The collapse of Connaught will undoubtedly cause hardship for its suppliers

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.

Source: Accountancy Age