Businesses in the construction sector have been especially vulnerable to insolvency during the pandemic due to lockdown restrictions delaying projects, supply chain issues limiting materials and soaring costs.
NMCN was the largest listed company to go under since Carillion. It went into administration in October 2021 having failed to secure a re-financing of its business. Grant Thornton was appointed as the administrator, and on an initial look, found that the company owed its creditors £60.5m. The firm’s full view concluded that the true figure is almost double that amount at £115.3m.
The most profitable elements of the business were sold off in pre-pack deals, with 1,642 employees keeping their jobs. However, 80 redundancies still had to be made from the building section of the business. Shareholders were also left with nothing. Dividends were declared in 2018, but they did not declare a final dividend for 2019 due to uncertainties posed by the impact of the pandemic.
BDO, which audited the company’s 2019 financial statements, is now being investigated by the Financial Reporting Council (FRC).
Twenty-six former employees have also lodged an employment tribunal claim which alleges that NMCN failed to follow the correct collective consultation process before making them redundant. They argue that there was no meaningful dialogue over how the redundancies could have been avoided.
Lawyers have also been instructed by Grant Thornton to look into why NMCN went insolvent and there is potential for further legal action down the line from disgruntled creditors.
Investigations and legal action – scope and scale
The FRC investigation is likely to examine whether BDO performed its auditor’s role properly when it prepared NMCN’s financial statements and final set of accounts before it went into administration. It’s likely they will look into why the previous auditor didn’t identify the deep losses which led to the company’s demise.
The lawyers investigating the failure of the business are likely to look into matters such as whether dividends were properly declared, whether there were any uncommercial loans taken out or borrowing by directors, and whether any creditors were treated more favourably than they should have been, such as being paid ahead of others before the company went into administration.
Depending on the findings, the liquidators may consider claims against the directors for breach of their directors’ duties for not minimising the company’s losses. The majority of litigation in this area arises from situations where directors knew, or should have known, that the company was in a potentially insolvent position but either carried on trading or did not act in the company, or its creditors’ best interests, from that point onwards.
The former employees allege that the company knew (or should have known) about the potential insolvency and so should have put them on notice sooner, so they didn’t have to face sudden dismissal and the prospect of not being paid wages that they were due.
The Employment Tribunal claim seeks a Protective Award for the company’s failure to consult employees ahead of making them redundant. If the employees are successful in their claim the Insolvency Service will have to pay because NMCN can’t, and any award will be limited to up to eight weeks’ pay.
The only defence that the company could have in the employment tribunal claim, is that it was relying on professional advice, for example that it was performing well financially, and had no solvency issues. However, this may only amount to a partial defence, especially if it is proved that the company’s directors had the professional qualifications and knowledge required to analyse the information given to them by its auditors.
Learnings for accountants
For accountants, in-house or in private practice, NMCN’s collapse and investigations that have followed it could put accountants under further pressure. As the advisors with inside knowledge of the company’s finances, the expertise to spot the warning signs of insolvency, and the ability to assess how much they can rely on an auditor’s findings, there may be an increase in the expectation that they will report their findings to directors.
If claims are brought by employees, Employment Tribunals will be particularly keen to see if the insolvency was truly unexpected. If there is a clear risk of insolvency, then the advice should be to inform and consult your employees by following the correct procedures. Failure to do this, could mean additional liability for up to 90 days’ full pay for each affected employee.
As an accountant you will need to have your wits about you. Recessions throw up many problems for professional advisers as victims look for someone to blame. Early, and well documented, advice on solvency concerns will be an important line of defence.
The authors of this article are Helen Young, associate, commercial litigation & dispute resolution team at SA Law and Nishma Chudasama, solicitor, employment team at SA Law