UK construction is going through a very tough time. Poor demand for new buildings, non-existent bank funding and rising material prices have created “perfect storm” conditions. You have probably seen the George Clooney film of the same name. If you haven’t it is worth a watch but I should tell you that everybody dies at the end.
Is this the future for UK construction - a perfect storm where all fail? Most definitely not, but my point is that we are looking at an increasing number of corporate failures over the next 2-3 years as we slowly emerge from recession with companies having very little access to working capital in order to fund growth. There is going to be a significant number of casualties whether we like it or not.
I know that no company director wants to think about insolvency but, unless the same director wants to risk personal liability for his company’s debts in the event of failure, there has to come a time when some serious navel-gazing is required.
So let’s just assume for argument’s sake that you are a director of a construction company and things are getting a little difficult; just what are your options?
I am sure you will be aware of administration and liquidation processes. These insolvency procedures bring the trading of the business to an end. There might be a “new-co” that rises, phoenix-like, from the ashes but, in this day and age, obtaining credit from the same suppliers who have just been badly burnt is not going to be easy, if at all possible. Add to that the problem of funding new-start businesses and the prospect of that VISA application to Australia sounds very attractive indeed.
If you are facing a construction business failure and you are not ready to emigrate just yet, Company Voluntary Arrangements (“CVA”) might just be the answer to your problems.
A CVA is a legally binding agreement made between a company and its creditors which “ring fences” old creditor liabilities and allows a company to move forward. This does not mean that the old creditors are written off in full. BUT, depending on what is agreed, a substantial portion of the old debt may well be written off. More importantly, a timetable is agreed to pay the balance over an agreed period which does not starve the company of cash as it goes forward, settles its new liabilities as and when they become due, and pays off the old liabilities in accordance with the proposal agreed in the CVA.
Make no bones about it, a CVA is a procedure recognised and ratified by UK insolvency law but it could help by, for example:
· allowing a company to terminate expensive property and other leases
· terminate expensive director and employee contracts
· stop pressure from HMRC in the form of demands for payment of VAT and PAYE contributions
· terminate onerous customer and supplier contracts
Historically, a CVA was thought of as a “no go area” for construction companies but things have changed. Creditors are more likely to approve a CVA which returns something to them, as opposed to the likelihood of nothing, in an administration and/or liquidation. There is even anecdotal evidence to suggest that creditors will be more supportive of directors who are attempting to return something to them in a CVA as opposed to the “slash and burn” outcome experienced in the alternative forms of insolvency.
CVAs have even been supported by those branches of the courts that deal with the enforcement of adjudicators’ decisions and next month’s article will be dedicated to looking at the approach of the courts to enforcing decisions where the Referring Party has agreed a CVA with its creditor. You will be surprised just how supportive the courts are.
So in the meantime, if the perfect storm is heading your way, a CVA may just be the life vest you are looking for.
Peter Vinden is a practising adjudicator, arbitrator, mediator, expert and corporate re-structuring advisor to the construction industry. He is Managing Director of Vinden and can be contacted by email at firstname.lastname@example.org