The construction insolvency figures for 2023 paint a harsh picture of the reality faced by contractors across the UK and this picture has continued into 2024.

In its 16 February 2024 update, the Building Cost Information Service recorded 4,378 construction insolvencies in the year to December 2023, an increase of 5.1% from 2022.

In a competitive market where many contracts are won on a fixed-price basis, the additional headwinds created by inflation, high energy costs, legacy pandemic issues and supply delays (including failures) are unwanted but hard to avoid for construction companies. For many, they have proved fatal, and predictions from Red Flag that 2023 would be “a perfect storm for insolvency in the construction industry” were realised.

It is likely that conditions will remain tough for the foreseeable future. The consequences of insolvency are all too clear for those directly affected but they are not solely confined to project delivery.

The Supreme Court decision in Bresco provides authority for a liquidator to commence an adjudication on behalf of an insolvent company. This means some parties may find themselves caught in the middle, facing claims and adjudications from liquidators, as well as other parties to the contractual chain affected indirectly by the insolvency.

Take, for example, main contractors on construction projects. If a key subcontractor becomes insolvent and ceases trading, in addition to any potential claim from a liquidator for payment, the main contractor’s works may suffer delay while a suitable replacement is found. If this delay is critical to completion, the main contractor may find itself exposed to the employer for liquidated and ascertained damages.

With a buoyant market in third-party claims companies, purchasing rights to the proceeds of claims from insolvent construction companies, the likelihood of disputes is significant. How can a contractor protect itself?

  • First, prior to an insolvency event even occurring is to engage with the supply chain to help identify companies at risk before they become insolvent.
  • A good line of communication and a regular dialogue is the best means of heading off an issue before it arises.
  • Supporting an at-risk company or taking early measures to arrange an eventual replacement may limit the financial exposure resulting from any delay to the project works.
  • Steps such as paying onward suppliers directly for materials or supplementing labour could be sufficient to stave off the crisis.

The danger signs to watch out for are the same as in any previous tough economic environment – a reduction of resources on site, failure to deliver materials or plant to site and exaggerated applications for payment. Engaging may delay an insolvency event where it is not as critical for the project.

Where this isn’t possible, there may be insurances in place, a performance bond or a parent company guarantee to claim against. These approaches, if available, may realise a better return than pursuing a company in liquidation, but success is not guaranteed especially in the case of a group insolvency. There are measures which can be put in place in the contract to provide protection such as cross-contract set-off clauses or delays to payments where an insolvency event has occurred, and termination has arisen.

Communication does not end with an insolvency event – it is important not to ignore the insolvency professionals appointed to close out the insolvency who will be interested in valuing the accounts of the insolvent company. Valuing your own position fairly and thoroughly is important, as demonstrating this to the insolvency professionals should be sufficient to head off a dispute before it arises. Parties who choose to stick their heads in the sand often find themselves on the receiving end of adjudications compelling a third-party valuation. At Mantle, our teams have worked on the biggest construction insolvencies around the world and are experienced in guiding clients through all available risk-mitigation options as well as dealing with the follow-on claims process.

Oliver Pickford
Associate at Mantle Law, London

Posted by: Oliver Pickford

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