Having an employer go insolvent when you have already been contracted to work on a construction project can create an intensely stressful situation.
The entire project may be brought to a standstill as contractors and subcontractors fear for their financial and reputational futures.
There are legal ways to protect yourself in the construction industry, and we want to illustrate your options before you find yourself at risk.
Spotting the signs of insolvency
Before we look at how to protect yourself from an employer going insolvent, it is worth understanding what it might look like when they do.
Insolvency can manifest as bankruptcy, administration, or a moratorium under the Corporate Insolvency and Governance Act 2020, amongst other forms of insolvency, and each type of insolvency will have a slightly different implication for the situation.
Fundamentally, for you, they will all result in unpaid invoices, frozen bank accounts, and a company unable to meet contractual obligations.
Some of the warning signs to keep an eye out for are missed payments, requests for extended credit terms, or a distinct shift in the tone and style of management communications.
If you spot the signs, it is time to take action to protect yourself.
What can be done to mitigate the impact of employer insolvency in the construction industry?
As with most protective measures in the construction industry, the best line of defence is a watertight contract.
There is a range of different clauses that can be written into a contract to pre-emptively give you the power to work around employer insolvency, especially if there are other interested parties such as a funder.
A Contractor may be able to grant Third Party Rights to a funder or other interested party, or enter into a collateral warranty which, amongst other things, would allow the interested Third Party, such as a funder, to step into the role of the Employer to get the project completed.
Step-in rights allow a Third Party to take control of the employer’s assets or contractual relationships to keep the works progressing and to allow payments to continue to flow down the contractual chain.
Each of these carries its own level of risk, and contractors should be careful about what rights are being granted.
However, they can be effective at maintaining your reputation within the supply chain.
Alternatively, termination clauses could give you the clean break you need.
Termination clauses have to be unambiguous and clearly define the circumstances under which the contract will be terminated and highlighting the need for outstanding fees to be paid.
Depending on how much debt has driven the employer into insolvency, there is still no guarantee that all the outstanding sums will be paid, but it is worth throwing your hat into the ring with other debtors.
If you are a subcontractor, your options are more limited than a contractor.
However, you can protect yourself with retention and project bank accounts that can enable you to ring-fence the funds for the work, allowing you to still get paid.
Subcontractors should also be sure to include direct payment agreements with contractors as well as collateral warranties.
Ultimately, employer insolvency is a problem that is particularly damaging in the construction industry.
With so many supply chains and interlocking businesses, one collapsing company threatens to create a domino effect that drags others down too.
Due diligence and well-written contracts are the best defence against this.
We are on hand to help you protect your assets from the financial misfortune of others.
Don’t get dragged down by employer insolvency. Speak to our team today.