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Dealing with insolvency in the construction industry

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10th Jun 2009
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With the building industry in the grip of the economic downturn, casualties are inevitable, but whilst the creditors look towards the insolvency practitioner to realise as much of the book debts as possible, a debtor may view insolvency as an opportunity. Michael Gerard advocates taking time out to investigate the form of contract and researching the appropriate terms and conditions appertaining to the contractor’s insolvency.

During times of economic hardship there will always be some services and sectors that thrive. One sector that is currently experiencing a boom time is the construction industry but paradoxically it also has to deal with insolvency. As more and more companies operating in the building market struggle to stay afloat, insolvency practitioners are experiencing an abundance of insolvency related instructions arising from this beleaguered industry.

Do your homework to reap the dividends
Once an insolvency practitioner begins to investigate a claim, first and foremost, they should dedicate some time to investigating what particular forms of contract the various projects are under. They will need to become familiar with the relevant clauses appertaining to insolvency and thoroughly examine set-off claims. Doing this sort of background preparation can be time consuming but will pay handsome dividends in the long run.

For the purposes of this article, the contracts referred to will be those that have been executed using the Joint Contract Tribunal (JCT) Intermediate Form of Contract 2005 edition (IFC 2005). This is commonly used when a contractor is undertaking works for an agreed lump sum.

Terminating employment, but not the contract
The IFC 2005 contains a useful definition of insolvency in section 8. By this definition, if a contractor is insolvent, under clause 8.5.1, as the employer, you can give notice to the contractor to terminate their employment under the contract. However, it is important to note that the employer can only give notice providing the works have not achieved practical completion. It is also important to realise that, in issuing the notification, it is the contractor’s employment that is terminated, and not the contract which actually remains in place.

However, more often than not it is the employer who will terminate the employment of a contractor. It is good practice for the insolvency practitioner to inform the employer of the contractor’s insolvency as soon as possible. Doing this has two purposes: it satisfies clause 8.5.2, and also enables the insolvency practitioner who is overseeing the insolvent contractor’s affairs to make initial beneficial offers post the insolvency. These could include completing the works or assisting with procurement information, all of which will minimise set-off against monies owed.

Completing the works
If, the employer has terminated the contractor’s employment, they then have the option whether to complete the works or not. If they decide not to complete, then clause 8.8.1 requires them to notify the contractor in writing within six months from the date of termination. In addition, they are required to send a statement of account within a reasonable period of issuing such notice. This statement is extremely important to the insolvency practitioner, as it provides the employer’s view of the monies due or owed. However, before this statement is accepted, it should be examined by a quantity surveyor.

This part of the process can sometimes be omitted which is an error. Without a proper examination from a suitably qualified professional, the accepted statement may be misleading or even incorrect, as often only the trained and experienced eye can detect anomalies.

Where an employer elects to complete the project, under clause 8.7.4, an account will still be due (set out in a certificate), but only within a reasonable time after completion of the works and the making good of any defects. It is therefore vitally important that the insolvency practitioner is aware of all incomplete projects at the time of the insolvency and that the progress and completion of such projects is carefully monitored.

Statement of accounts
Experience shows that employers can sometimes be reluctant to issue a statement of the accounts; this is because the valid cost of completing a project is often not enough to completely set-off against the insolvent company’s account. However, as an essential part of the process, the insolvency practitioner will need to ensure that employers or their agents obtain the relevant proof of cost, so that the documentation can then be checked by an experienced and qualified quantity surveyor.

By examining all of the insolvent contractor’s contracts, abstracting the pertinent information relating to time, progress and payment rules, together with engaging appropriately qualified and experienced contractual professionals to assist in the examination of the costings, the insolvency practitioner can ensure that returns for creditors will be maximised and that the best outcome in a difficult situation is achieved.

Despite some tentative whispers of recovery, things look unpromising for those allied to the construction industry for the foreseeable future. As the nature of our economy has always been cyclical and will continue to be so, even when the economic tide turns, the issue of insolvency is one that won’t go away. It pays to be prepared, so ensure that the proper process is followed using qualified professionals. Be open with information and help them get the figures – this will be to everyone’s benefit in the long term.

Michael Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MAE
www.michael-gerard.co.uk

Michael Gerard is a barrister, chartered builder, registered adjudicator and accredited expert in quantum and planning matters. He is managing director of Michael Gerard & Co, a company of chartered building consultants and quantity surveyors.
 

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