Small businesses suffer most from the 'domino effect' of insolvency in the construction industry. Missed opportunities to put things right mean the task is now urgent
The collapse of family firm Bickerton Construction at the end of last year has, again, highlighted the iniquities associated with insolvency in the construction industry – Bickerton was milked of its assets to the tune of £1.4m.

The consequences of insolvency for subcontractors and suppliers are not far short of scandalous. Embittered subcontractors of Bickerton, with payments and retentions outstanding, can only punch the air in frustration. While they were busily carrying out what was demanded of them, they weren't to know that their payer was being stripped of its ability to carry out its side of the bargain.

Many common law and civil law jurisdictions have recognised the difficulties faced by construction industry subcontractors in protecting themselves against upstream insolvency; title to goods and materials is lost once they have been used in the works. Some of the measures introduced in these jurisdictions are more effective than others. The nearest that the UK came to construction-specific legislation for insolvency was a private members bill introduced by Julian Brazier MP, which did not get beyond its second reading on 24 June 1994.

The bill sought to introduce a lien system – similar to that in the USA and Canada – by which subcontractors and suppliers could register a lien or charge against the employer's interest in the property. There was a further provision that, in the event of the employer's insolvency, contractors could be repaid before the owner of any other charge on the employer's property.

However, the greatest opportunity for legislation on this matter was the Construction Act. In Constructing the Team in 1994, Sir Michael Latham recommended that legislation should provide for trust funds to protect money earmarked for the supply side. Unfortunately, this proposal did not win a consensus, but, even worse, the Construction Act legitimised contractual pay-if-paid provisions (that is, a main contractor could operate a pay-if-paid provision in the event that his employer went bust; such provision could also be applied downstream). Not surprisingly, these provisions are now found in all bespoke subcontracts and sub-subcontracts.

So what is to be done? My view is that this presents an urgent task for the Small Business Service, since those that suffer from the "domino effect" of insolvency in the construction industry are inevitably small businesses. The service should carry out an in-depth study of the impact of insolvency on downstream businesses and make specific recommendations, including any necessary changes to the law.

My agenda for change would be as follows:

The subcontractors weren’t to know that their payer was being stripped of its ability to carry out its side of the bargain

  • A specific change should be made to the 1986 insolvency legislation to facilitate direct payment by employers to subcontractors in the construction industry and so overcome the perceived rule in the British Eagle case in 1976 – the rule being that it is wrong to enter into arrangements that privilege certain creditors to the detriment of others having the same level of security – or insecurity.

  • The Constructors Liaison Group campaign to get rid of retentions should take on an even greater urgency, since retentions are always at risk in insolvencies.

    (Latham's recommendations on retentions was that they should be either kept in trust or offered as a bond, but these were never implemented.)

  • Public sector procurers should insist that payment will only be made to prime or main contractors where they can show evidence that their subcontractors and suppliers have been paid.

    Moreover, the Small Business Service should initiate research to draw together the most positive features of construction industry insolvency protection available in other countries. It could then determine whether there is a case in the UK for construction-specific insolvency protection.