I was, in my younger days, an avid fan of the Mr Benn cartoon series, so I read the news of the recent death of its creator, David McKee, with a mix of sadness and fondness. The latter due to memories of watching Mr Benn on his many adventures while home from school.

For readers who know nothing of Mr Benn, the stories involved the bowler-hatted Mr Benn going to a fancy-dress costume shop (owned by a fez-wearing shopkeeper), choosing a costume, and entering a world of adventure. Thankfully, everything always worked out well (the goodies won) and Mr Benn returned to his everyday bowler-hatted life. I am sure some very clever people can explain the reason for Mr Benn’s escapism from his everyday life, however, I just enjoyed the stories.

Sadly, Mr Benn never chose the developer’s costume

The enjoyment I derived from my memories of Mr Benn was lacking when I happened to read some recent papers filed at Companies House concerning the demise in early February 2022 of a well-known construction group. The publicly available papers reported that the contractor’s demise was due to a variety of reasons, including the pandemic in 2020 and a large balance of disputed debts. So, no surprise there, then.

It also came as no surprise to me that the demise was tragic news for the former employees, clients, and a very, very long list of trade creditors. The last of these (the unsecured trade creditors) are, it is reported, unlikely to recover anything, because there is an estimated total deficit (after taking into account assets, trade debts etc) of some £57m. Put simply, many of these unsecured trade creditors will soon be (or are already) insolvent too.

Mr Benn never chose the Insolvency Practitioner’s costume (silly Mr Benn) - the silver-lining

But there is always a silver-lining (for some) and one also reads from the filed papers:

  • The pre-administration professional fees and costs came to some £325k, some £175k of which seems to have been earned in a 4-week period from 31 December 2021 to 28 January 2022. These have been or will be paid.
  • The estimated post-administration professional fees and costs are some £1.5m which is a lot of money, but at average hourly rates ranging from £542 to £1,100 it should not take too long to get to that figure. That all said, I am sure (well, I hope) these estimates will be subject to careful review and updates as the process continues.
  • Trade debts will be collected by a claims consultant paid on a ‘no recovery, no fee’ basis, i.e. some developers/employers will receive letters demanding the immediate payment of sums which, on closer analysis, will not be properly due. This means lots professional fees will be earned by those in the ‘dispute’ industry, because the retained claims consultant is incentivised to make claims regardless of the merits, i.e. no recovery, no fee.

At this point I should add that one part of the business was sold-off in a ‘pre-pack’ and continues to trade, a silver-lining perhaps for those employees and its clients, but probably not for its unsecured trade creditors.

Insolvency: Mr Benn’s ‘practical tips’ for Developers/Employers

Had Mr Benn chosen the costume of a lawyer (a dreadful idea), he might have come up with some practical tips on how to avoid or manage the worse effects of a contractor’s insolvency part way through a project. Indeed, Mr Benn might have adopted my own September 2020 list (see previous MT post) of eight practical tips on how a developer/employer could avoid having to pay the liquidator of a business that has failed and left the developer/employer to employ others to complete the job. These tips were:

  1. Check, at the ITT stage, that the contractor is 'solvent'. This is to rebut the argument that you accepted the risk that the contractor could go bust before the project was complete. This is probably easier said than done, but it can help you in the long run because it is an argument often deployed by the liquidator's team.
  2. Check that your building contract makes it expressly clear that on insolvency nothing further is payable until the Works are complete and the final cost is known. This should be easy to do. This will allow you to employ others and focus on getting the project completed.
  3. Make sure the contractor cannot assign the building contract or any rights to a third party. The JCT forms usually contain non-assignment provisions. These are sometimes (as in the John Doyle case) overlooked by over-zealous liquidators and third parties keen to 'buy' final account claims.
  4. Keep hold of that retention until the Works have achieved practical completion, e.g. don't be tempted into issuing a PC certificate with a 10-page 'snagging' list. Once you do issue that certificate, 50% of the retention will usually be payable.
  5. Get a performance bond that expires on the making good of defects rather than on practical completion. This is because many insolvencies occur after practical completion, i.e. when the cashflow starts to slow, and a bond will provide you with some additional financial security if substantial defects are discovered post PC.
  6. Ensure that the contract administrator knows how to work the valuation and payment procedure in the building contract. It can prove fatal if they miss a contractual date for issuing a piece of paper even if the money is not (and never was) properly due to the contractor. Indeed, you may have to hand over the money before you can ask politely for it to be repaid. [Since 2020, this has developed into the so-called ‘smash & grab’ adjudication industry and, more recently, examples exist where the interim application immediately preceding insolvency has increased by up to £10m for no justifiable reason.]
  7. Consider the option of expressly providing in your building contracts for debts under one contract to be set-off against sums due under a different contract. This is rare but can be an option where the contractor is doing a series of projects for you.
  8. Keep detailed records of all sums incurred following the contractor's insolvency so that the final account, once the Works are complete, can be properly substantiated.

To the above eight tips, Mr Benn might have added three more:

  1. Make sure to sign a building contract. This seems obvious too, but many problems arise because the parties are so keen to get the job started that they forget about the contract. By agreeing and signing (there are too many unsigned documents) a formal contract, the parties’ rights on the insolvency of the contractor will be set out.
  2. Include bespoke provisions in the building contract requiring the contractor to certify that the key sub-contractors have been paid, i.e. the money has been passed down the contractual chain. For example, the JCT Management Building Contract 2016 allows the works contractors to request this be done. This is important because it is common for the developer/employer to discover, after the contractor’s insolvency, that key sub-contractors have not been paid for some months despite the contractor having been paid in full.
  3. Include ‘step-in rights’ in collateral warranties or third-party rights from all key sub-contractors and any contractor appointed design consultants. This will allow the developer/employer to take over these contracts where the contractor goes insolvent, allowing the project to continue more smoothly than if no such right existed. That all said, such rights usually involve the developer/employer paying any sums not paid by the contractor, i.e. paying twice for the same work/services.

Mr Benn never chose the judge costume – Levi Solicitors v. David Frederick Wilson

One must mention the recent case of Levi Solicitors LLP v. David Frederick Wilson, JKR Property Development Limited [2022] EWHC 24 (Ch) which is generating lots of legal articles and, in summary, covers the situation where the contractor becomes insolvent and the employer employs others to complete the Works. In this situation, a certificate is to be issued by or on behalf of the employer within 3 months after the completion of the Works and the making good of defects. This certificate is, in effect, to be a final account showing (i) what it would have cost to the complete the Works had the contractor not gone ‘bust’ and (ii) what it did cost to complete the Works.

Usually, (ii) will exceed (i) and a sum will be owed by the contractor to the employer. But as the contractor is insolvent the employer will get £nil from the insolvency and will have to look to the bondsman (if any) to make good the loss.

The Levi Solicitors case is a timely reminder that on insolvency a discrete set of contractual provisions apply, and these are common to the JCT suite of building contracts. Indeed, these provisions apply automatically on the contractor’s insolvency regardless of whether the employer formally terminates (which it is entitled to do) the contractor’s employment or not. In simple terms, as from the date of insolvency no further sum is payable and the final account for the Works is to be set out in a statement issued by or on behalf of the employer following the completion of the Works and the making good of defects. The previous payment mechanism of interim or stage payment no longer applies.

This is certainly beneficial to the employer, but one should not forget that this final account statement is not (unless one amends the contract to say it is) final and conclusive, i.e. the contractor (well, the insolvency practitioner) can dispute it and frequently does.

While the JCT suite of contracts provide that this final account certificate is to be given within (typically) 3 months of the making good of defects, the Levi Solicitors case says this time period is not, in contrast to the prescribed period for giving a pay less notice, strict. In other words, a final account statement given after the expiry of this 3-month period will still be valid. That all being said, Mr Benn’s tip would, I am sure, be to aim to serve the statement within the contractual period but in the knowledge that the insolvency practitioner’s claims consultant is likely to dispute it in the hope of extracting some 'nuisance' payment.

Conclusion

Given the length of time that passes between the date of insolvency to the completion of the Works and the making good of defects, i.e. 12+ months, one can understand why Mr Benn never chose the costume of a developer/employer or contractor; it would have made for a very long and, one might say, very unexciting children’s adventure.

Finally, my favourite Mr Benn’s episode is probably “the Clown” because it reminds me of some of the demands for payment that come into my inbox from claims consultants following the insolvency of a contractor. These inevitably demand immediate payment of 100% of the retention which, on any analysis, could never have been properly due.