• 3 min read

Smash but nothing to grab?

Hard hat and toolbox on construction site, workers blurred background.

“Smash and Grab” adjudication has become commonplace in the construction industry. This term refers to rights under the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”), which allow a contractor to commence adjudication to recover an interim payment if the employer fails to serve a payment notice or pay less notice on time (or serves notice but does not pay the notified sum).

The importance of payment notices

For those familiar with applications for payment, payment notices, and pay less notices, it is clear that—barring insolvency—if no pay less notice is served, arguments about defects, negligence, or set-offs will not succeed. These disputes cannot be raised before an adjudicator until the interim payment is made. The case of Groves Developments Limited v S&T (UK) Limited also makes it clear that no final account can be adjudicated upon until the valid interim payment application is paid.

Strategic use of interim payment applications

Interim payment applications are often strategically used to maintain cash flow for projects, even if the final account may later reveal an overpayment to the contractor, necessitating a refund to the employer.

When employer insolvency intervenes

But what happens if the size of the interim payment application means the employer cannot pay and enters insolvency?

In such cases, contractors—well-versed in construction law—may find themselves out of their depth when faced with insolvency law, particularly regarding insolvency set-off.

What Is insolvency set-off?

Insolvency set-off means that, once formal insolvency proceedings begin, the applicable insolvency rules enshrined in legislation requires an account to be deemed as taken, with sums due from each party set off against one another as at the date of the insolvency order. Claims and cross-claims merge and are extinguished so that, as between the insolvent employer and the contractor, there is only a single claim representing the balance between the parties. As noted in Stein v Blake:

“In those circumstances it is difficult to see how a summary judgment can be of any advantage to either party where… the account can be reopened at some stage; and has to be reopened in the insolvency…”

An insolvency practitioner (whether that be an administrator or liquidator), as office holder is bound under the applicable insolvency set-off rules, by a higher calling than the HGCRA. They are concerned with their duties to protect the overall interests of the general body of creditors. Insolvency set-off is mandatory.

Insolvency practitioners have obligations under the Insolvency Act and Insolvency Rules that supersede those under the HGCRA. Insolvency set-off can be applied without requiring the interim payment application to be paid first. Paying the application in compliance with the HGCRA could unfairly prioritise one creditor over others.

Why interim payments may be denied in insolvency

Employer insolvency often means there is insufficient money to make the interim payment. This could create an untenable situation where an office holder has a valid counterclaim but cannot bring it because the insolvent company lacks funds to pay the interim payment.

The law acknowledges this necessity and allows the office holder to assess the final account without first making the interim payment. Contractors aiming for a “smash and grab” may find their “grab” out of reach.

Lessons for contractors and insolvency practitioners

Contractors should note that overzealous attempts to secure interim payments may win the battle but not the war. Likewise, insolvency practitioners acting for employers should seek legal advice to understand when their insolvency powers override standard construction procedures.

Construction dispute resolution advice

For help navigating construction disputes, including those involving insolvency issues, contact the Trethowans construction dispute resolution team.

If you are dealing with any insolvent or distressed parties in the construction supply team, our Restructuring and Insolvency team have experience in navigating routes to recovery.

Disclaimer

This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.

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