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Although pay-when-paid conditions have largely been outlawed under section 113 of the Housing Grants, Construction and Regeneration Act 1996, they are still valid if an employer becomes insolvent. However, as the parties in this case found, the route to that insolvency can be important.

Between October and December 2008 Shepherd Construction negotiated the subcontract with steelwork contractor William Hare for the fabrication and erection of steelwork on a large development at Trinity Walk in Wakefield. The main contract employer was Trinity Walk Wakefield.

The subcontract was based on a standard form but Shepherd had amended it, including clause 32, which defined the employer’s insolvency, specifying that the employer would be insolvent if one of four situations applied. These were: an administration order being made by the court under Part ll of the 1986 Insolvency Act; the appointment of an administrative receiver under chapters one or two of Part lll of the Act; insolvent liquidation; or the making of a winding-up order by the court. The words were similar to those in the 1996 Construction Act.

However, clause 29, which provided for the potential consequences if Hare became insolvent, was different. This said the subcontractor was insolvent if under the Insolvency Act 1986 or any amendment or re-enactment thereof (italics added) an administrator or administrative receiver was appointed.

On 2 March 2009 Hare issued its Application 5 for payment. However, on 11 March Trinity’s directors resolved to place Trinity into administration immediately.

Shepherd was an observer at that meeting and was formally told later when Trinity had filed form 2.8B (Notice of Intention to Appoint an Administrator) at court. On 19 March Trinity also filed form 2.9B (Notice of Appointment of an Administrator) and two forms 2.2B (Statement of Proposed Administration).

It meant that administrators had been appointed without any separate court order as specified in clause 32. This was a simplified process introduced by the Enterprise Act 2002 which had modified the previous acts on insolvency.

Meanwhile, Hare issued Application 6 on 25 March. On 8 April, Shepherd valued Hare’s Application 5 as £569,601.75 net and Application 6 as £427,081.60 net but withheld payments on both of these sums because Trinity was then insolvent. With nearly £1m outstanding Hare sued Shepherd.

Shepherd argued that the changes to insolvency made by the Enterprise Act meant the wording of clause 32 also had to be amended to include the new methods of entering administration that the Enterprise Act 2002 now allowed. Therefore, under the sub-contract, Trinity would be insolvent and Shepherd would be excused payment.

But the court held that this was not the case. While the Enterprise Act had introduced new methods of appointing an administrator, the old ones in clause 32 were still viable.

In addition, the Enterprise Act had been passed several years before the subcontract was agreed so the failure to amend clause 32 to reflect the Enterprise Act must have been a deliberate choice.

Shepherd’s withholding notices were invalid and it had to pay the money owed plus interest.