Insolvency of parties to construction contracts is not a new challenge to the construction industry, but recently it has become more prevalent.
Often, if a company becomes insolvent whilst owing you money, it is already too late, and prospects of recovery will be poor. The effects of this can be significant. It is therefore important to look for the warning signs, take action, and know what your options are if the worst were to happen.
What are the warning signs of construction company insolvency?
There are a few things to look out for which might indicate that a contractor or an employer is struggling financially or may be insolvent:
- Are they missing payments or requesting new payment terms?
- Has there been a slowdown in progress on site? Is work being done out of sequence by other sub-contractors?
- Are plant, equipment or materials being taken off site, or not being delivered, or is expensive plant being requested unusually early?
- Are their employees leaving or not turning up for work? Have their senior management left unexpectedly? Are their consultants carrying out their work?
- Are there persistent rumours that they are in financial difficulties?
- Are their company accounts on the Companies House website up to date? Late filing can indicate financial problems. What information can you obtain about their credit rating?
- Are there insolvency notices against them on the London Gazette website? If so, this would indicate that other companies intend to wind them up.
If you notice one or more of the above issues, they may become insolvent so it is important to take action quickly.
How can I protect my position?
As with so many issues, the earlier you act, the better the likely outcome if things go wrong and some of the best protection comes from what is agreed at the outset of the contract.
- Make sure you know what legal entity you are getting into contract with and what their financial position is.
- Carefully review the terms and conditions of the contract before entering into it. Avoid unreasonably lengthy payment terms and onerous clauses. Be clear about when materials are to be paid for. Termination clauses often get overlooked, but it may be useful to negotiate a mechanism to terminate for non payment and making sure that the processes and entitlements following any termination are reasonable.
- Seek protection in the form of a parent company guarantee, advance payment provisions, a retention bond or project bank accounts where appropriate. Some contracts can also operate so that payment is made directly by the employer to the sub-contractor.
- Consider credit insurance.
- Make sure applications for payment go in on time and in accordance with the contract terms – submitting them at the wrong time can mean you miss an entire payment cycle, increasing your exposure.
- Include all of your claims in your payment applications as soon as you are able to do so, so that differences in the valuations are visible sooner rather than later and make sure that you have followed all of the contractual procedures to avoid claims being rejected.
If large differences in valuation appear then explore the dispute resolution mechanisms in your contract at an early stage. - If the paying party defaults on a certified payment, you may be entitled to give notice and then suspend works in order to reduce your exposure. It is essential to check your contract and follow the process for suspension carefully and take advice before acting. Getting this wrong can be costly.
- There may be specific procedures in place that allow you to terminate the contract if you are not being paid. If your contract has this option, the proper procedure must be followed strictly, as getting it wrong can be costly. Without a specific mechanism in the contract a single failure to pay is unlikely to entitle you to terminate the contract. As with suspension, you should always seek specialist advice regarding termination before acting.
The worst has happened and the paying party is insolvent – what next?
I am a sub-contractor and the contractor has entered into insolvency – what do I do?
- The fact of insolvency does not automatically absolve you of your obligations under the contract.
- There may be grounds to suspend or to terminate the contract, but caution must be exercised here to ensure the right approach is taken and specialist advice should be sought.
- Whether or not you can remove any plant, materials or equipment from site will depend on the contract and exactly what has happened, but it should not be assumed that you are entitled to do so.
- You will also need to consider what you need to do to manage any downstream sub-contracts. Can you give notice to terminate those sub-contracts?
- Keep good records of what is happening.
- Maintain dialogue with other trades on site and with any individuals at the insolvent company that you are able to. Invaluable information can often be obtained by this simple action.
- There will be processes to follow to register the monies owed to you as part of the insolvency process, but often very little is recovered.
I am a sub-contractor and the employer has entered into insolvency – what do I do?
- There may not be anything that you can do as you have to fulfil your obligations under the relevant sub-contract.
- It is possible that this scenario will result in the termination of your sub-contract. In this situation, it is not unusual for there to be a contractual restriction on payment from the contractor that is subject to what they recover under the main contract. This is one of the exceptions to the law preventing pay when paid clauses.
- For this reason, when entering into a contract which contains such a clause, always consider pushing back against it and assess the financial position of the employer, as they ultimately hold the purse strings.
How we can help
Whatever stage your project is at, CCC can provide advice and assistance. This will ensure that practical steps are taken so that you achieve the best outcome when dealing with variations, just as we have helped many others. This includes:
- Providing advice to help you make sure that you are taking the right steps at the right time.
- Assisting with interim applications and final accounts, and presenting backup to variation accounts. It is important to do this in a way that is likely to result in a good outcome when presented to a third party such as an adjudicator.
- Formal dispute resolution, such as adjudication and arbitration.
