With the sad news that Carillion PLC has entered liquidation, it is a timely reminder of the classic issues that arise on insolvency and what are the dos and don’ts when you are in contract with an entity that goes into liquidation
DO:
1. Check your contract terms – how do your contracts deal with insolvency and termination? Do you need to serve a notice of termination? Do you need to serve a withholding notice? Under the standard JCT forms, the insolvency event itself if not a breach of contract, but a failure to settle sums due to the employer arising out of an insolvency will be construed as such. Can the benefit of the contract be assigned (it can in NEC contracts)?
2. Secure your site – put in place security on site to prevent removal of plant and materials by sub-contractors.
3. Check your performance bonds – you may need to “call” upon these forms, however, as above you may need to establish a breach on the part of the contractor. This may be yet to arise. Check the wording, however, as insolvency may be enough to trigger the bond (see Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc [2017] EWHC 3286 (TCC).
4. Ensure the site is adequately insured, if not, put suitable cover in place.
5. Joint Venture partners should consider their liabilities in the event of a partner’s insolvency. The JV may be terminated in the event of one partner’s insolvency or the one partner may have to take up the other’s liabilities.
6. As a sub-contractor, should you consider suspending performance? Consider your retention of title clauses, have you been paid for materials? Does your contract give you the right to retain them?
7. Consider the rights of any future tenants and long-stop dates. Enquiries should be made of alternative contractors as soon as possible to recommence the works so as to not to breach these terms.
8. Consider the procurement rules and whether there are particular rules to follow where the leading supplier is no longer able to deliver the works or services. Is an assignment or de facto novation a breach of these rules?
9. Ensure that your sub-contractor and supplier warranties are in place. This will ensure that there is a route in place should issues arise with the design and workmanship of the project in future.
10. Start collating and documenting losses that have been incurred as a result of the insolvency. This should include the costs of appointing a new contractor and any costs it incurs in completing the project.
11. Is there a project bank account? If so, funds should be available to continue to pay sub-contractors and facilitate further works being undertaken on the project.
12. If this decision impacts employees engaged on a project, check whether or not the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) applies.
13. If TUPE applies, ensure employees are informed and consulted to comply with the TUPE regulations.
14. If a redundancy scenario applies, ensure that redundancy consultation is also conducted and the correct period for consultation is carried out (depending on the number of employees concerned)
DON’T:
1. If the contract allows, don’t make any further payments to the contractor. Consider whether payment notices need to be served.
2. Make any direct payments to sub-contractors, these may fall foul of the insolvency rules. Consider instead, whether sub-contractors can be appointed directly.
3. Use drawings and designs without first checking that you have the requisite permissions to do so. Otherwise, you may fall foul of copyright infringement.
4. Assume that TUPE doesn’t apply or that employees can simply move between contractors by agreement. Make sure that you take advice accordingly so that there is full compliance with the TUPE Regulations (as required).
5. Ignore employees. Make sure that you support any affected employees throughout this difficult process.
