After weeks of speculation, Carillion has finally thrown in the towel, or rather its creditors have made the decision on Carillion’s behalf. The shock is that the company is being liquidated immediately without first placing the business into administration.
Please see below our practical guide for sub-contractors and suppliers where the main contractor is insolvent.
Should you continue to work?
Your first reaction on hearing the news of Carillion’s collapse may have been to stop work and remove all tools, materials, plant and equipment from site. However, there are a number of questions you should answer before taking such drastic action:
1. Is your project with Carillion a public or private sector project?
The Liquidator and Special Managers (PWC) have confirmed that, for public sector contracts, all work done and goods or services supplied after the appointment of the liquidator will be paid for. That means that if you continue to work on a public sector contract you will be paid for the work done from 15 January 2018 onwards. However, note that a number of public sector contracts will likely be put back out to tender, which means a new contractor will be appointed in place of Carillion. This may lead to discussion regarding your re-appointment.
If your project is a private sector project, then there is no guarantee that you will be paid for work done on or after 15 January 2018. It will be down to you to negotiate with the special managers (PWC) to determine whether to continue to work on the project. If PWC considers your work to be “critical” to their objectives for preserving as much value in the business as possible, then you may well have the leverage to be able to negotiate for payment guarantees if you continue to work.
2. How much are you owed?
You may be owed sums which you have applied for and which have been certified for payment. As an unsecured creditor, you are unlikely to be paid these outstanding amounts. If you continue to work on the project (and your future payments are guaranteed), it is likely that you will still have lost out on the outstanding debts. However, you will still need to pay your sub-sub-contractors and suppliers, and this will put pressure on your cashflow.
You may be able to hold the special managers to ransom if they consider your work on the project to be critical to their objectives. In such cases, you may be able to negotiate payments for overdue sums on that project and potentially better payment terms to help your cashflow going forward. If your work is not considered to be critical, then, on balance, it may be better for you to cut your losses and look for work elsewhere so that you can continue to meet your own payment obligations.
Termination and Suspension
In the event you elect not to continue to work, you may consider suspension or termination:
- Check whether your contract has termination provisions; it may allow you to terminate the agreement immediately in the event of the insolvency of the main contractor. Equally, the contract may provide for automatic termination in the event that the main contractor enters a formal insolvency process.
- Non-payment of sums due will amount to a breach of contract, which could potentially be used as a basis for terminating a sub-contract or supply agreement. However, this may be subject to giving prior notice or other restrictions, so check the terms carefully.
- Note that if you continue to perform works or services knowing that you have the right to terminate, you may lose the right to bring the contract to an end.
- Sub-contractors may also rely on s.112 of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) to suspend any, or all, of their obligations to carry out further works or services under the contract. If the main contractor fails to pay the notified sum by the final date for payment, the contractor may suspend works following a written notice, giving at least 7 days’ notice of its intention to suspend.
When suspending works or terminating the contract, the following issues should be considered:
- If, as a sub-contractor, you have given collateral warranties to third party beneficiaries which contain step-in rights, then you may be required to notify the beneficiaries of your intention to terminate or suspend. One of the beneficiaries may then wish to take over the contract. In this case, the beneficiary is likely to be required to pay to you all outstanding sums and also any reasonable costs incurred as a result of any legitimate suspension.
- Be prepared to account for any off-site materials listed under the contract or under a separate vesting agreement under which payments have been received. The liquidator will be likely to make subsequent enquiries.
- You need to be aware of health and safety obligations which may prevent you from removing certain equipment which could result in the site being left unsafe.
- Finally, suspension of works will not suspend any duties you may have under the CDM Regulations. You must therefore be aware of your ongoing responsibilities.
Sub-Sub-Contractors and Suppliers
If you have engaged sub-sub-contractors or your own suppliers, you will also need to check the terms of the relevant agreements. For example, if the sub-contractor’s employment is terminated, the sub-sub-contractor’s employment may be terminated automatically or at your discretion. In any event, it is likely that sub-sub-contractors and suppliers will need to be paid for all goods and services provided up to the date of termination.
Depending on the terms of the agreement, sub-sub-contractors and suppliers may look to you for payment of lost profits due to early termination.
If there is a possibility that the ultimate client wishes to engage you directly, then you may well need to keep sub-sub-contractors and suppliers on-side so you can continue to perform your obligations.
Retention of Title
Many contracts contain provisions which seek to prevent ownership of goods passing until they have been paid for. However, these clauses can often be difficult to enforce in practice, particularly where the ultimate client may have paid for the goods in good faith.
If the provisions are effective, you may be able to secure the return of the goods, but it is unlikely that a claim for the proceeds of any sale of the goods would be successful.
You will need to:
- Notify the insolvency practitioner of the claim as soon as possible;
- Identify the goods in question; and
- Identify the retention of title clause and explain how it was incorporated into the contract.
Be aware that the site is likely to have been secured following the main contractor entering an insolvency process, which means that sub-contractor and suppliers will be unable to gain access without permission. Therefore, any attempt to remove materials from site without such permission may be considered as trespassing and could lead to prosecution or injunction proceedings.
This is a difficult area of law and so specialist legal advice may well be required.
You may be lucky and receive payment from the insolvent company, but your luck may run out if other creditors have not been paid, as any payments you receive may be treated as a “preference”. A preference is where the payment made by the insolvent company puts you in a better position than you would have been, and the company wanted to put you in that position.
Another tactic often used as leverage is for sub-contractors to seek payments direct from the ultimate client. Whilst this may benefit the client and the sub-contractor, depending on the terms of the main contract, there is a risk that the client may still be liable for the same payment to the main contractor, the client
Such an arrangement could also breach the insolvency rules which require all unsecured creditors to be treated equally, and so again specialist advice should be sought.
How you respond to Carillion’s collapse will depend on your financial commitments, your contractual obligations, cash-flow implications and any leverage you have when negotiating with Carillion and the special managers. There is no easy answer to this and you will need to weigh up legal advice and commercial needs.
It is vital that you take specialist legal advice and make decisions quickly to avoid Carillion’s demise contaminating your own business. We can and will act quickly to understand your specific situation and needs and advise you accordingly.