The construction industry trade press frequently writes about administrations in the industry. Whilst the Insolvency Service’s figures show that around one construction company went into administration every other day in Q1 2023, significantly higher numbers went quietly into liquidation during the same period, at an average rate of around 11 per day.
Here, Jonathan Dunkley, along with Michelle Essen, Fintan Wolohan, and Jessica Tresham, construction and insolvency experts at Womble Bond Dickinson, highlight some of your options if insolvency looms when contractors are already working on-site.
Once the project is underway, you can protect yourself, for example, by keeping good records to help you evidence any losses that may arise out of an insolvency, whether you are an employer, contractor or subcontractor. This could include recording what materials and equipment are on site and what has been paid for. If an insolvency then occurs, you will already have this information to hand and can act quickly to protect your interests.
If the project has begun, and it becomes apparent to you that the other party is struggling financially, consider the following:
- Review your contracts promptly: check what your contract says about insolvency, and also about suspension and termination, retention of title, and payment. Check also whether you have any ancillary contracts that could help you, like collateral warranties or third party rights, parent company guarantees, performance bonds, or agreements for project bank accounts. Once you know what your options are, you can decide the best course of action.
- Seek expert advice: get advice promptly from whichever insolvency experts you choose to use, as this can help you keep your options open, for example there may be circumstances in which you wish to institute insolvency proceedings, rather and wait for someone else or the company to do so itself.
- Dispute resolution strategy: adjudicating before the other party becomes insolvent could mean the difference between securing payment before the insolvency as opposed to ending up in the queue of unsecured creditors with low prospects of payment or repayment. However this process of itself could force the other party into an insolvency process.
- The Third Party (Rights Against Insurers) Act 2010: These laws help a party to bring a claim against the insurers of defaulting insolvent companies. For employers, if latent defects arise after practical completion and the contractor has become insolvent, a claim may still be possible if the defects are covered by the insurance policy.
What next?
Bear in mind the above, and. also consider whether other protective options are available depending on, for example the specific nature of your project, your commercial bargaining power, your project or company structures and more.
Insolvency up and downstream is inevitable in periods of economic uncertainty. It is important that businesses look to protect themselves not only via their contractual processes but also by ensuring that the financial issues with contracting parties are dealt with swiftly.
A long read from Womble Bond Dickinson on ‘Navigating the construction industry’s insolvency storms’ is available here.
