What can be saved from Connaught's collapse?

Connaught’s collapse was spectacular. As late as June 2010 its shares were trading at 320p. It then issued a number of profit warnings that caused its share price to collapse quickly. It was unable to restructure about £220m worth of bank debt and on 8 September entered into a formal insolvency process. Connaught blamed its collapse on the cutbacks in the public sector, but the actual reasons will be a matter for subsequent investigation by the administrators.

So what has happened? Connaught plc itself and the social housing arm Connaught Partnerships Ltd (and its subsidiary Connaught Technical Solutions Ltd) went into administration, and various insolvency practitioners from KPMG were appointed as administrators. Connaught Environmental and Connaught Compliance are not in administration.

As a matter of law, it is not possible to transfer the burden of a contract without the consent of the other contracting party

Once appointed, it would appear as though the administrators discounted the possibility of a wholesale disposal of the Connaught Partnerships business. They have therefore embarked on a series of separate contract sales, with a view to preserving jobs and maximising returns to creditors. KPMG announced that it had transferred the contracts, but the reality is a little different from that.

As a matter of law, it is not possible to transfer the burden of a contract without the consent of the other contracting party. This means that employers in contract with a contractor such as Connaught cannot be required to assume a relationship with any purchaser. It is for the employers to decide if they wish to do so. An administrator will sell the interest that the contractor has in the contract, and it is then a matter for a purchaser to negotiate a transfer of the contract by way of a novation agreement.

An administrator will sell the interest that the contractor has in the contract, and it is then a matter for a purchaser to negotiate a novation agreement

A novation agreement is a three-way agreement between the employer, the insolvent contractor and the purchaser, by which the employer agrees to release the insolvent contractor and enter into a new contract with the purchaser for the completion of the outstanding obligations. Contract terms (even fundamentals such as price and timing) can be renegotiated. It therefore remains to be seen what the employers do.

What happens to the supply chain? Assuming that a purchaser is able to reach an agreement with an employer, the purchaser can pick and choose which parts of the supply chain it continues to use (although it will still have to agree terms with those parties). Those not taken on will be left with little option but to prove as an unsecured creditor in the insolvency (often with little prospect of a significant recovery of its loss). Unless they have the benefit of pay-when-paid clauses in their own supply contracts, they will still have their own liabilities to meet.

It is therefore likely that Connaught’s collapse will have a significant impact on the supply chain, affecting companies that may already be suffering, just as Connaught did, from the downturn in public sector work. The insolvency will have made it more difficult for those companies to prosper in what was already a difficult market.