Guides & Advice

What do the new insolvency guidelines mean for construction contractors?

Published: 10th December 2020
Area: Real Estate & Planning
On 25 June 2020, the Corporate Insolvency and Governance Act 2020 introduced some of the most transformative changes seen in insolvency since the Insolvency Act 1986.

For the construction industry, the Corporate Insolvency and Governance Act 2020 (‘the Act’) presents hurdles for contractors in terms of their ability to operate contractual termination clauses in the unfortunate event that their employer becomes insolvent.

What are the new changes to insolvency law?

The key points to be aware of are that the new provisions:

  • stop a contractor from exercising a contractual right to terminate where an employer has entered into a formal insolvency procedure (within the meaning of the Act);
  • stop a sub-contractor from exercising a contractual right to terminate a contract where a contractor has entered into a formal insolvency procedure (within the meaning of the Act);
  • prevents contractors and sub-contractors (as suppliers of goods and services) from withholding works on the basis that unpaid invoices for work done made before the start of the insolvency period are paid first. Therefore, contractors/sub-contractors under the Act are obligated to continue works despite non-payment; and
  • prevents the pursuit of unpaid invoices by way of a winding up petition based on:
    • service of a statutory demand between 1 March 2020 and 31 March 2021; or
    • service of a winding up petition based on a statutory demand before 1 March 2020, so long as it can be shown that the pandemic has not had a “financial effect” on the company or that the company would have become insolvent regardless of the pandemic.
The impact on contractors

For contractors, the new provisions can lead to a degree of uncertainty about what they can do if:

  • their employer become insolvent;
  • their ability to serve statutory demands/winding up petitions if employers do not pay their bills;
  • they are experiencing cash flow problems as a result of COVID-19 and receive statutory demands/winding up petitions;
  • they enter into an insolvency procedure themselves and what their continuing contractual obligations are; and
  • they want to use their statutory rights under Housing Grants, Construction and Regeneration Act 1998 to suspend works due to non-payment of goods/services and/or commence adjudication for non-payment and successfully enforcing the decision.
Can the parties reach a mutual agreement to terminate due to an employer’s insolvency?

One key question raised by contractors is likely to be whether parties can still mutually agree to terminate works due to an employer’s insolvency. The answer appears to be yes, but only on the basis that:-

  • The insolvency practitioner agrees; or
  • The insolvent party agrees.

It is likely that consent from an insolvency practitioner or insolvent party will be hard to come by, given the current economic climate, the strong onus and commitment by the UK government to restart the economy and insolvency practitioner’s duties to creditors.

One argument that could be used by a contractor when seeking to reach a mutual agreement to terminate is that it is not commercially viable (for either party) to continue with the works but this will need to be carefully considered and discussed between the parties.

If it is not possible to reach a mutual agreement to terminate, one final option for a contractor is to seek permission from the court on the basis that it should allow termination as continuing with the works by the contractor would cause ‘hardship’. Presently, the new rules do not provide any definition of ‘hardship’. However, on the face of it, larger contractors may have more of a struggle persuading the court that continuing the works will cause ‘hardship’ compared to smaller companies who may be more significantly impacted.

Supplies of goods and services by small suppliers

For a short window, there is a temporary suspension in the application of the new rules to small suppliers until 30 March 2021.

To count as a ‘small supplier’, they’ll need to tick two of the following criteria:

  • A turnover of less than £10.2m;
  • A balance sheet total of less than £5.1m; and
  • Less than 50 employees
What does this mean for the future of the construction industry?

Some of the temporary changes to the insolvency rules brought about as a result of the Act were originally due to expire on 30 September 2020., but these changes were extended until 31 December 2020. 

Unsurprisingly, these changes have now been extended for a second time until 31 March 2021. As a result: 

  • I’s not possible to issue a winding up petition based on a statutory demand served between 1 March 2020 and 31 March 2021; and
  • The prohibition on presenting winding-up petitions or making winding-up orders is extended until 31 March 2021. 

Given the ever changing nature of the restrictions as a result of the COVID-19 pandemic, and the challenges that these restrictions present, it remains to be seen whether these changes extended a third time. 

In the meantime, contractors should remain vigilant as to their employer’s financial position. It also makes sense to ensure that construction contracts entered into going forward include appropriate drafting to ensure that, as far as possible, the consequences of insolvency and the new rules from the Act are addressed and properly covered off.

We’re here to help

If you have concerns around the implications the new insolvency rules may have on your business then our construction disputes team can help – contact Kate Onions or Adam Watson for advice and support.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

Misconduct outside the workplace and business disrepute

8 Sep

Michael Hibbs, Partner | Danielle Humphries, Solicitor
Misconduct outside the workplace and business disrepute

In this webinar, Mike Hibbs – Partner and Danielle Humphries - Solicitor in our […]

Mental health and wellbeing in the workplace | Westminster Employment Forum

19 Sep

Helen Hughes, Legal Director
Mental health and wellbeing in the workplace | Westminster Employment Forum

Helen Hughes will be joining the upcoming Westminster Forum Projects online conference to speak about women’s […]

How well are charities served in parliament?

5 Aug

Catherine Rustomji, Partner & Head of Charities
How well are charities served in parliament?

With the prospect of a new prime minister on the horizon, Charles Mesquita of […]

Ethical investments – is this a ‘momentous’ new judgement?

12 Jul

Catherine Rustomji, Partner & Head of Charities
Ethical investments – is this a ‘momentous’ new judgement?

In this episode of Charity Chats Catherine Rustomji, Charles Mesquita and James Saunders discuss […]

Our Latest Thoughts

All the latest views and insights on current topics.

RPI to be phased out by 2030 – how could this affect landowners?

3 Aug

Real Estate & Planning

RPI to be phased out by 2030 – how could this affect landowners?

Read article Right Arrow

Commercial Rent (Coronavirus) Act 2022

19 Jul

Real Estate & Planning

Commercial Rent (Coronavirus) Act 2022

Read article Right Arrow

The Heat Network (Metering and Billing) Regulations 2014 | What do they mean for registered providers?

15 Jul

Real Estate & Planning

The Heat Network (Metering and Billing) Regulations 2014 | What do they mean for registered providers?

Read article Right Arrow

Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) Llp

29 Jun

Education

Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) Llp

Read article Right Arrow

Don’t waste money on space you don’t use! Re-gear

29 Jun

Real Estate & Planning

Don’t waste money on space you don’t use! Re-gear

Read article Right Arrow