When Connaught went into administration in September, it wiped £1.7m from supplier Speedy Hire’s first half profits. Speedy, with a turnover of £135m, will probably bear it better than others affected by the social housing contractor’s collapse. In a downturn like this, when industry giants go bust they may set off a deadly domino effect along the supply chain.

Fears that Connaught would not be the only big firm to go to the wall before the year ended were realised two weeks ago with the fall of listed builder Rok, owing £150m to its supply chain.

The government’s Insolvency Service estimates 27% of corporate insolvencies are triggered by another company going under. The latest official statistics out this month show 270 construction firms in England and Wales went into compulsory liquidation in the third quarter of this year.

Although this was a decrease on the second quarter (276 cases), it’s clear insolvency is a problem for an industry based on supply chain relationships. It’s essential firms have strategies to cope when a company higher up the chain goes bust. This is particularly vital for SMEs and small specialist contractors, whose size makes them vulnerable. We asked experts for survival tips.

1.

It might sound obvious, but the first tip is to do plenty of due diligence to try to avoid working for a company that could become insolvent. This means credit checks with agencies like Dunn & Bradstreet, n2check and Creditsafe, but also listening to what others are saying about particular companies.

Ken Tracey, commercial adviser at the Electrical Contractors’ Association, says: “Keep your ear to the ground and if you’re not hearing good things about a client, don’t work for them.”
If you are a subcontractor and you decide to work for a contractor, don’t agree to a pay-when-paid clause in your contract. Tracey says such a clause means that if the contractor becomes insolvent it only has to pay you when it is paid by the employer, so you may be left high and dry.

2.

Impose a credit limit on the client. Tracey says: “It can be difficult to enforce, but if you can tell a client they can only owe you, say, £10,000 a month, it does make them aware you’re serious about getting paid.”

But think carefully about where you set the limit. Nick Hood, partner at business rescue specialist Begbies Traynor, advises: “Be honest with yourself; giving credit to anyone is like a playing the slots in Las Vegas. Don’t bet more than you can afford to lose.”

Nor should you put all your eggs in one basket, he adds: “This can be tough advice to follow when there is a shortage of work, but don’t complain that your business has been destroyed by a bad debt if that customer is 70% of your revenue.”

Clive Lewis, head of small business issues at the Association of Chartered Accountants of England and Wales, recommends the 80-20 rule. “Avoid having more than 80% of your business with less than 20% of your customer base,” he says.

3.

If after all this a company goes under owing you money, there are steps you can take to protect yourself. Rupert Choat, partner and solicitor advocate at CMS Cameron McKenna, advises contacting the insolvency practitioner (IP) as soon as possible.

“It is important to know what type of insolvency it is,” he says. “For instance, administration and liquidation are often confused but differ significantly: the former is like a hospital, the latter a cemetery. If it’s administration, find out from the IP whether they intend to sell the business as a going concern or whether the intention is to rescue the business. Give the IP clear details of what you are owed and claim under any security.” 

IPs tend to keep a low profile as they know they’ll be inundated by firms owed money by the company in administration. Tracey advises going straight to the people you know at the company to find out who the administrator is immediately.

4.

You may have more strength in numbers. Choat recommends communicating with others who have been affected and appointing a “co-ordinator and spokesperson with knowledge of insolvency issues to act as a focal point in all communications with the insolvency practitioner”.

5.

You may find you can terminate your existing contract (on the grounds of insolvency) and enter into a new, direct, contract with the employer. This becomes more likely in proportion to how badly the employer needs your services. If you have been doing complex work that is critical to the job’s completion, such as M&E, you have a better chance.

6.

Choat advises getting your hands on what is yours sooner rather than later - whether that is the site, plant, equipment or materials. He adds that it may even be worth considering appointing security personnel to make sure you get back as much as you can. Materials that are incorporated into the works, however, often belong to the owner of the land even if you have a “retention of title” clause in your contract.

Of course there’s no guarantee that when a major player near the top of the supply chain plunges down a treacherous slope that it won’t drag other companies along with it, but following these steps will give you a fighting chance.

Extra tips for avoiding insolvent after your client goes bust

[those marked: @ are specifically for developers if their counterparty (the contractor) goes insolvent; * are for tier 1 contractors; # are for subcontractors and those lower down the contractual chain; where no markings - apply to all]

Pre-contract
- Due diligence on counterparty
- Security from counterparty
- Favourable terms obtaining@*/retaining*# of title to/rights over materials, plant and equipment
- Broad termination rights (not necessarily automatic) for insolvency and typical pre-insolvency matters
- Project bank account or ring-fenced payments*#
- Have*#/avoid# pay when paid or similar clauses
- Collateral warranties/third party rights from subcontractors that allow developer to “step in” if the contractor goes insolvent@

Pre-insolvency
- Be aware of insolvency warning signs and act accordingly (often a choice between pushing to maximise position (e.g adjudicate and/or issue statutory demand*#) vs. risking pushing counterparty under). If the works are nearly complete consider helping the ailing contractor/subcontractor with advance payments, omitting work and direct payments to those below them@*
- Seek advance payment*#
- Seek direct payment from party further up the chain/developer/funder*#
- (Threaten to) suspend for non-payment*#
- (Threaten to) terminate

On insolvency
- Secure site@ and any plant, equipment and materials you are entitled to
- Obtain design and health and safety documents
- Record status of works
- Know which type of insolvency it is (e.g. administration or liquidation, which differ: the former is like a hospital, the latter a cemetery)
- Consider terminating
- Review all payments to those below you in the contractual chain and give payment and withholding notices as appropriate
- Work with other creditors and the Insolvency Practitioner and identify their goals (e.g. if they aim to rescue the business or sell it as a going concern)
- Consider developer-subcontractor arrangements (often a win/win if the works are incomplete)@#
- Claim under any security

Rupert Choat, partner and solicitor advocate, CMS Cameron McKenna