Insolvency and procurement - what can we learn from the collapse of Connaught?

On 7 September 2010 'property and environmental services giant' Connaught appointed KPMG as administrators. In the wave of publicity which followed KPMG quickly announced that it had 'sold' the 'majority of the ongoing contracts and their related assets' to Lovell a subsidiary of Morgan Sindall. Since then announcements have been few and far between.

In fact, many local authority lawyers are now saying that their clients have refused to recognise the 'sale' and have taken the work in-house or re-started time consuming and expensive procurement exercises in some of which Lovell are competing with other interested parties despite the purported sale.

The predicament of councils across the country following the collapse of Connaught encapsulates both the problems said to have caused that collapse and the difficulties now facing insolvency professionals and local authorities in the aftermath of that collapse: the effect of The Public Contracts Regulations 2006  ('the Regulations').

For many cash-strapped local authorities Connaught represented a very good deal. Too good some competitors complained leading to legal challenges that the bids were in fact economically unsustainable. Unfortunately, if something seems too good to be true then it often is and the collapse of Connaught has left those who thought they had secured a good long-term deal without a supplier for essential building and other maintenance work.

When companies become insolvent the ripple effect on smaller enterprises is dramatic but the problem is magnified where a large number of public contracts are involved. The problem of unpaid debts is exacerbated by the already hard economic conditions and the most swingeing cuts in a generation to public services recently announced by the Coalition. Moreover, the effect of the Regulations is that an administrator cannot just 'sell' or novate from one supplier to another making the continuity of work and provision of services difficult to guarantee both for the public authority and the many smaller contractors caught out by the insolvency.

The problem centres on a ruling by a European court which established that in order to ensure transparency of procedures and equal treatment of tenderers, amendments to the provisions of a public contract during its term will constitute a new award if those amendments render the contract 'materially different' from the original contract. Substitution of one party for another or, in other words, novation by private treaty of public services is unlikely to be compatible with European law and in order to make it compatible the whole tendering process should be undertaken again.

The problem is very real. Many of those councils whose contracts were apparently sold to Lovell or which have tried to arrange alternative provision have spoken of contractors who were prepared to challenge the arrangement under the Regulations had they gone ahead with a replacement for Connaught.

It is unlikely that the law on this issue will change (or certainly not soon) despite the fact that it fundamentally undermines the efficacy of administration for companies with significant public contracts and creates untold uncertainty both for those dependent on public bodies and those procuring services on behalf of public bodies. Given the extent of public spending cuts and the dependence of the economy on public sector contracts Connaught may not be the last 'giant' to fall.

If you would like to discuss any of the issues raised in this post in more detail, please contact Helen Prandy on 01223 222344, helen.prandy@mills-reeve.com.

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