Are you adequately protecting your business?

Insolvency in construction

Following the collapse of Carillion in January 2018, we have continued to see a growing trend of struggling construction businesses. In May 2019, Dawnus, a Swansea based construction firm of approximately 700 strong, collapsed while reportedly owing debts of £50 million. In June 2019, the West Midland contractor Shaylor Group entered into administration with around 200 employees being made redundant almost immediately. More recently, in October 2019, Lincoln based Simons Group entered administration placing a further 120 jobs at risk, citing its woes on the decline of high street building projects.

For want of ‘flogging a dead horse’, the above aptly demonstrates that the ongoing financial concerns are prevalent not only to large construction firms, but to construction firms of all sizes; and in all locations of the country, north and south. This continues to be highlighted by the profit warnings that have been issued in recent years from groups like Kier and Galliford Try.

So, what can be done to protect your business? While there is a time and place to take chances, Contractors and Developers can similarly do more to promote better internal governance and assurances, helping them to be more risk averse where necessary. By way of example:

• do you have the right procedures in place to truly understand your potential clients and partners (due diligence), to ensure the relationship you are getting into is one that will be reciprocal; one in which you are not undermined and taken advantage of?
• have you appropriately prepared for the project, checking the soundness of your proposed designs and not rushing pre-build programmes?
• have you invested in your teams, upskilling where appropriate to continue to meet the tough economic demands of the industry?
• have your contracts been thoroughly considered, the right form selected and the potential risks and problems appropriately identified?

Cashflow

Notwithstanding these considerations, the phrase ‘cash is king’ is commonly applied to the construction industry. It is the lifeline of any construction project and enables the parties to buy the labour and materials required to complete the build.

It therefore goes without saying that payment issues and bad debts can cause problems with ongoing projects. This, when combined with a lack of profitability and tight margins in what is a highly competitive market, can be some of the main triggers for insolvency in the industry.

A company can give itself a better opportunity of success by ensuring that sufficient governance and assurances are in place in respect of any payment due under a contract. Namely, is the company (and/or any Contract Administrators/ Employer’s Agents) keeping a sufficiently accurate record of when notices should be issued; and are those notices being strictly complied with?

While this may seem basic, all too often we see issues arising around requests for payments and the valuation of an application, simply because notices are issued incorrectly, or are not issued at all. The short of it, getting the basics right can help you avoid unnecessary and protracted disputes (and unwanted legal fees)!

Contract considerations

Looking beyond the financial health of your company, you should also continue to look outwards, monitoring the health of those who you contract with; taking the necessary steps to protect yourself from others which may enter administration and/or liquidation.

Undertaking thorough due diligence of the counter-party may identify red flags that may steer you away from contracting with that party. In the alternative, it may give you a better indication of what security may be required from the counter-party (whether it is a Deed of Assignment by way of security for a funder, or generally a performance bond and/or parent company guarantee for an Employer).

Otherwise, consideration should be given to how ‘insolvency’ is defined within a contract. For instance, parties should consider expanding the meaning of insolvency so it enables the solvent party to act and issue notices under the contract at the earliest possible opportunity (usually before a party has formally entered an insolvency or similar procedure).

In addition, where you are contracting with a party on a regular basis, or in relation to multiple, separate, contracts; provisions for cross contract set-off should be included in the terms of the contract.

This is important to avoid a situation where the solvent party is being pursued for a debt on a single contract where the insolvent party owes the solvent party money on other contracts (for example, where an Employer instructs others to complete the Works of the Contractor under clause 8.7 of the JCT Design and Build 2016 edition). Without express cross contract set-off provisions, the solvent party may be left without any ability to set off (in the worst case scenario) or have to rely upon insolvency set-off pursuant to Rule 14.25 of the Insolvency (England and Wales) Rules 2016 (where an account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings).

For insolvency set-off to apply, an administrator must have issued a notice of an intention to make distribution to creditors or the relevant entity must have entered insolvent liquidation. If the relevant entity is in administration and is not able to make a distribution to certain classes of creditors, then you will not be able to benefit from insolvency set off at all unless the position changes or the company enters liquidation. In such circumstances, you will want to ensure that the contracts provide adequate set off remedies for you. Set-off is a complex and technical area of law, and susceptible to challenge by both the creditor and insolvent party.

In any event, whether you are a Funder, Employer or Contractor, it may be worthwhile keeping a list of trusted partners that may be willing to step in to take novation of contracts and/or otherwise assist you in mitigating any losses and to keep projects on track that could otherwise be derailed and put at risk of failing altogether.

Ultimately, many of these decisions come down to the commercial attitude and bargaining powers of the contracting parties and are often dependent on the timescales in which projects are to be completed. Taking a minute to stop, however, and thoroughly consider the assurances and contingencies that are in place together with the advice of your wider project team could be the difference between securing a profit on a project, or absorbing a significant loss. As many have seen, the profits that can be made across multiple projects can just as easily be wiped out by a single bad project.

Contact a solicitor

If in doubt, or you require further advice in respect of a problem relating to your construction contract or any solvency issues you may be experiencing (whether on your part, or that of the other side), please do not hesitate to contact one of our team members in our construction and insolvency departments.

Andrew Pratten