When a construction company enters insolvency, the work of recovering money owed to the company does not necessarily end with the appointment of an insolvency practitioner.
There may still be significant value tied up in work in progress, unpaid applications, retentions, final accounts, contractual claims and disputed sums.
For an insolvency practitioner, identifying and recovering that value can be an important part of administering the estate.
But construction debt recovery is rarely as straightforward as sending a demand for payment.
Construction contracts can involve multiple parties, variations, payment applications, extensions of time, defects, set-off arguments and cross-claims. Where a contractor or subcontractor becomes insolvent, those issues can become even more complicated.
This is where specialist knowledge of both construction and insolvency can become important.
What can be recovered from a construction insolvency?
The potential value within an insolvent construction company may take several forms.
Depending on the circumstances, this can include:
- unpaid applications for payment
- outstanding final account balances
- work in progress
- retention monies
- contractual debts
- claims arising from variations
- claims relating to extensions of time
- damages claims
- construction adjudication claims
- sums due from main contractors
- sums due from developers or employers
- subcontractor debt recovery
- other contractual claims.
Pythagoras Capital’s construction insolvency service specifically focuses on recovering sums owed to insolvent construction companies, including work in progress, book debts and retentions. Its model combines construction and insolvency expertise with engineering knowledge.
The key question is therefore not simply:
“Who owes the company money?”
It is also:
“What is actually recoverable, what evidence supports the claim, and what is the most appropriate route to recovery?”
WIP recovery in construction insolvency
Work in progress (WIP) can be particularly important when a construction company becomes insolvent.
A project may not have reached practical completion. There may be outstanding applications, variations, valuations or contractual entitlements that have not yet been resolved.
At the same time, the other contracting party may have its own allegations concerning incomplete work, defects, delay or additional completion costs.
That means the apparent value of a construction claim may not be the amount initially shown in the company’s accounts.
A proper assessment may need to consider:
- the construction contract
- payment applications
- certificates
- variations
- correspondence
- project records
- completion status
- defects
- delay
- contra-charges
- potential cross-claims
- the final account position.
For insolvency practitioners, this can make WIP recovery in construction insolvency a specialist exercise rather than a conventional debt collection exercise.
Recovery of unpaid retentions
Retentions can also represent significant value.
A retention is generally withheld from payments during a construction project, subject to the terms of the relevant contract. When a contractor or subcontractor becomes insolvent, determining whether retention money is due can involve examining the contract, certification, practical completion, defects provisions and other contractual requirements.
The recovery question may therefore be more complicated than simply identifying an outstanding retention balance.
It may be necessary to establish:
What was contractually due?
When did it become due?
Were the contractual conditions for release satisfied?
Does the other party have a valid contractual or other basis for withholding the money?
This is why recovery of unpaid retentions can form an important part of a wider construction debt recovery review.
Construction adjudication for insolvent companies
One of the most significant developments in this area came from the Supreme Court’s decision in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25.
The case concerned whether an insolvent company could refer a construction dispute to adjudication.
The Supreme Court gave judgment on 17 June 2020 and allowed Bresco’s appeal. The Court confirmed that the fact a company is in liquidation does not, as a matter of jurisdiction, remove its right to refer a construction dispute to adjudication.
That is important because adjudication is a statutory dispute-resolution mechanism under the Housing Grants, Construction and Regeneration Act 1996. Section 108 provides a right for a party to a qualifying construction contract to refer a dispute to adjudication, subject to the statutory framework.
However, insolvency creates additional issues.
The Supreme Court’s decision did not mean that every adjudication award involving an insolvent company would automatically be enforced. The Court distinguished the question of jurisdiction from the practical question of enforcement.
That distinction remains important when considering insolvent contractor adjudication.
Enforcing adjudication awards in insolvency
Obtaining an adjudication decision is not necessarily the end of the process.
Where the referring party is insolvent, the circumstances surrounding enforcement can be particularly important.
The subsequent Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC) decision considered the circumstances in which an adjudication involving a company in liquidation could be enforced.
The case involved Pythagoras acting as agent for the liquidators of Meadowside. The judgment discusses the interaction between adjudication and insolvency, including measures intended to address concerns surrounding enforcement and the position of the responding party.
This illustrates an important point for insolvency practitioners:
Construction adjudication and insolvency cannot always be considered separately.
The merits of the underlying construction claim matter, but so can the insolvency position, the existence of cross-claims and the practical arrangements surrounding enforcement.
Final account disputes in liquidation
A final account can become particularly important when a construction company enters liquidation.
The apparent balance may be disputed by the employer or main contractor because of allegations relating to:
- defective work
- incomplete work
- delay
- liquidated damages
- variations
- additional completion costs
- previous payments
- set-off
- other contractual deductions.
Consequently, final account disputes in liquidation can require detailed review of both the construction contract and the underlying project records.
A claim that initially appears straightforward may become a much more complex assessment of the net position between the parties.
Main contractor insolvency claims
The same principle applies when a main contractor becomes insolvent.
There may be amounts due from:
- employers
- developers
- main contractors
- subcontractors
- suppliers
- other contracting parties.
The insolvency practitioner may therefore need to examine the company’s entire debtor book rather than focusing only on the largest apparent debt.
Pythagoras Capital states that it pursues all debts on construction debtor books rather than cherry-picking individual claims, with its construction team supported by engineering expertise.
That broader review can help identify claims that might otherwise be overlooked.
Subcontractor debt recovery
Subcontractor claims can present their own challenges.
A subcontractor may have unpaid applications, retention money, variations or other contractual entitlements. However, the main contractor may also raise arguments concerning defects, delay, incomplete work or other deductions.
For an insolvency practitioner dealing with an insolvent subcontractor, subcontractor debt recovery may therefore require an assessment of the entire contractual position rather than simply pursuing the gross amount claimed.
When specialist construction debt recovery may be appropriate
There is no single recovery route that will be appropriate for every construction insolvency.
Depending on the circumstances, options may include:
- negotiation
- contractual recovery
- adjudication
- enforcement proceedings
- litigation
- settlement
- investigation of counterclaims
- assessment of the final account
- recovery of WIP or retentions.
The appropriate approach will depend on the contractual documents, evidence, financial position, merits of the claim and likely recovery prospects.
Pythagoras Capital provides a fully funded, contingent service for approved claims and states that its construction team combines insolvency lawyers, construction lawyers and engineering professionals.
Construction debt recovery is about identifying the full value of the estate
When a construction company becomes insolvent, the obvious unpaid invoice is not necessarily the whole story.
There may be value in:
WIP → Retentions → Final accounts → Adjudication claims → Contractual claims → Other construction debts
For insolvency practitioners, understanding the complete position can be important when assessing what may be recoverable for the estate.
Construction debt recovery therefore requires more than simply chasing outstanding invoices. It can require an understanding of the construction contract, project records, technical issues, insolvency position and the available recovery mechanisms.
Pythagoras Capital works with insolvency practitioners across the UK on construction insolvency and debt recovery matters, including WIP, book debts, retentions and construction adjudication.
If you are dealing with an insolvent construction company and want to understand whether there may be recoverable value within its contracts or debtor book, contact Pythagoras Capital to discuss the circumstances.