In Brief – Walker Morris Legal Update – February 2018
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Post Carillion: Contractor Insolvency and EU Procurement Rules[...]
With the news of Carillion – a company responsible for delivering a large number of public […]
With the news of Carillion – a company responsible for delivering a large number of public infrastructure and services contracts from building HS2 to serving school dinners – entering liquidation many public sector organisations (as well as private) must work out how they deal with the collapse. It provides a timely reminder to Authorities to consider the risks associated with outsourced contracts and their contingency plans to deal with a similar situation.
Service continuity will be uppermost in the concerns and the solution will need to balance this imperative with compliance and propriety concerns. For example how the Authority’s actions sit with EU procurement law and whether in solving one problem Authorities create another problem in the form of a procurement challenge. David Lidlington, Cabinet Office Minister has publicly stated that some services will be taken in-house whereas others will be transferred over to other operators “in a managed, organised fashion”. But how will this actually work in practice? This is a complex area and whilst this article looks at how termination and novation might work in practice, and what other issues Authorities should consider advice should be sought in the context of the objectives of the Authority customer and the status and rights arising under the contract as a result of the insolvency.
Termination
Authorities need to understand their legal rights, remedies and responsibilities. Typically outsourcing, PPP and public services contracts will contain a right to terminate upon an insolvency event.
In more complex contracts the Authority may have rights to keep the suppliers and subcontractors to the insolvent company in place for a period of time to ensure continuity in service provision and allow it to make a decision as to whether it will either appoint a replacement contractor or perhaps take the services back in house. These rights will flow from ‘collateral warranties’ or ‘direct agreements’.
A key concern for the Authority is that the insolvent contractor may have accrued sizeable debts and liabilities to its sub-contractors, in which case the Authority may be required to take on these debts and liabilities (usually only those that have been fully disclosed by the sub-contractor prior to step-in). There is also a risk that the sub-contractor may look to re-negotiate the risk allocation in the contract and the authority will need to assess whether any modified terms comply with the EU Rules.
On termination or expiry of public contracts, the services will usually either be performed by a new contractor or provided in-house by the Authority. Public contracts should contain provisions covering termination consequences including the transfer of assets, employees (pursuant to TUPE), pensions, IP and data. However in situations like this the benefit of contract terms dealing with such matters (eg warranties and indemnities on accurate disclosure of liabilities) are as worthless as the insolvent company itself. For this and other reasons the Authority may consider setting up a new company to provide the balance of the services and into which the staff and any assets transfer (assuming agreement with the insolvency practitioner).
If having taken the contract in-house, the Authority wishes to outsource then this will likely involve an OJEU compliant tender process under the EU Rules. This may make some Authorities query whether it wouldn’t be better simply to transfer the contract to another (solvent) contractor at the outset.
Transferring the Contract to a New Contractor
Cabinet Office has suggested that contracts will be transferred to other providers “in a managed and organised fashion” and the Guardian reported that “contracts were drawn up so that if Carillion failed, other contractors would take over its responsibilities.” However, transferring to a new contractor is not particularly straightforward under the EU Rules.
EU Rules state that a change of contractor is a substantial modification that requires a new tender process. There is an exemption to this rule where a new contractor replaces the old one if:
- The replacement follows corporate restructuring, including takeover, merger, acquisition or insolvency; and
- The new contractor fulfils the criteria for qualitative selection in the original tender process; and
- There are no other substantial modifications to the contract.
These conditions do not make a transfer to a new contractor particularly straightforward. First, the recitals to the EU directive suggest that the contractor should be able to undergo structural changes (including those arising from insolvency) during the currency of the contract. This suggests that the drafters of the EU Directive had more in mind changes to the contractor driven by the administrator rather than the authority selecting an alternative contractor. However, Authorities should bear in mind these second and third conditions if an administrator is seeking to change the contractor. The second condition will require the Authority to perform “a qualification stage” with this alternative contractor using the original qualification questions. Lastly, the alternative contractor may be reluctant to take on the risk allocation in the existing contract but a modification to this to make it more palatable may well fall foul of EU Rules as a substantial modification to the original contract.
If the insolvent contractor is delivering the contract in a joint venture then the Authority may want to explore whether it could transfer the entire contract to the remaining contractor. This is likely to be more straightforward. The Court of Justice decided in 2014 that a bidding consortium could be replaced with a single entity that was part of the consortium provided that the single entity met the qualification criteria for the contract. It therefore seems arguable that competition would not be distorted if the contracting parties were reduced in number provided the initial qualification criteria were met and there were no other material modifications such as the level of guarantees and similar surety obligations.
Some public contracts may contain provisions which permit the funders to auction off PFI contracts where the existing contractor is subject to insolvency. However, it will require a review of the exact drafting to determine whether or not these provisions would meet the requirements of the EU Rules for “clear, precise and unequivocal review clauses”.
If an authority were to drive a novation of the contract to an alternative contractor outside of the above exemption without an OJEU advertised procurement then the next question would be whether it complied with one of the grounds for direct awards in particular, whether this was “strictly necessary where, for reasons of extreme urgency brought about by events unforeseeable by the contracting authority, the time limits for the open or restricted or competitive procedure with negotiation cannot be complied with“.
Insolvency may seem an obvious unforeseeable event and there may be circumstances where Authorities could use this but it is far from clear cut. We would imagine different judicial views depending on whether the novated contract had 6-9 months left to run or whether it as PFI contract with another 15 years left. At the core of the EU Rules is the principle objective of ensuring the free movement of services and the opening-up to undistorted competition in all the Member States. The distortion of competition is likely to be a key consideration in determining whether a novation complies with the EU Rules or not.
Next Steps
The right course of action for any Authority will ultimately be to balance commercial pressures and the need to continue delivering services within the regulatory requirement of the EU rules on procurement. While Authorities directly affected by the Carillion collapse take urgent advice, its insolvency is a reminder to all Authorities to check and take expert advice on their existing contracts as well as their plans for future contract awards and procurements and ensure they are prepared for the unexpected.
For advice on this topic please feel free to contact David Kilduff or Ben Sheppard.

Freezing orders: the litigator’s nuclear weapon
The strict obligations facing a freezing order applicant have hit the legal headlines in several […]
The strict obligations facing a freezing order applicant have hit the legal headlines in several recent cases. Walker Morris’ Commercial Dispute Resolution specialists Gwendoline Davies explains.
Freezing orders: Significant tactical weapon
A freezing injunction or order restrains a defendant or potential defendant from disposing of or dissipating assets. A freezing order is typically obtained by a claimant or potential claimant who wishes to ensure that a defendant’s assets remain available pending the enforcement of a court judgment. Various different types of assets can be frozen, including bank accounts, shares, investments, land, and property. A defendant’s interest in assets held on trust can be frozen and the order can be made against assets or interests within England and Wales or worldwide. If a defendant fails to comply with a freezing order, this amounts to a contempt of court and the defendant can face a fine, imprisonment or seizure of assets. They can therefore be a very significant tactical weapon in a claimant/applicant’s arsenal and can have the effect of bringing what otherwise might have been lengthy proceedings to an end prematurely, given the amount of pressure they can exert on defendants.
Freezing orders are draconian and have been described by the Court as a “nuclear weapon”. However, they are usually obtained urgently, on an interim basis and without notice of the application being given to the defendant. Because the defendant is not given notice of the initial hearing of the application and is therefore unable to make representations prior to a return hearing by which time the freezing order will already have been made, the claimant is under a duty to ensure that all material facts are brought to the Court’s attention.
Requirements and applicant’s obligations
To obtain a freezing order:
- The claimant must have a substantive cause of action against the defendant.
- The claimant must have a good arguable case in respect of which the English Court has jurisdiction.
- There must be a real risk of dissipation of assets.
- It must be just and convenient to grant the freezing order, bearing in mind the conduct of the applicant (‘clean hands’); the rights of (and any impact upon) any third parties who may be affected by the freezing order; and whether such an order would cause legitimate and disproportionate hardship for the respondent.
In addition, and particularly where freezing orders are obtained on an interim/without notice basis, claimants must:
- Give full and frank disclosure of all relevant information to the court.
- Provide certain undertakings to the court, including an undertaking in damages to compensate the defendant if it is ultimately decided that the injunction should not have been awarded; and if made pre-action, to issue the claim form for the proceedings in respect of which the claim arises on the same or next working day.
The claimant’s obligations when obtaining a freezing order – in particular in relation to the giving of both full and frank disclosure and the requisite undertakings – have hit the legal headlines in several recent cases.
Recent key cases
Failure to give full and frank disclosure
In Roman Frenkel v Arkadiy Lyampert (1) and La Micro Group (UK) Ltd (2) [1] an interim freezing order had been granted on the claimant’s without notice application. At the return hearing, however, where the Court was required to decide whether or not the freezing order should be continued, it became clear that the claimant had been guilty of material non-disclosure.
First, the claimant had not notified the court that he had also served court proceedings on the defendant in the US. That fact was highly significant because it demonstrated that the defendant had taken no steps to dissipate his assets even though it was aware that the claimant was pursuing similar claims in the US.
Second, the claimant’s lawyers had failed to make proper enquiries about, and had therefore failed to disclose to the Court, the fact that the claimant had made a prior without notice application, which had been refused for lack of evidence.
Third, the claimant had not given the Court the full picture about the underlying facts in the litigation. Had he done so, the potential impact of a freezing order on the second defendant would have been understood and the interim injunction may not have been awarded.
Fourth, the claimant had not brought to the Court’s attention that the draft freezing order sought was not in the standard form.
Finally, the claimant had not served his application for the continuation of the freezing order on the defendant as soon as was practicable after the without notice hearing.
The claimant’s failure to give full and frank disclosure was serious and significant and the freezing order was therefore discharged.
Cost of a cross-undertaking in damages
The non-continuance of an interim freezing order and/or the dismissal at trial of the claims underlying the granting of the order can similarly have serious consequences for the claimant.
The undertaking in damages required to be given by a claimant seeking a freezing order can be very substantial and the claimant may, in some cases, also be required to provide security or “fortification” of that undertaking. In circumstances where an interim freezing order is discharged, the undertaking can be called upon and the claimants potentially exposed to a significant liability.
In SCF Tankers Ltd & Ors v Privalov & Ors [2] the Court of Appeal applied the principles governing the award of damages against the party who has given a cross-undertaking in damages in the course of obtaining an interim freezing order.
The freezing order in question, granted in 2005, prevented the defendant from entering into shipbuilding contracts (albeit the order allowed the defendant liberty to apply to the court for permission to use frozen funds for that purpose on an application-by-application basis). In 2010, after trial, the claimant’s claims were dismissed and the defendant sought compensation pursuant to the undertaking in damages. Assessing the damages payable to the defendant, the Court of Appeal confirmed:
- The burden is on the party seeking to enforce the undertaking to prove that its loss would not have been sustained but for the freezing order.
- Once that party had established a prima facie case that its loss was caused by the freezing order then (in the absence of material to displace it) the Court was entitled to draw the inference of causation.
- In this case, the fact that the defendant was given liberty to apply to release funds for the purpose of entering into shipbuilding contracts did not affect the nature of the restriction imposed by the freezing order. It sufficed for the defendant to show that the order prevented it from entering into such contracts and to demonstrate the difficulties of any application to the Court for permission to release frozen funds.
- As with other damages claims, it is open to the paying party to try to minimise its liability by alleging failure on the part of the receiving party to mitigate its loss.
- In this case, however, the failure to mitigate argument was dismissed because the defendant had faced the practical dilemma that it could not enter into shipbuilding contracts without the Court’s permission and without a concrete shipbuilding contract proposal it had nothing with which to convince a Court that permission should be granted.
Resulting in an order that the claimant pay US$59.8 million in damages and US$11.04 million in interest, this case is a salutary lesson in the potential consequences for a claimant seeking a freezing order as to the potential costs of getting it wrong.
Ordinary and proper course of business
Whilst freezing orders are obviously highly restrictive, the law recognises that they should not be used oppressively. Respondents should not be forced to cease trading and they should be allowed to meet reasonable expenses. Standard form (non-proprietary) freezing orders therefore place a cap on the value of assets to be frozen and except ordinary living expenses, reasonable legal costs and dealing with or disposing of assets in the ordinary and proper course of business.
Case law [3] has previously confirmed that, in determining whether a payment or any other asset-dealing falls within the ‘ordinary and proper course of business’ exception, the Court will consider:
- Whether the course of business in question – not the payment itself – is ordinary.
- Whether the payment/dealing is in satisfaction of any pre-existing liability. If it is, the transaction is one that the Court would be likely to permit.
- ‘The ordinary and proper course of business’ does not necessarily equate to ‘routine’ or ‘recurring’ dealings and it is not restricted to the payment of trade creditors.
The recent case of Koza Ltd & Anor v Akçil & Ors [4] provides confirms that the Court should take into account:
- What an objective observer, with knowledge of the business entity in question, would conclude was in the ordinary and proper course of its business.
- What the parties could have intended on the proper interpretation of the undertaking.
- That just because proposed expenditure is unprecedented or exceptional does not, of itself, mean that it is outside the ordinary and proper course of business.
- That if proposed expenditure would give rise to a breach of fiduciary duty by directors, then that might lend support to the conclusion that the expenditure would not be in the ordinary and proper course of a company’s business.
WM Comment
Whilst freezing orders are often a very valuable tactical remedy for claimants, they are by their nature usually sought in situations of urgency, without perfect information and often prior to underlying proceedings having been issued. The stakes are high: the very serious potential consequences of getting it wrong are to be balanced against the need to take urgent action when evidence emerges that assets are at risk of being dissipated. Claimants can be under pressure to undertake a lot of work in very little time, given the need to comply with the procedural and substantive requirements of the application whilst at the same time readying their underlying proceedings against the defendant, if not already issued.
The potential rewards from getting it right are powerful. The urgency and pressure to comply with a freezing order is intense. The consequences are draconian and the application for a freezing order is likely to include stringent asset disclosure obligations and, potentially, other very serious collateral relief not addressed in this note.
Freezing orders are therefore correctly described as a nuclear weapon, with potentially devastating consequences in the context of litigation both for the defendant and, conversely, for an unsuccessful claimant.
For these reasons, clear, calm but decisive advice is required both when applying for and responding to freezing orders.
____________________
[1] [2017] EWHC 3121 (Ch)
[2] [2017] EWCA Civ 1877
[3] Michael Wilson & Partners Ltd v John Foster Emmott [2015] EWCA Civ 1028
[4] [2017] EWHC 2889 (Ch)

Newsflash: Alleged Amazon abuse and restrictive clauses in[...]
The French economy ministry has taken what it has described as the “strong and unprecedented […]
The French economy ministry has taken what it has described as the “strong and unprecedented act” of filing a complaint before the Paris Commercial Court and seeking a EUR 10 million fine against Amazon, for the imposition of what it says are unfair contractual restrictions and Amazon’s abuse of its dominant position.
The claim follows a two-year investigation carried out by the consumer regulator, the Directorate General for Competition, Consumer Affairs and Repression of Fraud. The investigation criticised clauses within Amazon’s retailer contacts allowing it the ability to unilaterally change terms, such as the ability for Amazon to require shorter delivery times, to block sales or to suspend sellers’ accounts.
This complaint relates to Amazon’s operations in France, but there may well be implications for retailers with affected cross-border contracts. Similarly, publicity surrounding the case could prompt Amazon’s retailers in the UK and elsewhere to review their contracts for any terms which might be considered to be unfair or anti-competitive.
Walker Morris’ retail, competition and commercial contract experts will monitor the case with interest and will report on any key developments.
If you would like any advice or assistance in connection with any of your retail or commercial contracts, please do not hesitate to contact Gwendoline Davies, Walker Morris’ Head of Commercial Dispute resolution, and retail sector specialist.

Could 2018 be the year of the CVA?
Following the approval of the company voluntary arrangement (CVA) by the creditors of Toys “R” […]
Following the approval of the company voluntary arrangement (CVA) by the creditors of Toys “R” Us in December 2017, the start of 2018 has seen another high profile CVA. Troubled burger chain Byron announced at the end of January that it had also restructured its business with the use of a CVA. It could be that with the current economic pressures on high street retailers, 2018 may see an increase in the use of the CVAs as an alternative to formal insolvency procedures.
Market conditions
The high street continues to be a difficult place to trade at the moment for both retailers and food outlets alike. Businesses are continuing to face a squeeze from a number of factors, including the continued growth of online shopping, soaring labour costs, business rates, the popularity of food delivery companies and a drop in consumer spending amid economic uncertainty.
With this market background, it is unsurprising that a number of companies are considering CVAs in an attempt to restructure their business in the hope that they can weather the storm.
Although not the most common insolvency procedure in the UK, a CVA is often considered when a company has a large number of leasehold real estate interests which it needs to restructure to survive. In many cases, long term leases will have been entered into several years ago which include rent, rates and other obligations which are no longer viable in today’s market.
What is a CVA?
Although an administrator or liquidator can propose a CVA, in the current climate CVAs are being proposed with the intention of avoiding the company going into administration or liquidation. In this context, a CVA involves a proposal by the company’s directors to its unsecured creditors for a compromise or arrangement in satisfaction of its debts. It should be noted that a CVA cannot affect the rights of a secured lender to enforce its security without its specific consent.
In theory at least, a CVA should produce a better financial return for unsecured creditors than if the company was placed in a formal insolvency procedure. In contrast to other insolvency procedures, the directors remain in control of the business which continues to operate, subject to the terms of the CVA and under the supervision of an insolvency practitioner.
A CVA allows much greater flexibility than insolvency procedures such as administration or liquidation. The company and its unsecured creditors effectively agree when and what percentage of the company’s debts will be paid and in real estate focussed CVAs (see below) can amend the company’s lease obligations. The directors, along with their advisors, will draw up proposals for the restructuring (which commonly include a redrawing of the lease terms) and all unsecured creditors then vote to either approve or reject the proposal. The CVA must be carefully drafted to ensure that it provides a more commercially attractive outcome for the creditors than an administration or liquidation.
If 75 per cent. or more in value of the company’s unsecured creditors vote in favour of the proposals, they become binding upon all of the company’s unsecured creditors, including those who voted against the proposals and/or were eligible to vote but did not receive notice of the proposals.
Challenging a CVA
Once approved by the requisite majority, a creditor cannot take any step against the company to recover any debt or enforce any rights that fall within the scope of the CVA. The only challenge to a CVA that a creditor can make is by an application to court. The application has to be made within twenty eight days of the CVA approval or, in the case of a creditor who was not given notice of the creditors’ meeting, within 28 days of the day on which the creditor became aware of the decision.
A CVA can only be challenged on the basis that the arrangement unfairly prejudices the interests of a creditor of the company, or there has been some material irregularity at or in relation to either the decision procedure or (if requested) the meeting at which the arrangement was approved.
The concepts of prejudice and unfairness are questions of fact and are distinct considerations. A CVA can be prejudicial in the sense that it can treat different unsecured creditors in different ways. This is precisely the approach retail CVAs have adopted in treating landlords differently from other unsecured creditors and also treating landlords differently as between themselves. The question of fairness depends on the overall effect of the CVA.
The court will consider whether any creditor has been unfairly prejudiced by the CVA but challenges are not common. This may because the evidential burden on the creditor is likely to be high and the time period to bring a challenge is relatively short. In addition, for PR reasons a major creditor may not want to be responsible for challenging a proposal which is intended to save a business and in the case of a national chain, possibly hundreds of jobs. Finally, if the CVA does fail following a challenge and the company ends up in administration or liquidation, the outcome for the creditor is likely to be worse than if the CVA was implemented.
Reasons for using real estate CVAs
The use (or attempted use in the case of BHS) of CVAs for companies with large property portfolios (such as retailers, food chains or hotels) has increased in recent times, as evidenced by Travelodge, BHS, Toys “R” Us and Byron Burgers and going back further, JJB Sports, Focus DIY and Blacks Leisure. A CVA offers a mechanism that allows the tenant company to restructure its lease obligations on a mass scale, without the need to negotiate with each individual landlord. A CVA can significantly reduce the real estate overheads of a company and can bring about the closure of unprofitable stores even where an individual landlord does not approve the CVA.
Real estate CVAs have commonly used an approach whereby properties are split into different categories. Leases of profitable stores may be left unchanged, save in some cases for the rent moving from quarterly to monthly to assist cash flow. Leases of marginal stores may be amended to provide for sizeable rent reductions and the option for substantial lease renegotiation. Finally, unprofitable stores which are unlikely to be viable are closed and the lease obligations brought to an end.
Conclusion
A CVA will not suit all situations but retailers and other businesses struggling with large lease liabilities should consider a CVA as a potential option to reduce those liabilities and help with overall profitability. It could be that Byron is one of many companies in 2018 that use a CVA to restructure their business and speculation is rife that other large retailers and food chains may follow suit soon.
At Walker Morris we have a team of restructuring lawyers who have experience in both putting CVAs in place and challenging their validity. If you think that a CVA could help your business survive or you are a creditor on the wrong end of one, please get in touch and we can see how we can help.