Unit 12: �Financial Management �& �Business Practices in Construction

Dr Adewale Abimbola, FHEA, GMICE

www.edulibrary.co.uk

AIM & OBJECTIVES

Aim: Insolvency

Objectives: At the end of the lesson, the students should be able to:

• Define important financial terms related to the insolvency process.
• Explain the procedures open to an insolvent company.
• Assess the different strategies available for winding up or dissolution of a construction company.

Introductory Activity – Group-assessment Task

• Provide a brief definition of the following:
• Unsecured/non-preferential creditor.
• Secured/preferential creditor.
• Fixed charge.
• Floating charge.
• Insolvency practitioner.
• The Insolvency Service.
• Official Receiver.

Introduction

• Insolvency arises when assets cannot cover debts or debt payments become unmanageable.
• Directors must identify insolvency during trading, facing legal repercussions if they continue operations.
• Deciding on receivers, liquidators, or administrators involves multiple parties like banks, creditors, courts, directors, or the company, depending on the procedure.
• There are five main procedures open to an insolvent company. These are:

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1. Administrations

2. Company voluntary arrangements (CVAs)

3. Administrative receiverships

4. Compulsory liquidations

5. Creditors’ voluntary liquidations (CVLs)

6. Members’ voluntary liquidations

• The first three provide the potential for the rescue of the company or its business, while the last three do not.

Administration

• The administration procedure, modified by the Enterprise Act 2002, aims to save businesses and devise strategies for financial restructuring or asset sales.
• While its main purpose is business preservation and satisfying creditors, administration can also be used for asset liquidation, benefiting secured creditors.
• Administration can be initiated by the company, its directors, or secured/unsecured creditors.
• Court involvement in administration requires evidence of insolvency and a statement from an insolvency practitioner (IP), ensuring judicial oversight.

• Alternatively, directors or a floating charge holder can appoint an administrator without a court hearing,.
• Administrators take over day-to-day company operations and create proposals for creditor voting, which may be unnecessary in cases of insufficient funds for unsecured debts.
• When a company enters administration, it gains protection, preventing creditors from taking action to recover assets or initiating procedures without administrator consent or court approval.

Administration

• The administrator has the authority to dissolve the company after realising and distributing all valuable assets among creditors.
• Court approval is necessary for the administrator to distribute to unsecured creditors; otherwise, various options like Compulsory Voluntary Arrangement (CVA) or Creditors' Voluntary Liquidation (CVL), or even compulsory liquidation come into play.
• In the end, CVL, compulsory liquidation, or an unsuccessful CVA venture all result in the company's dissolution.

Company Voluntary Agreement (CVA)

• A CVA signifies a strategic agreement between a company and creditors to address its liabilities.
• It entails renegotiating payments with creditors, often leading to reduced amounts or financial restructuring.
• To take effect, a CVA requires approval from a 75% majority of participating creditors in a meeting convened to ratify the terms.
• Secured creditors maintain independence and can choose whether to participate in the CVA.

Company Voluntary Agreement (CVA)

• The CVA serves as a dynamic tool, providing distressed companies with a lifeline, leveraging their strong business foundation despite current challenges.
• Upon CVA approval, creditors typically have limited options for recovering debts in full.
• A successful CVA leads to the company's revitalisation, with control returned to its directors.
• If unsuccessful, the company is immediately placed into liquidation. As liquidation can take a number of weeks to arrange, management may have the opportunity to consider administration.

Administrative Receivership

• Debt collectors, appointed by lenders, have primary duties and limited legal obligations, particularly towards preferential creditors.
• Continuing business operations during receivership with the intent of selling it as a going concern can result in higher sale prices and provide the business an opportunity to thrive under new management.
• Administrative receivers can be appointed solely by floating charge holders, and this process typically unfolds without court involvement, allowing for rapid initiation.
• Company directors, often guided by professional advice, frequently request the lender to make the appointment, leading to phrases like 'calling in the receivers' and 'inviting the bank to appoint receivers.'

Administrative Receivership

• When realised assets in receivership do not fully satisfy the charge holder, unsecured creditors receive no available funds. The Registrar of Companies initiates the process of striking the company off the register in such cases.
• If surplus funds for unsecured creditors are left after the receiver's tasks, they are transferred to a liquidator, who assesses and distributes them to unsecured creditors.
• The company remains on the register until the conclusion of the liquidation process.

Liquidation

• Liquidation involves converting a company's assets into cash and distributing the funds to creditors. After the assets are sold, and proceeds distributed, the company undergoes deregistration or dissolution.
• There are 3 types of liquidation (COV.UK, 2023):
• Compulsory liquidation - your company cannot pay its debts and you apply to the courts to liquidate it.
• Creditors’ voluntary liquidation - your company cannot pay its debts and you involve your creditors when you liquidate it.
• Members’ voluntary liquidation - your company can pay its debts but you want to close it

Liquidation

• A winding-up order leading to compulsory liquidation can be made by the court, often at the request of an unpaid creditor or the company itself, its directors, or shareholders.
• Creditors' voluntary liquidation (CVL) involves shareholders passing a resolution (requiring a 75% majority) to wind up the company and appoint a licensed insolvency practitioner (IP) as a liquidator. Creditors subsequently affirm the liquidator's appointment or select an alternative through majority voting by value.
• Compulsory liquidation, initiated by any creditor, is usually the final option when a company refuses or cannot cooperate with other procedures.

Liquidation

• The creditor commences the process by petitioning the court for a winding-up order, typically requiring a debt of over £750 and insolvency, verified by issuing a statutory demand that remains unpaid within 21 days.
• In England and Wales, the Official Receiver initially reviews the case, potentially calling a creditors' meeting to appoint a different liquidator if assets suffice to cover administrative costs. If not, the Official Receiver continues or applies to the Secretary of State for an alternative appointment.
• In Scotland, the court may designate an interim liquidator or provisional liquidator to safeguard assets. The interim liquidator is obligated to convene a creditors' meeting for liquidator selection.

Liquidation

• At the conclusion of the winding-up process, the liquidator is mandated to submit a final return to Companies House, with automatic company dissolution occurring three months later, leading to the company's nonexistence.
• Business rescue in insolvency is orchestrated by an insolvency practitioner (IP), be it an administrative receiver or administrator, who negotiates the sale of the business and assets (ownership) to a new entity to a management buy-out team, competitor, or new industry entrant.
• The new company then forges fresh trading relationships with customers and suppliers, while the IP in the old company disburses sale proceeds to creditors or passes funds to a liquidator, adhering to their legal entitlements.

How to Find Out When A Company, Partnership or Individual Has Become Insolvent

Transparency through Gazette Notices

• With the exception of voluntary arrangements and receiverships, all insolvency procedures and appointments receive public notice through publication in the London Gazette, a daily source for various statutory notifications.

Scottish Insolvency Advertisements

• In Scotland, these announcements find their place in the Edinburgh Gazette, a bi-weekly publication dedicated to statutory notices.

Tracking Insolvency in the Register

• The bankruptcy and insolvency register serves as a critical resource for monitoring insolvency-related information.

Companies House Insights

• Companies House maintains an extensive register displaying comprehensive details of a company's insolvency process and the identity and contact information of the appointed insolvency practitioner.
• Additionally, Companies House offers a searchable database featuring disqualified directors, enhancing transparency in corporate governance.

Insolvency Case study: Carillion Company

BBC News (2018):

• Was an "integrated support services business“: it held about 450 governmental contracts, spanning the UK education (school dinners), justice (Maintained prisons and Young Offender Institutions), defence and transport ministries (Smart Motorways traffic control systems, maintenance service to Network Rail).
• Its responsibilities included cleaning, landscaping and catering.
• It also operated in Canada, the Middle East and the Caribbean and was a big supplier of construction services to the Canadian government.

Figure 1. Carillion’s businesses (BBC News, 2018)

Figure 2. Carillion’s revenue (BBC News, 2018)

Figure 3. Carillion’s building contracts (BBC News, 2018)

Insolvency Case study: Carillion Company

BBC News (2018):

• But it ran into trouble after losing money on big contracts and running up huge debts.
• The £350m Midland Metropolitan Hospital in Sandwell: opening delayed to 2019 due to construction problems
• The £335m Royal Liverpool Hospital: completion date repeatedly pushed back amid reports of cracks in the building
• The £745m Aberdeen bypass: delayed because of slow progress in completing initial earthworks
• The firm finally buckled in January 2018 under the weight of a massive £1.5bn debt pile.

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Figure 4. Carillion’s debt (BBC News, 2018)

Figure 5. Carillion’s share price collapse (BBC News, 2018)

Figure 6. Carillion’s bosses’ annual salaries and bonuses in 2016 (BBC News, 2018).

Insolvency Case study: Carillion Company

• What went wrong for Carillion?
• Carillion relied on large contracts, some of which have proved much less lucrative than it expected. In 2017, it slashed the value of them by £845m. As its contracts underperformed, its debts soared to £900m.
• The company needed a £300m cash injection, but the banks (Santander UK, HSBC and Barclays) that lent it money refused to put more in.
• The government also refused to bail it out. That left the company unable to continue trading, forcing it to go into liquidation.

• Why liquidation and not administration?
• Administration aims to help a company repay debts to avoid insolvency if possible, while liquidation is the process of selling all assets before closing the company completely.
• Carillion went straight into liquidation for two reasons:
• It does not even have enough cash to keep trading during an administration process and
• The public services run by Carillion need funding from the government to carry on and only the official receiver, who oversees liquidations, can deal with such payments.
• The Carillion Crisis Explained – Chris Williamson MP - YouTube

Insolvency Case study: Carillion Company

• Who is handling the liquidation?
• David Chapman, a civil servant working for the Insolvency Service, was appointed as liquidator. Insolvency practitioners from PwC have been appointed as special managers to support the Official Receiver (a civil servant) as liquidator.
• They will take over the day-to-day control, selling assets, dealing with creditors’ claims and investigating the cause of failure.
• The directors will no longer be involved. The costs of the liquidation are paid from the assets.

Additional update.

Self-assessment Task

Assess the different strategies available for winding up or dissolution of a construction company.

Hint:

• Compulsory liquidations, creditors’ voluntary liquidations (CVLs), and members’ voluntary liquidation.

References/Bibliography

BBC News (2018) Carillion: six charts that explain what happened. Available at: https://www.bbc.co.uk/news/uk-42731762 (Accessed: 19 September 2023)

GOV.UK (2023) Liquidate your limited company. Available at: https://www.gov.uk/liquidate-your-company (Accessed: 17 September 2023)

Makortoff, K. (2023) KPMG settles £1.3bn lawsuit from Carillion creditors over alleged negligence. Available at: https://www.theguardian.com/business/2023/feb/17/kpmg-pays-13bn-to-settle-negligent-auditing-claim-by-carillion-creditors (Accessed: 24 September 2023)

National Audit Office (2018) Investigation into the government’s handling of the collapse of Carillion. Available at: https://www.nao.org.uk/wp-content/uploads/2018/06/Investigation-into-the-governments-handling-of-the-collapse-of-Carillion.pdf (Accessed: 24 September 2023)

PricewaterhouseCoopers (n.d.) Insolvency in brief: A guide to insolvency terminology and procedure. Available at: https://www.pwc.co.uk/assets/pdf/insolvency-in-brief.pdf (Accessed: 19 September 2023)

The Insolvency Service (2023) Guide to bankruptcy. Available at: https://www.gov.uk/government/publications/guide-to-bankruptcy/guide-to-bankruptcy#what-bankruptcy-means (Accessed: 19 September 2023)

Tresham, J, Dunkley, J. and Wolohan, F. (2023). A guide to insolvency terminology. Available at: https://www.lexology.com/library/detail.aspx?g=8aa63c4e-3292-4762-8727-aa266155caad (Accessed: 17 September 2023)