How to avoid going bust

On Thursday 21 June 2012 companies in the John Doyle Group entered administration. The group, which was established in the sixties, consisted of three core businesses: core concrete frames, commercial fit-outs and refurbishment and plant hire.

The administrators at Deloitte have eight weeks in which to issue their proposals providing details as to the cause of the group’s decline, but according to Building magazine, the contractor suffered “working capital strains” and had struggled to get customers to pay on time, with the termination of one particular high-end residential job in London triggering the firm’s collapse.

If an employer is not making payments as they fall due, a contractor needs to act quickly

Notwithstanding the efforts of management, in some circumstances it is not possible to protect a company from the insolvency or financial distress of others, and here we make no comment on the efforts of the Doyle management to try to save the companies. In order to try to protect a business from the financial distress of employers it is recommended that contractors consider the following points:

1. If there is not a written contract, try to formalise the position into a written contract to ensure all parties are clear as to the terms on which you trade. Consider (i) What are the payment terms? Can the terms be tightened? (ii) What are your rights on a payment default? (iii) Is English law applicable?

2. If you supply goods, consider whether you have a valid and enforceable retention of title clause, whereby you retain title to the goods until payment. If so, do you retain title to all goods until all debts have been paid in full or only retain title to the particular goods that have not been paid for? To assert retention of title you need to identify the goods supplied. If goods are mixed with another party’s goods, title to the goods supplied may be lost notwithstanding such a clause.

3. Will the employer pay deposits or make payments in full prior to delivery of goods or services to assist cash flow? If the employer does not feel comfortable making a payment up front it may be possible to agree the monies are paid into an escrow account with an independent third party or a separate retention account. An agreement should be carefully drafted to set out the circumstances in which the monies will be paid out and that the monies are held on trust for the contractor such that they are not available for other creditors of the employer.

4. Could the employer pay your subcontractors direct? This would assist a contractor’s cash flow if the employer is late in making payments to it. However, consider carefully how your profit element will be received as this arrangement leaves you exposed to the employer for payment.

5. Third party security will spread the risk. In accordance with a guarantee, a third party will agree to perform the principal’s obligations under an agreement. A guarantee will generally only relate to the contractual obligations at the time that the guarantee is entered into unless the guarantor expressly agrees otherwise. A performance bond from an insurance company or bank may be appropriate where the other contracting party has to perform works (i.e. subcontractors) and will usually expire at the end of any rectification period. A payment bond, however, may be useful if an employer is situated in a foreign jurisdiction

If a circumstance arises in which an employer is not making payments as they fall due, a contractor needs to act quickly. The key things to remember are:

• A contractor has a statutory (and possibly contractual) right to suspend performance of all or any obligations where a party owes a debt and no notice to pay less has been received
• Assert any retention of title or or possession claim and identify goods quickly
• If an employer, or subcontractor, enters an insolvency process, contact the relevant office holder as soon as possible and only negotiate with the appointed office holder. The directors may no longer have the power to bind the company
• Reserve rights against third parties and review whether claims can be made against those third parties
• In insolvency situations in the context of a construction contract, contractors can rely on “pay when paid” provisions.

Claire Martin-Royle is restructuring partner at Taylor Wessing