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Last edited 15 Dec 2020

Main author

Alistair Cantor

Insolvency in the construction industry

1 Introduction
2 Bankruptcy/individual insolvency
3 Company insolvency
4 Related articles on Designing Buildings Wiki

[edit] Introduction

'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 both cases, insolvency proceedings do not constitute formal legal claims. Instead they are effectively administrative processes instigated by either the insolvent entity or one of their creditors. Their specific aim is to recover all available assets so that they may be disposed of and the proceeds distributed to creditors to satisfy all debts to the greatest extent possible.

This article aims to provide a general overview of a highly complex area of law, and does not constitute legal advice. Any reader wishing for further information should consult a practitioner textbook or seek legal advice.

[edit] Bankruptcy/individual insolvency

A person is made bankrupt when a bankruptcy order is made by a court following the presentation of a bankruptcy petition. An individual may petition for their own bankruptcy where they are unable to pay their debts, or alternatively a petition may be presented by an individual’s creditor, or more than one creditor acting jointly.

Any creditor owed a debt exceeding the bankruptcy limit of £750 may petition for an individual’s bankruptcy. The debt must be liquidated and unsecured.

A petition may be founded on one of three grounds:

A court judgment has been entered against the individual, and the Judgment Creditor has taken steps to enforce the judgment (e.g. by the seizure of goods) which have been unsuccessful.
A statutory demand has been presented to the debtor and not complied with.
A debtor has failed to comply with their obligations under a binding Individual Voluntary Agreement (IVA).

[edit] Statutory demands

Any creditor may present a debtor with a statutory demand, in prescribed form, for payment of a debt. Upon receipt of a statutory demand, the recipient may either satisfy the debt within 21 days of service, challenge it by applying to set it aside or not respond to it.

Where no response is made, or an application to set aside the demand is dismissed and the demand stands, a presumption that a debt exists and cannot be paid is created. A petition can then be presented on this basis.

[edit] Individual voluntary agreements

IVAs are specifically provided for in the Insolvency Act 1986. An individual will present a detailed proposal to all their creditors, with the help of a licensed insolvency practitioner. A detailed analysis of all income streams and assets will be conducted, possible courses of action suggested (e.g. sale of property), and an overall proposal presented to all creditors. Generally, the individual will aim to persuade their creditors to allow them to discharge their debts over a period of time rather than to petition for bankruptcy, usually achieved by demonstrating a higher return in the pound than via bankruptcy.

A meeting of creditors will be held, at which they will vote to either accept or reject the IVA proposal. If 75% of creditors by value of debt vote in favour the IVA will be adopted and become binding on all parties.

The obligations imposed on an individual by an IVA can be extensive and varied (for example to sell a property by a certain date) and any failure to comply with the obligations can lead to a bankruptcy petition being presented.

[edit] Hearing of petitions

Once a petition has been presented to the court, a date for the hearing of the petition will be set. Detailed rules as to procedure and the form and service of any petition must be followed.

At the hearing the court will determine whether or not a bankruptcy order should be made. A petition may be opposed, in which case the court may adjourn the petition and give directions for the filing of evidence. A trial of the disputed issues may then be held. An unreasonable refusal of an offer to settle the debt may lead to a court dismissing the petition. What constitutes a reasonable offer is a matter of fact for the court, but for example an offer to settle a modest debt over two months would perhaps be considered one no reasonable creditor could refuse.

Ultimately, if a court is satisfied a valid debt exists that cannot be paid, and all necessary procedure has been followed correctly, a bankruptcy order will be made.

[edit] Bankruptcy

Following the making of a bankruptcy order, a Trustee-in-Bankruptcy will be appointed, in whom the bankrupt’s estate vests. Generally, the bankrupt’s estate comprises all assets and property owned at the time the bankruptcy order was made, with certain exceptions (for example tools of trade).

The Trustee’s duty is to get in the bankrupt’s assets to be disposed of, and to utilise the proceeds to satisfy all debts. They have wide powers to enable them to do this, including the power to sell property. The bankrupt has duties to cooperate with the Trustee, for example by providing information as to their assets and income. Once all assets have been realised, the Trustee is entitled to cover their own costs - which can be substantial - from the proceeds. Following this, creditors’ debts are satisfied in order of priority and any surplus returned to the bankrupt.

A bankrupt will be discharged from bankruptcy after one year, although this period may be extended on the application of the Trustee if they have failed to comply with their obligations. While a bankrupt may be discharged after one year, the process of realising their estate may take longer than this.

[edit] Company insolvency

There are four types of procedures set out under the Insolvency Act 1986 governing the affairs of insolvent companies:

Company Voluntary Arrangements.
Administration.
Receivership.
Winding up.

[edit] Company voluntary arrangements (CVAs)

These reflect the same procedures and aims as for IVAs. The directors of a company may put forward a proposal to creditors, or alternatively, if the company or partnership is already in administration or being wound up by the receiver or liquidator. As with IVAs, a meeting of creditors is held and if 75% of creditors by value vote in favour, the CVA is adopted.

[edit] Administration

An administrator may be appointed by a company's directors, by order of the court or by the holder of a qualifying floating charge. The purpose of administration is to:

Rescue the company as a going concern.
Achieve a better result for the company's creditors as a whole than if the company were wound up.
Realise property to distribute to creditors.

A qualifying party, such as a director of the company or a creditor, may apply to court for an administration order. The court may make such an order where satisfied the company is unable to pay its debts and that administration is likely to achieve its purpose as set out above.

Following appointment, an administrator must assess the company's position and put forward proposals for achieving the purposes of administration. Under certain circumstances creditors' meetings may or must be held in order for proposals to be accepted or revised. Progress reports must generally be provided by the administrator every 6 months. The administrator has wide powers, for example the ability to dispose of property or to bring or defend legal proceedings on the company's behalf.

Administration ends 1 year after the initial order is made, although this period may be extended in certain circumstances or indeed may end earlier where the purposes of administration have been already met.

Contractor has gone into administration receivership, what do you do?

You must act quickly, following measure which need to be discussed with the design team.

Advise the client of contractor insolvency, contractual position and recommended action
Go to site, secure site and materials and change the locks
Get in touch with administrative receiver
Instruct the QS to prepare a detailed valuation of the completed work and an inventory of materials and equipment
Termination of the contractor’s employment under the contract at any time by notice. Written notice is required, delivered by hand, special or recorded delivery. Termination effective with immediate effect upon the contractor receiving the notice. Contractor’s obligations to carry out and complete the works are suspended
Withhold any payments to the contractor. Employer is not obliged to make any further payments or release monies if Termination is in effect. If anthe interim certificate has recently been issued, it is advised to issue a withholding notice
Contact key sub-contractors, suppliers and commence discussions about continuation contracts.
Begin the process of engaging a new contractor to proceed with the works
Check the contract for Bonds or Parent Company Guarantees (PCG).
Get in touch with administrative receiver or liquidator and client about their views with regard to project completion
Ensure that the project is insured and that the insurance obligations have been fulfilled/ complied with

[edit] Administrative receivership

Historically, administrative receivership was a widely used insolvency process, granting the holders of floating charges the power to appoint a receiver. An administrative receiver's principal duty is to realise the indebtedness owed to the creditor by whom they were appointed by disposing of assets. In practice, this remedy is now much less common following the enactment of the Enterprise Act 2000.

[edit] Winding up

A registered company may be wound up either by court order or voluntarily. A court may wind up a company upon presentation of a petition on one of a variety of grounds, including, inter alia, that it is unable to pay its debts.

A company is deemed unable to pay its debts if (inter alia):

A statutory demand for a debt exceeding £750 has been served on the company and the company has failed within three weeks of service to satisfy the debt; or
It has a court judgment against it, and steps to enforce said judgment have been taken unsuccessfully; or
It is proved that the company is unable to pay its debts as they fall due; or
The company's assets are less than its liabilities.

As with bankruptcy detailed rules as to procedure and the form and service of demands and petitions must be followed. Persons served with the petition may appear at the hearing if they have given notice and may support or oppose the petition.

[edit] Liquidation

Where a winding up order is made, it has the effect of discharging all employees, ending any agency relationships, and dismissing the company’s directors, who cease to possess powers of management. They continue to hold certain responsibilities as officers of the company, for example to respond to requests for information.

A liquidator will be appointed. Their responsibility is to get in and dispose of the company’s assets in order to discharge its liabilities to creditors, with any surplus passed to whomever is entitled to it. They hold wide powers to enable them to do so, constituting the governing body of the company and the receiver of its assets. They are entitled to their own costs before the proceeds are distributed to creditors. Once this process is complete the company is dissolved, which means that the company has now ceased to exist entirely.

[edit] Phoenixing

Construction is an industry that can suffer the most from of what is known as 'phoenixing'. This is where directors dissolve companies to avoid having to pay staff wages, pensions or creditors before re-emerging 'phoenix-like' in a similar guise.

For more information, see Insolvency Act- Use of Prohibited Names.

In August 2018, the government's Insolvency Service announced plans to tackle phoenixing to help safeguard workers, pensions and small businesses. Directors may face investigation and be liable to fines or be disqualified from running a business if they try to avoid paying a dissolved company's debts. Under the new powers, directors will be required to explain to shareholders how dividends can be paid alongside other financial commitments.

Business Minister Kelly Tolhurst said: “While the vast majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue. That is why we are upgrading our corporate governance to give new powers to authorities to investigate and hold responsible directors who attempt to shy away from their responsibilities, help protect workers and small suppliers and ensure the UK remains a great place to work, invest and do business.”