Managing PFI contractor liquidation: A short guide for contracting authorities

It has recently been reported in the press that the project company for England’s largest Private Finance Initiative (PFI) contract is going into liquidation, affecting 88 schools in Stoke-on-Trent. 

The insolvency of a contractor party to a PFI contract presents significant challenges for contracting authorities and end-users of the PFI asset. With essential public services often at stake, contracting authorities must act swiftly and strategically to ensure service continuity whilst protecting the public interest. Understanding the available contractual mechanisms and immediate priorities is therefore critical.

This short guide outlines some key steps contracting authorities should consider in the event of PFI contractor insolvency.

1.  Immediate response actions

The first priority is to review and understand the PFI contract's insolvency provisions. This should include all contractual documentation, which might include step-in provisions and direct agreements with lenders. These provisions will typically inform the starting point for a contracting authority's response strategy.

A contracting authority should also consider at an early stage which relevant stakeholders will need to be notified, such as senior lenders, guarantors, subcontractors, and relevant government departments. Prompt communication helps ensure that contractual mechanisms, such as lender step-in rights, can be activated efficiently and that all parties adopt a coordinated approach.

2. Understanding step-in rights

Most PFI contracts will contain a step-in mechanism that allows either the contracting authority or lenders to assume control of service delivery when the contractor fails. These rights are often triggered by insolvency events. 

The contracting authorities should assess:

• whether lender or authority step-in rights have been triggered;
• which party is best placed to exercise those rights; and
• whether step-in is viable, proportionate and operationally workable in the circumstances together with considering any contractual or commercial alternatives. 

Step-in is not automatic and often carries legal, logistical and cost implications. It should be weighed against other contractual or commercial options.

3. Ensuring service continuity

Avoiding or minimising disruption to of critical public services will be the immediate operational concern. Authorities should move quickly to:

• identify essential services and critical subcontractors (e.g. FM, lifecycle, catering, cleaning);
• review the financial stability of key suppliers, who may also be exposed to the project company’s insolvency;
• explore interim arrangements to maintain service continuity, which may include temporary agreements or direct funding where contractually permissible.

Short-term stabilisation measures should run in parallel with discussions with lenders and wider stakeholders about longer-term service delivery solutions.

4. Strategic considerations

Once immediate continuity is secured, authorities should evaluate the longer-term, strategic options. These could take the form of project refinancing or restructuring, procuring a replacement contractor, or in extreme cases, bringing services in-house. Each option carries different risks, costs, timeframes and procurement implications that must be carefully evaluated.

5. Managing and resolving outstanding disputes

Due to the long-term and complex nature of PFI contracts, it is not unusual for disputes to arise particularly around historical performance, payment claims, liability questions and deductions When a contractor enters liquidation, those issues often crystallise. Liquidators may pursue claims for unpaid sums or dispute deductions the authority has made for performance failures. Authorities may equally have claims for breaches or underperformance.

These disputes can become especially challenging close to contract expiry, when issues such as the condition of assets, responsibility for dilapidations, and final account settlements can persist long after the contract term has ended. Post-expiry, a PFI contractor may no longer exist as an entity which presents several risks to contracting authorities in terms of likely recovery. In line with IPA guidance, contracting authorities should:

• commence handback preparations at least seven years prior to contract expiry,
• avoid ‘saving up’ unresolved disputes until the end of the contract – seek to resolve disputes on an ongoing basis,
• maintain thorough records, particularly as access to contractor data may become more limited once insolvency processes begin.

Obtaining independent legal advice will support contracting authorities in navigating the complex interplay between contract law, insolvency law, and public procurement regulations, to name a few.

If you are dealing with a distressed PFI contract or would like to strengthen your contingency planning, our specialist PFI team can provide rapid and practical legal support.