Helping the supply chain navigate the collapse of ISG

On 20 September 2024, the companies that made up the ISG Group were placed in administration. ISG administrators have advised customers that no further work will be undertaken on existing UK contracts and that the UK operations of the ISG Group have ceased to trade with immediate effect.  They have advised companies and customers should take all necessary steps to arrange security and insurance at relevant premises.  Early estimates suggest monies owed to the supply chain could be as high as £700m with only around 10% of this insured.  It is not yet clear what the level of protection afforded by Project Bank Accounts (PBAs) is, but we know a small proportion of ISG supply chain will be protected by PBAs.

If the client intends to continue works then it will have to either step in as main contractor or appoint a new main contractor who will be tasked to re-appoint or re-tender the completion works.

 Understanding Administration

Administration is when a company is given legal protection from creditors while an appointed administrator attempts to rescue the business or achieve a better outcome for creditors than liquidation would provide. During this time, creditors generally cannot pursue claims against the company without court permission.

It’s important to note that in cases like this, immediate payments to creditors are rare, except in exceptional circumstances. Most creditors will need to wait for the administration process to be completed, which can take time. Therefore, it’s crucial to manage expectations regarding cash flow.

Details of the appointment and a Q&A from the administrator is available here.

 How to proceed if you have been impacted:

 If you believe you have exposure to ISG companies, we would advise the following immediate actions:

• Review your contracts. A key thing to look for is whether the contract is a Collateral Warranties, these are used to bridge the contractual gap and create a direct contractual link for the benefit of those parties that may otherwise have no recourse. Some collateral warranties can also contain ‘step-in’ rights which effectively allow the beneficiary to step in to the underlying contract and issue instructions.  Under a simple contract should the main contractor of a project fall into insolvency the subcontractor will be under no contractual obligation to accept instructions from the employer to complete the works given there exists no contractual relationship. The use of a collateral warranty in this instance creates a direct contractual link allowing the employer to give instructions to the subcontractor, ensuring completion of the latter’s obligations is achieved.
• Assess any ongoing work: determine the stage of each project and identify any outstanding deliverables.  Submit any outstanding applications.
• Document all work completed to date. Take detailed photographs, videos and notes as this documentation will be crucial for any future claims or negotiations.
• Recovering Tools, Plant and Materials. The administrators have advised that retrieval of equipment and / or materials will not be a matter for the Administrators and should be arranged directly between customers and any applicable contractor.  Contact should be made with the client to arrange a time to visit your project sites to retrieve any tools, equipment or materials that belong to you. Ensure you have documented proof of ownership for any assets you remove to prevent any disputes – this is particularly the case with materials where ownership may be less clear.
• Do not pursue unauthorised actions such as attempting to remove materials or equipment that are not legally yours. Also, ensure you do not cause any damage to the sites or completed works.
• Prepare your financial records by compiling a comprehensive list of all outstanding invoices, including amounts due, due dates and any retention sums. Keep records of all communications and transactions related to your ISG projects for reference.
• Get a grip on Cash flow: Do a detailed cashflow forecast, given the likely delays and possibility of defaulted payments, consider all your options and GET PROFESSIONAL HELP if required.  Through your membership of FIS you have access to specialist financial advice and BABR have offered additional interim advice here.
• Renegotiations: Speak to other clients and suppliers to potentially renegotiate payment terms or request upfront payments to help cover any cash flow gaps.

It is important to note that ISG Administrators have stated “at present, it is not anticipated that there will be any funds available for a distribution to unsecured creditors.”

BuildUK has now published additional guidance which covers what to do with materials stored on site.

 Project Bank Accounts

We have had a number of questions with respect to Project Bank Accounts, these should ringfence any monies due and certified payments should progress.  Any applications submitted, but not certified could be subject to a delay.

Completing ISG Projects.

Clients will hopefully be looking to appoint a contractor to replace ISG.  How they are able to progress the project and the impact on existing sub contractors will depend on the contract and funding.  We will be working with CLC and pressing clients to manage transition with sensitivity to the impact on the incumbent suppliers.

Below is a list of considerations with respect to projects that are restarting:

• Get a clear picture on completed works, the status of payments to ISG and what the intention is to honour any payments for work completed by the client.
• How will step-in rights be managed.  Step in rights are usually drafted to give the beneficiary (often the employer or a funder) the right to step in at its option into the contractor’s shoes in the building contract.  The employer doesn’t have to and may seek alternative options as it exposes the party stepping in to take responsibility for outstanding payments to the party providing the warranty and also the responsibility of being the contractor.
• As an alternative, it is common for arrangements to be made (with agreement of all the parties including the contractor and its insolvency providers) to make direct payment to the subcontractors.  In this case new direct contracts between the employer and the subcontractors or between the replacement contractor and the subcontractors may be presented.  These are likely to be similar terms, but not necessarily identical terms, to the original subcontracts.  Any agreement for outstanding payment and arrangement with respect to warranties would be covered in this appointment.  If you have had design input, be clear on any Intellectual Property (IP) that will be taken forward in the project.  Ensure that you have not ceded rights in your contract with ISG.
• Re-tendering work:  If you are asked to re-tender ensure this takes into account any IP related input that you may have had on the project and assumptions are emphasised in your tender documents.
• Ensure that you are clear on the contractual terms for any reappointment – don’t assume they will be the same or even that the contracts won’t be terminated and work re-tendered.  Check the wording of any contracts for onerous high-risk clauses.  Be particularly watchful of any change in design responsibilities or compliance clauses, and that you are not taking any responsibility for any design work carried out by another contractors.  FIS contract reviewers are offering additional pro bono support to members impacted by the failure of ISG. BuildUK have also published guidance that covers the novation process.
• Collateral Warranties, caution advised: If you are asked to sign a Collateral Warranty ensure that you get legal advice (you can access free legal advice via the FIS Helpline).  Sometimes contractors ask for these at a later date (if obligation is not in the contract) and there may be commercial reasons why a subcontractor would still be prepared to provide a collateral warranty (or may ask for extra payment for doing so) but you are not obliged to do so.  Remember this gives a third party a contractual right to bring  a claim against  you for breach of your contractual obligations.  Without a collateral warranty there is no direct contractual link.
• Timings:  Ensure that you have a clear understanding of when the expected recommencement date is and factor this into your pricing accordingly.
• Status of woks: Make sure that any previous works are inspected and any defects identified.  Even if it is your work, things may have changed since you left the site.
• Managing Risk:  Remember it is appropriate to seek reassurance that the funding is in place to complete the project and if any bonds or project bank accounts are being deployed to protect the supply chain.  FIS members can access free credit checks email FIS team for a one-off or access to the portal. info@thefos.org
• If you are unsure – check.    FIS offers access to expert legal advisors, consultants, contract reviewers and financial advisors – many of whom have offered pro bono support to members impacted by the failure of ISG.

Vital information FIS is collating.

We have a list of impacted ISG projects, but are trying to gather more detailed information on the direct impact on members. Data we are looking for is size of the contract and monies owed (certified, a valuation of any completed works currently uncertified and retention).  This will be used to support a collective approach to influencing clients to behave responsibly and to support representation and lessons learned as we engage with Government and the wider industry.   For ease of capture, we have set up a short survey for impacted members to complete.

FIS would like to thank colleagues from SNIPEF, ECA, Hill Dickinson, BABR, Len Bunton and DAC Beachcroft for their support in pulling this advice together and their support for our community in this challenging time.