Construction is a financially volatile sector. The high cost of materials and labour, combined with delayed payments and thin profit margins, creates significant cash flow pressures. Successful construction companies struggling with a liquidity crisis if several key customers simultaneously delay payment is far from unheard of, particularly with the economic pressures many firms are currently facing.
The sooner a construction firm recognises that it is facing significant financial stress and seeks solutions, the greater the number of solutions that will be open to it. Depending upon the circumstances, there are likely to be a variety of suitable solutions for insolvency for construction to enable the firm either to rescue or restructure the business or bring it to a formal end.
Company Voluntary Arrangement (CVA)
A CVA enables an insolvent firm to agree with its creditors the terms under which some or all of its debt obligations will be discharged. This can be a very strong solution for insolvency for construction firms. Typically, the firm would continue to trade during the repayment period.
For example, a company may have experienced unforeseen increases in the price of materials or lost money on a specific contract. Alternatively, it may have had to wait too long for a large client to settle their account. In these situations, a CVA may give the necessary “breathing space” to allow the company to recover without having to cease trading immediately.
Company Administration
Another form of rescue from insolvency for construction companies is Company Administration. An Administrator takes control of the company, which gains protection from creditor enforcement action through a ‘moratorium’. The Administrator will investigate the company and determine what course of action should be taken based on their findings. Depending on its circumstances, this may include restructuring, negotiations with creditors or disposing of part or all of its assets.
In cases where a construction company faces immediate creditor pressure but retains a viable underlying business that may be capable of being rescued or sold, administration may represent a particularly attractive route.
Pre-Pack Administrations
When a Pre-Pack Administration is used, prior arrangements are made for the disposal of part or all of a company’s business and/or assets before it officially goes into administration. The transaction then typically occurs shortly after an administrator has been appointed. This is a powerful means of handling insolvency for construction companies that are being sold.
Continuity is often cited as the biggest benefit in such cases. Contracts with suppliers and contractors, employment, etc., may be transferred to a new owner, thereby minimising disruption and possibly saving value that could otherwise evaporate if trading were to cease immediately. However, pre-packs are subject to very stringent regulations and considerable scrutiny, especially where the purchasing entity is related to the current directors.
Creditors’ Voluntary Liquidation (CVL)
Occasionally, the idea of rescuing the company becomes unrealistic, and construction companies struggling with cash flow problems for an extended period of time may have no choice but to call it quits. At this point, a CVL provides a structured method by which to shut down an insolvent construction company. The directors initiate the process voluntarily, following which a Licensed Insolvency Practitioner is appointed as Liquidator. Trading ceases, assets are realised, and money received from realisation is distributed among creditors in accordance with statutory priorities.
A CVL would be a suitable means of dealing with insolvency for construction companies where debts have become unsustainable, and there are no reasonable prospects of restoring profitability.
Like many businesses, insolvency for construction firms is becoming more common as the economy continues to struggle. If you’re struggling, get advice quickly and give us a call at Ballard Business Recovery. Our experienced team will be able to help you understand the best route forward for your business.
