When the site gates are shut
SOURCE: PROJECT SCOTLAND, MARCH 2004
The recent demise of contractors Melville Dundas, Lilley and Ballast has again seen the warning flags raised for sub-contractors and suppliers. No one can afford to be complacent, says Phil Morrison.
There was a 10 per cent increase in business failures in the construction industry in 2003 and it's predicted that over 2,000 more businesses could fail in the coming year.
When a company is deemed unable to pay its debts, it is said to be insolvent and faces having an administrator, liquidator or receiver appointed to deal with its affairs and take over its property. A liquidator and receiver will wind up the company and sell what assets it has whereas an administrator is there to try and save the company. It is at this point that creditors can find themselves in hot water if they’re not properly prepared.
When this happens, creditors are likely to find the site gates locked and no access is allowed to reclaim any of the materials that are delivered or left on site. This is because any liquidator taking over a company will take the view that any goods or materials that they can get their hands on are owned by the company until proven otherwise.
In the meantime, creditors such as sub-contractors or suppliers will have to lodge their claims and wait. However, if the company has entered into hire purchase, credit of conditional sale agreements or there is a security over some of the company's property, they have a more steady footing and the liquidator will probably have to deal with parties wanting their goods back.
It is very common for suppliers of goods to commercial buyers to only agree to sell goods subject to a retention of title clause. This means that the goods do not belong as such to the insolvent company. However, if the insolvent company has sold the goods to a third party who has purchased them in good faith, the third party would then essentially 'own' the goods, leaving the seller with only a claim against the insolvent company for the price.
The position of unsecured creditors has improved slightly with the law now stating that a percentage of the insolvent company's property is set aside to pay unsecured creditors.
It is not necessarily the case that a construction contract ends and does not apply if a contractor becomes insolvent. For example, if a developer employs a construction company to build offices on an ordinary contract it is usually the case that if the contractor becomes insolvent, the developer can tell the contractor that he no longer want him to carry out the work and can pursue claims against it should he choose to do so.
Any sub-contractor employed by a contractor in this situation will find that his own employment comes to an end when the contractor is sacked. This will generally leave the sub-contractor unemployed and unpaid.
The developer of our offices is obviously left with a problem but he can have the work carried out by another contractor and claim for his losses against the insolvent company. If our developer has been prudent in making the contractor provide assurances from a third party by way of a performance bond or parent company guarantee that will pay up if the contractor doesn’t perform then the developer may actually be able to find someone who can pay the bill. And if the contractor is obliged to carry insurance then claims could be transferred to the insurance company.
The fact that it is difficult to avoid being hit if a contractor becomes insolvent. The obvious way of protecting yourself is to know who you are dealing with and be aware of their solvency and credit rating. However, even this is not foolproof as a solid company can be pushed into insolvency itself if it remains unpaid and then cannot pay its own creditors.
Our prudent developer will cover himself to some extent by getting the contractor to provide a performance bond or a parent company guarantee or both, meaning a third party will have to cough up instead of the contractor.
However, a sub-contractor really has to look out for himself as bond or parent company guarantees are never granted in favour of a sub-contractor. He should therefore ensure that he insists on being paid when the money falls due and keep the bare minimum of materials on site at all times. He should also keep his eyes and ears open, as the construction grapevine is a very good indicator of who can pay their bills and those who can't.
In the end, the best way to protect yourself if to follow the old scout motto…be prepared!