The appointment of an administrator over the Connaught Group is expected any day. Many housing associations will have employed Connaught to carry out maintenance services under the JCT measured term contract or similar. These contracts contain specific provisions for the steps to follow if an administrator is appointed over the contractor (or some other form of insolvency).
When that happens, the housing association as employer has a right to terminate the contract and often it is advisable to do so as soon as possible, although the impact on any security (particularly any bonds) will need to be analysed in advance. It is then in a position to appoint a replacement contractor to continue or complete the work or to put direct payment arrangements in place with key sub-contractors.
Under a JCT, from the date the administrator is appointed the housing association ceases to be liable to make progress payments to the contractor. It must then within three months make a valuation to determine what final amounts (if any) are due to the insolvent contractor. The valuation will show the difference between the value of work completed by the contractor up to the date of administration (not previously paid for) and the loss the housing association incurs because of the contractor's insolvency. If its loss is higher there is no further payment to the contractor but the housing association as an unsecured creditor in the insolvency can expect little or no recovery.
The largest element of loss will be the cost of a replacement contractor to complete the work covered by the work order. In practice the process of valuing work and the housing association's loss can take significantly longer than three months and disputes often arise between employers and administrators as to the amounts finally payable. Careful recording of the additional cost and anticipated additional cost of completion work by replacement contractors will be essential when dealing with the potential claims from the original contractor's insolvency practitioner and in recovering under guarantees and bonds, particularly as the position of bondsmen has hardened significantly in the last 12 months in light of the economic downturn.
Where associations have engaged an insolvent contractor such as Connaught under a framework agreement, it should also be checked to ensure that in the event of the insolvency of one of the framework contractors the work can be taken over by one of the others. This is again something that should be investigated at the earliest opportunity, so as to ensure as good a continuity of works/services as possible. Penningtons has considerable experience with construction insolvency and can help with the range of possible legal remedies available to housing associations, the settlement of the termination account and the agreements which can be set up to facilitate a continuity of work as cost effectively as possible.