Corporate Recovery and Insolvency

Corporate Recovery and Insolvency

Overview

Corporate recovery and insolvency are important topics in the business world, as they deal with the financial distress and failure of companies. This report provides a brief overview of the main concepts and issues related to corporate recovery and insolvency, including the types of insolvency, the legal processes, and options available, and the role of the QS in the event of insolvency. The report aims to provide a comprehensive and practical guide for professionals and stakeholders involved in the construction industry, to help them understand and manage the challenges of insolvency.

Types of Insolvency

Insolvency is a situation where a person or a company cannot pay their debts as they fall due. There are two main types of insolvency: cash flow insolvency and balance sheet insolvency. Cash flow insolvency occurs when a person or a company has enough assets to pay their debts but does not have enough liquid cash to do so. Balance sheet insolvency occurs when a person or a company has more liabilities than assets, regardless of their cash flow situation. Both types of insolvency can lead to legal action by creditors, such as bankruptcy or liquidation [1].

Bankruptcy

Bankruptcy is a legal process that allows a person or a company to discharge some or all of their debts, subject to certain conditions and restrictions. Bankruptcy can be voluntary or involuntary, depending on whether the debtor initiates the process or the creditors force it. Bankruptcy can have serious consequences for the debtor, such as losing their assets, affecting their credit rating, and limiting their future borrowing options. However, bankruptcy can also provide a fresh start for the debtor, by relieving them of the burden of debt and allowing them to reorganize their finances [2].

Individual Voluntary Arrangement

An individual voluntary arrangement (IVA) is a formal and legally binding agreement between a person and their creditors, to pay back a portion of their debts over a period of time, usually five or six years. An IVA is an alternative to bankruptcy, and can be initiated by the debtor or the creditors. An IVA can offer some advantages for the debtor, such as avoiding bankruptcy, keeping some of their assets, and reducing their monthly payments. However, an IVA can also have some drawbacks, such as affecting their credit rating, requiring regular reviews, and involving fees and charges [3].

Liquidation

Liquidation is a process that involves winding up a company and selling its assets to pay off its debts. Liquidation can be voluntary or compulsory, depending on whether the company's directors or the creditors initiate the process. Liquidation can result in the dissolution of the company, meaning that it ceases to exist as a legal entity. Liquidation can have different outcomes for the company's stakeholders, such as shareholders, employees, and suppliers, depending on the type and priority of their claims [4].

Administrative Receivership/Fixed Charge Receivership

Administrative receivership or fixed charge receivership is a process that involves appointing a receiver to take control of a company's assets that are subject to a fixed charge, such as a mortgage or a debenture. The receiver's main duty is to sell the assets and repay the secured creditor, who has the power to appoint and remove the receiver. Administrative receivership or fixed charge receivership can be seen as a form of enforcement action by the secured creditor and can often lead to the liquidation of the company [5].

Company Voluntary Arrangement

A company voluntary arrangement (CVA) is a formal and legally binding agreement between a company and its creditors, to pay back a portion of its debts over a period of time, usually three or five years. A CVA is an alternative to liquidation and can be initiated by the company's directors or the creditors. A CVA can offer some benefits for the company, such as avoiding liquidation, continuing to trade, and improving its cash flow. However, a CVA can also have some challenges, such as requiring the approval of at least 75% of the creditors, involving fees and costs, and risking termination if the company fails to comply with the terms.

Role of the QS if Insolvency Occurs

The QS (quantity surveyor) is a professional who provides advice and services on the cost and management of construction projects. The QS can play an important role if insolvency occurs, by performing various tasks, such as:

• Assessing the value of the work done and the materials on site, and preparing interim and final accounts.

• Negotiating and settling claims and disputes with the contractors, subcontractors, and suppliers.

• Advising on the best course of action to recover the funds and complete the project, such as appointing a new contractor, novating the contracts, or terminating the contracts.

• Acting as an expert witness or a mediator in legal proceedings, if required [7].

Termination and Suspension of Contracts

Termination and suspension of contracts are two options that can be used to deal with the situation of insolvency, depending on the terms and conditions of the contracts. Termination of contracts means ending the contractual obligations and rights of the parties, usually by mutual agreement or by a breach of contract. Suspension of contracts means temporarily stopping the performance of the contracts, usually by a force majeure event or by a notice of suspension. Termination and suspension of contracts can have different implications for the parties, such as affecting their liabilities, claims, and remedies [8], [9].

Assignment/Novation

Assignment and novation are two methods that can be used to transfer the rights and obligations of a contract from one party to another, in the event of insolvency. Assignment means transferring the rights of a contract to a third party, without changing the original contract. Novation means replacing the original contract with a new one, involving a third party. Assignment and novation can have different advantages and disadvantages for the parties, such as affecting their consent, liabilities, and warranties [10], [11].

Ownership of Material and Plant

Ownership of material and plant is a key issue that can arise in the case of insolvency, as it can affect the rights and claims of the parties involved in the construction project. Material and plant are the physical items that are used or produced in the course of the project, such as bricks, cement, pipes, tools, machinery, etc. The ownership of material and plant can depend on various factors, such as the terms and conditions of the contracts, the stage of delivery and incorporation, the payment and retention of title clauses, and the insolvency laws and procedures [12].

Bonds and Guarantees

Bonds and guarantees are two types of security instruments that can be used to protect the parties from the risk of non-performance or default, in the context of construction contracts. Bonds are a form of financial guarantee, issued by a third party (usually a bank or an insurance company), that obliges the third party to pay a sum of money to the beneficiary, if the obligor fails to fulfil their contractual obligations. Guarantees are a form of contractual promise, made by a third party (usually a parent company or a director), that assures the beneficiary that the obligor will perform their contractual obligations, or else the third party will be liable for the loss or damage. Bonds and guarantees can have different types, forms, and effects, depending on the nature and terms of the contracts and the insolvency situation [13], [14].

Set-off

Set-off is a legal principle that allows a party to deduct or offset a debt or claim that they owe to another party, by a debt or claim that they are owed by the same party, in the event of insolvency. Set-off can be contractual, legal, or equitable, depending on the basis and the conditions of the set-off. Set-off can be a useful tool for the parties to reduce their exposure and recover their losses, in the case of insolvency. However, set-off can also be subject to some limitations and challenges, such as the rules of insolvency, the priority of creditors, and the disputes over the validity and amount of the debts or claims [15].

RICS Information Paper on Construction Insolvency

The RICS (Royal Institution of Chartered Surveyors) is a professional body that regulates and promotes the standards and practices of the surveying profession, including the QS. The RICS has published an information paper on construction insolvency, which provides guidance and advice for the QS and other professionals involved in the construction industry, on how to deal with the issues and challenges of insolvency. The information paper covers topics such as the causes and signs of insolvency, the types and effects of insolvency, the roles and responsibilities of the QS, the options and solutions for the parties, and the sources and references for further information [16].

Recap

 In conclusion, corporate recovery and insolvency are complex and challenging issues that require careful consideration and management. This report has provided an overview of the key concepts and issues related to corporate recovery and insolvency, and has highlighted the various options and solutions available to the parties involved. By understanding the causes and effects of insolvency, and by taking proactive and informed steps to address the situation, the parties can minimize the risks and maximize the opportunities for recovery and success.

References

1. Insolvency, Investopedia: https://www.investopedia.com/terms/i/insolvency.asp

2. Bankruptcy, UK Government: https://www.gov.uk/bankruptcy

3. Individual Voluntary Arrangements, Money Advice Service: https://www.moneyadviceservice.org.uk/en/articles/individual-voluntary-arrangements

4. Liquidation, UK Government: https://www.gov.uk/liquidate-your-company

5. Administrative Receivership, UK Government: https://www.gov.uk/government/publications/administrative-receivership/administrative-receivership

6. Company Voluntary Agreement, UK Government: https://www.gov.uk/company-voluntary-arrangements

7. Quantity Surveying & Construction, RICS: https://www.rics.org/uk/upholding-professional-standards/sector-standards/construction/quantity-surveying-and-construction/

8. Termination of contracts, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Termination_of_contract

9. Suspension of Works, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Suspension_of_works

10. Assignment of contracts, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Assignment_of_contracts

11. Novation, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Novation

12. Ownership of Plant & Materials, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Ownership_of_materials_and_plant

13. Bonds in construction contracts, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Bonds_in_construction_contracts

14. Guarantees in construction contracts, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Guarantees_in_construction_contracts

15. Set-off in construction contracts, Designing Buildings: https://www.designingbuildings.co.uk/wiki/Set-off_in_construction_contracts

16. Construction insolvency information paper, RICS: https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/construction/construction-insolvency-rics-information-paper.pdf