Carillion collapse - first steps
Tuesday, 16th January 2018
16 January 2018
With the liquidation of facilities management and construction services business Carillion having been confirmed yesterday, and reports quoting Cabinet Office Minister David Liddington that firms working for Carillion on purely private sector deals will only have two days of government support, we look at the steps that those with Carillion group contracts should consider taking at this stage to limit their exposure. It is critical that the risks are properly considered and a robust strategy is deployed at an early stage to avoid preventable losses.
Reports suggest Carillion spent £952m with local suppliers in 2016 and used an extensive network of small firms, who are now waiting to learn if they will be paid. One industry group estimates that up to 30,000 firms are owed money by Carillion.
The first step for all parties should be to check their contract portfolio to identify which contracts and projects may be affected by these events. Note that the subsidiaries of Carillion plc are not necessarily easily identifiable by their names - the Carillion corporate group includes hundreds of wholly and partially owned subsidiaries, many of which have been set up with the express purpose of providing sector-specific services and/or works.
It may not be immediately clear whether an entity comes under the Carillion umbrella, so a detailed contractual review should be undertaken.
Where you do have direct contracts with an affected Carillion group company, you should check any insolvency provisions in those contracts and establish what rights you have flowing from these events. In a simple commercial contract the insolvency of a parent company may not provide the counterparty with any rights. Even so, strategies should be considered and developed in such circumstances in preparation for any non-payment. Steps may need to be undertaken to ensure rights are reserved.
Even if a contractual right does accrue as a result of the liquidation (for example termination), in many circumstances exercising this right may not lead to a favourable outcome. Termination can mean a loss of revenue. It may be more appropriate to call on security deposits or bonds in place to cover contingency arrangements while the situation becomes clearer.
The insolvency provisions of your contracts should be considered closely to ensure the right steps are taken at an early stage.
In the context of larger public service or construction projects, Carillion's insolvency is likely to trigger a right of "step-in" (or analogous procedure), allowing the employer to see that the services or works continue. As a supplier or subcontractor to Carillion this may assist you in maintaining cashflow in the immediate term, but it will rarely provide a long term solution. Direct engagement with the employer may be required to work to achieve a mutually favourable outcome.
Service continuity is likely to be the main concern. There are a number of issues that should be borne in mind when looking at deploying contractual rights and implementing service continuity plans on privately procured projects. These issues will be equally as relevant to contractors who are working in conjunction with Carillion companies through joint venture or similar arrangements.
Payments - Are there provisions for continued payment of suppliers and employees of the contractor? Can (and should) the employer suspend payment on an insolvency event? Do any "Pay Less Notices" need to be issued on any projects currently in construction phase?
Employees - Will existing employees be able to be redeployed on other projects? Will there need to be dismissals if the contract is terminated? Will TUPE provisions apply?
Exit Requirements - If the employer chooses to terminate, what assistance is the contractor required to provide to ensure continuity? Does a framework for handover need to be agreed between the parties? Are there monies available to cover these services?
Handover - There is usually a general requirement for the contractor to handover the relevant assets to the authority following termination. Is the asset register up to date? Are there procedures for such an event? What additional resources are required to deal with this?
Supply chain impacts
Even if you are not in direct contracts with Carillion, the effects are likely to be felt right along the supply chain. Carillion have a significant portfolio of contracts and assets; the potential impact should not be underestimated.
You should be poised to deal with any compounding factors that result from Carillion's liquidation as a subcontractor or supplier, particularly if you operate within Carillion's core sectors.
The practical matters
Apart from the contractual and commercial issues, there are also a number of practical matters that companies and public sector bodies should be considering at this point:
Access - Do your project representatives have appropriate access codes/ passwords to service centres and sites shared with Carillion group companies? Do you share equipment or assets on site?
Security - Employees may choose to abandon their roles in expectation of dismissal or non-payment. Are there appropriate arrangements in place to ensure sites and equipment are appropriately secured in the absence of employees?
Contingency Plans - These are usually in place for long term contracts and will be relevant if Carillion is part of the supply chain. Is the Contingency Plan up to date? Is it still fit for purpose?
Once these short term issues are addressed, companies and public bodies will need to adopt strategies to deal with the longer term issues as the liquidation unfolds. Re-procurement or retendering may well be necessary on some projects, which is time consuming and costly for all parties.
The Carillion group of companies has been placed in a court-based form of insolvency called "compulsory liquidation". Unlike other voluntary insolvency procedures where it may be possible for the entity to carry on by agreement with its creditors, at the end of the compulsory liquidation process the company will be dissolved. The Official Receiver's function will be to collect in and realise the company's assets, and to distribute the proceeds to the company's creditors; it has wide-reaching powers to assist in fulfilling this function. PWC has been appointed as "Special Managers" to assist the Official Receiver in compulsory liquidation. It has released a statement on its appointment here.
Note that although employees are automatically dismissed when a winding up order is made, PWC suggests key employees remain on hand to deal with creditors, so some may be retained by the liquidator to assist with that process. We can assist with considering the practicalities of this under existing employment contracts.
Re-procurement and re-tendering
The need to find new contractors and supply chains will be a significant burden for public sector bodies. It can also be a significant burden for contractors to retender on existing projects, particularly when they may already be under payment pressure following on from the liquidation.
Some public sector parties may look to use their "get out of jail free card" emergency powers to undertake negotiated procedures without notice. This could be helpful for both public sector and contractors in some situations, as could the safe harbour provision relating to insolvency for modification without the need for a new procurement.
We can assist in helping develop practical and pragmatic re-procurement options for the short and long term.