During the current economic crisis, instances of construction company insolvencies have been higher than in any other industry sector in the UK, a fate which has been experienced at all levels of the supply chain.
Although some increased activity has been experienced, the general outlook for the industry for the immediate future remains uncertain, the key driver for this, of course, being a lack of funding.
There is, however, a degree of optimism from some quarters that the new era of political governance represents an opportunity for renewed investment in and focus on the construction industry.
Whilst this may assist companies in avoiding insolvency in the future, this provides little respite for those companies which are faced with a statutory demand or abbreviated demand (commonly known as a 48 hour demand) from a creditor.
If a company is served with a statutory demand in terms of the Insolvency Act 1986 (“the Act”) requiring it to pay a sum which is due, payment must be made within a period of 21 days of service. If not, the company will be deemed unable to pay its debts and the creditor may petition the court for its liquidation.
An abbreviated demand offers a creditor an alternative, quicker route to having a company wound up affording a minimum period of 48 hours for payment before a petition can be submitted to the court.
What should a company do if it receives either one of these demands?
If the debt is due then it should be paid or agreement reached with the creditor as to suitable instalment payments.
If either whole or part of the debt is genuinely disputed, this must be raised immediately with the creditor. If the company can establish a stateable ground for not making payment, the creditor will not be in a position to proceed with a liquidation petition. Legal input at this stage can be critical to ensure that the dispute is clearly stated and there is no dubiety about the position going forward.
From a creditor’s or pursuer’s perspective, it is clear that these demands, particularly the 48 hour demand, provide a useful, although sometimes regarded as controversial, mechanism to creditors wishing to recover funds quickly, without the need to raise a potentially expensive and drawn out court action. We are often instructed to issue both statutory and abbreviated demands by a range of clients.
If the situation arises where a liquidation petition is presented to the court, a document called a caveat gives a company advanced notice of a creditor’s attempt to wind up the company. We are regularly involved in lodging caveats with the court to afford clients this level of protection. Caveats last for a period of one year and operate as a highly useful advanced warning system.
Demands aside, construction companies should, nevertheless, be alert to the fact that a debt will not become indisputably due within the terms of the Act as a result of an adjudicator’s decision. The rationale of the Housing Grants, Construction and Regeneration Act 1996 does not mean that, without further investigation, a company will be wound up where other disputes exist to extinguish the amount said to be owed. The debtor will, however, have to show that his dispute is genuine which will likely mean taking active steps, such as commencing a cross-adjudication or litigation, to enforce payment in these other disputes.
bto’s Construction and Insolvency teams would be pleased to assist companies in these difficult times.
Construction: Jilly Petrie
Insolvency: Kirsteen Maclean