New guidance from Europe on insolvent contractors under procurement rules

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What happens when a contract for a long-term strategic partnership is cut short when a partner becomes insolvent? Can an authority simply transfer an existing public contract to another provider, perhaps at the request of the administrator?

The role of an administrator is, of course, to act in the best interests of any creditors, but can this really be acceptable from a procurement context where the authority has a new partner imposed by an insolvency practitioner?

It is well-established under procurement law that a public contract cannot simply be transferred to a third-party contractor without there being risk of a successful procurement challenge on the basis that the opportunity should have been re-advertised to the market.

However, the Public Contracts Regulations 2015 introduced a helpful provision in Regulation 72(1)(d)(ii). This states that this is permissible where the new contractor is ‘stepping into the shoes’ of the original contractor “by way of a universal or partial succession into the position of the original contractor”.

But what does this mean?  Does there have to be a sale of the related business to the incoming contractor? Or does “universal or partial succession into the position of the original contractor” simply refer to them stepping into the shoes of the original contractor for that particular contract, or even part of that contract, and not the business more generally?

Helpfully, some persuasive guidance has now arrived from the Advocate General (AG) in the context of a referral to the Court of Justice of the EU by the Swedish national courts. As you may be aware, the AG acts an adviser to the CJEU judges and assists the judges by writing an impartial and independent opinion on the case which the judges will consider before giving judgment. Such advice is usually followed.

Whilst the advice from the AG is an opinion only, and EU based, so not binding in our post-Brexit world, we can draw some guidance from the opinion which the English courts are likely to find persuasive.

What happened in the case?

The Swedish Legal, Financial and Administrative Services Agency tendered for the supply of computer equipment under a number of framework agreements. The nine top-ranking candidates that met the qualifying criteria at selection stage were invited to submit tenders. Advania was a qualifying candidate but was not ranked within the top nine.

Misco secured four of the framework agreements and Dustin Sverige two.  Subsequently, Misco was declared insolvent.  The administrator for Misco agreed to transfer the four framework agreements to Advania.  There was no related takeover, business sale or transfer of assets or personnel to Advania.  Dustin Sverige challenged this transfer on the basis that it was a substantial modification to the contract which should have been re-tendered.

What does the law say?

Regulation 72(1)(d)(ii) states that a contract or framework agreement may be modified during its term without a new procurement procedure where:

“a new contractor replaces the one to which the contracting authority had initially awarded the contract as a consequence of:

(ii) universal or partial succession into the position of the initial contractor, following corporate restructuring, including takeover, merger, acquisition or insolvency, of another economic operator that fulfils the criteria for qualitative selection initially established, provided that this does not entail other substantial modifications to the contract…”

The Swedish national laws were almost identical to the above as they came from the same originating EU Directive.

What did the AG say?

Advocate General Henrik Saugmandsgaard said that where a new contractor had agreed to take over the original contractor’s rights and obligations under a framework agreement after the initial contractor had been declared insolvent, the effect of the equivalent of Regulation 72(1)(d)(ii) meant that the new contractor must be deemed to have succeeded, in full or in part, into the position of the initial contractor within the meaning of that provision. A transfer or assignment of the contract was not required to be accompanied by a transfer to the new contractor of part of the initial contractor’s business assets or personnel used to perform the agreement.

The AG’s opinion was, therefore that the new contractor need only take over the public contract or framework agreement, and not the business assets of the initial contractor itself.

In summary

This is a helpful and sensible practical interpretation of the Directive which we hope is followed by the English courts. The thinking behind Regulation 72(1)(d)(ii) makes sense, it provides a solution that is in the interests of the contracting authority, the successful tenderer and its creditors in an insolvency situation.

There are a few points to note; firstly, there are three conditions which must be satisfied in order for Regulation 72(1)(d)(ii) to apply under the Directive:

  • The new contractor must be an economic operator which would fulfil the qualitative criteria for tendering. In this case, Advania had met the qualitative criteria under the selection questionnaire.
  • There cannot be any substantial modifications to the contract when it transfers;
  • The transfer to the new contractor must not be aimed at circumventing the application of the procurement rules (i.e. not a means by which the contracting authority selected its own choice of contractor without calling for competition and reopening the tender to the market).

It is also worth noting that under the provisions in Regulation 72 this exemption can only apply where the transfer of the contract follows a corporate restructuring, for example, a merger, takeover or, as in this case, an insolvency, and will not apply to any assignment or novation of a contract to a third party contractor without this.

Finally, it is important the administrator itself chose the replacement contractor – the AG’s view, which fits with the purpose of the procurement regime, was that it is for the administrator and not the contracting authority to select the replacement contractor.  If the contracting authority were to select the contractor then this would be likely to require a new advertisement and tender process in accordance with the Regulations.

For further information please contact Alison Walton on 0191 211 7850 or email [email protected]