More building firms may close in wake of Pierse liquidation

 

Some of the problems in the Pierse group stem from the way the building industry does business, writes BARRY O'HALLORAN

A NUMBER of the subcontractors owed money by Pierse Contracting and Pierse Building Services were contemplating closing their own businesses yesterday after the High Court placed the two companies in liquidation.

Pierse had been seeking to have an examiner appointed to the company, which has a deficit of more than €200 million, but a further deterioration forced a dramatic withdrawal of this petition yesterday morning and it instead asked to be placed in liquidation.

The group acknowledged that unsecured creditors, owed a total of €51 million, are unlikely to get anything from this process. Any assets will go the secured creditor, Bank of Ireland.

There are a couple of thousand businesses involved, mainly subcontractors and suppliers. The ripples from the case are going to be felt far beyond Pierse itself and its 100 or so staff who lost their jobs yesterday.

A number of the smaller unsecured creditors said they are facing the possibility that they too would have to wind up their own businesses. One man, who did not want to be named, said his company was owed more than €250,000 on foot of several jobs that it had either completed or was working on for Pierse Contracting.

He added that the company had told him earlier this year that he would be paid by next January, but he became increasingly sceptical as time wore on.

The subcontractor pointed out that he was depending on payments from Pierse to pay some of his own creditors, which he cannot now do, and said that it looked like he had little choice but to shut down his own operation. “It looks like I’m finished myself,” he said.

Robert Dore, a solicitor representing a group of smaller creditors owed €1.7 million, wrote to John McStay, the interim examiner appointed to Pierse last month, saying his clients were “deeply suspicious” of its directors.

The creditors claimed they had been asked to work overtime to meet deadlines on building projects where Pierse was the main contractor, in circumstances where its directors must have known that the company was insolvent.

Kilsaran Concrete, which is owed €2.7 million, argued that the company decided to continue trading in the hope that it would get €16 million from Gannon Homes and €1.8 million from a schools-building project, even though it owed €50 million to unsecured creditors. A number of unsecured creditors, led by the largest of the group, scaffolding and platform specialist CF Structures, which is owed €5.7 million, nominated their own liquidator, Simon Coyle of Mazars.

Given the concerns that the creditors raised, Mr Justice Peter Kelly instructed Mr Coyle to investigate the circumstances in which the company was trading in the last 18 months.

During yesterday’s hearing, Mr Justice Kelly observed that the group’s total deficit, €212 million, could not have grown overnight. He pointed out that even in an era when people seem to measure everything in billions, this was still an enormous amount of money.

But Pierse itself could claim to be a victim of the same syndrome that has hit its creditors. Money due to it has not been paid, meaning it cannot pay those businesses to which it owes money.

In an affidavit, Pierse director Fearghal O’Nolan said that in the run-up to the company’s first application for High Court protection last month, monitoring cash flow was an absolute priority for the business.

He explained that the amounts due to subcontractors increased sharply as a lot of projects were completed in the two months before October.

Mr O’Nolan also pointed out that of the €51.5 million claimed by unsecured creditors, almost €9 million had yet to be collected from the company’s own debtors.

Last month, Pierse said that while its contracting business was profitable, the company was owed more than €30 million, over €20 million of which was “severely delayed”, causing it serious cash-flow problems.

At least part of the problem stems from the way that the building industry does business. A main contractor is hired to do a job on the basis of a price. Around 80 per cent of the actual work is done by subcontractors, who may themselves hire other subcontractors.

This is fine as long as the money keeps flowing, but in circumstances where someone along this pyramid cannot pay, everyone below them suffers as well.

Only Mr Coyle’s investigation can establish if this is what happened to Pierse, or, as creditors such as Kilsaran and those represented by Mr Dore say, the company continued to trade while it was either insolvent or close to it.

Either way, the fact remains that the current contracting system carries with it a lot of risk. Senator Feargal Quinn recently introduced a Private Members’ Bill aimed at tackling this problem.

It allows for enforceable stage payments allied to a quick, accessible adjudication system to deal with situations where there is a row. The Construction Industry Federation’s (CIF) director general, Tom Parlon, said the organisation is endorsing this, and points out that the Pierse case is strong evidence that the industry needs such a system.

If the Bill makes it onto the statute books, it will be too late for Pierse and its creditors. It could also be too late for many others in the industry, as it is widely believed that this is just the first of a number of big contractors to go.

Over the last two to three years, companies such as Pierse have been forced to cut their margins to the bone, to zero in many cases, in order to win contracts.

There are fewer contracts going and they are worth less money. Where once there was a strong stream of jobs worth €30 million to €50 million, there are now far fewer projects, and they are more likely to be in the €10 million to €20 million bracket.

Sources say that this has forced companies into situations where they are effectively bidding below cost, which is unsustainable.

The inevitable consequences are that more cases like Pierse are coming down the tracks. One source yesterday estimated that there are at least three or four more on the way.

Others are saying that of the large contractors that are operating here, there could be just three or four left standing when the building slump has taken its final toll, meaning that yesterday’s scenes in the High Court could be replicated many times.