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RICS Professional Guidance, UK

1st edition, guidance note

GN 104 /2013

Termination of contract, corporaterecovery and insolvency

Part of the QS & Construction Standards

Termination of contract, corporaterecovery and insolvencyRICS guidance note

1st edition (GN 104/2013)

Acknowledgment

Cover image © iStockphoto (image no. 12812121)

Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square

London

SW1P 3AD

UK

www.rics.org

No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in thispublication can be accepted by the authors or RICS.

Produced by the QS & Construction Professional Group of the Royal Institution of Chartered Surveyors.

ISBN 978 1 78321 005 3

© Royal Institution of Chartered Surveyors (RICS) June 2013. Copyright in all or part of this publication rests with RICS. No part of thiswork may be reproduced or used in any form or by any means including graphic, electronic, or mechanical, including photocopying,recording, taping or web distribution, without the written permission of RICS or in line with the rules of an existing licence.

Typeset in Great Britain by Columns Design XML Ltd, Reading, Berks

Contents

Acknowledgments iv

RICS guidance notes 1

1 Introduction 31.1 What is termination of contract in terms of a construction contract? ........................... 31.2 What is corporate recovery in terms of a construction company? ................................ 31.3 What is insolvency of a party in terms of a construction contract? .............................. 3

2 General principles (Level 1 – Knowing) 42.1 Termination of contract.................................................................................................... 42.2 Corporate recovery and insolvency................................................................................. 5

3 Practical application (Level 2 – Doing) 103.1 Termination of contract.................................................................................................... 103.2 Corporate recovery and insolvency................................................................................. 12

4 Practical considerations (Level 3 – Doing/advising) 174.1 Termination of contract.................................................................................................... 174.2 Corporate recovery and insolvency................................................................................. 19

Appendices 25A Simple notional final account example ........................................................................... 25B Construction project risk assessment matrix.................................................................. 26

TERMINATION OF CONTRACT, CORPORATE RECOVERY AND INSOLVENCY | iii

Acknowledgments

RICS would like to thank the following for their contributions to this guidance note:

Technical author:

Nigel Willifer (Anncom)

Black Book working group:

Chair: Andrew Smith (Laing O’Rourke)

Christopher Green (Capita Symonds Ltd)

David Cohen (Amicus Development Solutions)

Jim Molloy (Department of Health, Social Services and Public Safety NI)

John G. Campbell (BAM Construction Limited)

Kevin Whitehead (McBains Cooper Consulting Limited)

Michael T. O’Connor (Carillion Construction Limited)

Michelle Murray (Turner & Townsend PLC)

Stuart Earl (Gleeds Cost Management Limited)

iv | TERMINATION OF CONTRACT, CORPORATE RECOVERY AND INSOLVENCY

RICS guidance notes

This is a guidance note. Whererecommendations are made for specificprofessional tasks, these are intended torepresent ‘best practice’, i.e. recommendationswhich in the opinion of RICS meet a highstandard of professional competence.

Although members are not required to followthe recommendations contained in the note,they should take into account the followingpoints.

When an allegation of professional negligenceis made against a surveyor, a court or tribunalmay take account of the contents of anyrelevant guidance notes published by RICS indeciding whether or not the member had actedwith reasonable competence.

In the opinion of RICS, a member conformingto the practices recommended in this noteshould have at least a partial defence to anallegation of negligence if they have followedthose practices. However, members have theresponsibility of deciding when it isinappropriate to follow the guidance.

It is for each member to decide on theappropriate procedure to follow in anyprofessional task. However, where members donot comply with the practice recommended inthis note, they should do so only for a goodreason. In the event of a legal dispute, a courtor tribunal may require them to explain whythey decided not to adopt the recommendedpractice. Also, if members have not followedthis guidance, and their actions are questionedin an RICS disciplinary case, they will be askedto explain the actions they did take and thismay be taken into account by the Panel.

In addition, guidance notes are relevant toprofessional competence in that each membershould be up to date and should haveknowledge of guidance notes within areasonable time of their coming into effect.

This guidance note is believed to reflect caselaw and legislation applicable at its date ofpublication. It is the member’s responsibility toestablish if any changes in case law orlegislation after the publication date have animpact on the guidance or information in thisdocument.

TERMINATION OF CONTRACT, CORPORATE RECOVERY AND INSOLVENCY | 1

Document status definedRICS produces a range of professional guidance and standards products. These have been definedin the table below. This document is a guidance note.

Type of document Definition StatusStandardInternational Standard An international high level principle based

standard developed in collaboration with otherrelevant bodies

Mandatory

Practice StatementRICS practicestatement

Document that provides members withmandatory requirements under Rule 4 of theRules of Conduct for members

Mandatory

GuidanceRICS Code ofPractice

Document approved by RICS, and endorsed byanother professional body/stakeholder thatprovides users with recommendations foraccepted good practice as followed byconscientious practitioners

Mandatory orrecommended goodpractice (will beconfirmed in thedocument itself)

RICS Guidance Note(GN)

Document that provides users withrecommendations for accepted good practiceas followed by competent and conscientiouspractitioners

Recommended goodpractice

RICS InformationPaper (IP)

Practice-based information that provides userswith the latest information and/or research

Information and/orexplanatorycommentary

2 | TERMINATION OF CONTRACT, CORPORATE RECOVERY AND INSOLVENCY

1 Introduction

This guidance note reviews the subjectprimarily from the perspective of a charteredsurveyor for RICS with a commensurate level ofspecialism. It also deals with the main issuesencountered in and associated with aconstruction project. Generally, the guidancenote advises on the issues and also suggestswhen further specialist assistance may berequired either legally or technically.

The guidance note will review the main types ofinsolvency and termination issues for genericcontracts:

+ the processes

+ the parties to them

+ their purpose and

+ general terms.

At Level 1 (Knowing) general principles arediscussed with the meanings of certain terms.

At Level 2 (Doing) practical applications areconsidered for the chartered surveyor.

At Level 3 (Doing/advising) practicalconsiderations and issues may lead to therequirement for further reports, advice andappointments other than chartered surveyors,as well as other related topics covered by RICSguidance notes, such as bonds andguarantees.

1.1 What is termination ofcontract in terms of aconstruction contract?

Termination of a construction contract by oneparty to the contract can occur where the otherparty has breached the terms of the contract.

Most construction contracts contain provisionsdetailing how in such circumstances it may beterminated.

1.2 What is corporaterecovery in terms of aconstruction company?‘Corporate recovery’ is a term used to describethe process and actions taken to bring an ailingcompany back to full health; this can involvethe provision of financial, restructuring,accounts and legal advice by those qualified togive such advice and the possible appointmentof an insolvency practitioner.

1.3 What is insolvency of aparty in terms of aconstruction contract?A company or party is deemed to be insolventwhen it does not have sufficient assets tocover its debts or is unable to pay its debtswhen they are due. A common indication that acompany may be insolvent is that itconsistently makes late payment to creditors(including HMRC). Also, the instigation of legalaction against the company by a creditor torecover an unpaid sum of money is evidencethat the company may be insolvent.


2 General principles (Level 1 – Knowing)

2.1 Termination of contract

2.1.1 Good management/avoidanceof potential problems

It is clearly preferable to avoid having toterminate a contract by discussing the issuescausing the concern. This will avoid theexpenditure of time, cost and expertise ofappointing a new party.

With this in mind, the chartered surveyor canwork to suggest possible actions to preventtermination. To do so, the chartered surveyorneeds to be familiar with the terms of thecontract and the obligations of both parties inrespect of termination, and the subsequentconsequences.

2.1.2 What is a release agreement?

A release agreement is an agreement drawn upby the parties that, for the avoidance of doubt,lays down the terms of the termination of thecontract. This provides a clean, unequivocalbreak for the parties. This is importantespecially if one or both parties are still solventand wish to continue in their core businessesunaffected by the termination. It is prudent tocheck the contract and ensure that all of theduties and obligations have been performed,including financial recovery. Legal adviceshould be sought for such an agreement.

2.1.3 What is a breach?

A breach of contract (or subcontract) is afailure by a party to the contract to comply withan obligation imposed on it under the terms ofthe contract. The types of breach and theconsequences are discussed later in thisguidance note under the practical applicationsection (Level 2 – Doing). Some breaches ofcontract are minor and do not necessarily leadto circumstances whereby the aggrieved partyhas grounds to terminate the contract.

Breaches of construction contract by thecontractor frequently involve defective work orworks. For example, often a party fullyperforms their required work tasks but thesecontain defects. The consequence of suchdefects could be deemed to be a failure of theparty to carry out their contractual obligations.In such a situation the defective work is usuallycovered by a parent company guarantee, or ina bond situation the additional cost ofcompleting the works may include the cost ofrectifying the defective works. This element isdiscussed in more detail in the RICS guidancenote Construction security and performancedocuments.

2.1.4 General termination provisionsin construction contracts

Most construction contracts contain provisionfor termination, and the chartered surveyorshould be aware of these in order that thepotential for termination can be managedand/or acted upon. The termination may bevoluntary or involuntary.

Voluntary termination is where the parties agreemutually to terminate or, alternatively, it can bewhen one party ends the contractualagreement.

Involuntary termination can be theconsequence of insolvency (discussed in moredetail in subsection 2.2) and will occur where aparty does not have enough assets to cover itsdebts, or if the party is unable to pay its debtswhen they are due.

In either case the contract clauses must befollowed closely and diligently by the charteredsurveyor dealing with the termination since awrongfully terminated contract can lead torepudiation (see paragraph 3.1.2.1). Thecontract should invariably describe therequirements for the serving of notice, settingout the default(s) and preferably the clause or


clauses in the contract relied upon. Withoutdetailing each of the construction contracts,below is a brief checklist for ensuring thecorrect process is adhered to. Ultimately, a

chartered surveyor who does not have therelevant experience necessary should seekadditional assistance, whether legal ortechnical.

Checklist for termination of contract1 Discuss the situation with the employer/party2 Make a note of all of the relevant contract clauses for the termination3 Seek additional assistance from an expert if required4 Write and serve a notice in accordance with the contract detailing the breach, ensuring correct postal

delivery procedure5 Assuming the breach continues, and after the requisite time period, dispatch the further notice

(assuming the contract requires one), keeping to the facts and the contract clauses6 Document preparation/final account information/site security/alternative contractor/party tenders

2.2 Corporate recovery andinsolvency

2.2.1 Who can deal with constructioninsolvency?

RICS has published a regulation/insolvencyinformation sheet (available at www.rics.org/Global/Downloads/Insolvency_further_information_sheet.pdf) that offers advice onregulation issues and the recommended courseof action for the chartered surveyor orchartered company. Another useful contact isthe Insolvency Service (www.bis.gov.uk/insolvency), which is part of the Department forBusiness, Innovation & Skills and is aninsolvency law and regulatory frameworkoperating mainly under the following legislation:

+ Insolvency Acts 1986 and 2000

+ Company Directors Disqualification Act1986

+ Employment Rights Act 1996

+ Companies Acts 1985 and 2006 and

+ Enterprise Act 2002.

With regard to insolvency, all liquidators,supervisors, administrative receivers andadministrators taking office after 29 December1986 must be authorised insolvencypractitioners. Companies House produces adocument that provides information on theInsolvency Act 1986. Consequently, a charteredsurveyor without such authorisation is unableto deal with construction insolvency.

2.2.2 Different types of insolvency forcompanies

There are five types of insolvency, namely:

1 company voluntary arrangements (CVAs)

2 administration

3 winding up of the party/company orcompulsory liquidation

4 administrative receivership (or receivership)and

5 voluntary liquidation.

2.2.2.1 CVAs

CVAs occur when a company is in difficultyfinancially but is not necessarily insolvent,although that may become the case as aconsequence. They are usually commencedby the directors of the company.

The process involves the CVA beingapproved at a scheduled creditors meeting.The directors then put forward a person whois able to make a viable proposal to thecreditors with a view to them being able tosecure an acceptable percentage of themonies due to them. The nominee will beresponsible for chairing the CVA process.

2.2.2.2 Administration

Administration involves the adoption of aprocedure that allows a company unable topay its debts to continue to trade for afurther period, during which its assets areprotected. The intention is to achieve a good


market price for all or partial assets and/or tokeep the company fully operational, as a‘rescue’ function.

The advantage of this over involuntaryliquidation is that the assets may realise abetter position to that of an involuntaryarrangement, and the administrator can wieldfull management powers to secure the bestposition for all creditors, not just thepreferential ones. This hopefully negates theneed for the winding up of the party.

Administration is normally instigated by thedirectors of the company and an unsecuredcreditor or a floating charge holder. Thedirectors or creditor make an application tothe court, or the floating charge holder(surety) appoints an administrator. The partythen continues to trade while theadministrator endeavours to realise the bestprice for the company’s assets. Theadministrator is legally obliged to do so.

A little-used subcategory of administration isa ‘pre-packaged insolvency’, in which partialassets or the company itself are negotiatedwith a potential purchaser such as a ‘newco’or existing directors. The administratormanages the sale immediately uponappointment.

2.2.2.3 Winding up of the party/company or compulsory liquidation

Winding up of the party/company orcompulsory liquidation occurs when thecompany is unable to pay its debts.Compulsory liquidation can be instigated byone of the creditors acting on behalf of theother creditors. The resultant debt has to be:

+ undisputed

+ more than the monetary sum of £750.00and

+ the creditor must have informed the debtorof its intention to pursue and collect thedebt.

The creditors submit a petition to the courtand in the intervening period, as an interimmeasure, the creditor can apply for a

provisional liquidator. The hearing is thenheard in court approximately six weeks afterthe petition, at which time the court mayissue a winding-up order if the petition isupheld.

At this juncture, on the issue of a winding-uporder the company ceases to trade and theofficial receiver acts in its capacity asliquidator to sell off the company assets.

2.2.2.4 Administrative receivership (orreceivership)

Administrative receivership (or receivership) iswhere a party breaches the terms of itsborrowing from a creditor (for example, abank with a floating charge). The creditormay then appoint an administrative receiver,who must be a licensed insolvencypractitioner, to recover the money owed.

In the case of a floating charge, the rights ofthe creditor are dependent on whether theprocess it instigated was registered before orafter 15 September 2003 (see Part 10 of theEnterprise Act 2002).

Before 15 September 2003 the creditorcould:

+ do nothing and let the insolvency processcommence or

+ appoint an administrative receiver of theirchoice or

+ appoint an administrator of their choice.

After 15 September 2003 banks’ and lenders’rights were slightly reduced, so they are nowunable to appoint an administrative receiver,but can still appoint an administrator out ofcourt, i.e. in accordance with the provisionsof the Enterprise Act 2002.

The procedure before 15 September 2003meant that the administrative receiver onlyworked on behalf of the charge holder andnot all of the creditors. Also, theadministrative receiver did not strive torescue the insolvent company.

2.2.2.5 Voluntary liquidation

Voluntary liquidation may be instigated whenthe company is still solvent. The members


(directors) of the company can cast a vote,usually by passing a resolution, to the effectthat the company’s liabilities are too great toallow the company to continue in business.This can be due to a debt that cannot berepaid. In this scenario a liquidator is againappointed by resolution and is charged withthe realisation and distribution of assets ofthe company. As a consequence, thecompany ceases trading.

2.2.3 What is the role of thechartered surveyor?

The chartered surveyor can utilise aconsiderable amount of skills relevant to aconstruction insolvency situation; these caninclude measurement, financial costing,procurement/retendering, claims, payments andvaluations. The chartered surveyor is thereforewell placed to assist an insolvency practitionerat both the pre- and post-insolvency situations.

2.2.3.1 Commercial awareness/practicalsolutions

Usually the signs are obvious when acompany – whether contractor,subcontractor, consultant or client – is indifficulty. However, the chartered surveyorshould always be alert to the potential signswhich, in respect of a contractor orsubcontractor, can be some or all of thefollowing:

+ work on site lacks progress or slowswithout any particular reason

+ applications for payment are grosslyovervalued or on account payments arerequested as well as those catered for inthe contract

+ unexpected claims for additional paymentare made

+ materials/plant required for the works arenot ordered or delivered to site asexpected, or suppliers are frequentlychanged

+ labour resources provided to execute theworks are not sufficient for the tasks inhand, or there are frequent changes in the

labour force, suggesting non-payment ordelayed payment to operatives

+ word of mouth/verbal evidence and

+ County Court judgments (CCJs) against thetroubled party.

2.2.3.2 Pre-insolvency actions for thechartered surveyor

(a) Reference to Companies House: Theparty experiencing distress can beresearched through Companies House(www.companieshouse.gov.uk). The full nameof the party involved and/or companynumber is required, but care must be takento ensure that the correct company isinvestigated. This involves a ‘Webcheck’against the potentially insolvent party. Creditreference checks using Experian(www.experian.co.uk) or other suitable bodiesto disclose credit details can be useful,though can lag behind the actual companyfinancial situation. The check may uncoverfinancial difficulties, recent changes indirectorship or CCJs against the company.Alternatively, the party being investigatedmay already have gone into liquidation oradministration, and the Webcheck couldreveal this.

(b) Keeping detailed records: Commenceand maintain detailed records of transactionsand events. This will ensure that thechartered surveyor is prepared to assist inthe process, i.e. has the benefit of accurateand substantial records. Regular meetingswith the parties can often assist, themeetings being agreed and minutes taken toform a formal record of the points discussed.

(c) Investigate verbal evidence: Word-of-mouth evidence should be followed up withenquiries to express the chartered surveyor’sconcern and offer assistance/support orexpert assistance from others.

(d) Relaxation of payment terms: Thechartered surveyor may suggest that a client,contractor or subcontractor considerstemporarily relaxing the payment conditions


under an agreement, if such action reducesthe risk of insolvency. However, the risk hasto be within acceptable parameters for theparties involved.

(e) Reletting work to others: The charteredsurveyor may suggest that a client orcontractor considers reletting some of thework to others, subject to the agreement ofthe parties, if such action reduces the risk ofinsolvency.

(f) Direct payment: The chartered surveyormay suggest that a client or contractorconsiders direct payments to a (third) party,again with the agreement of all the parties, ifsuch action reduces the risk of insolvency.

(g) Termination: If the party is in breach ofits contract (covered in subsection 2.1.3)consider terminating the contract.

2.2.3.3 Applications for payment

Contractually, the applications for paymentmay be on a 28-day basis and this obligationmust be maintained. In due course there maybe time to suspend the next payment due.However, it is advisable to inform thedirectors of the company involved of anysuch actions and again follow the procedureset out in the contract.

2.2.3.4 Claims

Claims can often ensue following insolvencyand again it is important to follow thecontractual procedure. This will involve thecorrect dispatch of contractual notices: ofparamount importance is the timing andmethod of delivery of the notice. Thecontract should specify the terms of thegiving of notice and if this is not known thenadvice should be taken. Claims involvingbonds, guarantees and the like are discussedin the RICS guidance note Constructionsecurity and performance documents.However, it is important that thesedocuments are reviewed at an early stageand the salient points reported to thecompany directors. This may also involvenotifying the surety.

The chartered surveyor should ensure thatany set-off, contract charges and/or withheldsums are correctly deducted from the party,in accordance with the terms of the contractand the serving of notices to withhold.

2.2.3.5 Valuations

Valuations for the purpose of interimpayments should be fair and reasonable butnot overstated. The risk for the employer orcontractor is that, if an interim valuation isovervalued and subsequently paid and theparty becomes unable to carry on, theovervalued element may be unrecoverable orrecovered only after considerable time andexpense.

2.2.4 Process and procedures whena party becomes insolvent

When a party is unable to pay its debts whenthey are due, the party has insufficient casheven if all of its assets combined, if realised,would be sufficient to pay off such debts.Consequently, to avoid subsequent insolvencythe party may be placed in administration, asdiscussed in subsection 2.2. In this case, aloan of some type may be sought to enable theparty to remain in operation and perhapscomplete its contractual obligations. This mayin turn lead to corporate recovery of thebusiness.

However, if a party becomes insolvent, thechartered surveyor should consider thefollowing issues:

+ If working with the non-insolvent party, it isvital to take urgent action to ensure that theparty’s interests are protected, whether it isthe employer, funder, contractor, consultant,or subcontractor, etc.

+ Determine whether there are any otherprojects with an unresolved situationbetween the company and the insolventparty (for example, enquiries, tenders,tender lists, schemes in progress or underdefects, and retention monies outstanding).

+ The appointment of an individual withknowledge of insolvency issues to act as acoordinator in all of the actions taken and


to be the focal point for consultations withthe administrator/receiver/liquidator.

+ Is legal advice needed?

+ A right of set-off is available underinsolvency law (the right to off-set monies).Seek legal advice to investigate the mostsuitable option(s).

+ Upon insolvency of a party, consider aclaim on the bond as well as any claimsagainst the insolvent party or consequentialclaims against third parties.

+ A final auditable financial reconciliationstatement/valuation over all contracts willeventually be required, in which moniesowing or due overall to either party willneed to be prepared for presentation to thereceiver/liquidator.

+ Preparation of a notional final account.


3 Practical application (Level 2 – Doing)

Under Level 2 the chartered surveyor mustconsider practical applications of the issuesand not only be aware, as in the previoussection, but also carry out some of theactivities for which they are responsible.Therefore, this section concentrates on theanticipated duties required of the charteredsurveyor, with the added caveat that some ofthe elements of work are still required to beexecuted by others such as insolvencypractitioners and/or lawyers.

The areas covered by this guidance note areimportant in that errors can lead to theemployer/contractor being exposed to claimsfor breach of contract due to poorly executednotices and contract interpretation.


3.1.1 Contractual rights to terminate

3.1.1.1 Contractual provisions

(a) Termination provisions vary for each typeof contract. For example, the provisions inthe New Engineering Contract (NEC) suite ofcontracts differ from those in the JointContracts Tribunal (JCT) suite of contracts.This guidance note does not comment oneach of the mechanisms within each type ofcontract, but rather on what the charteredsurveyor should do in terms of invoking aparty’s rights to terminate.

(b) Before considering termination, seek legaladvice. Such advice may suggest writing anddispatching letters and/or notices, checkingthe contract before documents aredispatched to the party in breach and the fullengagement of lawyers to manage theprocess. However, there are cost

consequences of engaging a lawyer, the riskof which should be discussed with theemployer.

(c) The majority of modern contracts containa termination clause that details when andhow the termination process should beinstigated and conducted. The charteredsurveyor should gather the necessaryinformation involved in a particular breachand assemble it into the correct notice.

(d) The process of terminating a contract canbe emotive, frustrating and certainlydisruptive, so following the correctcontractual procedure is vital. For effectivetermination, whether voluntary or involuntary,the reasons for the termination must be givenin the termination notice. If no such notice isrequired under the contract (which would beunusual), then it is advisable to describe thebreach or breaches of contract, giving asmuch detail as possible.

3.1.1.2 Breach or breaches of specifiedcontractual obligations

(a) Most contracts mention breach ofcontract. A material breach of contract is anevent that allows the party not causing thebreach to consider terminating the contract,citing the specified contractual obligations. Anon-material breach means that the contractwill remain and the issue can be rectifiedunder the terms of the contract. Expressprovisions within the contract or subcontractwill usually allow a party to terminate acontract.

(b) Again, following a breach of contract, thechartered surveyor should strictly follow theprocedures expressed in the contract. It is acommon procedure in most contracts towrite and dispatch a formal notice and, if the


breach is not rectified, the party who issuedthe notice issues a financial statementdetailing the financial situation and (usually)the due sum. At this juncture the other partymay contest the notice and statement if itconsiders the breach to be incorrect.

(c) If the termination of the contract isthought to be in breach (i.e. incorrecttermination), the other party may well bewithin its rights to calculate a claim for lossand/or expense. Again, seek legal advice insuch a situation to establish whether in legalterms a breach actually exists.

(d) A material breach, such as non-paymentof an interim application, may have beencommitted by a party, but the contract maynot be specific on this point. In this instancethe chartered surveyor should seek legaladvice. This type of dispute may be heard incourt, which will decide on thedocumentation and evidence gatheredwhether a material breach has occurredbased solely on the evidence presented bythe parties. It may be that a material breachhas not occurred, in which case the otherparty may be able to claim damages.

3.1.1.3 Termination at will

Termination ‘for convenience’ or ‘at will’ maybe included in a contract, which may allow aparty to terminate the contract withouthaving to prove that some event hasoccurred or breach has been committed bythe other party. The following situations couldpossibly lead to termination for the sake ofconvenience:

+ a party finds the project will be unprofitableor will carry too much risk, making itunviable

+ the project has been delayed due to long-term planning issues and/or is suspendedindefinitely for a significant period with noforeseeable prospect of it beingrecommenced

+ alternative land use is considered or

+ finance cannot be secured due to a lack ofpre-lets.

For contractors and consultants to be giventhe right to terminate for convenience is raresince it would usually be of great detrimentto the project if the employer had to seekothers through no fault of its own.Consequently, it is unusual to include such aclause. If included, the termination forconvenience clause is usually for the benefitof employers/developers, where the project issubject to a number of factors, such as pre-letting agreements, securing finance,execution of development agreements andplanning.

3.1.2 Non-contractual termination

3.1.2.1 Repudiation

An act of repudiation occurs when a partycommits a breach of contract that issufficiently serious such that it entitles thereceiving party to consider the contract asterminated with immediate effect, and to suefor damages (for loss and/or expense) forbreach of contract. Whether this is a materialor non-material breach will depend upon theseverity and effect of the breach and whetherit is a contractual obligation.

A clear repudiation of a contract will occur,for example, with the following:

+ abandonment of the site or removal of plantby the contractor

+ refusal by the party to carry out work

+ employment of other contractors to carryout the same work or

+ access denial: failure by an employer togive access to the site.

Certain breaches of contract may not be sodefined and are therefore open tointerpretation. If one party purports to treatthe contract as repudiated because of abreach that is not repudiatory, theconsequence is that that party will havecommitted wrongful termination and will bein breach. In this situation, where there isdoubt about whether or not a breach isrepudiatory it is worth considering instead


exercising a contractual right to terminatethrough the contract. This may have aconsequential effect on the level of damages,which may well be less than for a repudiatorybreach.

3.1.2.2 Frustration

Frustration occurs when neither party hasdefaulted on the original contract but otherunforeseen circumstances have intervened toprevent the contract from being performedas originally intended. The result is thatfurther performance of the contract is notpossible, is illegal, or is so inherently differentfrom what the parties contemplated whenthey entered into the contract that it isconsidered to be void.

If a frustration event occurs, the contractautomatically ends and the parties areexcused from their future obligations,although any accrued liabilities will remain.For example, such liabilities could be defectsfor the work already undertaken and theremaining defects period remains in place.

A frustration event must by its nature gostraight to the heart of the contract andwould proceed entirely beyond what wasenvisaged by the parties at the formation ofthe contract. It is very important that a partygives consideration to the veracity of thefrustration event that has actually occurred.This is important if the party is going to relyon frustration to justify the cessation ofperformance of its obligations under thecontract to avoid being in breach, i.e. if it isnot in fact an act of frustration.

The following are examples that may seemlike frustration but in fact are not classed asfrustration events.

+ If the project is more expensive to carry outthan planned. It is unfortunate, but thecontract will continue to operate.

+ If an unusual planning event (such asplanning approval from the local authority isrefused) occurs that is provided for in thecontract, the consequences of that event

happening will be as set out in thecontract, and it will not be a frustrationevent. This could occur where planningpermission is expected, but the eventualityof planning permission not being gained iscatered for in the contract.

+ Force majeure or any circumstancesbeyond the reasonable control of a partythat impede or prevent the dueperformance of the contract. In this case,no automatic entitlement is available to theparty suffering the force majeure. Anexample of this could be a civil riot.


3.2.1 Types of appointment

The various categories of insolvency arediscussed in subsection 2.2.2; here we givegeneral details of the types of appointment. Interms of corporate recovery and insolvencyand the various appointments, these issueshave been grouped into the following threesubcategories. Not all are applicable to thechartered surveyor, but it is often the case thatthe chartered surveyor assists in part of theprocesses, providing information in asupporting role:

+ formal insolvencies

+ corporate recovery procedures and

+ receiverships that are not treatedprocedurally as insolvencies.

3.2.2 Formal insolvencies

3.2.2.1 Administrative receivership

An administrative receiver may be appointedto manage the affairs of a company by asecured creditor who holds a debentureagreement containing floating or fixed andfloating charges over the whole, orsubstantially the whole, of a company’sassets.

Upon the appointment of the administrativereceiver, the floating charges will crystallise.


The administrative receiver will treat thebusiness assets covered by the charges insuch a way as to recover the money due tothe secured creditor. If the administrativereceiver deems it to be in the best interestsof the secured creditor, the business willcontinue to trade.

3.2.2.2 Bankruptcy

A bankrupt is an individual against whom thecourt has made a bankruptcy order. A courtcan declare a person bankrupt on petitionfrom the individual, from one or more of theircreditors, or from the supervisor of anindividual voluntary arrangement. Thebankruptcy order indicates that the person isunable to pay their debts and, subject tocertain exceptions, deprives them of theirproperty, which can then be sold in order topay their creditors.

3.2.2.3 Sequestration (Scotland)

This is the bankruptcy process of anindividual or partnership (firm) in Scotland.The petition for sequestration can bepresented by a creditor or trustee actingunder a trust deed.

The court issues a citation, or warrant, toorder the debtor to appear before the courtwithin 14 days to state their case as to whysequestration should not be awarded. If thedebtor fails to appear, sequestration isawarded.

3.2.2.4 Creditors’ voluntary liquidation

Creditors’ voluntary liquidation usually relatesto an insolvent company and is commencedby a resolution of the shareholders. Usuallyan insolvency practitioner is appointed. Theappointment can be a shareholders’appointment or, alternatively, an independentinsolvency practitioner.

3.2.2.5 Members’ voluntary liquidation

The directors of the company, or the majorityof its directors, are responsible for amembers’ voluntary liquidation and make a

declaration of solvency. In the declaration ofsolvency, the directors state their opinion thatthe company will be able to settle its debtsin full plus interest within a period notexceeding 12 months of the company beingplaced into liquidation. In terms of timing, thedeclaration must be made within the fiveweeks immediately preceding the date of thepassing of the resolution for winding up.Liquidation takes place when the resolutionis passed.

3.2.2.6 Compulsory winding up

The court orders a compulsory winding up asa result of the presentation of a petition byone of the following:

+ the company

+ its creditors

+ its directors

+ one or more of its shareholders or

+ the Secretary of State.

3.2.2.7 Partnership winding up

The court orders a compulsory winding up asa result of the presentation of a petition bythe members of the partnership or a creditor.

3.2.2.8 Provisional liquidation

Usually a provisional liquidator is appointedby the court after the presentation of apetition for winding up in order to protect theassets of a company before a winding-uporder is made.

Where a provisional liquidator has beenappointed, the case is not usually treated asinsolvency until a winding-up order is madeand a ‘permanent’ liquidator is appointed.

3.2.3 Corporate recovery procedures

3.2.3.1 Company administration

The court may appoint an administratorfollowing an application by the company, thecompany directors, or one or more of itscreditors. Alternatively, an administrator may


be appointed out of court by the company orits directors or a holder of a qualifyingfloating charge.

The administrator is obliged to perform thefollowing general functions:

+ attempt to rescue the company

+ if for whatever reason a rescue is notpracticable, the administrator is required toachieve a better result for the company’screditors as a whole than would beachieved in a winding-up situation and

+ if the second option is not practicable, theadministrator is required to produce thebest result for the secured and preferentialcreditors without unnecessarily harming theinterests of the creditors as a whole.

(a) Partnership administration order: Thecourt appoints an administrator following anapplication by the members of thepartnership or by a creditor, which has thefollowing effects:

+ it allows the partnership, or part of it, tosurvive in a restructured format

+ it allows for the approval of a partnershipvoluntary arrangement and

+ it allows a more favourable realisation ofthe company’s assets than would beobtained from winding up the partnership.

(b) County Court administration order: Thecourt administers the scheme, which is onlyavailable to individuals, and issues an orderfor regular payments to be made over aperiod of time in settlement of debts.

(c) Deceased persons’ administrationorder: The court issues an order made forthe administration of a deceased person’sestate. However, this is unlikely to be used ina construction scenario.

(d) Deed of arrangement: An individualmakes the arrangement, usually with legaladvice. This is also a method by which theindividual can endeavour to arrange terms ofpayment with the creditors.

(e) Scheme of arrangement: This isgenerally used to describe a compromise or

arrangement between a company and itscreditors or members, or any class of them,which may involve a scheme for thecorporate reconstruction (of the company).

(f) Voluntary arrangement: This provides analternative to bankruptcy or liquidation, withfewer restrictions, giving the personappointed to deal with the arrangement moreflexibility to manage and/or realise some orall of the company assets. Usually a licensedinsolvency practitioner is appointed. Also, asupervisor can be appointed to manage theprocess in terms of the company, whichcould be a chartered surveyor with therelevant experience.

3.2.3.2 Procedures not treated asinsolvencies

(a) Fixed charge receivership: A receiver, orreceiver and manager, is appointed by asecured creditor who holds a fixed chargeover the specific assets of a business. Theassets will be used for the benefit of thesecured creditor.

(b) Agricultural charge receivership: Asecured creditor can appoint a receiver underthe Agricultural Credits Act 1928 over theassets of a farm estate. Again, this is unlikelyto be used in a construction scenario, unlessthe development involves change of use ofplanning and/or the construction of a schemeon agricultural land.

(c) Law of Property Act receivership:

A lender, such as a bank or building society,can appoint a receiver of a mortgagedproperty under the Law of Property Act 1925to recover money advanced. The receiver willusually also try to arrange for the property tobe sold or will be responsible for collectingrents so that the revenue can be maximised.The business may continue to tradeindependently of the receiver’s appointment.

(d) Court-appointed receivership: The courtappoints a receiver to collect chattels orproperty. Property is not actually invested insuch a receiver, but their appointment acts


as an injunction restraining other parties fromrealising company assets that the court-appointed receiver has been appointed toreceive.

3.2.4 Understanding the role of thirdpartiesThird parties are more often than not used as asurety and their role is to basically make goodon a claim on the bond in the case of default.This aspect is discussed in detail in the RICSguidance note Construction security andperformance documents.

3.2.4.1 Step-in rights

A collateral warranty may contain ‘step-inrights’, which relate to construction andproperty contracts in that the namedbeneficiary in the collateral warranty can‘step in’ and effectively assume a role. Forexample, if on a project a developerbecomes insolvent and there is the benefit ofa collateral warranty, the third party (usuallythe funder) can step in and assume the roleof the developer. In doing so, the third partycan honour the payments due to thecontractor and consultants and to all intentsand purposes take the project to completion.Step-in rights are invoked, for example, whenthe employer becomes insolvent. It isessential to check that step-in rights areenforceable, and the chartered surveyorshould take advice on this issue if notexperienced in the matter.

A collateral warranty may have also beenrequired for key subcontractors so, in thesame way as above, the beneficiary may beable to exercise their step-in rights if themain contractor becomes insolvent. Similarly,and if the collateral warranty exists, thebeneficiary could step in if a constructionconsultant commits a material breach of theircontract or, again, becomes insolvent. Inaddition, beneficiaries will need to beinformed if the employer becomes insolvent.

3.2.4.2 Insolvency and bonds

Most construction contracts have aprotection mechanism in the event of

insolvency which manifests itself in the formof a performance bond, guarantee andretention funds. See the RICS guidance noteConstruction security and performancedocuments.

3.2.4.3 Floating charge/debenture fixedcharge

A ‘floating charge’ is a charge that ‘floats’over the whole of the party or company andcomes to fruition upon the default or breach.An administrator (administrative receiver ifthe floating charge was created before 15September 2003) is appointed by the holderof any debentures of the company securedby the floating charge. Debentures are themost common form of long-term loans thatcan be taken by a company, and have alower interest rate than overdrafts, forexample. The administrator then has thepower to deal with the assets of thecompany (whether by sale or otherwise) thatare covered by the floating charge. Theproceeds go to the charge holder to paysome or all of the debt.

3.2.4.4 If the employer becomesinsolvent

If the employer becomes insolvent, thecontractor must act strictly in accordancewith the terms of the contract and terminatethe contract, if provisions allow it to do so. Itmay be that a new contract can benegotiated to complete the works. Thecontractor must decide whether to securethe site and/or withdraw from the site.However, the site must be made safe andsecure until its future is decided.

+ The contractor may inform subcontractorsto remove their materials assuming theyhave not been invoiced and paid for by thecontractor and in doing so there are notrespass implications.

+ The chartered surveyor will be required toissue a valuation statement to thenominated person dealing with theinsolvency, consisting of a final accountand any claims such as loss and/or


expense. Due care should be exercised tobe accurate and to give the current positionon any retention, outstanding claims/issuesand, if late, any effect of liquidated andascertained damages.

+ This process may indicate a sum due to thecontractor or, more unusually, to theemployer if, for example, extensive defectshave been uncovered.

3.2.4.5 If the contractor becomesinsolvent

If the contractor is no longer able tocontinue, the chartered surveyor must issuethe requisite notices and closely follow theprocesses and timelines detailed in thecontract and terminate the contract. Abreach will inevitably incur if the contract isnot followed precisely, which would lead tothe contractor potentially receiving a claimfrom the employer.

+ Again, the chartered surveyor should issuea valuation statement with the currentposition of the works, detailing all risks,liabilities and claims.

+ If outstanding works remain, a tenderprocess may be required to complete theproject with an alternative contractor. Anoption would be to novate the services ofan alternative contractor.

3.2.4.6 If a subcontractor becomesinsolvent

Usually the contractor or subcontractor willdispatch the necessary notice(s) to theinsolvent party. This will assume that steps toprevent insolvency have already been takenas outlined in paragraph 2.2.3.2, such asrelaxing the terms of payment, and holdingdiscussions or meetings on or off site withthe beleaguered party.

The contractor or subcontractor is usuallywithin their rights to terminate a contract ifthe party considered as being insolvent failsto perform under the contract, including thesupply of design, goods or services, and/or afailure to perform regularly and diligently with

design or progress. An insolvent party willoften fall into one or both of thesecategories.


4 Practical considerations (Level 3 –Doing/advising)

The final part of this guidance note considersthe practical level of doing/advising that achartered surveyor should take into accountwhen encountering insolvency, termination ofcontract and corporate recovery. The charteredsurveyor may be required to give reasonedadvice to their client on how to progress aproject following a contractor’s or employer’sinsolvency, or to give advice to a contractedparty following insolvency of the other party. Ifin any doubt, legal advice should be sought, asthis area is peppered with risk, especially if thecontract is not specific on the issue beingconsidered. This guidance note covers thegeneral construction issues for a project withwhich the chartered surveyor should becomfortable in advising a client.


4.1.1 Strict adherence to thecontract, formal notices and noticeperiodsOn insolvency, it is likely that a contractor willbe unable to progress the works.Consequently, the contractor’s obligation tocarry out the remaining works is effectivelysuspended. The chartered surveyor can advisethe client concerning the relevant clauses in thecontract on termination, although it must bestressed that legal and/or technical assistanceshould be sought if there is any doubt on theinterpretation of the clauses or the charteredsurveyor does not have the relevantexperience.

Termination of the contract should not be madeprior to insolvency as this will no doubt openup the party wishing to terminate to a chargeof breach of contract from the receiving party.

It could also be construed as an endeavour toundervalue the company and its assets.

The contract should clearly spell out theparties’ termination obligations. Withoutcontract termination provisions, the partiesmust rely on common law, which permitstermination in the event that the other partycommits a material breach. A contractor isnormally provided with the right to terminateand/or suspend their work only in the eventthat the employer fails to pay undisputedamounts after notice and an opportunity toremedy the situation. However, if the amount isdisputed, additional expert advice may benecessary to ensure the position taken is assecure as possible. In some cases thecontractor may have the contractual right tosuspend their obligations and/or work due tosome material breach by the employer. Theemployer will usually reserve the right toterminate the contract for material breach,insolvency or convenience.

4.1.2 Proper advice and timing

The contract will stipulate what is consideredto be a material breach, how and when todispatch the notice(s), and the period to waituntil the (final) notice of termination can beserved. This process, procedure and timing candiffer for each type of contract. Uponnotification of the breach, the receiving partyshould have time to rectify the issue.

If the issue is not rectified within the prescribedperiod then the contract can be terminated.Again, it is advisable to consider legal ortechnical advice on termination.

In an insolvency or termination of contractsituation a main contractor/subcontractorshould consider doing the following.


+ Withhold payments and the release ofretention monies in accordance with theHousing Grants, Construction andRegeneration Act (HGCRA) 1996, s.110,and all revisions thereto, and the LocalDemocracy, Economic Development andConstruction Act 2009.

+ Secure the site and make it safe, andsecure both contractors’ andsubcontractors’ materials and plant.

+ Make use of existing temporary site set up.

+ Employ a security firm on a visiting orpermanent basis.

+ Decide whether to retain scaffolding/structural issues, as this will probably beowned by a third party.

+ Obtain legal advice or advice ontermination of the contract.

+ Ensure the project has adequate interiminsurance and inform the insurer about thesituation. Think about fire, theft anddeterioration through inadequateweathering. The contractors’ insuranceobligations may well cease when thecontract is terminated.

+ Make an inspection of the site and recordthe progress accurately.

+ Make a schedule of the works to completeas at the date of termination.

+ Make a schedule of materials on site andinspect materials off site. If they are storedat the insolvent parties’ premises and havebeen paid for by the employer, make anarrangement to move them to alternativesecure premises.

+ Serve an ‘urgent work notice’ and/or‘repairs notice’ as necessary to furthersafeguard or secure the site andenvironment.

+ Under the current Construction (Design andManagement) (CDM) Regulations 2007, theclient is required to ensure continuity withboth a CDM coordinator and maincontractor. Therefore, in an insolvencysituation, ensure the employer takes on theresponsibilities of the main contractor (andCDM coordinator if the contractor wasperforming this function) for site safety from

termination of the building contract until theappointment of a new main contractor.

+ Advise on the options for completion of theproject.

+ Advise on the options for claims, such asbonds, guarantees, collateral warranties,loss and/or expense, prolongation,disruption, overvaluing of the works,professional indemnity claims forconsultants, extensions of time, andliquidated and ascertained damages.

+ Obtain and collate design information,specifications and drawings. Obtain anytechnical advice or reports on installedwork and/or contractors’ specifications.

+ Advise a schedule of defects is made at thedate of termination. This may involve someintrusive investigation if it is reasonablyanticipated that works were not installedsatisfactorily.

+ Send enquiries and obtain quotations forthe making good of defects on acompetitive basis.

+ Liaise with the insolvency practitioner.

+ Advise as to whether professionalindemnity insurance is being maintained oris at risk of lapsing.

+ Write and issue a notional final account.

+ Write and issue a completion final account.

+ Complete general administration of theproject, including financial monitoring andretendering.

4.1.3 Suspension of payment

Payments that are due must not be delayedand also must not be unfairly reduced in anattempt to prepare for possible insolvency (i.e.not undervalued). Before insolvency is proven,delaying or reducing payments arbitrarily isunreasonable, is not authorised under thecontract and can have a detrimental effect tothe party being considered and also to theproject as a whole. If the interim payments areundervalued, the contractor is denied theiroperating capital and may struggle to pay theirdebts. Conversely, overvaluation may in thecase of subsequent insolvency involve therecovery of the overvalued monies which, in


the circumstances, will be difficult to achieve. Itmay also lead to professional indemnity issueswhich can be avoided if work is properly andreasonably valued in the first place.

Once insolvency is fact, a ‘withholding notice’is not required in accordance with the HGCRA1996 (s. 111(10)) as this still allows the use of‘pay when paid’ clauses in an insolvencysituation.


4.2.1 Preparation of reports

Various reports will be required in an insolvencysituation; these can be prepared by thechartered surveyor and generally consist of thefollowing.

4.2.1.1 Notional final account

This is an account which assesses theparty’s liability to the insolvent company andshows the implications on the contract. Itmay be that, as a result of the insolvency, thenotional final account will be higher than theanticipated final account before insolvency.This is because the notional final account willrecognise the cost incurred by the party atthe time of insolvency and will build on thatcost to show the cost to complete (had theoriginal contractor completed its works).

The difference between this amount and theoriginal sum as a commitment to completethe works is a debt, the same amount, or again. Generally the difference is a debt sinceappointing a new party to complete theconstruction project has inherent additionalcosts.

4.2.1.2 Completion final account

The completion final account is in effect thecontract final account. Whether or not this isdifferent from the notional final account willdepend on the nature of the project and theissues arising, but the final account willinclude any claims, such as loss and/or

expense, disruption, prolongation,acceleration, etc. and so consequently thetiming of the final account is paramount. Onmany contracts, if the final account is issuedafter practical completion this sets in motiontiming issues as set out in the contractprovisions, which can be construed ascompliance with the contract. Therefore, it isessential to ensure that the final account iscomplete and as fully substantiated aspossible.

Sample notional final account

Appendix A is a simple and indicative notionalfinal account based on an in situ concretesubcontractor originally contracted to completethe shell of an office block. The example is ageneric construction situation; in reality thedetail would be far more significant and wide-reaching. The values and rates are for thepurpose of an example, and the notional finalaccount has been simplified.

At the date of insolvency the value of theworks is £825,000 for the subcontractor, if theyhad completed the works and were solvent. Byinterim monthly payments by the maincontractor, Oldco Ltd, to the subcontractor,Smallco Ltd, a net payment to date of£454,000 has been agreed (net of retention).

Works to complete involve further in situconcrete work, some defects and somemaking good. The total revised cost of the insitu concrete works is therefore £1,013,500.

Subtracting the original value of the worksshows a resultant debt of £188,500 (with aretention of £22,700 having already beendeducted), which leaves a debt from SmallcoLtd of £188,500. The notional final accountshould put Oldco Ltd back into the position itwas in pre-insolvency, hence it shows theliability for that sum. The chartered surveyorwill be able to regularly update the notionalfinal account until the project reachescompletion. At completion, a completion finalaccount can be issued.

Since the amount due from Smallco Ltd islarge and is not covered by the subcontractor’sretention fund, Oldco Ltd can consider a claimthrough the bond and/or Oldco Ltd couldregister as a creditor.

4.2.1.3 Progress report

This report should accurately record theprogress made against the construction


programme and the following issues shouldbe recognised and expanded upon if there isany likelihood of further risk or concern:

+ commencement and completion dates, keymilestones, partial handovers andanticipated handover(s)

+ procurement, monitoring and subletting ofsubcontracts for work and the supply ofmaterials

+ claims compilation, submission and likelyoutcome

+ extension of time claims/extension of timegranted to establish any deficit

+ preliminaries, site set up, scaffolding

+ health and safety, CDM, identification ofany areas that need populating withrelevant details to complete records

+ progress on design, drawings,specifications and relevant documentationand

+ record keeping, i.e. labour, site diaries,plant and materials, material on site and offsite.

Also refer to the RICS guidance noteDamages for delay to completion.

4.2.1.4 Defects report

This type of report will be required if, forexample, on the insolvency of a contractor itis discovered by visual or physical (intrusive)checks that the standard of workmanship ormaterials on the project has failed to meetthe specified contract obligations. This couldbe a major variance to the specification ordrawings and could be uncovered.

Unfortunately a symptom of financialproblems on a project may be the ‘cutting ofa few corners’, so the chartered surveyorshould be vigilant in endeavouring to spotany non-compliance. An example could be amore economical external cladding systemfor a structure that looks adequateaesthetically, but fails to meet the insulation,acoustic or weather resilience criteria. Inaccordance with the instructions of theemployer and/or the insolvency practitioner,

defects reports can be commissioned fromindependent consultants or experts toinvestigate non-compliance and offersolutions.

The cost of such reports should be detailedin the final account. It may be that the costcan be subsumed into larger, moresubstantial claims on the bond that wouldinclude reports, defects, procurement,reletting and completion of the project. Seethe RICS guidance note Constructionsecurity and performance documents.

4.2.1.5 Report on bonds and collateralwarranties

In an insolvency or termination of contractsituation it is advisable that a report is writtento investigate the type of bond issued by thecontractor, the way it operates and thetimings and procedures necessary to satisfythe surety. Similarly, with a collateral warrantythe report should consider the parties andhow the warranty is to operate if there is abreach. Upon termination there is likely to bea claim situation or call on the bond, and themechanism for such a call will be stipulatedin the bond wording. A collateral warrantywill give some of the parties recourse shouldanother of the parties be in breach of theobligations. Both issues are described inmore detail in the RICS guidance noteConstruction security and performancedocuments.

4.2.2 Provision of advice to officialreceiver/insolvency practitioner

The chartered surveyor will have in-depthknowledge of the project and, in an insolvencysituation, will probably be best placed toprovide information on the position of theproject/works in respect of finance, progressand management. The 2011 changes to theHGCRA 1996 in respect of insolvency nowallow the notified sum to be withheld inaccordance with the Act and/or the scheme.The situations where this can arise are asfollows:


+ when the insolvency occurs after the expiryof the time required to serve the counternotice and

+ when the contract allows the withholding ofsums in the case of insolvency, i.e. thereare no clauses to the contrary.

A notice of intention to pay less (superseding awithholding notice) can be sent to the receivingparty with the relevant information detailing theamount(s) and the ground(s) – insolvency beingone – before the payment is due, observingany time obligations in the contract. This noticeis required for payments prior to insolvency.

Every project is different and uses a variety ofdesign, structures, materials, services andfinishes; for this reason the insolvencypractitioner for a construction scheme musthave a construction-based skill set. Thechartered surveyor will be able to supplementthis skill set with in-depth practical andtechnical knowledge as a ‘specialist’ in theproject. When giving advice to the insolvencypractitioner the following issues should beconsidered.

+ Report on and review the insolventcompany’s financial records to verify theoverall financial book debt position.

+ Liaise with the insolvency practitioner toreport and notify the company’s debtors ofthe trading/financial position.

+ Report on potential recovery from debtorsand assist with recovery of companyrecords relating to contract debtors andpursuit of debts, if so instructed.

+ Advise on bonds and collateral warrantiesand form a weighted list which presents thebest opportunity for financial recovery.Provide information for the surety (legaladvice may need to be taken).

+ Liaise with the insolvent company’sdirectors to prepare ‘asset sales pack’information on current contracts.

+ Obtain a letter of permission to carry outwork on behalf of the insolvencypractitioner/administrator.

+ Calculate risk for best and worst ranges ofestimated realisation of assets for bookdebts.

+ Assist and negotiate novation agreementsfor ‘live’ contracts and subcontracts.

+ Liaise with the insolvency practitioner tonotify the company’s debtors of the tradingstatus and financial position.

+ Assist with recovery/collation of companyrecords relating to contract debtors, whereinstructed.

+ Where instructed, assist the insolvencypractitioner with the review and settlementof subcontractor and material suppliercreditor claims.

+ Pursue/recover contract book debts, whereinstructed by the insolvency practitioner.

+ Assist the appointed insolvency practitionerto review any legal action necessary torecover disputed book debts. This mayrequire additional legal and/or technicaladvice.

4.2.3 Administration of fixed chargereceiver appointments

This is a role that can be carried out by achartered surveyor with the commensurateexperience. A fixed charge receiver may beappointed by a lender (possibly a bank orbuilding society) with a mortgage, charge orother security over the property or otherspecified assets, such as in a developmentscheme. The appointment of a fixed chargereceiver is reasonably rapid and fairlyinexpensive. The fixed charge receiver willgenerally have wide powers to realise assetsand, in respect of suitable property, collectrent. Unlike many other insolvencyappointments, a fixed charge receiver need notbe a licensed insolvency practitioner, andspecialist chartered surveyors are commonlyappointed. Chartered surveyors will generallybe RICS members, but many will be membersof the Association of Property and FixedCharge Receivers (NARA) and comply withNARA’s voluntary code.

NARA has its own code of practice to which allof its members must adhere, in addition to theRICS rules of conduct and regulations.


4.2.4 Reviewing construction/development projects

As part of the chartered surveyor’s supportingrole to the insolvency practitioner there areseveral important issues to be considered.These may be instigated by an instruction fromthe insolvency practitioner and will assist in themaximisation of the value of contracts,subcontracts, claims, land, rents and propertysales. The broad range of issues is as follows.

+ Valuations. In terms of property, insolvencypractitioners and the lender will requireinformation on the value of a property. Thiswill require in-depth knowledge of localresidential, commercial or other markets. Itmay be prudent, therefore, to seekassistance from chartered surveyors withexpertise in the commercial property,residential survey or valuation, or valuationof businesses or intangible assets pathway.

+ Building, project management andconstruction consultancy appointments.These may involve structural surveys,remedial surveys, planning issues,boundary/right of light issues, procurement,tendering, life cycle costing, buildinginformation modelling, project monitoringand document control. The charteredsurveyor may be tasked with assisting theinsolvency practitioner with one or severalof these services to help with completion ofa part-built development and completingthe resultant scheme on budget and ontime.

+ Planning issues. The planning process cantake time to implement through theplanning system. Therefore, it can beprudent to progress existing planningapplications and/or new applicationssubmitted to enhance the value of theproject. It may be that existing planningpermission can be improved upon andrenegotiated, taking into account newplanning law or new revisions to therelevant development plan/framework.

+ Material plant and machinery, such asfixed assets, are tangible assets with afinancial value. It may be the case that thescaffolding is owned by the scaffoldingsubcontractor but other items such as site

set up, tools, plant and material on and offsite may be owned by the insolvent partyand can be assessed for value. Theseassets could be built up into a concern tobe sold off as a whole, or may be soldindividually, dependent on the best value tobe achieved.

+ Asset/property management, lettingsand sales. Asset value can be enhancedby managing the daily processes for theproperties with the view to maximisation ofproperty liquidity prior to the property beingrealised.

+ Environmental risk. Environmental duediligence will most probably be required toset out the liability for potential and knownhazardous and non-hazardouscontamination associated with the project.It may be the case that there is a moreeffective method for treating contaminationissues that can benefit the scheme andvalue recovery.

+ Securing the project. It is important to dothis as soon as it is known that acontractor has become insolvent. Swift,decisive action in erecting appropriatefences/barriers, appointing a security firmand locking away valuable materials mayprevent losses that would otherwisematerialise over time. The insolvencypractitioner will need to be briefed onwhich items of plant and materials havebeen paid for and therefore rightfulownership decided upon.

+ Claims: liquidated and ascertaineddamages. Most forms of building contractinclude a clause entitling the employer to aspecified level of damages, known as‘liquidated and ascertained damages’(LADs), if the contractor is late in handingover the building. LADs are essentially acontractual right to a pre-determined sumfor the period of delay.

Most construction contracts contain relevantclauses entitling the contractor to an extensionof time (EOT) of the contract period as a resultof events (relevant events) for which theemployer is responsible. In such cases, wherethe EOT is granted, the date for practicalcompletion is moved back by the agreed EOT


period. Where, for whatever reason, the workswere not completed by the revised date forpractical completion and there is no EOT inplace, the contractor is exposed to LADs.

In an insolvency situation, the charteredsurveyor should be aware that the following nolonger apply.

+ As long as the insolvent party is under theobligation that gives rise to the paymentliability before it goes into administration,the fact that the payment liability itself doesnot fall due until after the administration(and that the amount of the liability is notquantified until after the administration)does not stop the payment liability beingset off.

+ Insolvency set-off for a party inadministration does not operate unless anduntil the administrator gives notice of theirintention to distribute assets to unsecuredcreditors.

With regard to claims, when a party becomesinsolvent, although each contract and situationis different, there are a number of issues thatcan be addressed with the careful compilationof a fully substantiated claim that is compliantwith the contract. Some examples to considerare:

+ performance bonds, on demand or default

+ parent company guarantees

+ professional indemnity claims forconsultants

+ delay claims: loss and/or expense,prolongation, disruption

+ collateral warranty claims, step-in rights(the lender) and

+ subject to timing and permission from thecourt, adjudication, arbitration or mediation.

4.2.5 Risk evaluation

To mitigate risk, chartered surveyors can actearly to assess the options, take legal/technicaladvice and ultimately influence the transition.Check and act on the following.

+ Ensure that, before parties are engaged inthe tendering process, their track record,both financially and on site, is fullyinvestigated: look at Companies House

documents, obtain references and requestparent company guarantees.

+ Ensure the client is protected contractuallywith relevant protection clauses – bonds,retention, collateral warranties, professionalindemnity and LADs.

+ Look for early signs of insolvency: latepayments, lack of labour, legal actions,CCJs and repossession of plant andmaterials.

+ Collate documentation for claims, design,drawings and payments.

+ Check site security, permission from theemployer, and hence enforceability. Becognisant that a supplier is unable toaccess land and property owned by theemployer or a third party.

+ Check information: permission, copyrights,collection, storage and monitoring.

A generic example of a construction riskassessment matrix is shown in Appendix B.Every project will have different factorsaffecting it, and therefore the matrix can betailored to suit the particular set of criteriarequired.

4.2.6 Cash flow projections

These can assist the funder and the insolvencypractitioner in the assessment of financialdealings with an insolvent funder or contractor.Cash flow projections also provide a goodindicator to predict insolvency. There are manyfactors to consider for a construction cash flowprediction, such as:

+ client/contractor changes to initial design,inclement weather, variation to works,labour shortage and production targets

+ slippage, delay in agreeing variation/dayworks and client delay in settling claims

+ abnormal costs/technical detailing; forexample, contamination, foundations,archaeological issues, underestimatingproject complexity, estimating error andundervaluation

+ time period to appoint a new funder/contractor/subcontractor/supplier and

+ labour strikes/shortages.


Further information on cash flow forecastingcan be found in the RICS guidance note Cashflow forecasting.

4.2.7 Asset disposal

When a party (as opposed to an individual or apartnership) becomes insolvent, the lawprovides two types of outcome. One is that thecompany enters into a corporate recovery typeof proceeding, usually with the objective ofenabling all or part of the company’s businessto continue. The other is liquidation, wherebythe company ceases to trade and is wound up.

In some cases an insolvent company will gothrough both of the above procedures to somedegree. For example, an administrator isappointed and sells the party’s primarybusiness as a going construction business.Following the sale, the administration ends andthe company goes into liquidation, with theliquidator distributing the sale proceeds andany other assets of the company to the party’screditors.

The chartered surveyor may be able to assist inthe administration process in recording,scheduling and valuing individual assets. Thebenefit of such an asset sale is that theliabilities associated with the business are leftwith the insolvent company on the whole, andthe purchaser of the assets can utilise anyremaining goodwill from the business.


Appendices

Appendix A: Simple notional final account example

Typical notional final account summary (£) Cost (£)Project In situ concrete office blockMain contractor Oldco LtdSubcontractor Smallco LtdValue of contract works 750,000Value of additional works (variations etc.) 75,000Total value of works 825,000Liability for Oldco Ltd to carry out construction works:Payments to Smallco Ltd (net) to date 454,000Add Cost of works to completion by othersa Reinforced concrete to slabs, beams,

downstands and the like, including formwork,rebar falsework and finishes450m3 × £1,200/m3

540,000

b Defects: gun out and replace 6 No. reinforcedcolumns6 No. × £1,500/No.

9,000

c Making good to works including risk for thedefects period of 12 months1 No. × £10,500

10,500

Total revised cost of the project works 1,013,500Less Smallco Ltd total value of the works −825,000Total 188,500

Resultant monies due from Smallco Ltd 188,500


Ap

pen

dix

B:

Co

nstr

ucti

on

pro

ject

risk

asse

ssm

ent

mat

rix

Pro

ject

titl

e:P

roje

ctre

f:A

utho

r(s)

:D

ate:

Pot

entia

lris

kfa

ctor

sP

rob

abili

tyof

risk

aris

ing

(H/

M/L

)

Imp

act

(H/M

/L)

Ris

kin

dic

ator

sC

ontr

olm

echa

nism

sN

amed

risk

per

son

Fina

ncia

lE

mp

loye

r/fu

nder

pro

ble

ms:

Fund

ers’

inso

lven

cy

Failu

reto

del

iver

pro

mis

edfu

nds?

Last

min

ute

bud

get

chan

ges

–un

der

fund

ing?

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ched

fund

ing

not

avai

lab

le?

No

infr

astr

uctu

rals

upp

ort?

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ing

del

ays

inm

onie

sb

eing

del

iver

ed?

Fund

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linki

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gto

del

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s

Est

imat

e:

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h

Med

ium

Low

Info

rmat

ion

from

any

sour

ceac

coun

ting

for

risk

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line

pro

pos

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read

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bm

itted

and

app

rove

d

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note

sm

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cord

ed.

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pro

ble

ms?

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ular

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tings

with

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loye

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rs

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eetin

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np

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ility

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with

resp

onsi

bili

ty


termination of contract, corporate recovery and insolvency · 2018-07-26 · to setting and...

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