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Carillion – contracts are king on insolvency

15th January 2018

We wake up this morning, to the news that Carillion is to be placed into liquidation immediately, with the Official Receiver (an officer of the insolvency service in England & Wales, which has no equivalent in commercial insolvency in Scotland), to be appointed as liquidator, but employing PWC as special managers.

There is a great deal of commentary this morning around the rights and wrongs of government actions in continuing to trade with Carillion, over the last few years of profit warnings and the Hedge Fund predicted trouble on the horizon, but I would like to discuss in this article a little about what the impact will be on those sub-contractors and those involved in the supply chain to this giant of the construction industry and what they can do to protect themselves.

On the minds of the business owners this morning, who supply or work with Carillion, will be the huge issues of payments, retentions, retention of title and continuing work. Those businesses depend on Carillion making payment of retention monies, contract prices and continuing with the contracts upon which their own trading futures are built.
Liquidation is a different insolvency regime to administration (the main “rescue” process in the UK), and whilst it is of interest to insolvency practitioners and insolvency lawyers, makes very little difference to the countless smaller businesses, trying to navigate their way with this process.

As events, and the plans of the Official Receiver and PWC, remain unclear and unspecific at this early stage in the process, what we can say to our clients, and those who may stand to lose money, is, to get out your written contracts immediately.
In insolvency, contracts and the way they provide for title to money or assets is the absolute key.

Retention Monies
Retention monies, are the sums routinely held back from sub-contractors until snagging is complete. That money, if it is not held separately from Carillion’s own funds, leaves those waiting on payment, lodging a claim in the liquidation and hoping, that there will be some money left at the end of the day to pay some of that from the insolvent estate. Over the last 8 years or so, since the financial crisis, some contracts provide for retention monies to be placed on trust for contractors, pending the resolution of snagging etc. If your contract provides for that, then we advise getting in touch with PWC quickly to ascertain if that has happened and if so, you should eventually be paid in full, as the funds were ring-fenced from the assets of Carillion.

If you are waiting for payment of your contract price, then again, you should look to the terms of the contract to see if there is any scope to by-pass Carillion and look to the ultimate client for payment. If you are mid contract, and are asked to continue, you may choose not to do so, but you may be able to use this as an opportunity to renegotiate terms to try to recoup or protect your exposure. Again, it all comes down to bargaining position and your contract.

Retention of Title
Some suppliers to Carillion will have delivered goods and materials onto Carillion sites, and again, the contract position on who retains title to those goods should be looked at urgently, particularly if building work is to continue. Whilst retention of title provisions are unlikely to be enforceable if the materials are incorporated into the building work, if they are still on a Carillion site, and easily identifiable as yours, you may be able to take advantage of your retention of title provisions. Some suppliers will be approached to continue to supply materials, and from today, that supply contract should be with the Company in Liquidation and paid as an expense of the liquidation.

Continuing to Work
Much has been made of the fact that Carillion is a main contractor to the Government, but 60% of its work was to the private sector, so it is clear that there may be a 2 track approach to work which has started but is not yet complete. There may be pressure on sub-contractors or suppliers to continue working, and that is very tempting, where there has already been a loss, however, the most important thing businesses can do at this stage is to take this opportunity to be absolutely clear on what the deal on the table actually is. Would you be happy to continue working for a liquidator, where only the price from today onwards may be paid? Are you willing to continue committing staff to fulfil those contracts? Will your contract remain the same or will it be changed? A liquidator, appointed to a company in England and Wales, has a right not available to those appointed to Scottish Companies, and that is to disclaim (or abandon) contracts they consider onerous, so you may find that the liquidator is happy to continue, but on a renegotiated position, or, you may find that your contract is terminated and those looking to complete the work may wish to negotiate with you afresh (although you may find it goes back out to tender).

At the end of the day though, payments, if you are going to be fortunate in being paid, are likely to be delayed. Cash flow and payment uncertainty are going to be an unwelcome and problematic position for an industry which is already under pressure.

When planning this article, as I drove to work this morning, I noticed, a few cars in front, a small white van, branded with the Carillion logo, and it was a timely reminder that at the heart of this are some 20,000 directly employed employees and the hundreds of thousands in the supply chain who are driving to work this morning with no certainty that they will be in employment tomorrow.

For those sorting out how this impacts on them, and their business, please get out your contracts and terms and conditions, and speak to your usual Morisons contact or speak to Pamela Muir, our partner specialising in insolvency, and take this opportunity to talk your own position through. We are confident that we can guide you through this difficult time.

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