The Insolvency of Cleveland Bridge
The Administration of Cleveland Bridge, a structural engineering business having its roots in the North of England as far back as the 19th century, has sobering lessons for directors on a number of levels.
One of these relates to reliance upon foreign parent companies for financial support. The Times reported on Thursday 16th September that Cleveland Bridge was owed by a Saudi company – Airpic. Cleveland had not made a profit since 2018 and had run up debts of some £20 million.
In effect, it appears that the parent company decided to stop providing further support. That of course left subsidiary company directors in the UK in a difficult position and they appear to have concluded that the only way to discharge their duties as directors was to appoint administrators. That may have been a wise decision; to continue to trade in those circumstances may have amounted to a breach of their fiduciary duties. Such issues are not reserved to subsidiaries owned by conglomerates or sovereign wealth funds. Subsidiary company directors need to be very clear about their relationship with a parent company. If they are reliant on a parent company for support as a basis for continued trading (and to be clear we do not know if that was the case here) directors need to be able to evidence that it is reasonable to do so. Written documentation is generally required or at the least, wise. Separately, subsidiary directors need to be careful about relying on parent company legal advice. The directors of the subsidiary may well have a need for independent legal advice in such circumstances.
As a side note, The Times reports one of the difficulties in this case was not a lack of work but the amount of work being done at a loss. Generating revenue, but not a profit, is not a problem simply reserved to small companies. Cleveland Bridge may be another lesson in that regard.