Construction companies! Are you effectively managing your risks?
There has recently been a spate of high profile construction companies entering into an insolvency process at both national and local level.
Due to the sometimes precarious nature of the industry, it has become more common that in the case of large scale projects, the contractor is asked to request security from another party. This is usually sought to:
- Protect against an inability to complete a project
- Pay for any damages and/or losses relating to the construction project
- Protect against the insolvency of the contractor.
It is normally the case that a company connected to the contractor is asked to enter into the guarantee. On some occasions, all companies within the same group as the contractor will be asked to provide the guarantee.
A guarantee of this nature will generally provide that all obligations under the construction contract are covered. It is very much accepted that the primary purpose of such a guarantee is to protect against an insolvency event of the contractor.
If the contractor becomes insolvent, the party with the benefit of the guarantee can recover its losses from the company/companies that provided the guarantee. It could also compel the company providing the guarantee to carry out any other obligation under the contract.
Where group companies are guaranteeing the obligations of a contractor (or any other company for that matter), they may at some stage have to compensate for losses and/or damages under that construction contract. They may even have to go as far as stepping in the shoes of the original contractor to complete the works. This can have serious financial implications for a group of companies as a whole. As we all know, where a construction project becomes problematic this can be very costly indeed.
In the event that a guarantee is requested, it is very important that you understand the implications of providing these guarantees and how they can affect your entire business structure/model if they are called upon. It is important that all construction companies asses their corporate structure to ensure that each business/company is protected so far as possible. It is sometimes commercially unavoidable to enter these guarantees.
Winding up petitions
If you and your company face a winding up petition – what steps should you take?
It is somewhat common that construction companies will be threatened with winding up petitions on a disputed debt.
If you are in receipt of a demand for payment on a disputed debt, it is crucial that you take steps to prevent the issuing of the winding up petition. If an alleged creditor refuses to withdraw the threat to issue a petition, an application to Court may become necessary.
You must act quickly as if a petition is presented, an alleged creditor may give notice of the petition in the London Gazette following seven days of service of the petition. This will have negative commercial consequences.
If the debt is disputed and the petition has been issued, you could apply for an injunction to restrain the alleged creditor from giving notice of the petition and/or to strike out the petition.
It is important to avoid any presentation of a winding up petition. Even if the petition remains unadvertised, it is still a Court document and credit agencies will still have notice of the petition and they could provide public information relating to the petition. This could adversely impact any construction contract as a presentation of a petition is usually a ground for termination.