Directors of construction companies minimise insolvency liability
The current construction market is particularly volatile at the moment and there will be both winners and losers. However, directors of companies can take steps to minimise the risk of insolvency for their company as well as personal liability and actions against them if their company does fail. The featured webinar with insolvency Partner Brian Baker goes into more detail on rising costs and insolvency in the construction industry.
The issues currently buffeting the economy have been particularly severe for construction companies and have led to a steep rise in construction company failures this year. 23 construction companies entered into administration in July 2022 in the UK, an increase of 130% over July 2021. In addition to companies entering administration, the wider construction-related sector was responsible for almost a fifth (19%) of all insolvencies in the UK in 2020.
What is causing this situation?
The economy as a whole and construction in particular is suffering from a combination of Brexit, the situation in Ukraine and Coronavirus. This has led to steeply rising inflation, labour shortage, delays in critical supplies and rises in costs, such as fuel and insurance. Credit ratings are being affected, so obtaining funds for working capital is becoming harder.
Uncertainty in the economy is also leading to projects being delayed, postponed or cancelled. Additionally, fixed-price contracts mean that some businesses, particularly specialist subcontractors, simply cannot complete contracts profitably.
These issues coincided with the end of governmental Coronavirus support, leaving many companies with significant loans and deferred tax liabilities that they now need to repay.
What are the risks to directors?
When companies fail, the appointed insolvency practitioner seeks to maximise the realisation of assets for the creditors owed money by the company. One way is taking action against directors who have not acted in the best interests of the company and its creditors. The Insolvency Act gives wide powers to insolvency practitioners to take action against directors. These include, among others:
- Wrongful trading – if a director causes a company to continue trading after they should have realised that it could not avoid insolvency, they may be held personally liable for the increase in losses incurred by not ceasing to trade and taking every step to minimise the loss to creditors.
- Transactions at undervalue – selling or transferring company assets at below current market value.
- Preferences – if the company does something that puts one creditor in a better position than other creditors at a time that it is insolvent, this can be unwound by the insolvency practitioner applying to court.
- Disqualification – directors can be disqualified from acting as directors for a period if the court considers that they have not acted properly.
How can directors minimise the risk to themselves?
The best way to reduce the risk of action against directors is to ensure that the company keeps reliable and up-to-date financial information and acts promptly on issues that arise to avoid the risk of wrongful trading. These include:
- Cashflow forecasts – these should be regularly updated and reconciled to the balance sheet and profit and loss account. These should take account of all contracts and anticipated delays and over-runs.
- Management accounts – maintain detailed up-to-date monthly management accounts.
- Board meetings – hold regular board meetings to review finances and major contracts, including projections of future movements on contracts. Encourage all concerns to be raised and discussed properly.
- Board meeting minutes – produce detailed minutes detailing the rationale for decisions.
- Valuations – get third-party valuations for any asset disposals.
How can directors help the business survive?
Accurate management information is key as this will allow the position to be understood properly and options for the future to be explored with advisers, funders, clients and stakeholders.
If insolvency is a real risk, there are various options for restructuring the businesses to allow viable parts to continue. These can include the new restructuring plans that the government has introduced to help businesses survive. Other routes, such as moratoria, company voluntary arrangements and administration, can be used to enable all or parts of the business to continue.
Professional advice should always be obtained as soon as future solvency problems are forecast. Contact us for advice that can help save both the business and protect the director against personal claims.