The initial government support schemes for businesses impacted by Covid-19 have now come to a close, leaving construction firms facing considerable cash flow pressures and a threat of looming insolvency.
The sector has been well protected by CBILS and Bounce Back Loans, VAT deferment, and furlough, but it is feared that without these schemes many businesses will suffer a swift decline.
A low level of insolvencies in 2020 belies a serious situation for construction. Figures from the British Business Bank show construction businesses received the largest proportion of CBILS and Bounce Back Loans amongst all sectors, so a different picture may emerge in 2021 as repayments and tax deferrals become due.
With strong competition for construction work, some businesses face the prospect of low income and high outgoings. So-called ‘zombie companies’ that have so far survived because of government support may be the first to feel the effects of its withdrawal.
The moratorium on creditor action, which provided an invaluable safety net for construction businesses, is also expected to end on 30th September 2021. This means that winding up petitions and statutory demands can once again be issued.
Given the uncertainty ahead for many construction firms, obtaining early professional advice is crucial. Begbies Traynor Group is the UK’s leading rescue and recovery consultancy, and can provide the guidance and support you need if your construction company is facing decline.
Additional challenges in the construction sector
In addition to the withdrawal of government support and the return to tax and loan repayments, other issues also threaten the sector, including:
Skilled labour shortage
An ageing workforce has created a shortage of skilled labour in construction for some years now, and younger workers have not been attracted to the industry in sufficient numbers. Additionally, Brexit has ended the right to free movement, making it difficult for construction companies to attract workers from the EU, and operate to the same productivity levels as pre-Brexit.
Reverse charge VAT
HMRC introduced a VAT domestic reverse charge in March 2021, which means in certain instances VAT must be accounted for by the recipient of supplies rather than the supplier. With healthy cash flow typically problematic in construction, this could adversely affect businesses that are not main contractors, and increase the threat of irreversible decline.
Professional insolvency advice for the construction sector
It is imperative to obtain early insolvency advice if your construction company is experiencing financial distress, to avert a crisis situation. Dealing with severe creditor pressure at a time when the moratorium on legal action is ending, could leave companies on a precipice in terms of liquidation.
Swift and decisive action is needed in this scenario, as once a creditor has petitioned to wind up your company, the time available for action is extremely limited. The UK operates a robust regime to help businesses in financial distress, and the sooner you seek advice from an insolvency professional, the greater the likelihood of company rescue.
So what procedures might be available if formal action is required?
Rescue my construction business
Company administration offers your business a safe haven from creditor legal action. For eight weeks from entering administration, a moratorium remains in place, providing the administrator with time and space to formulate a plan.
This might include cost-cutting, for example, to relieve the pressure on working capital and emerge as a more streamlined company, or restructuring debts within a legally binding arrangement.
Company Voluntary Arrangement (CVA)
If your business is assessed as viable for the long-term by a licensed insolvency practitioner, a Company Voluntary Arrangement can reset its financial capability and enable it to trade out of difficulty.
A repayment proposal is presented to creditors, and if 75% (by value of debt) vote in favour, the CVA comes into force, typically lasting between three and five years. A significant benefit of this process is that directors regain full control once the arrangement is in place.
Sell my construction company
A business sale may be possible even if your company is experiencing severe financial decline. Pre pack administration is a procedure that quickly enables the underlying assets of a business to be sold, with staff contracts being transferred safely under TUPE regulations.
Selling your business via pre pack administration may be an option if a creditor is threatening a winding up petition. The process is typically appropriate for larger companies, and is fully regulated.
Liquidation advice for the construction sector
If it is not possible to rescue your business, it is important to act swiftly and place it into voluntary insolvent liquidation. Creditors Voluntary Liquidation, or CVL, protects creditor interests as is required by insolvency law, but also helps directors to avoid accusations of wrongful trading.
The appointed liquidator sells all business assets, and the funds generated from sale are used to repay creditors. The company name is then struck from the register at Companies House, and the business ceases to exist.
Compulsory liquidation is the other form of insolvent liquidation, but choosing to take this route introduces considerable risk. It could leave you facing disqualification for up to 15 years, and personal liability for any increased creditor losses due to the delay in ceasing trade.
When you enter Creditors’ Voluntary Liquidation, you may also be eligible for redundancy pay and other statutory entitlements, such as holiday pay and wage arrears. We can put you in touch with a trustworthy and highly experienced claims management firm to establish your entitlement and help you make a claim.
Those firms that act quickly and seek professional advice at an early stage of decline, or before cash flow problems increase to the stage of distress, can protect themselves from the worst outcomes.
Awareness of cash flow needs, streamlining practices, and other protective measures, can save businesses from liquidation. Our team of experts at Begbies Traynor Group are here to provide that support, and help you deal with the unparalleled economic and trading circumstances currently being experienced by the construction sector.
Please get in touch with one of the team – we offer free, same-day consultations and operate an extensive network of offices around the country.