Never too big to go bust!

22nd Jan 2018

The fallout and ramifications of Carillion going into compulsory liquidation has been widely reported in the local and national media during the last week or so. Just about every company involved with servicing the construction industry – solicitors, accountants and business insolvency specialists have published articles on their websites, on why it occurred and what is going to happen to the companies awaiting payment or undertaking work.

Construction and Engineering

There is no doubt of the wide ranging consequences that Carillion’s failure brings, the volume of comment reflects this as these are very concerning times for anyone who was expecting to get paid by one of the Carrillon group of companies.

Going straight into liquidation is both a huge and unusual step, it reflects the poor state of Carillion’s financial position – immediate liquidation was considered to be a better option for their creditors than the sale of the group (or parts of it) in administration.

The implications of Carillion’s liquidation to its enormous supply chain will be significant. Many are owed substantial sums of money and the fact that payment may not now be received will risk the future of many within that supply chain. It has been estimated that between 25,000 and 30,000 firms are owed money by Carillion, with total debts running into the hundreds of millions of pounds. More worryingly, in previous major contractor insolvencies it is estimated that 18% of those firms owed money did not survive the next five years. It’s crucial for suppliers and sub-contractors to consider their position very carefully in the coming days and weeks.

As Carillion has gone into liquidation, most forms of contract will allow the contractor to terminate the contract and the obligations will be suspended. There has to be the possibility that sub-contractors and consultants, already a long way through projects, will be a valuable resource and employers and that any new main contractor may wish to retain the use of the resource so they can mitigate delay and disruption to the project. This could provide a negotiating stand point for the companies and individuals in the supply chain. It may also be that sub-contractors and consultants have granted collateral warranties to Carillion’s employers, which contain step in rights.

Another option, although relatively unusual, would be that contracts may provide for the automatic termination of the contract on the insolvency of a contractor and the back to back automatic termination of any sub-contracts. We recommend that all payment notices should be served strictly in accordance with the contract in question, so there can be no doubt as to their validity.

The ability of sub-contractors and consultants owed money by Carillion to recover those un-paid sums from the Employer or replacement contractor is likely to be slight and contractors will still have to pay their workers and pay for materials. Contractors and sub-contractors should check their terms of contract and look to recover any materials under a Retention of Title clause. We can advise on this. In this respect, those working with Carillion will also need to look closely and quickly as to whether it can legitimately retain title to any materials and equipment that have been supplied as part of its works that have not been paid for.

The size of a company like Carillion going into liquidation illustrates exactly why no company is too big to fail. Many small companies feel that their futures are assured when they pick up long term contracts with multinational conglomerates and quite often acquiesce to their wishes regarding the terms of the contract, just to get the work. This lack of foresight could prove telling in the future and should encourage companies to get legal advice for any contracts they are signing.

If you want to discuss any contractual issues your company may have or clarify the content of one you are about to sign then you can contact me on ph@rogers-norton.co.uk or on 01603 675639.