If the client goes bust, a contractor faces real trouble. Unless the contractor has a parent company agreement covering the client’s payment obligations, it will simply rank as an unsecured creditor during the insolvency proceedings.
Contractors in this situation usually seek to recover any unused materials and plant and equipment they own.
The contractor cannot easily begin adjudication against the defaulting client. Where the client is insolvent, the contractor will need the court’s consent before adjudication or indeed enforcement proceedings can begin. This is at odds with the Construction Act, which says that adjudication can be started at any time. This is a real problem if the contractor has missed the ‘window’ to start adjudication, but may be less of a practical concern if ultimately the employer has no funds.
Where a main contractor is insolvent, subcontractors often seek to obtain direct payments from the ultimate client. The problem for clients is that if they pay a subcontractor directly they risk paying twice for the same work, because the main contractor’s receiver/administrator could still claim from the client amounts that are payable to the contractor under the building contract.
A fundamental principle of insolvency law is that unsecured creditors must be treated ‘pari passu’, or equally. Therefore, the main contractor cannot put one subcontractor in a better position than others. This is likely to be judged a ‘preferential payment’ and the administrator can challenge any payments in the six months prior to the insolvency.
Unless bonds or guarantees are in place, however, contractors and sub-contractors are likely to find themselves really stuck.
Hamish Lal is a partner in law firm Dundas & Wilson