As part of our HJ Housing Week 2022, Natasha Nicholas, Associate from our Construction team, looks at the latest official statistics on insolvency. It makes for some stark reading, especially for those operating in the construction industry.
According to Government figures, between 1 April 2022 and 30 June 2022 (Q2 2022), there were 5,629 company insolvencies in total.
The industry with the highest number of insolvencies in the 12 months ending Q2 2022 was construction (3,665 insolvencies, 19% of cases with industry captured). Insolvency of contractors is a recurrent issue that has intensified in recent years and has a significant impact on your projects and plans for the future.
Varying factors have contributed to the problem including supply shortages of labour and materials leading to significant inflationary costs; these started as a consequence of Brexit, then Covid-19 and now issues arising out of the conflict in Ukraine. Our team frequently encounter questions from clients about how to ensure they are in the best position possible when finding themselves in this situation with a contractor and what can be done to lessen the impact. Here are our top 3 practical steps to decide your way ahead.
Check the contractual definitions
Unless expressly provided for by the contract, insolvency will not be a ground upon which an employer can terminate the contract. In that instance, the employer would need to wait until the contractor fails to perform its contractual obligations and then terminate for a repudiatory breach of contract.
Fortunately, the majority of JCT contracts contain provisions which assist in terms of dictating what happens in the event of contractor insolvency.
The first thing to note about the insolvency provisions in the JCT is the definition of insolvency. The JCT provides that a company is insolvent either:
- When it enters administration
- When it enters receivership
- On the passing of a resolution for voluntary winding-up without a declaration of solvency or on the making of a winding-up order (i.e. liquidation)
- When it enters into an arrangement, compromise or composition in satisfaction of its debts.
This definition is important for employers to be aware of because the test for insolvency is much narrower than the general test such as “whether a company is able to pay its debts as they fall due” or “whether the value of the company’s assets is less than the amount of its liabilities”.
Ensure Site Security
The JCT provides that regardless of whether the Employer has given notice of termination, upon the occurrence of an insolvency event, the Employer may take reasonable measures to protect the site and materials.
The contractor may not interfere with this process.
Examples of reasonable measures include but are not limited to:
- Immediately changing the site locks;
- Setting up a new site security contract;
- Organise an audit of plant, equipment, goods and materials on site;
- Setting up procedure to prevent unauthorised removals from site.
With this in mind, as an Employer, during the negotiation stage of a building contract, sub-contract or collateral warranty for example, you may want to resist the inclusion of any retention of title clauses.
Employers may also wish to incorporate clauses into their contracts that provide that the ownership of both onsite and off-site materials will pass to the Employer in the event of the contractor’s insolvency.
Check the Payment Provisions
Under the JCT, upon the contractor’s insolvency (as defined) no further sum shall become due to the contractor (except as prescribed by the “balancing up” provisions).
Authority for this is provided by Section 111(10) of the Construction Act which states that the paying party will not be required to make payment under section 111(1) if both:
- The contract expressly provides that the paying party need not pay the sums due if the unpaid party becomes insolvent; and
- The unpaid party becomes insolvent after the time for the giving of a pay less notice has expired.