Back to Basics #50 - 5 Types of Insolvency in Construction

Back to Basics #50 - 5 Types of Insolvency in Construction 

Insolvency can have an impact at all levels within construction, be it with the Employer, the Main Contractor, the Subcontractor and/or the Suppliers. “Insolvency” covers both bankruptcy and the winding-up of insolvent companies. Simplistically, a party is considered as being insolvent when it is unable to pay its debts or does not have sufficient assets to cover its debts.

There are five types of Insolvency in Construction:

1. Company Voluntary Arrangement (CVA) – A CVA is a procedure that enables a company to settle its debts by paying only a proportion of the amount owed to creditors and/or an arrangement with creditors regarding the payment of the debt(s).

2. Administration – In the event that a company is or is likely to be unable to pay its debts, an administrator may be appointed, with the objective of a “rescue” operation to keep the company operational, achieve a market price for all or part of the assets, or for the realisation of assets for distribution accordingly to secured or preferred creditors.

3. The Winding-Up of a Party – This is where a party is unable to pay its debts. This is a procedure instigated by the creditors submitting a petition to the court and an application for a provisional liquidator may be made. The debt must be undisputed, must be a greater sum than £750.00 and the creditor must have informed the debtor of the intention to pursue and collect the debt.

4. Administrative Receivership – This is where a party breaches the borrowing terms from a creditor. An example of administrative receivership is a bank that holds a floating charge, it may employ the services of a receiver, with the objective of recovering the debt owed. This may be by selling the company assets that are subject to the floating charge.

5. Voluntary Liquidation – A resolution may be passed by the directors of a company, whilst it is still solvent, to the effect that the company’s liabilities are greater than its ability to repay its debts. A liquidator is then appointed for the realisation and distribution of the company’s assets.

Unfortunately, in the event of a party to a construction contract becoming insolvent, there is a likelihood that it will be unable to perform its contractual obligations. Therefore, it is important that the parties to a contract understand its contractual position when the of issue insolvency arises. This applies to the up and downstream relationships between an Employer and Contractor, and/or a Contractor and Subcontractor.

Many of the standard form contracts deal with the issue of insolvency in the Termination procedures of the contract. The JCT Standard Building Contract, for example, deals with it under Section 8 ‘‘Termination’’, whilst NEC4 contains the procedures of handling insolvency within Clause 9 ‘‘Termination’’.

Should you be faced with an issue involving insolvency on a construction project, Ramskill Martin can: advise on your obligations and entitlement under the contract, assist in the valuation of the works up to the point of an insolvency/termination, aid in the forecasting of the additional cost of completing the works and support the provision of substantive evidence that is required.

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