Connaught collapse sends stark message to subcontractors

The collapse of the Connaught’s social housing unit has certainly caught the
eye of the public and has created much debate about the reasons for the failure
and the impact of the government’s cost cutting and efficiency measures on all
industries supplying the public sector.

The exact reasons for the collapse have yet to be determined or formally
announced by the administrators but commentators are attributing the failure to
some or all of the following:

• ‘Suicidal pricing’ in order to win new contracts

• Governmental cost cutting

• Aggressive accounting strategies designed to improve the reported health of
the company

Whatever the real reasons for the failure, the impact of the insolvency is
wide reaching both in a micro and macro economic sense.

Firstly, Connaught is the first publically recognised manifestation of the
government’s efficiency savings on its suppliers. Whether government cost
cutting was ultimately to blame is unclear, but it brings home the impact of
restrictions on spending to all sectors reliant on public money. Be this in
social housing, education and training, social care or any of the other
outsourced private industries that rely on tax payers’ money to provide the
services we take for granted.

Although, judging by the speed of the sale of large numbers of the company’s
former contracts and the transfer of such a high proportion of the employees’
jobs; corporates still believe there is money to be made serving the public
sector.

So while this administration is the first incident, it certainly will not be
the last. For instance, care homes will come under increasing pressure as
council funded rates are squeezed against shrinking budgets but the operators’
costs will continue to rise. Less cash in and more cash out is likely to lead to
further rationalisation of the sector.

On a micro level, the terms of the sales of the Connaught contracts are not
public. So while a large number of employees’ jobs have been saved by the early
action of the administrators, large numbers of subcontractors and limited
companies are as yet uncertain if they will receive payment for their work and
in what timescale. Perhaps most important, whether they will still be engaged in
the ongoing provision of services for the future?

The impact of the none payment of Connaught’s sub contractors is unclear, and
the possible loss of future income as contracts are sold or renegotiated, leaves
the subcontractor in a very difficult position in terms of their own cashflow.

Suppliers that have already been hit hard by the difficult times of the last
two years may have already utilised HMRC’s Time To Pay (TTP) arrangements or
agreed voluntary arrangements with their creditors. Both solutions provide them
with breathing space from their own creditors and allows them time to rebuild
their own resources while making contributions to their creditors.

The collapse of Connaught will create additional working capital pressures
that could lead to defaults in these agreements, leaving HMRC or the voluntary
arrangement’s supervisor little choice but to alter the terms of the TTP
agreement or the voluntary arrangement or ultimately petition for the insolvency
of the subcontractor.

Insolvency in service industries frequently leads to little return to the
unsecured creditors due to the lack of assets available for the insolvency
practitioner. This leaves creditors (including HMRC) with further bad debts and
additional working capital requirements. This ripple effect can have very
harmful effects, especially in the light of a number of failures hitting
concurrently across sectors. It appears inevitable that there will be an
increase in the number of TTP agreements, voluntary arrangements or even
insolvencies occurring in the forthcoming months and years.

Public response to this failure along with other potential spending cuts, has
already received much coverage. Thus fuelling the debate as to whether the
Government’s current approach to spending is appropriate? If this is just the
tip of the iceberg, the Governments’ position will be severely tested.

Matt Haw is a director at Baker Tilly Recovery and Restructuring