Leaked documents reveal how the Ballast board told senior personnel to 'show some sense of excitement and hope about the refreshed Ballast plc' while the company was falling apart around their ears
The explosive documents revealed this week by Building help to build up a picture of the failed contractor's desperate financial position.

The firm went into administration on 15 October after the decision of its Dutch parent, Ballast Nedam, to stop funding its UK operation. A document by administrator Deloitte & Touche shows that Nedam had been told that it would have to give the UK arm £30m to keep it afloat until the end of 2003.

At a meeting in Holland on 13 October, the Nedam board decided this was too costly and pulled the plug.

Given the scale of the company's problems – in the eight months to 31 August, Ballast had lost £14.3m – the decision was understandable.

However, many subcontractors think they were misled by Nedam and are seeking advice on whether they can recover compensation from it. Deloitte has stated that there is only £500,000 at most available in the Ballast accounts to pay creditors, who are owed a total of £31.5m.

In September, many unpaid subcontractors were on the verge of pulling their workers off site.

Reassure clients of substantial financial support from Nedam to meet obligations

Ballast briefing note to RMDs

But a Nedam-approved statement by Ballast chairman Ruud Jacobs on 11 September pre-empted this. It said: "Ballast Nedam NV continues to be committed to the UK, and is further investing significant financial resources to ensure the UK business is well equipped to take advantage of commercial opportunities."

Ballast regional managing directors were instructed as to what they could tell their customers. "Reassure them of the substantial financial support from Ballast Nedam to meet all obligations," they were told.

Six days before, a meeting of the Ballast board discussed the parlous state of the Ballast finances. The minutes read: "Jacobs reminded the board that our current cash position was awful."

Another area of uncertainty for creditors was the future ownership of Ballast. For months Nedam had been attempting to sell the UK arm. It abandoned this policy in August.

But Ballast's lucrative PFI division, Ballast Services, appears to have still been up for sale. The minutes state: "Jacobs reported that a bid had been received for services from Mapeley. However, we do not yet tell the outside world that we are talking to Mapeley. Jacobs said we are aiming for a deal by the end of the month."

Regional managing directors were told of the bid. However, any questions from customers over the sale of any part of the business following the 11 September reassurance were to be deflected. In a briefing note, the board told the managing directors: "If asked about the sales process, you can mention that it has been called to a halt. Please note: it is essential for statutory reasons you do not mention any plans for the services division."

The briefing note goes further, hinting that Ballast's culture had caused the company's problems: "We are determined to put an end to the little kingdoms that have evolved. We must have work on a level and deal with each other openly."

The 11 September statement also announced that it was to axe 275 jobs as part of a restructuring. The briefing note contained instructions of how to keep coverage of this to a minimum: "We anticipate that, particularly in the local press, the media will focus on redundancies and other negative aspects of the story. We need to keep coverage to the bare minimum so we do not suffer from the drip feed of negative press coverage."

Ballast went into administration a month later, ensuring that press coverage was largely negative – particularly as 500 jobs were immediately lost and Deloitte could not save most of the business, including the bulk of the services division.

The Deloitte document invites Ballast's creditors to a meeting next week that will give them an opportunity to ask what the administrator has achieved so far. But they should not expect to recover any of their money.

Minutes of directors’ meeting

Current financial position: “RJ [Ruud Jacobs, Ballast chairman] reminded the Board that our current cash position was awful. We hope to have an arrangement with the banks and bondsmen in the next few days. We have to act quickly.”

Sale process: “RJ reported that a bid had been received for Services from Mapeley; it has yet to be evaluated. However, we do not yet tell the outside world that we are talking to Mapeley.”

Current contracts: “We have problems at East Lothian and Tower Hamlets. The council on East Lothian are threatening termination; there is a meeting today … They now do not believe what we tell them. They have now said that they will not pay us.”

Briefing notes for regional managing directors

Financial position/future: “Reassure them (Ballast customers) of the substantial financial support from Ballast Nedam to meet all obligations. Reassure them of the continued 150% focus on them/their business … Demonstrate your sadness about the redundancies, but reassure them that these are necessary measures and that the reorganisation will result in a much slicker, more professional practice. Show some sense of excitement and hope about the refreshed Ballast plc, and the opportunity to provide an even more professional service to them.”

Sale process: “If asked about the sale process, you can mention that it has been called to a halt. Please note: it is essential for statutory reasons you do not mention any plans for the services division.”

Deloitte & Touche’s letter to creditors

“Between 2 and 13 October the board prepared and submitted business plans to Ballast Nedam. These showed funding of £5m being required for the following two weeks and £30m would be required to enable Ballast to continue to trade to the end of 2003.

“On the evening of 13 October and throughout 14 October 2003 the board met representatives of Deloitte to consider options available to them. Without ongoing parent company support, it was clear that the companies were insolvent and unable to continue to operate outside of formal insolvency proceedings. The August 2003 draft management accounts showed negative net assets of £50m and losses of £14.3m in the eight months to 31 August 2003.”

What we asked Ballast Nedam

These were among the questions we put to Ballast Nedam:

Q In early September, Mapeley had put in an offer for Ballast Services. We understand you hoped to sign a deal by the end of the month. Why was there no mention of a sale in the 11 September statement?

Q It turned out in October that £30m was needed to keep Ballast going until the end of the year, and this led to Nedam abandoning its UK arm. Does this mean that the reassurance to customers in September was an unreasonable claim – or did letters to regional managing directors at the time exaggerate Nedam’s financial commitment to Ballast?

Q Did Nedam know the full facts about Ballast’s financial problems on 11 September, or was it misled as to the real position of the UK arm?

A spokesperson for Ballast Nedam responded: A It is not appropriate for Ballast Nedam to comment. It falls under the administrator’s remit.

How subcontractors can guard against another Ballast

This year, a spate of insolvencies involving major contractors has exposed the considerable risks assumed by specialist contractors in the supply chain.

Sir Michael Latham, in his report Constructing the Team almost 10 years ago, acknowledged that such risks could not be easily overcome, and recommended statutory trust funds. Unfortunately the proposal never saw the light of day. But many European Union countries and states in Australasia and North America have legislation to protect firms in the payment queue from upstream insolvencies.

Not surprisingly, the greatest sums lost through upstream insolvencies are retentions. Last year the Trade and Industry Select Committee learned that the largest M&E firms had each lost an average of £50,000 in unpaid retentions because of insolvencies over the previous 10 years.

Current laws governing wrongful and fraudulent trading appear to have little impact in the construction industry. It is accepted that many firms do not have the means to pay their subcontractors and suppliers unless they receive cash from their clients or customers. They have no assets and are utterly dependent upon positive cash flow. This position is reinforced by section 113 of the Construction Act, which legitimises pay-when-paid arrangements on the insolvency of a third-party payer.

In the meantime, subcontractors must act to minimise insolvency risks by:

  • Keep payment cycles as short as possible
  • Chase outstanding payments
  • Don’t leave everything to stack up at final account
  • Challenge unwarranted set-offs immediately (using adjudication)
  • Either refuse to offer cash retentions or, instead, insist that either a bond is accepted or the cash is kept in a separate, identifiable account.
  • Use section 112 of the Construction Act to suspend your contract if payment is not forthcoming
  • Remember: act promptly – any delay could be fatal.

Payment security in the industry must be priority for 2004. Unless this is substantially improved it will frustrate efforts to improve the industry’s performance.