Contractor insolvency is a growing problem for Registered Providers of Social Housing. If you are responsible for responsive repairs, capital works programmes or gas servicing or installation within your organisation, you should make sure that you:
avoid the risk of events of insolvency;
work out the practicalities of insolvency;
know about the options if an insolvency event occurs.
Insolvency is when a contractor is unable to pay its debts as they fall due or its liabilities are greater than its assets. There are three main types of insolvency:
a company voluntary arrangement;
liquidation or bankruptcy.
Where a company enters a company voluntary arrangement or administration, it is possible that the company may continue trading and provide the works or services. Under your contract, you should usually be able to terminate the contract immediately or you can reserve your rights to terminate and see whether a buyer comes forward for the business or whether it trades out of insolvency.
If a company is in liquidation or individuals in a partnership are bankrupt, the services or works will not continue and you will have to look for emergency options in order to provide essential services or works.
Avoiding Insolvent events
What are you doing to avoid coming into contact with contractors at risk of insolvency?
Have you reviewed your procurement processes to ensure that the tests of bidders’ financial standing are sufficiently robust? Do you specify proper selection criteria or pass/fail conditions to exclude bidders with poor bank references or poor credit rating checks? Do you ask for management accounts to investigate financial standing?
If a bidder puts in a very low price, are you applying the abnormally low tender rules? Bidders can be excluded from the procurement process after certain steps are taken if there are concerns about whether they can deliver the contract for the tendered price.
During the service period or works, is the contractor having trouble obtaining credit from its suppliers? Do you have an integrated supply chain which will allow you to investigate potential issues? Spotting the signs of impending insolvency will give you more time to manage and mitigate the situation.
If an insolvency event prevents the works or services being provided, you will need to think about things such as:
Information or IT systems provision – do you have rights to use the contractor’s software or data needed to continue the providing the service?
How do you terminate the contractor’s contract properly?
Do any depot or call centre leases need to be terminated as well as the main services or works agreement?
What are your liabilities for any staff that might transfer under the TUPE regulations?
Who owns the stores or materials which have not yet been used?
Do you need to make arrangements to insure the works or services the insolvency contractor has provided for you if the contractor’s insurance has lapsed?
Options for dealing with Insolvency
If a business has purchased the shares in the company in administration or subject to a CVA, the company may come out of administration and operate as usual. There is little you need to do apart from deciding whether or not to terminate the contract (usually provided you have reserved your rights to do so).
If the insolvent company’s assets are purchased, you will need to consider whether you should “novate” the contract from the company in administration to the new organisation which owns the insolvent company’s assets. “Novate” means ending the current contract with the old contractor and starting a new contract on the same terms with the new organisation. This is important to ensure the arrangements between you and the new entity are reduced to writing. It will be important to ensure that the new company takes responsibility for all the works or services provided by the old company.
You might consider bringing the works or services back “in-house” to be provided by a direct labour organisation. Where this is the case, you will need to think about the capacity your organisation has for organising and managing a labour force and works or services itself. You may decide to bring the service in-house whilst you go through a fresh procurement process to identify a new provider for the works or services.
Things to watch out for
Do not forget that:
when a novation or change of a service provider, take advice about whether you are entering into a new qualifying long term agreement (QLTA) or doing qualifying works for the purpose of the leaseholder consultation regulations;
you need to consider compliance with the procurement regulations when procuring any “new” contracts; and
you should investigate whether you can claim against any bond or parent company guarantee that might have been provided by the insolvent company.