Construction insolvency: forewarned is forearmed

The impact of the government lockdown has been wide reaching with many sectors affected.

The Centre for Economics and Business Research has recently conducted a survey which found that 1 in 10 businesses say that there is a high risk they will enter insolvency as a result of the coronavirus crisis. This equates to more than half a million businesses.

While the construction industry is suffering, there are ways to prepare your business to better weather the storm. Below, we cover the warning signs to look for, reducing the impact of insolvency, and how to minimise your risk as a Director.

Be aware of the warning signs of insolvency

  • Reduced standard of work – increased defects
  • Decrease in labour and minimal materials on site
  • Failure to adhere to timescales or silence
  • Request for upfront deposits
  • Late filing of accounts
  • County Court Judgments
  • Be sure to check what is happening on other sites

Reduce the impact of insolvency

  • Check the financial status of the company before entering into a contract and don’t hold back in asking questions.
  • Review the contract and ensure you identify when payments are due and that any issues are addressed as soon as possible.
  • Consider a performance bond as an insurance position.
  • Ensure you have a valid retention of title clause.
  • Take guarantees from a third party.
  • If warning signs are there, ensure you are at the front of the queue for payment.
  • Work with companies that you know rather than the unknown and untested.
  • Check you are complying with the terms of your existing contracts. If there are any breaches, seek remedy.

If you’re facing insolvency yourself, minimise your risk

  • Keep up to date financial information. You need to regularly monitor, review and update your financial records, management accounts and cash flow projections.
  • Hold regular board meetings and keep records of decisions and minutes. You can hold Annual General Meetings online.
  • You must document why your decisions were best for the business.
  • Coordinate with key stakeholders (in particular lenders) and HMRC where a default may occur.
  • Discuss short term facilities for working capital. However, look at the terms as they will have to be repaid eventually and could end up being a millstone around the neck.
  • Reduce cost and review reliefs and assistance available from the government.
  • Ensure you understand your position in relation to lender’s terms and those under contracts to which you are a party.
  • Seek advice as soon as possible in relation to your contract wording, the impact of insolvency and what it would mean.
  • Take advice in relation to your duties as a Director.
  • Take all possible steps to avoid loss to company’s creditors – wrongful trading action may be suspended but there are plenty of other options available to Insolvency Practitioners.

Read more about construction insolvency in Issue 15 of our newsletter Real Estate Matters.

Read Real Estate Matters Issue 15

Get the support you need

It is imperative to discuss options at an early stage to help better understand your business’ financial position. The earlier advice is sought, the more options that are available. Professionals can help you recognise the warning signs of insolvency and understand whether your situation is
one that you can trade out of.

The pandemic will inevitably result in challenges for construction firms but those who take expert advice early will be better placed to deal with the situation and hopefully reduce the impact on their business.

Contact a member of our Construction and Real Estate team for further advice.