When things go wrong on a project we tend to think that the contract will finally determine issues between the parties. Of course, this is not always the case: we must not forget about statutory rights.
Common contract terms
A standard term in many building contracts allows the employer, having determined the employment of its insolvent contractor, to use that contractor’s plant, machinery and materials to complete the works. This gives the employer some comfort that it can get on with the job if its contractor goes bust, without having to incur time and money in procuring these items afresh.
The Insolvency Act
So that’s clear cut, isn’t it? The insolvency practitioner will simply have to wait until the works are complete before getting his hands on any remaining plant, machinery and equipment.
This is because this type of clause appears to frustrate the statutory duties and powers given to an insolvency practitioner, particularly section 234 of the Insolvency Act 1986. Section 234 gives the insolvency practitioner the power to go to court to require the employer to deliver up any of the insolvent company’s property so the assets can be realised as soon as possible. It does not contemplate extending the liquidation for some indeterminate period whilst the employer completes the project.
The case law
In Smith (administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council  UKHL 58 (8th November, 2001) the House of Lords held that the contractual right of the employer to sell the insolvent contractor’s assets and apply the proceeds towards settling the employer’s claims against the contractor, amounted to a floating charge over the assets of the contractor, which was void as against the administrator (in that case) as it had not been registered. The House of Lords also held that the administrator had the power under section 234 to recover assets belonging to the contractor and a claim for conversion against the employer for selling the contractor’s assets.
The House of Lords judgment in Cosslett did not consider how section 234 operated where the employer had a contractual right to use (but not sell or dispose of) the contractor’s plant once the insolvency had occurred. However there must be the same risk that the courts would uphold the insolvency practitioner’s powers to get his hands on the assets under the Insolvency Act in these circumstances, even if they are at odds with the terms of the contract.
In our experience, parties who find themselves in this situation, including insolvency practitioners, tend to try and work through the problems rather than strictly enforcing their contractual or statutory rights. However, with the number of insolvencies that are currently affecting the industry we would be interested to hear whether anyone has had to grapple with this issue.