Insolvency in a post-Carillion world
In the wake of the Carillion liquidation, this briefing offers a top 10 list of issues for employers, professionals and the supply chain to consider in the event of main contractor insolvency
The construction industry's traditional model of low profit margins, poor payment practices and unbalanced risk profiles has been brought into stark relief by the recent, and well publicised, insolvency of Carillion. It is a sad reality that insolvency of one or more of the parties to a construction project has been a risk which has been realised all too often.
It is, in part, in recognition of that model, and the attendant risks which flow from it, that the construction industry has experienced intervention by Government. An example of this can be seen in the introduction of the Housing Grants, Construction and Regeneration Act 1996, which was intended to, amongst other things, improve payment practices and provide for an extrajudicial speedy form of dispute resolution. That Act was then amended by the Local Democracy, Economic Development and Construction Act 2009. A review of this legislation is now planned. A consultation is also ongoing to consider the practice of cash retention in the construction industry. The results of that review and consultation will be watched very carefully by commentators and industry professionals alike.
In the meantime, the risk of insolvency remains and parties to a construction project should be alive to that risk and the issues they should consider in the event of that risk materialising. Whilst the issues are broad ranging and depend on the particular circumstances, the top 10 issues that employers, professionals and the supply chain should consider in the event of main contractor insolvency can usefully be summarised as:
1. Payment cycle – check where in the payment cycle you are. Are there interim payments due? There are limited saving provisions under the Housing Grants Act in the event of insolvency, but pay less notices must still be issued.
2. Security – check the terms of any bonds or guarantees which have been granted. Are they valid? Do they respond to insolvency? Insolvency may not be treated as a default, depending on how the bond or guarantee is drafted. What is the process for making a valid call?
3. Termination provisions – check what the contract says about termination. What is the process? Do notices require to be issued? What is to happen to materials and equipment on site?
4. Status of the works – accurately record and document the status of the works on the date of insolvency. This will be relevant to calculating what works remain to be carried out and what the entitlement to payment due to or by the main contractor is.
5. Completing the works – how are the works to be completed? What form will the completion contract or contacts take?
6. Defects – accurately record and document any defects which are discovered and the costs incurred for making good. Check for collateral warranties in relation to defects as that may give rights against other still solvent parties.
7. Final account – check what the contract says about preparing a final account. When should this be carried out and what is the process?
8. Step-in rights – check if the contract makes provision for step-in rights, where a party may have the right under a contract to take the place of the main contractor.
9. Making a claim in the insolvency – is a claim to be made and what is the process and timing for that?
10. Insurance – check any insurances which are in place and whether they will respond to insolvency.
The far reaching consequences of the insolvency of Carillion have caused the construction industry and the Government to pause and reflect on current practices. It may then be the case that the insolvency of Carillion proves to be the catalyst for further and more radical change.
Keith Kilburn is managing associate with Brodies LLP