Construction Insolvency

Francis Ho, Head of Construction | Tuesday 7 June [email protected] | +44 20 7067 3505 | @fkyh

Construction Law Masterclass: Construction Insolvency

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Construction insolvencies in UK

#olswangconstruction2

• Sector with most insolvencies (roughly ¼ of total UK insolvencies)

• In Q1 2016, output in construction industry decreased by 1.1% compared with Q4 2015 (ONS).

• 2,462 construction company insolvencies for Q4 2015 in England and Wales (all-time low)

• Down 3.4% from 12 months ending Q3 2015

• Begbies Traynor Red Flag Alert: 17% increase in construction and real estate firms in financial difficulty at the end of last year (50,122)

www.constructive blog.com

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"Brexit" and construction companies


• ⅔ of industry in favour of remaining in EU (Building, May 2016)

• Anecdotal evidence that clients unwilling to commit to new projects ahead of EU Referendum, e.g. office occupiers (British Land)

• Loss of EU labour would affect construction (220k new workers needed), e.g. ⅔ of Barratt's London workforce comes from EU, ½ of Berkeley's sub-contractors

• Inward investment, e.g. multinationals using London as their base, may be affected

• Removal of European Investment Bank's €16bn funding over last 3 years (e.g. Oxford University, Crossrail, London transport links, Thames Tideway)

• Trade barriers to buy materials from EU?

• Reduction in red tape?

• Other factors: slowdown in Far East economies, collapse in oil prices


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What makes construction companies prone?


• Cash flow

• Disputes/risky projects

• Shortage of credit

• Pricing


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What is meant by insolvency? #1


• Section 123, Insolvency Act 1986:

• “Cash flow test” – company cannot pay debts when they fall due

• “Balance sheet test” – company’s liabilities exceed assets

• Unable to pay statutory demand of over £750

• Enforcing a County Court Judgment for unpaid debt


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What is meant by insolvency? #2

#olswangconstruction6 www.constructive blog.com

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How can employers mitigate risks? #1 – Due diligence


• Credit/insolvency checks (Dun & Bradstreet/Mint Global, Companies House, Bankruptcy Court, company accounts, project history)

• Financial common sense (e.g. is this project too big for contractor, is the tender price unrealistically low or the programme overly ambitious, has contractor underestimated what is involved?)


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How can employers mitigate risks? #2 – Documentation


Regarding client-side consultants:

• Structuring payments

• Intellectual property rights

• Ability to terminate/to terminate for insolvency and consequences of such termination


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How can employers mitigate risks? #2 – Documentation


Regarding contractors:

• Performance security

• Structuring payments

• Intellectual property rights

• Ability to terminate for insolvency and consequences of such termination

• Retention monies/retention bond

• Retention of title over materials and goods

• Collateral warranties/third party rights from sub-contractors with step-in rights

• Pay sub-contractors direct under tri-partite payment agreement or use project bank accounts


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What can indicate an insolvency?


• Can occur out of the blue but often warning signs can be detected, e.g.

• Sub-contractors or suppliers not being paid on time

• Underperformance, understaffing on site

• Trying to get paid more early than entitled to

• Cutting corners regarding specifications or not complying with other contractual requirements

• Claims for additional payments with shaky justifications


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What do you do when an insolvency occurs? #1


• Check:• Can you/when can you terminate for insolvency (if not, may have common law right)

• Performance security

• Insurances are being maintained

• Whether you need to secure site (to avoid materials or plant being removed)

• If another contractor can be lined up – insolvency practitioners may even be able to assist

• Whether any interim payment is due – you may need to serve a withholding notice if there is an insolvency before you can terminate

• Position in relation to third parties, e.g. forward purchasers, funders (you may have a duty to inform)

• If sub-contractors can be retained (step-in rights/direct payments)

• Be wary of information coming out of contractor or purported agents of the contractorwww.constructive blog.com

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What do you do when an insolvency occurs? #2


• After termination:

• Contract may allow you to appoint another contractor at the contractor’s expense (but may need to prove mitigation of costs)

• Keep record of costs

• Deal with insolvency practitioner's correspondence promptly

• Consider whether to appoint any sub-contractors

• Keep the insolvency practitioner informed

• Asking for insolvency practitioner to be regarded as a general creditor of the company and to be kept informed of developments


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Any questions?

#olswangconstruction13 www.constructive blog.com

•For more information•please contact:

Brussels+32 2 647 4772

London+44 20 7067 3000

Madrid+34 91 187 1920

Munich+49 89 203 031 300

Paris+33 17 091 8720

Singapore+65 6720 8278

Thames Valley+44 20 7067 3000

Olswang:Changing Business.www.olswang.com

Francis Ho+44 20 7067 [email protected]

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Construction Insolvency

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