COVID has tested the resilience of the construction industry over the past 18 months: temporary site closures; working restrictions; price increases and material shortages, to name but a few. Those challenges have brought cashflow pressures to bear. Is the next storm to be weathered that of solvency? It certainly seems ever more acute in these unprecedented times.
As part of a series of protective measures for businesses during the pandemic, the UK Government introduced a temporary hold on winding up petitions in June 2020 under the Corporate Insolvency and Governance Act 2020. This has undoubtedly been a saving grace for some and a source of frustration for others in the industry.
Today – 1 October 2021 - those temporary measures have now been lifted.
Some construction companies who were in financial difficulty at the beginning of last year have found that their fortunes have turned and they are in a better position given the upturn in project numbers. Others, however, have not fared so well.
Issues of late payment still exist (and likely always will). Pre-COVID, a threat to wind up an employer or contractor was an effective tool to prompt payment during a project, particularly when there was an unpaid notified sum. However, while the restrictions on winding up petitions have been lifted, to make sure there isn’t a wave of insolvencies, the Government has specified that certain Conditions now have to be fulfilled before you can petition to wind up. These conditions will remain in place until at least 31 March 2022.
Schedule 10 of the Corporate Insolvency and Governance Act 2020 states that an application to wind up a company, on the basis that it is unable to pay its debts, cannot be made unless four conditions are satisfied:
1. The creditor is owed a debt which is liquidated, has fallen due for payment and is not an excluded debt. (e.g. the notified sum which has not been paid by the final date for payment under a construction contract).
2. The creditor has delivered a written notice to the debtor which sets out:
- the identification details for the debtor (one assumes company number and registered address)
- the full details of the creditor
- the amount of debt owed and how it arises
- the date of the notice
- a statement that the creditor is seeking the debtor's proposals for payment of the debt; and
- a statement that if no proposal is made to the creditor's satisfaction within 21 days beginning with the date on which the notice is delivered the creditor intends to present a winding up petition to the court.
(In the construction industry we are all well versed in the need for and importance of issuing notices in the correct form and on time).
3. At the end of the 21 days (beginning with the date on which the notice is given) no proposal for payment of the debt has been made by the debtor or no proposal which meets the creditor's satisfaction has been made.
4. The creditor is owed the sum of £10,000 or more.
At first blush, the £10,000 threshold and the 21-day period look like they might mean that contractors and sub-contractors seeking quick payment of overdue sums have lost the benefit of the threat of a winding up petition. However, if you get this right – ensuring your notice meets the conditions - then there is every reason why it should ensure prompt payment.
The courts will apply the four conditions strictly. If one element is missing, the petition will be refused, and the creditor may find itself further out of pocket. So the real emphasis is to get it right.
The lifting of the hold on winding up petitions will not herald a return to debt recovery mechanisms that were once considered "normal" in the industry. If you are owed money under a construction contract, it would be worth seeking advice on the best recovery mechanism and how to meet the new requirements of the Corporate Insolvency and Governance Act 2020. Alternatively, if you are served with a winding up petition after 1 October 2021, it may be worth seeking advice on whether the petition can be challenged.