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Public Sector Bulletin - 16 January 2018

With the news of major government contractor Carillion's liquidation, we look at the practical steps public bodies should be taking if Carillion is one of their contractors or is part of their supply chains so as to ensure there is as little disruption as possible across their service areas.

Contract review

The first step for all public sector parties should be to check their existing service and works contracts to identify which may be affected by these events. Note that the subsidiaries of Carillion plc are not necessarily easily identifiable by their names - many have been set up with the express purpose of providing services and/or works to the public sector and accordingly may not share the name of the parent company.

Where you have direct contracts with a Carillion contractor, the first step will be to check the insolvency provisions in those contracts and establish what rights you have in relation to that contract. Often there will be a right of "step-in" or similar provisions to allow you take measures to ensure service continuity. The insolvency provisions of your contracts should be considered closely to ensure the right steps are taken at an early stage.

Even if you are not in direct contracts with Carillion, the effects may be felt further down the supply chain. You should be poised to deal with any compounding factors that result from Carillion's liquidation as a subcontractor, particularly if you provide services within Carillion's core sectors.

Service Continuity

If you have direct contracts with Carillion, or a Carillion party plays a key role in your supply chain, a key concern will naturally be service continuity. Service continuity provisions are a feature of the majority of public sector outsourcing contracts and it is likely you already have contingency plans in place for these circumstances.

There are a number of issues that public bodies should bear in mind when looking at deploying contractual rights and implementing service continuity plans.

1) Payments

Are there provisions for continued payment of suppliers and employees of the contractor? Can (and should) you suspend payment in an insolvency event? Do any "Pay Less Notices" need to be issued on any projects currently in construction phase?

2) Exit Requirements

If you choose to terminate, what assistance is the contractor required to provide to ensure continuity? Does a framework for handover need to be agreed?

3) Handover

There is usually a general requirement to handover the relevant assets to the authority following termination. Will you have the resources to deal with this? Is the asset register up to date?

Practical matters

Apart from the contractual and commercial issues, there are also a number of practical matters that public bodies should be considering at this point:

1) Access

Do your project representatives have appropriate access codes/ passwords to service centres and sites?

2) Security

Employees may choose to abandon their roles in expectation of dismissal or non-payment. Are there appropriate arrangements in place to ensure sites are appropriately secured in the absence of employees?

3) 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?

What next?

Once these short term issues are addressed, public bodies will need to adopt strategies to deal with the longer term issues as the liquidation unfolds. Re-procurement may well be necessary which is time consuming and costly.

Liquidation

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

The need to find new contractors and supply chains will be a significant burden for public sector bodies. The construction and service delivery markets are probably reeling from Carillion's collapse as they assess the impact of the liquidation.

The impact of the public procurement rules will need to be factored into any contingency plans both in the short and long terms. No doubt many of the works and services contracts which are able to be terminated for contractor and/or supply chain insolvency provide for the recovery of re-procurement costs - such provisions may well be useless when there is no entity which can pay these costs.

For re-procurement the "get out of jail free card" to use emergency powers to undertake negotiated procedures without notice could be helpful 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.

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