Barrister, Professor Rudi Klein, takes an overview of the retentions campaign with some thoughts on future action and call on the industry to lobby candidates and new MPs to support legislation to protect cash retentions.
First of all let us congratulate Alan Brown, the Kilmarnock MP, for making history by introducing in the House of Commons the first ever Bill on protecting cash retentions. We understand that the Small Business Minister (Margot James MP) in Theresa May’s Government agreed that this was an important issue.
Unfortunately Alan Brown’s Bill will not progress because of the General Election. But he has helped to maintain the momentum for legislation to protect cash retentions either by ring-fencing them in a trust account (or in a government approved scheme similar to those statutory schemes that protect tenant’s deposits in the private rented sector).
“This Government continually acknowledges a productivity problem in the UK, yet we have smaller companies struggling with cash flow, stressed and having to put man hours into chasing up these cash retentions. Surely resolving this issue can only improve productivity, in terms not just of the man hours saved through not having to chase up the retentions, but of money released for investment in new equipment or job creation, which will further improve productivity.”
Alan Brown MP, 26 April 2017, House of Commons
AMOUNT OF RETENTIONS AT RISK
Large companies in the construction industry and their clients (including public sector clients) should live within the revenues they generate by their own activities and not rely on accessing over £3 billion worth of retentions ultimately funded by small firms. The top 12 UK construction companies are owed £1 billion worth of retentions but the bulk of this is funded by their supply chains. One of these companies had taken an amount of retention from its supply chain that was 1½ times greater than the retention it had provided its clients.
These monies are wholly at risk; this would not be acceptable in any other industry sector. But it is not just the £3 billion. One could almost double this amount by adding the costs associated with chasing the monies, waiting for release of the monies (i.e. the loss of interest) and losses from upstream insolvencies.
WHERE DO WE GO FROM HERE?
FIS member firms have been very vocal in highlighting the debilitating impact on businesses of the cash retentions system. This has helped to keep the issue alive.
The UK government should have published a review of the retentions system in early February this year but it has been further delayed by the General Election. Whilst we must continue to exert pressure on the UK Government to ring-fence cash retentions, we should also exert similar pressure on the devolved governments.
CHALLENGING THE LACK OF SECURITY OF YOUR RETENTIONS
Over the years I have had numerous calls and emails from firms concerned about their retentions in the hands of a business that is likely to go into insolvency. I have a suggestion for dealing with this particularly if the amount of retention at risk is substantial. Before I develop this I should emphasise that, wherever possible, you should seek to define the purpose for which the other party has a right of recourse to your retention.
Retention monies belong to you. They are deducted from payments that have become due. They are not deducted for the purpose of satisfying the demands of your payers’ creditors especially where your payer has gone into insolvency. Ostensibly they are deducted as security in the event that you do not return to remedy non-compliant work during the contractual rectification period.
Therefore it is possible to argue that the monies should be held in trust by your payer and, thus, segregated from their working capital by being held in a ring-fenced account. You could request this of the other party. In the event – as is likely – they refuse to segregate the monies you have a dispute.
Such dispute is referable to adjudication. You could, therefore, ask the adjudicator for a declaration that the monies should be held in a separate trust account for your benefit (until the monies are due for release or the monies have been accessed to deal with non-complaint work).
Again I emphasise this may be worth doing if the retention amount is substantial. The issues involved are fairly technical (because they relate to trust law) and, therefore, legal advice and support will be necessary.
THE 8 JUNE GENERAL ELECTION
The forthcoming General Election now presents us with the opportunity to email/write to our local candidates vying to become the next Member of Parliament. But what are we going to say to them?
It’s always best to be brief and to the point. We must also obtain a commitment from them that, if elected, they will support the change we are seeking.
Here is what to include in your email/letter:
- You are an SME; cash retentions are seriously damaging your business. State the impact on your business (how much retention is outstanding; any insolvency losses; cost of chasing retentions; time taken to release the monies etc.).
- Tell them you are not just saying this. Here’s what Her Majesty’s Revenue and Customs is saying: “In recent years, construction industry customers have become increasingly reluctant to pay retention monies, irrespective of whether there are defects to be made good. It is now common for such monies never to get paid.”
- Enough is enough. A few years ago a House of Commons Select Committee described the system as “unfair and outdated”.
- Will the candidate support legislation to protect cash retentions by ring-fencing them in a trust account? Such legislation exists in Europe, the United States, Canada and Australasia. We are trailing behind these other countries.
- Ask the candidate to email you indicating their commitment to support legislation on this.
- Provide feedback from the candidates to FIS to help continue the fight.
With your help we can – finally – make a difference. Let’s send as many MPs as possible back to the House of Commons with a commitment to support legislation to protect cash retentions.