Construction continues to face insolvency risks

Fast forward five years, and sadly the industry is coming to terms with the failure of ISG: another huge contractor with a multi-billion pound turnover, employing more 2,000 people working across some of the biggest projects in the public and private sector.

But while ISG is undoubtedly the biggest name to fail since Carillion in 2019, the sector has also lost significant players such as Buckingham Group, Osborne, Henry Construction and Inland Homes recently.

Indeed, out of all industries, the construction sector accounted for 17% of corporate insolvencies in the 12 months to June 2025. It has been a consistent theme for a number of years as insolvency continues to be a major concern for the sector.

Cause and effect

There are several issues which have contributed to the distress in the construction sector. High interest rates and low consumer demand for new homes, goods and material pricing remaining stubbornly high, and labour markets continue to be challenging. Civil engineering workloads have dropped sharply, while non-housing building work has also dipped to the point we saw the lowest UK cement production for 75 years.

A recent Construction Index survey of senior commercial directors highlighted issues across the board in the sector. Commercial property and high-risk residential construction projects have been delayed by increased regulatory reform around energy efficiency and the building safety regime, which simply does not appear to be working. Public sector projects have been delayed or face funding challenges due to the wider economic picture. Larger “sheds” and data centres face uncertainty as to their long-term viability, whereas utilities such as water and energy related projects are accelerating and face competition for resource.

It’s not all doom and gloom - turnover is up 7.3% year on year, with pre-tax profits up considerably too. Margins remain low but have increased from 1.9% to 2.4% year on year. It is likely that the larger contractors are better placed to battle through economic and political headwinds and have more levers to pull. They are also more easily able to adopt new technology and innovation to streamline processes and create efficiencies. Further down the supply chain is where the stress is being felt more acutely.

On a typical construction project, it is not uncommon for a contractor or sub-contractor to be waiting 90 days from issuing a payment application for work completed that month, until it gets paid. In addition if, during that 90-day period, an issue arises, the employing party can serve a pay-less notice to withhold some or all of that payment. A dispute may well follow that could take up to three months to resolve, leaving the contracting party out of pocket for that period while still incurring costs on the project.

When you overlay inflationary pressures on materials and recruitment, and a historic reticence to adopt new process, technologies and governance to improve efficiencies and visibility on projects, it is easy to see why so many businesses in the sector show signs of distress.

Safety issues

The advent of the Building Safety Act 2022 (BSA) has also had a considerable impact in the residential sector. The BSA introduced a new “gateway” process for building regulator approval on the construction of new high risk residential buildings, and the remediation of existing buildings. But this process has been subject to much publicised delay, hindering progress and productivity

The National Audit Office has recently published a report summarising progress made since 2019, when the Ministry of Housing, Communities and Local Government (MHCLG) announced £600 million to support fixing high-rise buildings with unsafe cladding, with remediation works on most tower blocks over 18 metres with the most dangerous form of cladding now completed or nearing completion.

However, the scale of the task still to be completed remains significant, with works on unsafe buildings over 11 metres not set to be completed before 2035 based on the MHCLG’s estimates. To accelerate the process, the government recently set out clear new targets to fix unsafe buildings in England. The new measures are aimed at getting buildings fixed more quickly and holding accountable anyone who is not making progress by introducing significantly tougher penalties. 

Another factor is the ability of claimants to pursue “associated” companies and pierce the corporate veil in seeking Building Liability Orders (BLO) in respect of these BSA claims (or relevant Defective Premises Act (DPA) claims). Section 130 of the BSA empowers the High Court to make a BLO if it considers it just and equitable to do so, imposing liability on companies associated with whoever originally carried out the works.  

The intent of BLOs is to limit the scope for construction companies to avoid liability for defective work by delivering projects through special purpose vehicles that may be dissolved after completion, but the drafting of the legislation means it could have far wider consequences - and there is currently little settled law in this area. 

There may well be groups of companies where projects were completed up to 30 years ago, or companies which became insolvent many years ago, now having to revisit projects to assess the extent to which a BLO claim could be brought against them, after the BSA extended the limitation period for dwellings completed before June 2022. On one recent case we worked on, a similar exercise showed that the total liability could run to hundreds of millions of pounds. Clearly, if that was to crystallise across any of the companies in the group, it will almost certainly render the group insolvent. 

At-risk companies should now be exploring restructuring options such as a restructuring plan to mitigate the impact of BLO liabilities crystallising against them and threatening the solvency of the group. Sufficient consideration would need be given to the level of compensation payable to claimants in a plan, to include a suitable share of the restructuring surplus, especially as claimants are likely to include individual leaseholders.  

It is likely that the compromised class would need to be crammed-down due to it being a large and disparate class of creditors. Care would need to be given to ensure that the class is adequately and properly consulted with on the terms of the plan. However, we believe it would be possible to implement a restructuring on this basis. The alternative is that we see a further increase in insolvencies in this sector: indeed, we have already seen Ardmore go into administration citing BSA liabilities as the root cause.

Recovering value for creditors

In terms of using legal routes to recover value for creditors post-insolvency, it is often outstanding contractual retentions which are the low hanging fruit and are pursued first.

For more complex “final account” disputes, case law has continued to develop in this area in terms of whether an administrator/liquidator is entitled to adjudicate a construction dispute against a solvent counterparty, and whether a successful award would be enforced against that solvent counterparty.

There is a tension between the insolvency legislation and the Housing Grants, Construction and Regeneration Act 1996. Where a claimant in an adjudication is in liquidation and the defendant asserts a cross-claim which might qualify for insolvency set-off, the court ought not to grant summary judgment to enforce an adjudicator’s decision. The proper forum for this, assuming the liquidator does not admit the cross-claim, is the Business & Property Court where the matter would proceed as an appeal against the liquidator’s rejection of the defendant’s proof of debt, following the Court of Appeal’s judgment in Bouygues v Dahl-Jensen in 2000.

In that case, the claimant went into liquidation the day before the adjudicator’s decision was issued, but liquidation set-off was not raised in argument by the defendant at the enforcement hearing. Consequently, the Court of Appeal ordered summary judgment but granted a stay of execution until after the expiry of the time for lodging an appeal in the Business & Property Court, or until after the outcome of any appeal.

In 2009, in Enterprise Managed Services Limited v Tony McFadden Utilities Limited, the High Court held that the net balance due was capable of assignment even before the taking of the account but could not be referred to adjudication as the claim arose under the insolvency legislation thereafter, not under the contract. However, the latter part of the judgment was overturned in the Bresco Electrical Services Ltd v Lonsdale dispute, by both the Court of Appeal in 2019 and the Supreme Court in 2020.

The Court of Appeal decided that although adjudication was possible notwithstanding insolvency set-off, an injunction would normally be granted as the adjudication would be an exercise in futility as the incompatibility of the separate processes of adjudication and insolvency meant that a reference to adjudication of a claim by a contractor in insolvent liquidation in circumstances where there was a cross claim, would be incapable of subsequent enforcement in view of the Bouygues case above.

Lord Briggs, in giving the judgment of the Supreme Court, agreed with the Court of Appeal that there was jurisdiction for an insolvent company to go to adjudication, notwithstanding insolvency. However, he disagreed on the issue of futility, saying that there had been too much focus on the ability to enforce, and insufficient recognition of the role adjudication played in dispute resolution. Insolvency was, therefore, not a bar to adjudication itself, and enforcement would be the point at which insolvency was a factor. Enforcement of a decision would be considered on a case-by-case basis and “where there remains a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company's claim as security (pro tanto) for its cross claim, then the court will be astute to refuse summary judgment”.

In 2021, in John Doyle Construction Ltd (In Liquidation) v Erith Contractors Ltd, the Court of Appeal followed and strengthened the line of cases since the Bresco ruling in refusing to grant summary judgment in respect of an adjudication decision in favour of an insolvent company. The judgment makes it clear that it is very unlikely that such a scenario would ever apply, with the judge stating: “I do not consider that the provisional finding of an adjudicator, even on a single final account dispute where no other significant non-contractual or other contractual claims arise, can be treated as if it were a final determination of the net balance, in circumstances where the other party maintains its set-off and cross-claim. It is not a question of security; it is a question of the insolvent company's cause of action being for the net balance only. It is not a matter of discretion because it is impossible to waive or disapply the Insolvency Rules. As my lord, Lord Justice Lewison put it during argument, insolvency set-off must apply to adjudication; it is not somehow an exception. To find otherwise would give rise to incoherence.”

However, where it can be shown that there is no prejudice to the solvent counterparty, enforcement should still be possible. It will be necessary to show that adequate funding and resources are available to the insolvent estate, including robust ATE insurance cover. It is likely that the insolvency practitioner will have to give undertakings to ringfence and not distribute the sums received, pending the outcome of the substantive dispute between the parties. Third party security or bonding may also be needed.

As a cautionary tale for solvent counterparties, the recent case of Malin Industrial Concrete Floors Ltd v VolkerFitzpatrick Ltd cannot be ignored. The claimant, a concrete flooring contractor, was awarded £59,950 plus interest, VAT and fees by an adjudicator against the defendant. The claimant subsequently went into administration. The defendant raised a cross claim against the claimant for defective flooring, having spent £66,000 on repair works. The claimant sought summary judgment to enforce the adjudication decision, while the defendant opposed enforcement due to the cross claim and the claimant's insolvency. The defendant had not made any effort to particularise its cross claim and had merely trailed it.

The court granted summary judgment in favour of the claimant but stayed enforcement pending further order. The defendant was given three months to satisfy the court that they could evidence sufficient liability on the claimant's part, giving rise to a cross claim that could potentially extinguish the amount awarded by the adjudicator.

This case is helpful in reminding solvent counterparties that they cannot simply ignore an adjudication by an insolvent company. If they do, they may find the court will grant summary judgment, with only a short window for them to properly substantiate a defence or counterclaim.

The future

It is likely that, for meaningful long-term change to this pattern to occur, more systemic changes are required to improve the long term prosperity and sustainability of the construction supply chain, including:

• Payment terms: The regulation of contractual payment terms and contractual retentions has been the subject of debate for a number of years. In 2020, the UK government published its response to an industry consultation on these matters, with more than 80% of respondents agreeing the current industry framework was ineffective. Reform must happen if the financial position of the construction supply chain is to be secured.
• Procurement: For too long the focus on tendering has been to prioritise the lowest priced options, driving a market fuelled by chasing turnover with low costs bids. Inevitably, this had led to the supply chain being squeezed on price and stretched on payment. Far greater emphasis should be placed on value for money, deliverability, and sustainability to drive innovation in the sector. The UK government has a unique role to play in improving procurement practices in the industry, as employer on a large proportion of UK construction, infrastructure and services projects.
• Innovation: Investment in new practices and the use of technology to streamline processes and increase efficiency is another area which the industry needs to continue to focus on to improve margins.
• Enhanced contract management: Firms are increasingly diligent in their contract management processes, both in contract awarding and throughout a project’s lifecycle. Enhanced due diligence and greater contractual protections against the early signs of failure are key to ensuring that any such problems can be mitigated early.
• Funding: The construction industry represents 8-10% of UK GDP. Funding demand and availability is essential to ensuring the industry continues to grow. In recent years there has been a rise in asset-based lenders and alternative funders offering lending products to the sector, which can be a vital part of managing cashflows. More should be done to encourage further lending into the sector.