Navigating contractor’s insolvency: What subcontractors and businesses should do next following ISG’s collapse

The collapse of construction giant ISG has sent shockwaves through the industry, leaving many scrambling to protect their interests – and plenty of companies and people in an extremely challenging position. Phil Caton, construction law partner at Aaron & Partners, looks at what businesses and subcontractors should do in the case of a contractor’s insolvency

For subcontractors, many will be left with unpaid invoices and uncertainty about ongoing work, while businesses who had contracted ISG for projects will now need to navigate difficulties such as assessing their contractual rights and securing sites to prevent further damage or loss.

In such turbulent times, understanding your rights and taking swift action is crucial to minimising losses and ensuring project continuity. Here’s some practical advice on what to do next to minimise impact and protect your interests:

For subcontractors: Protecting your position

Subcontractors are often the most vulnerable in contractor insolvency situations, as unpaid invoices and halted projects can put immense financial strain on operations.

If you find yourself in this position, here are some key steps to consider:

1. Assess your termination rights

The first step is to confirm ISG’s insolvency and review your subcontract to understand whether you have the right to terminate or suspend work. Pay particular attention to clauses related to termination and suspension.

If you’re uncertain, seek legal advice to ensure compliance with contractual terms and the Housing Grants, Construction & Regeneration Act 1996, which may imply suspension rights even if your contract is silent.

2. Secure payment for work already completed

Issue any outstanding invoices promptly, ensuring they comply with the contractual notice requirements. In some cases, it might be possible to recover payments through other stakeholders, such as the project owner or funders.

Submitting a proof of debt to ISG’s administrators, with supporting documentation like invoices and contracts, will also help establish your claim for unpaid sums.

3. Audit site materials

Conduct a thorough audit of any materials or equipment you’ve supplied to the site. Determine whether retention of title clauses in your contract allow you to reclaim unpaid goods. Notify the administrators if you intend to recover these assets, and document everything to support your position.

4. Check for parent company guarantees or bonds

Review your subcontract to see if ISG provided any parent company guarantees or performance bonds.

Although you may not be a party to these agreements, the employer often is. This can offer a potential route for recovering unpaid sums or damages for unfinished work.

5. Engage with the administrators

Establish communication with ISG’s administrators to understand the status of the project and your claim.

This will help you stay informed about the administration process and may reveal opportunities to continue work under new terms or negotiate direct payments with the employer.

6. Liaise with other project stakeholders

Communication with the project’s owner, other subcontractors and suppliers can provide valuable insights into the project’s future. Check any collateral warranties to see if step-in rights allow the employer to directly engage with you to complete the project, potentially securing ongoing work and payment.

7. Maintain detailed records of work and costs

Contractor’s insolvency scenarios often result in complex claims and disputes. Keep meticulous records of your completed work, delivered materials and incurred costs. This documentation will support your position during negotiations with administrators or legal proceedings.

For businesses: Securing your projects

If your business engaged ISG as a main contractor, you might be facing significant uncertainty about the future of your projects.

Here’s what you should do next to safeguard your investments and minimise disruption:

1. Assess your termination rights

Determine if the contract allows for termination due to a contractor’s insolvency and follow the procedure strictly. A wrongful termination can have serious repercussions, so it’s important to seek legal guidance if you have any doubts.

2. Secure the site and materials

Once termination is confirmed, secure the site, any ongoing works and materials to prevent theft, vandalism or further loss.

Immediate action is essential to protect your assets and maintain compliance with the Construction (Design and Management) Regulations 2015.

3. Audit plant and materials ownership

Conduct a detailed audit of all materials and equipment on-site, particularly if payments have already been made for off-site goods. Ensure that vesting certificates are in place to secure ownership and prevent potential disputes.

4. Obtain critical documentation

Request copies of all essential design documents, subcontracts, collateral warranties and supply agreements. This information will be critical for understanding your position and planning next steps, especially if you decide to appoint a replacement contractor.

5. Review and update safety records

Ensure that all health and safety documentation is up to date. Compliance with safety regulations is non-negotiable, and it’s vital to have these records in order if work is to resume under a new contractor.

6. Check insurance and funding arrangements

Notify your funders and insurers about the contractor’s insolvency to confirm that all coverage and funding agreements remain intact. This step is crucial to prevent gaps in coverage and ensure compliance with lender requirements.

7. Commission a quantity surveyor

Engage a quantity surveyor to conduct a detailed valuation of the works as they stand. This will help establish the financial position of the project and inform your discussions with the administrators.

8. Maintain records for replacement contractors

If you need to appoint a new contractor, keep detailed records of all decisions, costs, and justifications. This will provide transparency and help defend your position in any subsequent disputes or claims with administrators.

9. Evaluate bonds, retentions and guarantees

Verify the validity and terms of any performance bonds, retentions or guarantees. These instruments may provide the easiest route for recovering costs or securing completion, so understanding their scope is essential.

10. Consider issuing a pay less notice

If you are due to make further payments to ISG, consider issuing a pay less notice within the prescribed timeframe if appropriate. This will allow you to legally withhold payments while the financial situation is assessed.

Be proactive, seek expert guidance

Contractor’s insolvency situations are fraught with complexity and every decision can have significant financial and legal implications.

Acting quickly, understanding your rights and seeking early legal advice are crucial steps in protecting your position, whether you are a subcontractor or a project owner.

By taking a proactive approach and staying informed, you can navigate the aftermath of ISG’s collapse and safeguard your interests effectively.