Retention when someone goes bust

Two situations, opposite outcomes.

When the party holding your retention fails

If it was held on trust in a separate identified account, it is yours and it comes back. If it was a book entry, you are an unsecured creditor for the full amount.

Unsecured creditors in construction insolvencies commonly recover a few pence in the pound, and sometimes nothing. The distinction between those two outcomes was decided at contract stage, by whether anyone asked for the separate account.

When the party you hold retention from fails

Now you are holding a fund, and several things want it.

• The cost of completing outstanding work, if the contract has been terminated.
• The cost of making good defects that the contractor will now never return to fix.
• Liquidated damages, if the works are late and the procedure was followed.
• The administrator, on behalf of the general creditors, for whatever is left.

The contract usually provides for setting the cost of completion against sums otherwise due, and retention is one of them. What matters is establishing the entitlement properly, with figures, before releasing anything.

Do not release into an insolvency

A release made after the insolvency event, without establishing what the employer is entitled to deduct, is difficult to recover. The administrator has no obligation to hand it back.

The right sequence is to stop, quantify the completion cost and the defects exposure, establish the damages position, and then account for the balance.

Watch the second moiety in particular

The end of the rectification period frequently falls after a contractor has failed. Releasing the balance because the calendar says so, on a contract where nobody is going to make good anything, gives away the only fund available to pay for the remedial work.

The portfolio view

For a subcontractor, retention held by one main contractor across six live packages is a single concentrated exposure to one company. It is worth totalling occasionally, because the number is usually larger than anybody expects and it is the number at risk if that company fails.