Carillion PLC, a UK based construction and services company (along with 5 subsidiaries) went into liquidation on 15 January 2018.  It provided services for 450 Government contracts, including prison and school meals and the HS2 infrastructure project. It was also heavily involved in private sector construction and outsourcing contracts.

It had issued a profits warning in July 2017 and could no longer obtain liquidity from its banks and, combined with debts of £1.5bn, a pensions black hole and untimely collection of debts owed, the company had no choice but to appoint PwC as Special Managers, alongside the court appointed Official Receiver.

At the time of writing, over 700 jobs have been confirmed as lost and the Government have agreed to pay to keep the Carillion government contracts going.  The Carillion case highlights the massive knock on effect an upstream insolvency can have on smaller local businesses in the supply chain, who are struggling now to be paid for work done or services provided.

This article examines what these supply businesses can do in the wake of the Carillion insolvency.

First Steps

Obviously the first step would be to seek advice from us on your legal rights and also seek advice from your accountants as to the current state of your own cash flow and liquidity needs going forward.

The official line from the Government and PwC is “keep calm and carry on” and work as normal, which is unusual in itself for a liquidation.  This is most likely to try and find buyers for the business and to avoid a potential infrastructure disaster for the country and many key council services.

However, for the many subcontractors and others engaged with Carillion, their first priority should be to have their legal counsel review their contracts at the earliest opportunity. Compulsory liquidation in and of itself does not terminate contractual agreements unless expressly set out as an event of default/termination.

They need to ascertain which Carillion entity is their contracting counterparty as not all Carillion entities are in liquidation. Even if your contract is not with an insolvent entity, it may have cross defaults into your contract. 

Any legal review should look specifically at things such as insolvency events of default, termination rights and what to do in the event of late payment?  Are there any step in rights with other contractors?  Are you legally obliged to continue providing services to Carillion?

Also of great importance are retention rights as regards, for example, retention payments and/or physical building supplies or intellectual property, discussed further below.

Inform PwC

As a sub contractor, you need to make PwC aware that you exist. They also need to be informed of any valid retention of title claims  as the items should be returned as soon as possible or given that this is an unusual situation of a company in liquidation continuing to trade, the items should be paid for ( as an expense of the liquidation) to allow for such continuity.  It may be difficult to prove the validity of any retention of title claim if the items have been subsumed into the construction itself but if they are easily identifiable as yours then they should be returned.

Similarly, PwC’s website can be used to submit claims, such as proof of debts for moneys owed by the relevant Carillion company to yours.  Evidence is required to substantiate any such claim, such as the contract itself and any correspondence between the parties relating to payment

Retentions

Cash retentions are frequently used in the construction industry until final snaggings are complete.  On the assumption that these sums have gone into the general Carillion pot and are not ring fenced for each subcontractor or held in trust, it is highly unlikely that subcontractors will ever receive these retentions in full.  President of the Building Engineering Services Association Tim Hopkinson said this could lead to “catastrophic losses for thousands of SMEs”. One chief executive of a contractors group has estimated in a quote to Construction News that Carillion may have been holding as much as £1bn in retentions. Many such subcontractors are now looking to the government to pay these; however Minister for the Cabinet Office, David Lidington MP has said that the government will not be making payments to trade creditors, as the company’s failures relate more to its private sector contracts, not its public ones and the “taxpayers should not, and will not, bail out a private sector company for private sector losses or allow rewards for failure.”

It is a real possibility then that the liquidation of Carillion could have a domino effect of causing the insolvency of many other SMEs in the same sector, who cannot afford to pay staff or finish jobs with outstanding retentions owing of, in some reported cases, up to £200,000.

Ironically, the Government’s consultation on the use of retentions closed on 19 January, just days after Carillion went into liquidation.  Construction News is quoted as saying that ”Carillion should mark the beginning of the end” of their use and that there should be more clarity and certainty for small contractors so they are protected from upstream insolvency.

Conclusion

If your business has been affected by the Carillion insolvency or other companies within the supply chain with whom you may have dealings, please contact us straightaway so that we can assist with any legal reviews or assistance you may need. Time is of the essence in these situations.

The worries and concerns for SMEs will not end with Carillion, indeed another government provider, Capita, announced a profits warning on 31 January, wiping 34% of their share value in the process. There is naturally a sense of unease and concern over these huge outsourcing companies and the damage their failure and insolvency could wreak on the wider construction industry.