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Construction company directors - is there trouble ahead?
Peter Vinden, Leonard Curtis Director and a specialist adviser to the construction sector, talks about options for business owners when performance pressure, in an industry like no other, starts to take its toll
Running a company involved in the construction sector is hard work. There is an infinite number of variables to juggle. Material price rises, labour shortages, staff under pressure, banks with changing requirements, clients that insist on changing their minds but don’t like paying, designers who aren’t up to speed with what a proper construction detail looks like, unpredictable weather patterns, and advisors who don’t understand the industry landscape. Even when you manage to get all your ducks in a row the modest margin you expected to make can quickly disappear because of something that comes from “left field”.
We know problems can hit the best of businesses hard. It is what you do about it and how quickly you react that determines whether or not the problem will prove to be fatal.
Let’s assume for a minute that you are a director of a company involved in construction that has issues. Who do you turn to for advice? What advice do you need? What are your options? Is a turnaround possible or is failure inevitable? What are your responsibilities as a director? What does the future hold?
The first thing you have to decide is how bad is it? Is the company insolvent?
Section 123 of the Insolvency Act 1986 sets out a guide to establishing if a limited company is insolvent.
A company is insolvent if:
- A company’s liabilities exceed its assets – ‘balance sheet test’ and/or
- A company is unable to meet its debts as and when they fall due – ‘cash flow test’ and/or
- A company has not paid a debt exceeding £750 after being served with a written demand – ‘statutory demand’ and/or
- A court judgement remains unsatisfied.
As soon as a company fails one or more of these tests, it is in English Law defined as being insolvent and the directors of the company concerned must recognise this position and are obliged to take appropriate action. In reality, it is usually a company’s inability to meet its debts as and when they fall due that defines whether or not it is insolvent.
Why is this so important?
As soon as a company reaches a position where it fails one or more of the tests set out above, its directors are obliged to cease trading and take steps to safeguard the interests of all creditors. In practice, this might mean implementing one of the procedures laid down in the Insolvency Act 1986 (Creditors Voluntary Arrangements, Administration, Liquidation) but not always. Provided you act quickly enough, a formal insolvency may well be avoided.
But a director who refuses or willfully neglects to protect the interest of a company’s creditors may well find himself or herself personally liable for the debts of the company from the date when a reasonable director would have known or ought to have known that the company was insolvent. Burying your head in the sand is not an option.
So what can you do?
Even if your company is on the brink of, or has become, insolvent there will still remain the possibility of saving part or all of the business. Practical options open to you might consider include:
- Organising alternative funding lines
- Negotiating “time to pay” agreements with creditors - including HMRC
- Transferring contracts to other companies
- Accelerating cash collections
- Assigning debts to third parties
- A sale of the business
- Formal insolvency arrangements as part of a re-structure
One or a combination of these options should form the central plank(s) of the recovery plan.
The key to avoiding a formal insolvency and personal disaster is to recognise the issues and to act promptly and decisively after taking appropriate advice.
How do you know if you have the right adviser on board?
Whether you can navigate your way through troubled waters or not will depend on moving quickly and appointing an adviser who knows your industry and can advise you properly and practically.
If you have appointed the right adviser, that adviser will be concentrating on what can be done to ensure that you have a future. There is no “one size fits all” solution. Every situation needs to be considered carefully, and in confidence, and a bespoke plan developed.
Two final pieces of advice. Firstly, please be careful who you speak to. “Loose lips do sink ships”. Secondly, be sure that your advisers truly have your interests at heart.
We are very proud to have clients we re-structured over 30 years ago that have gone on to trade out of difficult circumstances and are now in a completely different position.
For more information and a confidential no-obligation chat contact peter.vinden@leonardcurtis.co.uk.
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Reach Commercial Finance Limited. Registered in England no 09056450. Leonard Curtis is a trading style of Reach Commercial Finance Limited. Leonard Curtis is a broker not a lender and is independent with access to the whole of market. We may receive commissions that will vary depending on the lender, product or other permissible factors. The nature of any commission model will be confirmed to you before you proceed. Authorised and regulated by the Financial Conduct Authority FCA no. 753686. Registered with the Information Commissioner’s Office reference ZA069234
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