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Can a failed construction industry be rebuilt?

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Phil Deyes is an IP and Real Estate Specialist at Leonard Curtis.

Construction is a key sector of the UK economy and a good barometer of the country’s trade prospects.

The construction industry is back in the spotlight as governments release bankruptcy figures for England and Wales. The construction industry experienced the highest number of bankruptcies in the second quarter of 2022 at 19% (almost one-fifth of all bankruptcies) or 3,665 bankruptcies. Most of it was liquidation and closure.

The number of bankruptcies has also doubled compared to the last 12 months, at a time when the sector’s backlog is declining.

Why is it difficult to reorganize the construction industry?

Medium-sized prime contractors tend to have assets available to meet transaction requirements in the form of cash, work-in-progress and debtors. Debtors can be payments, reservations, final accounts, or unpaid invoice applications for items in dispute. WIP is essentially completed work, but may not have been claimed and verified yet.

This snapshot of a construction company’s balance sheet is an indication of the bankruptcy’s volatility, given the volatile nature of contracts in progress and debtor mix, with contracts in progress ending or unable to be completed due to bankruptcy. You may be deceived.

Construction contracts are complicated. On the one hand, compliance with industry standards provides a high degree of familiarity among all stakeholders. A standardized set of documents allows each party to know when and how much to pay or will be paid, and the procedures that must be followed in the event of a dispute.

Conversely, this somewhat prescriptive and legally formulated framework makes adaptation difficult, especially in times of financial crisis or when insolvency is imminent for one of the key parties to the contract.

Construction projects also have a broad and diverse group of stakeholders. In addition to the specific parties within the contract, there are third party stakeholders in the form of funders and underwriters, as well as trade protection insurance companies, employees and ultimate occupiers of schemes under construction . Each of these parties may have competing interests and funding arrangements in the event of bankruptcy.

Fallout can be important

Without exception, all contracts in force (with lenders, subcontractors, bondholders, surety providers, design and intellectual property owners, credit insurance companies) automatically terminate in the event of insolvency. will default on its obligations. A bankruptcy event cannot prohibit termination of such agreements.

Additionally, in the event of insolvency, the Contractor will be liable to pay liquidated damages (LAD) in the event of delay and/or termination of the contract. In fact, these claims can dwarf the claims of the contractor’s creditors on the verge of bankruptcy, exacerbating restructuring difficulties.

These new claims incurred are ranked equal to previous creditors. Bankruptcy itself, therefore, embodies some additional claims that make regeneration out of the reach of many contractors.

Impact of Bankruptcy on Stakeholders

An insolvent and unsuccessful construction project requires all stakeholders to bear a portion of the restructuring costs and accept some loss, regardless of whether there is a contractual obligation. This is based on the overall exposure being significantly less in a joint settlement than in a formal bankruptcy. This is not to say that some may have to give up more than others in a stakeholder mix.

It is the heterogeneity of loss sharing and, in some cases, the fact that bankruptcy events can improve the position of one class of stakeholder and worsen the position of another. , which sometimes makes cooperation impossible.

Is there anything I can do before a bankruptcy event occurs?

Early bankruptcy and early legal advice do help. This facilitates conversations with key working capital providers to negotiate additional headroom at existing facilities. While this can remedy a temporary cash crisis, it cannot fundamentally transform a loss-making business into a profitable one.

Many funders and bondholders require quarterly accounts. If they are not strong, a candid and open conversation can help get these key stakeholders on board. Their reluctance to do so is usually based on their concern that the situation may soon be taken out of their hands. It may cause

Attempting settlements on legacy holds and other controversial accounts can also help you get cash quickly and form part of your liquidity plan. Settlement prior to dispute proceedings (expensive and time consuming) can be a useful step.

It seems logical to try to terminate unprofitable contracts and focus on profitable ones, but a flood of LAD claims on abandoned contracts can quickly get out of hand. There is a nature. When it comes to keeping some contracts in place to focus on what guarantees the company’s viability, bankruptcy relief may be the only solution to separating the liabilities from the remaining assets. You will need expert bankruptcy advice.

A key factor is balancing the losses and gains of all stakeholders. If nothing happens, the business fails and it becomes an education to establish the best available alternatives among all stakeholders. In fact, the status quo is no longer an option and alternative solutions must be found to avoid bankruptcy.

Sometimes the only solution is to open a conversation with the employer trying to change the contract, but the employer’s own funding arrangements and the employer’s suspension of expected payments until the matter is resolved. may be hampered by the fear that the and may extend credit terms.

In summary, financial restructuring is complex, but not impossible if you seek advice early and start a dialogue with all stakeholders. With a complex, contract-heavy and multi-stakeholder operational framework, the sector faces more challenges than most, but it can be navigated.

The key is to identify when a business is in trouble and act early to give all stakeholders the best possible options for restructuring success and the future of the transaction, both inside and outside the bankruptcy process. to provide.