Bankruptcy and insolvency
| Author | Julian Bailey |
| Pages | 1653-1686 |
1653
CHAPTER 22
BANKRUPTCY AND INSOLVENCY
Introduction 1654
Bankruptcy 1655
(i) Introduction 1655
(ii) Procedure for bankrupting a debtor 1655
(iii) Trustee in bankruptcy 1657
(iv) Clawback of property 1658
(v) Eect on contract 1659
Corporate insolvency 1659
(i) Introduction 1659
(ii) What is insolvency? 1660
(iii) Administration 1661
(iv) Receivership 1662
(v) Voluntary arrangements and liquidation 1663
Statutory demand for payment 1664
(i) Introduction 1664
(ii) England 1664
(iii) Australia 1665
(iv) Hong Kong 1672
(v) Singapore 1673
e eect of contractor insolvency on a project 1674
(i) Termination of a construction contract for insolvency 1674
(ii) Disclaimer of contract or completion of work by liquidator 1675
(iii) Specic performance 1675
(iv) Performance bonds and other securities 1675
Eect of insolvency on legal proceedings 1676
(i) England 1676
(ii) Australia 1676
(iii) Hong Kong 1677
(iv) Singapore 1677
Liquidation 1678
(i) Introduction 1678
(ii) Role of liquidator 1678
(iii) Appointment of liquidator – England 1679
(iv) Appointment of liquidator – Australia 1680
(v) Appointment of liquidator – Hong Kong 1681
(vi) Appointment of liquidator – Singapore 1682
(vii) Distribution of company’s assets 1682
BANKRUPTCY AND INSOLVENCY
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(viii) Completion of work by liquidator/trustee in bankruptcy 1683
(ix) Disclaimer of contract 1683
(x) Set-o 1684
(xi) Unregistered securities 1684
(xii) Void or voidable dispositions of property 1684
(xiii) Directors’ liability 1686
Introduction
22.01 e nancial stability of the par ties to a construction or engineering contract is
usually a matter that is critical to the success of the project. If an owner becomes nan-
cially embarrassed, and is unable to make payment to the contractor for work performed
by it, the contractor may have grounds for suspending its works, or terminating the
contract. Similarly if a contractor runs into nancial diculties, and is unable to con-
tinue the performance of its works, the owner may be entitled to terminate the relevant
contract and nd another contractor to complete the works.1 Where money is owed
under or in respect of a construction or engineering contract, and the money is not paid
when it ought to have been paid, it may be open to the creditor to seek to recover the
amount owed by bringing bankruptcy proceedings, if the debtor is an individual, or by
instituting insolvency proceedings or taking other insolvency action, if the debtor is a
company. Although not every project will be plagued by one or more party’s nancial
diculties, it has rightly been observed that insolvency is “not an unknown phenomenon
in the building industry”.2
22.02 In England, the law relating to the bankruptcy (or personal insolvency) of indi-
viduals and insolvency generally is governed primarily by the Insolvency Act 1986, as
amended by the Enterprise Act 2002. In Australia, personal insolvency is governed
primarily by the Bankruptcy Act 1966 (Cth), and the insolvency of corporations by the
Corporations Act 2001 (Cth). In Hong Kong, corporate insolvency is regulated by the
Companies (Winding-up and Miscellaneous Provisions) Ordinance,3 and personal
insolvency by the Bankruptcy Ordinance.4 And in Singapore, the applicable statute
for personal insolvency is the Bankruptcy Act,5 and for corporate insolvency it is the
Companies Act.6 e laws of bankruptcy and insolvency in each of these jurisdictions
are broadly similar in their operation and eect. A comprehensive treatment of bank-
ruptcy and insolvency is not provided in this text.7 Instead, a brief overview of the law
1 Termination issues were discussed in Chapter 9.
2 Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWCA 190 at [52], per Spigelman CJ. e insol-
vency of a party may arise for a number of reasons. It has been suggested that a signicant contributing factor
leading to the insolvency of construction businesses may be “unfair” contractual terms being used by those who
employ contractors (or subcontractors): Coggins, “‘Levelling the playing eld’ – a proposal for the regulation of
unfair contract terms in construction contracts” (2019) 35 Const LJ 271.
3 Cap 32.
4 Cap 6.
5 Cap 20, 31 October 2009 revised edition.
6 Cap 50, 2006 revised edition.
7 But see Goode and van Zwieten, Goode on Principles of Corporate Insolvency Law (Sweet & Maxwell, 5th edition,
2018); Walton et al, Kerr and Hunter on Receivers and Administrators (Sweet & Maxwell, 20th edition, 2017); Briggs
and Tribe, Muir Hunter on Personal Insolvency (Sweet & Maxwell, looseleaf); Murray and Harris, Keay’s Insolvency:
Personal and Corporate Law and Practice (Law Book Co, 10th edition, 2018); Kwan (ed), Company Law in Hong
BANKRUPTCY AND INSOLVENCY
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of bankruptcy and insolvency will be provided, with vignettes of how that law has been
held to apply to construction and engineering projects. Greater attention is given to cor-
porate rather than personal insolvency, as in practice it is more common to nd projects
disrupted by the former than the latter.
Bankruptcy
(i) Introduction
22.03 An individual is insolvent when he is unable to pay his debts as and when they
fall due for payment. e usual consequence of a person being insolvent is that he will
have legal restrictions placed upon the use of his property, and his property may be
divested from him so that it can be used to pay his creditors. A bankruptcy order against
an individual has the eect of appropriating the bankrupt’s assets for use in payment of
the bankrupt’s creditors. ere are, however, forms of personal insolvency that fall short
of full bankruptcy, under which an insolvent person agrees with his creditors to make
certain payments to them to compromise their claims.8 In summary, it has been said that:
“e modern bankruptcy law serves three purposes. e rst is to ensure that the assets of the
bankrupt are distributed rateably among creditors. e second, which is interrelated with the
rst, is to ensure that one creditor does not obtain an undue advantage over other creditors.
e third is to bring about the discharge of the debtor from future liability for his existing
debts, so that the debtor may start afresh.”9
(ii) Procedure for bankrupting a debtor
22.04 Under English law, an individual debtor may be bankrupted by the court being
petitioned for a bankruptcy order against him. e court may be petitioned by a creditor
(or creditors), or even by the debtor himself.10 A creditor may present a bankruptcy
petition where the amount of the debt owing to the creditor is liquidated and in excess
of £750, and where the debtor appears either to be unable to pay or to have no reasonable
prospect of being able to pay the debt.11 A debtor is taken to be unable to pay or to have
no reasonable prospect of being able to pay the debt where the petitioning creditor has
served a statutory demand for payment that is not complied with within three weeks of
it being served.12 In such cases where a statutory demand has not been complied with,
the court may make a bankruptcy order that will take eect from the time it is made.13
Kong: Insolvency 2019 (Sweet & Maxwell, Hong Kong, 2019); Yin and eng (eds), Law and Practice of Corporate
Insolvency (Lexis Nexis, Singapore).
8 For example, in England a debtor may enter into an Individual Voluntary Arrangement with his creditors under
Part VIII of the Insolvency Act 1986 (UK). ere are similar provisions under Part X of the Bankruptcy Act 1966
(Cth) for Personal Insolvency Agreements.
9 Re McMaster; Ex parte McMaster (1992) 33 FCR 70 at 72–73, per Hill J [Aust Fed Ct], cited with approval in
7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328 at [7], per Flick J.
10 Insolvency Act 1986 (UK) section 264(1).
11 Insolvency Act 1986 (UK) section 267.
12 Insolvency Act 1986 (UK) section 268.
13 Insolvency Act 1986 (UK) section 278.
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