Managing financial risks is integral to a construction project’s success. Financial complications can easily arise, leading to situations like insolvency.
In the UK construction sector, insolvency is an unfortunately common event with far-reaching implications.
When looking at insolvencies in different industries in the UK, construction remains the most significant contributor.
According to a report published by Creditsafe, 17 per cent of all insolvencies in April 2023 came from the construction sector, a figure that is replicated when looking at year-to-date data.
Why is insolvency a major problem in the construction sector?
There are many reasons why the insolvency figures in the construction sector are so high, and construction insolvency can have several causes.
Overtrading, poor cash management, contractual disputes, and economic downturns can all push construction companies towards insolvency.
The financial implications of insolvency are profound and can lead to job losses, and delayed projects, and can have a knock-on effect on the wider economy.
In some cases, it might also cause the liquidation or bankruptcy of the company.
The insolvency process involves a range of legal processes designed to address situations where a company or individual can no longer meet their financial obligations.
In the UK, the insolvency process is governed by the Insolvency Act of 1986 and the Insolvency Rules of 2016.
When insolvency looms, the management has a duty to act in the best interests of the company’s creditors.
If a construction company finds itself in such a precarious situation, the steps taken might include administration, liquidation, receivership, or voluntary arrangements with creditors.
The goal is to ensure that the creditors receive the maximum possible return given the company’s financial situation.
A statutory demand is a written demand for payment issued by a creditor. It’s essentially a formal demand for a debt that a company or individual owes and has not paid.
The debtor has 21 days to respond to a statutory demand, either by settling the debt or reaching a satisfactory agreement with the creditor. If they fail to do so, it can be used as evidence of insolvency and lead to winding up proceedings.
In the UK, statutory demands are governed by the Insolvency Act of 1986. It’s important to note, however, that issuing a statutory demand is a serious step and is not to be taken lightly.
Statutory demands can be used as a debt recovery method in the construction industry. However, the inherent nature of construction contracts often complicates their use.
Construction contracts are often subject to various deductions, offsets, and retentions, meaning the amount owed might not be easily determined or may be subject to dispute.
It is generally advised that statutory demands should not be used in situations where the debt is disputed on substantial grounds.
The courts may set aside statutory demands where the debt is genuinely disputed or where the debtor has a counterclaim, set-off, or cross-demand which equals or exceeds the amount of the statutory demand.
Construction insolvency and the use of statutory demands are critical aspects of the construction industry.
However, they must be handled with care, given the complex nature of construction contracts and the severe implications of insolvency proceedings.
If you have received a statutory demand or are worried about insolvency, please contact our expert team who will be able to help you.