construction insolvency
TRANSCRIPT
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)
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"Brexit" and construction companies
#olswangconstruction3
• 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?
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• Cash flow
• Disputes/risky projects
• Shortage of credit
• Pricing
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What is meant by insolvency? #1
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• 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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How can employers mitigate risks? #1 – Due diligence
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• 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
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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
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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?
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• 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
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• 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
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• 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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•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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