
  2. Liquidator Fees and expenses
  3. Preferential creditors: pensions, employees pay
  4. Floating charge holders
  5. Unsecured creditors: CLIENTS

Question 14

What is the position of the client in liquidation/ administration?

Answer 14

• Unsecured creditor, little if any money left.
• Enterprise Act requires funds permitting, liquidator or administrator reserve a portion of realised assets for the benefit of unsecured creditors.

Question 15

Can the employer terminate if the contractor goes insolvent?

Answer 15

Yes - Procedure is:

• Written notice required, delivered by hand, special or recorded delivery.
• Termination effective with immediate effect upon contractor receiving notice.
• Contractor’s obligations to carry out and complete the works are suspended.

Question 16

Does the employer have to make further payments if the contractor goes into liquidation?

Answer 16

• Employer is not obliged to make any further payments or release retention monies.
• If interim certificate has recently been issued it is advised to issue withholding notice.

Question 17

What happens if the employer goes insolvent?

Answer 17

• Clause 8.10.1
• Contractor can terminate his employment under the contract.
• Contractor can remove temp buildings, plant, and materials from site.
• Provide employer with 2 copies of CDP documents
• Prepare a final account including all direct loss and expense, damage resulting from termination.
• Not likely to get any money because contractor is unsecured creditor of employer.

Question 18

What about retention monies if employer goes insolvent?

Answer 18

• Clause 4.18.3 requires the employer to place retention monies in a separate bank account if requested by the contractor.
• In the event of employer insolvency the contractor has a right to that money.
• In the absence of a separate bank account, case law suggests that the contractor may lose this right.

Question 19

What action should be taken on suspicion of contractor insolvency?

Answer 19

• Interim valuations carefully prepared to ensure work is not over valued.
• Materials on site should be carefully checked they are in accordance with the contract documents, properly stored and intended for incorporation into the works and related to the programme.

Question 20

What immediate action should be taken upon contractor insolvency?

Answer 20

• 8 steps to take and need to act quickly, following measures need to be discussed with professional team.
  1. Advise client of contractor insolvency, contractual position and recommended action
  2. Secure the site, change locks, secure all valuable goods equipment and materials.
  3. Prepare a detailed valuation of the completed work and an inventory of materials and equipment
  4. Stopping the processing of any payment to the contractor
  5. Contacting key S/Cs, suppliers and commence discussions about continuation contracts.
  6. Check the contract for Bonds, PCG.
  7. Contact the administrator or liquidator and client about their views with regard to project completion.
  8. Keep a record of the time spent and costs incurred in dealing with and advising on the insolvency. Normal for additional fees to be chargeable in this respect.

Question 21

How do you complete the works?

Answer 21

1. Continuation with original contractor- only practicable if works are nearing completion.
2. Assignment or Novation of the contract.
3. Appointing a new contractor to complete the project. (new contract, PC basis)

Question 22

Assignment or Novation to complete the works if a contractor goes bust?

Answer 22

• Administrators or employers generally prefer Novation.
• Form a new agreement with a new contractor to complete the works
• (Transfer rights and obligations to a 3rd party, new contract formed, all parties must agree.)

Question 23

What are continuation contracts?

Answer 23

• Contract for completing the works with a new contractor can take several forms:
• Basis of contract and documentation will be affected by:
  1. Time available to prepare docs and agree terms
  2. Scope and amount of work required
  3. Progress made by original contractor
  4. The doc and contractual basis of the original contract
  5. The need to obtain competitive tenders.
• If project has only just commenced may be possible to use original tender and contract docs with addendum
• May be possible to negotiate a contract with one of original tenders.

Question 24

What is retention of title?

Answer 24

• Condition that ownership of the goods does not pass to the contractor until they have been paid for.
• Claim will fail if material is fixed in place.
• Materials paid for in interim payments are also owned by employer.
• More confusing when talking about materials of S/Cs not incorporated into the works.
• Hence the reason why it is important to secure the site!!