SOUTH AFRICA: MY CONTRACTOR IS IN LIQUIDATION…WHAT NOW?

In today’s current economic environment, it is not unusual for construction companies to experience financial distress, and for them to abandon projects as a result of cashflow constraints.

Where this happens, the client generally has a right to terminate the contract and claim damages, which can be set off against monies due to the contractor for works performed.

But how does this change, if the contractor goes into liquidation?

In general, post-liquidation set-off is not permitted in South Africa as the process prefers creditors who cannot rely on set-off. The liquidator can also disregard any set-off that took place in the six-month period leading up to the liquidation, if it did not take place ‘in the ordinary course of business’.

This ordinarily means the client must first pay for work performed under the contract, and then wait to receive a liquidation dividend in respect of its damages claim if there are funds available for distribution to concurrent creditors. In reality, this might mean the client gets nothing.  

But this is not always the case.

A liquidator steps into the shoes of the insolvent contractor and is bound by the rights and obligations in the contract should the liquidator elect to enforce it. So, if the contract provides that on termination, an amount only becomes due to the contractor after certain counterclaims by the client have been satisfied, the liquidator must abide by that.

A liquidator cannot ‘cherry pick’ and enforce certain terms while ignoring others.

This is why set-off provisions in a construction contract are so important. Liquidators wanting to enforce a contract that provides for set-off, will only be entitled to payment of the net amount (if any) due after set-off.

The lesson is: do not brush over set-off clauses when drafting or negotiating a construction contract; it can prove to be one of the most critical mechanisms in determining a client’s options if a contractor goes into liquidation.