Last edited 19 Jan 2018

Liquidation of contractors in the construction industry

Contents

[edit] Introduction

The term ‘insolvency' describes the inability of a debtor to pay its debts. In the United Kingdom, insolvent individuals are made 'bankrupt', while companies are put into 'liquidation' or 'administration'. In cases of administration, a key objective is to try to ensure the company survives, whereas in liquidation, the company will generally not survive.

Insolvency proceedings are administrative processes instigated by either the insolvent entity or one of their creditors to recover assets so for disposal, the proceeds of which are distributed to creditors.

The Insolvency Act 1986 sets out four types of procedures governing the affairs of insolvent companies:

  • Company Voluntary Arrangements.
  • Administration.
  • Receivership (less common following the enactment of the Enterprise Act 2000).
  • Winding up leading to liquidation.

[edit] Liquidation

A company may be wound up either by court order or voluntarily. A court may wind up a company on presentation of a petition on grounds such as being unable to pay its debts.

A company can be deemed unable to pay its debts for a number of reasons, including:

  • A statutory demand for a debt being served on the company and the company failing to satisfy that debt within three weeks.
  • A court judgment against it, where steps to enforce the judgment have been unsuccessful.
  • It is proved that the company is unable to pay its debts.
  • Its assets are less than its liabilities.

Where a winding up order is made, this has the effect of discharging all employees, ending any agency relationships, and dismissing the company’s directors.

A liquidator is appointed to dispose of the company’s assets to discharge its liabilities to creditors, with any surplus being passed to whomever is entitled to it. Liquidators hold wide powers, constituting the governing body of the company and the receiver of its assets. They are entitled to their own costs before proceeds are distributed to creditors.

Once the process is complete the company is dissolved, which means that it has ceased to exist.

[edit] Liquidation of the main contractor

Liquidation is less common that administration in the construction industry. In the case of Carillion in 2018, it is thought that liquidation was chosen as there were insufficient remaining funds to appoint an administrator. Contractually, the consequences are the same, treated simply as 'insolvency'.

Insolvency of contractors is relatively common due to the low margins that they typically operate with, the high risk of project costs increasing, and constant cash flow and late payment issues.

Signs that a contractor may be in difficulties can include:

Most contracts will allow employers to terminate the employment of the contractor in the event of contractor insolvency and to cease payment. Typically, the contract will also allow them to employ others to complete the works and to use plant, tools, equipment, materials, temporary buildings and so on to do so. However, the employer must be certain of the insolvency first, and may seek evidence to confirm the fact.

This still leaves the employer having to find a new contractor and this can be time consuming and expensive, with other prospective contractors knowing that the employer is in a weak negotiating position. They client may also need consent from funding bodies to replace the contractor.

There may also be issues about:

The situation is complicated by the prevalence of sub-contracting in the industry. The employer's main contractual link to subcontractors is through the contractor, and this link is been broken by the insolvency. The employer may be protected to some extent by provisions such as collateral warranties and step in rights.

However, the complexity and extent of the supply chain means that the knock on effects of main contractor insolvency can be far reaching. This is exacerbated by the fact that late payment is rife, and so companies in the supply chain of the insolvent company might be owed very large sums of money that they may be unable to continue without.

Other provisions that might give the employer some protection from main contractor insolvency include:

[edit] Find out more

[edit] Related articles on Designing Buildings Wiki