This week’s news headlines have been dominated by the collapse of Carillion, the second largest construction firm in the UK with an estimated debt of £1.5bn. The ramifications of such a high profile liquidation has caused shudders across the industry.
The liquidation process
The Official Receiver has been appointed by the court as liquidator of Carillion and PwC have been appointed as Special Managers to assist the Official Receiver.
Any sub-contractor, as an unsecured creditor, will no longer be able to pursue or enforce their own claims against the liquidated company.
There is a set priority in which the money shall be distributed from Carillion’s assets as part of this process. The liquidators will take their fees first, followed by secured creditors (fixed charges), preferential creditors, floating charge holders and then unsecured creditors from anything that is left. Sub-contractors shall sit as unsecured creditors and shall only be entitled to a distribution from the liquidator later on in the process.
It is important to note that the debt burden was considered so severe that other options such as administration or a more informal arrangement with its lenders were not considered viable. The likelihood of recovery for unsecured creditors is therefore considered low. Claims should be lodged with PWC as liquidators and details will be made available on both the PWC and Carillion websites.
How to protect yourself now if you are a Carillion sub-contractor
Sub-contractors to Carillion should check the terms of those contracts, and if necessary take advice on the effect of liquidation. Contracts may not automatically terminate following insolvency, but typically contractual clauses will allow for termination by the sub-contractor in the event of insolvency.
There may also be retention of title clauses, which often become of great importance after a liquidation.
Sub-contractors may have entered into collateral warranties with step-in rights allowing the ultimate client to step-in to the position of Carillion under the sub-contract. If a sub-contractor has provided a collateral warranty on such terms then they should consider any obligations they may have to notify the beneficiary prior to exercising their right to terminate.
Construction contracts typically allow for the main contractor to hold retention from sums due to sub-contractors, to be released when the sub-contractor has completed its obligations under the contract. Main contracts often require the Employer to hold such sums in “trust” in attempt to ring fence those sums from insolvency. This would be very unusual in a sub-contract but provisions relating to retention should be considered.
How to protect yourself in the future as a sub-contractor
Sub-contractors across the UK will now be considering how best to protect themselves from the risk of main contractor insolvency:
- Keep alert to the contractor’s financial position using information available (for free) from Companies House or from specialist credit reports. Reports may identify court judgments against the contractor for non-payment.
- Monitor any evidence of non-payment or late payment on other projects or to other sub-contractors.
- Note any unusual resourcing allocation or turnover of staff on site.
- If you have suspicions that the contractor may be in financial trouble then minimise materials brought to site. Any material on site will be caught up in the insolvency process even where a retention of title clause may be ultimately invoked.
- Use a properly considered contract allowing for termination on insolvency and providing for regular payment. Contracts may allow for a wider definition of insolvency allowing you to terminate prior to formal liquidation proceedings. The imbalance of power between contractors and sub-contractors may preclude it, but a retention of title clause may assist in protecting a sub-contractors position in the event of insolvency. However, any such clauses may not operate where materials have been incorporated into the building under construction. It is important to note that the law in relation to the passing of ownership in materials on construction projects is slightly different as between Scotland and England.
- Sub-contracts often have a contractual right to suspend performance for late payment and this is reinforced by rights under the Housing Grants, Construction and Regeneration Act 1996.
The Carillion fall out will also renew discussions on using project bank accounts allowing for sub-contractors to be paid directly from the project bank account rather than money passing to them via the main contractor. Any such project bank account needs to be carefully considered to ensure it is not caught by the insolvency process.