Award-winning business recovery and insolvency specialists Gibson Hewitt are warning construction businesses to be cautious about the relationships they build with businesses that operate as a Special Purchase Vehicle (SPV).
These companies are often a subsidiary company of a larger business created for one-off projects. They have a liability structure and legal status that makes their obligations secure even if the parent company goes bankrupt.
However, these types of businesses are increasingly used by developers to hide debt or to remove liability from a project if it doesn’t meet the budget, which often results in the liquidation of the SPV, leaving construction companies and contractors out of pocket.
The experienced team at Gibson Hewitt are now warning businesses to be on the lookout for these types of arrangements, as they have seen a growing trend of developers using SPVs as a way of avoiding liability.
In fact, they point to the fact that SPVs are now coming under increasing scrutiny by Government departments in the form of new tax rules and legislation, which demonstrates that these business practices are coming under growing suspicion by the authorities.
Lynn Gibson, Director at Gibson Hewitt, said: “The use of SPVs in construction has long been common practice and it is not unusual for a developer to operate multiple SPVs to cover each site they are developing.
“In one way it makes sense as the funding for each site is then protected if another site suffers. For the employer (SPV) it can make sense as one project does not put others at risk but for the builder it can increase the risk as the SPV may not be adequately funded. Some employers have a history of inadequately funded SPV’s”.
She said while this remains a fairly rare practice it was something that construction firms and contractors needed to be aware of before starting any job.
“Research is key before taking on any contract, no matter how lucrative or straightforward it may seem,” said Lynn.
“Ask around and do background checks online on the business behind the SPV to try and find out whether they have previously liquidated any other companies, as this could prove invaluable.
“If there appears to be a trend of liquidations then it may be best to walk away or at least give you time to ensure that the contract is watertight before signing on the dotted line.”
When SPVs liquidate construction firms can find it very difficult to get paid and recover any debts, expenses or costs they may have incurred during the project, warned Lynn.