PART 3
March 2012
Realising Work in progress
31.6.76 Work in progress – general
Work in progress may be described as products and services in intermediate stages of completion. It is possible that work in progress could be realised without any further preparation, or it may be that extra costs have to be incurred before the work is saleable – or saleable at a greater sale price.
The Part gives advice on deciding whether to complete work in progress but, in most cases of this nature, the appointment of an insolvency practitioner should be sought (see paragraph 31.6.77) who will be able to obtain the necessary skills and expertise required to complete the work.
This Part should be read in conjunction with Chapter 62 – which covers continuation of a business as, necessarily, there is some overlap.
31.6.77 Seeking the appointment of an insolvency practitioner
In most cases where there is work in progress to be completed it is likely that it will be appropriate to seek the appointment of an insolvency practitioner to act as liquidator or trustee. The insolvency practitioner is likely to have greater experience in continuing a business, will have greater access to funds likely to be needed to complete the work and will be able to obtain the necessary knowledge skills and expertise.
In the likely event that the appointment is needed urgently, the advice in paragraph 17.52 should be followed. Where the official receiver is to seek the appointment at a meeting of creditors (see Chapter 16), he/she should ensure that the work in progress and related raw materials are suitably protected and insured in the interim period. The official receiver should also ensure that the value of the work in progress does not diminish in the interim.
31.6.78 Retention of title on goods used/to be used in manufacturing process
It is possible that raw materials supplied to the insolvent may be subject to a valid retention of title clause even after they have entered into a manufacturing process. Further guidance on this can be found in paragraphs 63.18 to 63.19.
The existence of a valid retention of title clause will, obviously, be relevant to the official receiver’s decision, as liquidator/trustee to complete work in progress (see paragraph 31.6.79).
31.6.79 Deciding if work in progress should be completed prior to realisation
When considering whether additional expenditure should be incurred to complete work in progress, the official receiver, as liquidator/trustee, should take into account the costs of completing the work (taking into account costs such as labour, materials, rent, insurances and utilities) and the likely value of the goods in completed form against the value of the raw materials in unprocessed (or part processed form) . It is likely that specialist agents will need to be employed to advise the official receiver – a quantity surveyor, for example, in the case of uncompleted building work. Further advice regarding matters to be considered is in paragraph 31.6.80. That said, it is far more likely to be appropriate to seek the appointment of an insolvency practitioner (see paragraph 31.6.77).
Where there is any doubt that the completion of the work will result in a net benefit to the estate (or an increased benefit to the estate, as the case may be), the work in progress should be sold without further processing or abandoned/disposed of as appropriate.
31.6.80 Matters to be considered before completing work in progress
The following matters, in particular, should be considered when deciding whether to complete work in progress:
31.6.81 Work in progress that should not be completed
In certain cases, it will not be appropriate to complete the work in progress, even if there may be a financial benefit to the estate in doing so. These include:
31.6.82 Contract with a penalty clause
Where a contract entered into by an insolvent contains a penalty clause against non-completion, steps should be taken to disclaim the contract (see Chapter 34) unless it is decided that the work is worth completing (see paragraph 31.6.79).
31.6.83 Employing a special manager
Where a business is likely to be sold as a going concern (see Chapter 62), or to protect work in progress in the period leading to the appointment of an insolvency practitioner as liquidator or trustee (see paragraph 31.6.77), it may be necessary to apply to court for the appointment of a special manager. This is a costly and expensive procedure which should only be considered if the work in progress is of a high value. Further guidance on employing a special manager is in Chapter 32.4.
31.6.84 Employing the bankrupt
There is guidance on employing the bankrupt in paragraphs 32.3.46 and 32.3.47 of Chapter 32.
Such an arrangement should only be considered where there is no realistic alternative.
31.6.85 Accountant client files – work in progress
Where the accountant has commenced working as instructed by a client and the work has not been completed, the official receiver should attempt to establish any amount due by the client, to the insolvent, in respect of the work undertaken and the book debt contractor should be contacted to deal with the collection of the debt (see paragraphs 31.1.4 to 31.1.33). The official receiver should retain the file until the amount due has been settled. Once any outstanding bill has been settled the file should either be returned to the client or forwarded on request of the client to another accountant. Any papers belonging to the accountant should first be removed from the file.
31.6.86 Barrister’s work in progress
If a barrister has commenced working on a matter on which he/she has been instructed it will be necessary to establish the value of the work completed up to the date of the bankruptcy order. The barrister’s clerk usually deals with the settlement of client bills and should be able to assist the official receiver in establishing any amounts due. Any money recovered from fees in relation to work completed prior to the bankruptcy will vest in the bankruptcy estate and the book debt contractor should be instructed to deal with the collection of the debt, (see paragraphs 31.1.4 to 31.1.33). As it is generally expensive to instruct another barrister to take on a case it is likely that the barrister will seek to continue to act for the client post bankruptcy and in such circumstances the file should remain with the barrister.
31.6.87 Solicitor’s client files containing work in progress
Where a file contains work in progress by the solicitor the official receiver needs to balance the need to return client files (see paragraph 59.92) whilst seeking to preserve the estate by demanding settlement of overdue accounts. The file should remain with the official receiver as trustee until such time as any outstanding bill in respect of the work undertaken by the solicitor has been paid.
The accounting records of the solicitor should be examined to establish amounts due by clients and the book debt contractor should be instructed to deal with the collection of any outstanding fees (see paragraphs 31.1.4 to 31.1.33).
The official receiver may encounter difficulties where the bankrupt’s accounting records are incomplete and the amounts due for work undertaken by the solicitor are not known. Due to client confidentiality the official receiver should not peruse the file, without the client’s consent, other than to establish whether it contains a time costs sheet to assist in the calculation of outstanding fees. When the bill for outstanding fees has been settled the file can then be returned to the client or sent on to another solicitor at the client’s request to complete the work.
The Solicitor’s Regulation Authority may be able to assist the official receiver, where there has been an intervention (see paragraph 59.89).
31.6.88 Growing crops as work in progress
Where the official receiver is dealing with an insolvent farming business, it is highly unlikely that he/she will have the resources or expertise on hand to care for and harvest any growing crops.
In these circumstances, the early appointment of an insolvency practitioner as liquidator or trustee should be sought (see paragraph 31.6.77).
Guidance on dealing with a stock of grain (paragraph 31.6.48) or seed (paragraph 31.6.51), or livestock (paragraph 31.6.42) is given in Part 2.
[Back to Part 2 – Realising stock] [On to Part 4 – Realising plant and machinery and fixtures and fittings]