A key contractor entering into insolvency can cause major issues for Registered Social Landlords (RSLs). Steps will need to be taken to secure continuity of key services whilst also ensuring that various legal and regulatory obligations (such as public procurement and value for money) are achieved.

With corporate insolvencies in Scotland rising by 49.1% in the first quarter of 2022 compared to the same period of 2021 (with more stark rises in England and Wales), and warnings in sectors such as construction that more financial difficulties are to come– how can RSLs manage contractors in financial difficulty?

This blog will give an overview of some key points to keep in mind.

Be Alert

There are numerous early warning signs that a contractor is about to become insolvent, such as: aggressive invoicing; high turnover of key staff; low employee morale; unhappy subcontractors and poor performance.

RSLs should ensure warning signs are known and monitored.

More formal action, such as petitions by creditors and formal insolvency applications will often be openly available via the Gazette and Companies House.

Check the Terms of Your Contract

Many contracts will allow RSLs to take action in the event a contractor becomes insolvent. This could range from termination to entitling you to claim costs associated with a contractor’s insolvency (for example getting a replacement contractor to step in).

It is important to understand what you are entitled to do under your contract and act on this in order to minimise the risks associated with insolvency.

Read more: Eviction After Bankruptcy or Signing a Trust Deed (Scotland)

Keep Records

Understanding: what work the contractor was currently undertaking; what has been paid or is due to be paid to them (and why); who has possession of materials and what steps need to be taken to secure sites and equipment will help RSLs in managing contractor insolvency.

Don’t Forget Procurement

Ensuring that key services (such as reactive repairs) continue to be delivered will be a priority for RSLs handling contractor insolvency. This will normally involve putting a replacement contract in place ASAP.

However, where a replacement contract is above the procurement thresholds, RSLs will need to consider their obligations under procurement law.

Procurement law recognises that in some instances contracts need to be procured quickly and offers the following routes RSLs dealing with contractor insolvency might follow:

• using accelerated timescales to conduct a procurement exercise
• making a direct award without undergoing a formal procurement exercise

Both options may only be used in limited circumstances and RSLs should consider these carefully and seek advice where appropriate.

RSLs should also consider if there are any suitable framework agreements or dynamic purchasing systems that would allow them to quickly call-off a replacement contract.

Read more: Trust Deeds and Sequestration in the Social Housing Sector

Do You Have Any Protections?

For certain contracts RSLs might have extra protection measures in place such as a parent company guarantee or performance bond.

These are contractual documents provided by a third party who promises to assist the RSL (either via compensation or by arranging for works/services to be delivered) in the event a contractor fails to perform its obligations under a contract.

Where such documents exist RSLs should ensure they understand how they operate and how to make a claim under them. 

Further steps may need to be taken depending on the nature of the contract. If you have concerns regarding contractor insolvency you can contact our team.