When giants fall: navigating contractor insolvency

On Friday 20 September 2024, eight entities of the construction giant ISG entered administration. As a result, all of its UK operations have ceased trading with immediate effect and no further work will be undertaken on existing UK contracts. ISG's insolvency is likely to be the largest collapse in the sector since Carillion's demise in 2018. 

The insolvency of a large main contractor poses significant challenges for the supply chain and the industry in general. To help you navigate these challenges we have summarised some of the key issues and practical next steps for affected parties, many of which will be owed substantial amounts by ISG or have incomplete projects on their land.

Impact on contracts

Most standard forms of contract would allow ISG's employers to terminate upon an insolvency event. For example, under the main JCT and NEC forms, an administration event triggers the right to terminate for insolvency and have the work completed by others. However, many of ISG's contracts will be bespoke or framework contracts and as such each contract will need to be considered on its own wording and in light of insolvency legislation, which, in some circumstances, suspends the right to terminate.

ISG's subcontracts and consultant agreements will likely provide for back-to-back termination of the subcontract in the event the main contract is terminated, as is typical under the main JCT and NEC forms of subcontract. However, it is best not to take any steps to terminate until you have more information about if / when / how the project will proceed. For example, the contract may be assigned, or the employer may step in, and this cannot happen if you have terminated. Termination is always a big risk to take and should be considered carefully.

Claims

As a party to a contract with an insolvent contractor, your goals are likely to be to recover monies owed, minimise losses and to have input into or knowledge of what will happen to the project. To do this, it is important to notify the insolvency practitioner of your interests. A dialogue with the relevant insolvency practitioner is likely to be useful in most circumstances. Submitting a proof of debt form is also a key part of this process. 

Unfortunately, claims against a company in an insolvency process rarely result in full recovery, especially for unsecured creditors. We therefore strongly suggest exploring the other legal and contractual mechanisms available to recover your losses and/or secure completion. In general, these can include calling on collateral warranties, bond claims or taking action against the insurer of the insolvent contractor directly (i.e., under the Third Parties (Rights Against Insurers) Act 2010). As to the latter, notification to the insurer within an insured period is key. Moving fast gives you a far better chance of a recovery (though it is often still not great!).

It is also worth noting that in an administration a moratorium will be in place which can prevent the bringing of legal action or proceedings against the company without either first obtaining the consent of the administrator or leave from the court.

How can we help?

Our team has significant experience helping clients to navigate insolvencies in the construction industry. The effect of ISG's insolvency will spread beyond those directly affected very fast. Being aware of your legal rights and options allows your decision making to be more agile and strategic. We can assist you in proactively managing the myriad issues that arise and that need to be considered in situations like this.

Please do get in touch with our team if you have any questions.