High profile insolvencies in the construction industry highlight the risks faced by contractors, and also the way in which debtor companies can seek to obtain advantage through ‘forum shopping’ once insolvency occurs, by seeking to invoke the jurisdiction of debtor-friendly countries like the United States.

In the last few years there have been some high profile losses made on construction projects in the energy and resources sector, highlighting the financial risk that a contractor takes on from the moment that earthworks commence. A contractor's broader corporate group will often have the balance sheet to ride out the loss. However, this isn’t always the case.

As contractors become increasingly global in their reach, the ‘ripple effect’ of an insolvency event on one project can have far reaching consequences. This is particularly so in the construction industry where the proportion of insolvencies derived from the industry (between 20 and 25% in Australia, approximately 23% in Scotland and 15% in England and Wales) is out of proportion to the broader economic contribution of the industry.

Take, for example, the development of the Baha Mar resort in The Bahamas. The project is a 3.3 million square foot resort complex located in Cable Beach, Nassau, The Bahamas. With a reported project cost of US$3.5 billion the project was supposed to add 12% to The Bahamas’ GDP1.However, despite being 97% complete, work on the project has stopped and it has become the “world’s biggest white elephant” as claims and bankruptcy proceedings wind their way through the project’s DRB and courts in The Bahamas, Delaware and London.

There are multiple reasons for why the parties have started proceedings in different forums. One obvious reason is that different contracts associated with the project are subject to laws of different jurisdictions. A less obvious reason is the various ways in which different jurisdictions treat insolvent debtors. It was for this reason that the debtor companies in the Baha Mar case sought the protection of the US Chapter 11 provisions.

In order for the claim to come within the jurisdiction of the US, each of the debtors opened up bank accounts in Delaware in June 2015 and deposited a mere US$10,000 on the basis that this would be enough to allow them to claim Chapter 11 protection. The debtors’ tactic relied on a line of authority which held that the requirement that there be “property in the US” was satisfied even where there was only minimal property. However, Judge Carey in the Delaware District Bankruptcy Court was not swayed. He held that (for all but one of the debtor companies) the insolvency proceedings would take place in The Bahamas because it was obviously more closely related to the project than the presence of a small amount of money in a US account.

In the current economic climate it seems almost inevitable that insolvencies in the construction industry (including in large scale international projects) will continue to rise, leading to choice of jurisdiction issues. Factors that might influence a choice of jurisdiction might be whether the jurisdiction offers alternatives to liquidation, whether there are specialist courts and “fast track” processes in place to speed the restructuring process, or even the consequences for individual directors in relation to insolvent trading2. However, regardless of the factors influencing the choice it seems clear that last minute efforts to fall into a debtor friendly jurisdiction will not always be successful. This is particularly so in the EU where forthcoming reforms to the Insolvency Regulation (EC) 1346/2000 (taking effect on 29 June 2017) will require decision makers to carefully investigate changes to a debtor’s “centre of main interest” in the three months prior to the insolvency proceedings commencing. Of course, this will not prevent parties to construction projects who are having solvency issues from trying. So if your subcontractor suddenly moves its project office to a different jurisdiction or asks you to deposit the next payment into a bank account in the US it might be time to start asking questions about their solvency position and taking steps to protect your project.