Top Tips for Navigating Contractor Insolvency

The demise of ISG, the UK’s sixth biggest construction contractor with annual revenues of approximately £2.2 billion and involvement in 69 live government projects, will undoubtedly have wide reaching implications for the industry.

ISG’s insolvency is the most significant collapse of a UK construction giant since Carillion in 2018, whose liquidation reportedly delayed some projects by up to seven years and led to spiralling cost increases.  Such failures highlight the importance for employers to act swiftly but carefully once a contractor becomes insolvent.

With this in mind, we set out below some practical considerations for employers when faced with contractor insolvency.

What can employers do when faced with contractor insolvency?

1. Confirm whether insolvency proceedings have commenced 

Whether or not a company has entered formal insolvency proceedings, and the nature of those proceedings (e.g. administration, liquidation or receivership), can impact your contractual rights. To find out a contractor’s status, you should check The Central Registry of Winding-up Petitions or ask your lawyer to conduct searches.

2. Contact the relevant insolvency practitioner

Proactive engagement with the insolvency practitioner will hopefully ensure you are kept informed on key developments, including, for example, the prospect of any potential sale of the contractor’s business. The insolvency practitioner may be able to provide an early indication as to whether there is any prospect of the contractor performing its remaining obligations under the construction contract. This can help you decide which options to pursue, particularly in relation to termination (see below). Consider reserving your rights whilst these discussions take place.

3. Site protection

It is important to secure the site - both for health and safety reasons and also to prevent any disgruntled members of the supply chain removing materials that you have paid for. 

4. Site inspection

You should carry out an initial inspection so that you have an accurate record of the works completed by the contractor. Following this, it is sensible to carry out a full audit of the works, unincorporated materials and contractor’s equipment, with supporting evidence such as videos and photographs with time and date stamps.

5. Off-site materials

Where practicable, conduct an audit of any materials stored off-site to confirm (i) which have been paid for; and (ii) which have not yet been paid for, but are key to the completion/ operation of the project. In respect of the first category, and subject to the terms of the relevant agreement(s), ownership may have transferred on payment. If so, it is important that you clearly and visibly mark these items as your property to avoid the insolvency practitioner assuming they belong to the contractor. In respect of the second category, this will require discussions with the insolvency practitioner as it may be possible to agree terms for their purchase. In both instances, you will need to be mindful of any retention of title provisions in any relevant subcontracts. 

6. Sub-contractors and suppliers

You should locate copies of any subcontracts, supply contracts, appointments and collateral warranties. It is recommended that you seek legal advice to help decide on the next course of action as there can be lots of complexities in this area. 

For example, paying the subcontractors directly can risk you paying twice for the same work, but this needs to be weighed against the need to keep the subcontractors on board to complete the project. Also, whilst collateral warranties may allow you to ‘step into the shoes’ of the contractor, this will likely be conditional on payment of any outstanding sums. Therefore, it is important to clarify what (if any) sums are owed by the contractor prior to any attempts to exercise step-in rights.

7. Payments

In order to assess the value of the works to date, you should establish the sums paid to the contractor, sums due but not yet paid, and the value of any other compliant work undertaken. This will involve careful examination of all payment certificates and any Pay Less Notices.

8. Terminate the contractor’s employment under the construction contract? 

Insolvency may entitle you to terminate the construction contract, subject to the contractor being ‘insolvent’ as defined in the contract. Assuming you have the right to terminate, it is important that any termination notices are served strictly in accordance with the terms of the agreement. It is therefore recommended that you seek legal advice before taking any steps towards termination. Getting the process wrong can have significant adverse consequences.

9. Claims against the contractor’s insurance

The Third Parties (Rights Against Insurers) Act 2010 enables the employer to pursue the contractor’s insurer directly for an indemnity under a relevant policy of insurance, in the event that the contractor becomes insolvent. Such claims could include (for example) any design-based claims that the employer has or had against the contractor, which may be covered by the contractors’ professional indemnity insurance policy. Where a contractor enters insolvency, it is important to move quickly to progress any claim, as it is likely that other employers with claims against the contractor will be following the same strategy and policy limits could be quickly eroded.

If you have any questions or would otherwise like to discuss any issue raised in this article, please contact Jessica Evans in our Construction Disputes team, Matthew Kaltsas-Walker in our Insurance team, or Andrew Eaton in our Corporate Restructuring and Insolvency team.