Post COVID-19: insolvency and survival

In the wake of the pandemic and enforced shutdown of the entire construction industry, what can offsite suppliers do to avoid becoming insolvent or falling victim to an insolvency elsewhere in the supply chain? Michael Gerard of Michael Gerard Solicitors offers his advice to the Offsite Hub Blog readers. 

With the havoc and tragedy wrought by COVID-19, very few of us will look back on 2020 with any fondness. Not just because of the deadly nature of the disease, but also because of the impact it will have on the UK and global economy. Although we are now in unchartered territory, it is not a question of if the UK is going to go into a recession, but how deep, how long and how damaging will that recession be? 

As any good accountant will tell you, when entering a recession, insolvency work will increase. Unfortunately, it is those businesses that are allied to the construction industry, such as offsite suppliers that will be among the most vulnerable. As a result, it is essential in the coming months, that businesses take steps to ensure they are vigilant in managing their contracts and cashflows in order to avoid becoming another insolvency statistic. 

Insolvency & Common Law
At common law, insolvency in isolation is not a breach of contract. However, its effect may result in the party becoming insolvent to wrongly repudiate the contract, thus allowing the other party to accept the repudiatory breach and bring the contract to an end. For example, where a timber truss supplier suddenly stops making deliveries to site in accordance with the agreed delivery schedule (because it is having its own supplier problems due to non-payment), it could be said that the timber truss supplier has abandoned the contract. 

Sections 122(1)(f) and 123(1) of the Insolvency Act 1986 define insolvency as where a company is unable to pay its debts when they fall due for payment. This contrasts with standard forms of contract, like the JCT suite, which defines insolvency as when a party has entered into a formal
insolvency procedure. 

The Importance of Cash Flow
The age-old adage that profit is sanity, turnover is vanity, but cashflow is king, is just as relevant today as it was when it was first coined. So how does a goods supplier ensure a healthy income stream? Top of the list are advantageous payment terms and the implementation of a range of
mitigation measures.

- Ensure that payment terms are favourable. This could include invoicing once delivery has been completed (in lieu of monthly invoicing), and prompt payment, with perhaps a small discount as an incentive

- Specify that the T&Cs have a suspension of performance clause

- Ensure that the contract includes a termination clause for party insolvency that also sets out what happens post termination

- Incorporate a paid-when-paid clause for insolvency events for downstream payments. This will protect the business in case of an upstream insolvency

- Consider including a ‘Romalpa’ clause (retention of title). However, even with a Romalpa clause, it may not be enough to recover goods supplied if those goods are annexed to the structure

- Collateral warranties are particularly useful for third party funders and future purchasers of buildings where there are defects in the structure, but the developer may have ceased trading. Collateral warranties can also be good news for specialist suppliers if the warranty includes step-in rights and payment of outstanding sums. 

The next couple of years are likely to be difficult for construction suppliers, but with good fiscal and commercial management systems in place, businesses will be placing themselves in a stronger position to survive the downturn ahead. 

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