Insolvency in the construction sector
The pandemic has placed the construction industry under considerable pressure, with it accounting for 17% of all UK corporate insolvencies in May 2021. Now that restrictions have lifted, it’s hoped that many companies will be able to survive moving forward. However, sector leaders should ensure they understand the insolvency process – whichever side they’re on.
The challenge ahead
Even before the pandemic, the construction industry was facing a number of challenges, including wafer thin profit margins and materials and labour shortages. This left many businesses in vulnerable positions, particularly in the wake of the May 2020 construction boom.
The complexity of construction supply chains often means that one problem can have widespread repercussions, so it’s important to be aware of warning signs that things may be going wrong
Understanding the signs
There are often distinct warning signs that indicate that a project is headed for trouble, these include:
- Problems contacting subcontractors, employers or site teams
- Unexpected changes in management
- Subcontractors suddenly removing plant and equipment from the site
- Unexplained reductions in productivity or resources
In the event these tell-tale signs appear, it’s time to take action.
The first course of action should be to review your contracts and documentation, which will help you to understand the risk and who carries it. A plan can then be formulated.
If the financial position is worsening, it’s important to maintain lines of communication with key stakeholders, including the team ‘on the ground’. Staying close to site activity will provide a greater insight into any future problems.
If the financial problems evolve into something more serious, there are things that can be done to manage the risk. Communication is vital, so take advice and engage with major stakeholders and funders as soon as possible. Getting key suppliers on board at an early stage may also help in the long run.
Law of Property Act (LPA) receiverships
Administrations and liquidations, where a business is placed under the control of insolvency practitioners, are still common. However, not all insolvency situations are equal and there is a growing number of distressed projects being placed into LPA receiverships. Here, a receiver is instructed by a lender to take charge of discreet assets (usually a property) and sell them to recover the debt.
This option is particularly beneficial for construction projects as it is quicker, cheaper, and often means the project will be seen through to completion.
The director’s role
Directors and owners must be aware of their responsibilities and personal risk during an insolvency. Although it may be tempting to walk away from a struggling business, assisting administrators or LPA receivers could result in a better outcome.
Legal provisions such as The Corporate Insolvency and Governance Act 2020 are also in place to provide directors with time to consider all of their options.
As the pressure facing the construction industry increases, insolvencies will inevitably happen. Ensuring directors and senior leaders know how to spot the danger signs, could prevent further problems down the line.
Get in touch to find out how our restructuring and insolvency team can help.
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