Carillion’s insolvency—how to protect yourself

19 Jan 2018 | 10 min read

Following the liquidation of Carillion earlier this week, Ray O’Connor, Devinder Singh, Russ Hill, Graeme Bradley and Roy Grist of Squire Patton Boggs LLP look at the practical issues for subcontractors, employers/developers and funders.

Original news

The government has committed to deliver all public sector services following the insolvency of Carillion PLC. Carillion announced the decision to initiate insolvency proceedings following a meeting with its bank-ers and lenders. The official receiver has been appointed by the court as liquidator, along with partners at PwC that have been appointed special managers. The government has also said it will provide the funding required by the official receiver to maintain public services. Legal experts suggest the collapse of Carillion indicates some worrying signs in terms of UK business.

Introduction

It has recently been announced that Carillion has gone in to compulsory liquidation. The companies we understand are currently affected are as follows:

  • Carillion Plc
  • Carillion Construction Limited
  • Carillion Services Limited
  • Planned Maintenance Engineering Limited
  • Carillion Integrated Services Limited
  • Carillion Services 2006 Limited

If you are involved in a construction, engineering or FM project that includes Carillion, you need to consider your options and how to protect yourself.
In this article, we share some of our thoughts on issues to consider if you are a:

  • Sub-contractor
  • Employer/developer
  • Funder

Current State of Affairs

The official receiver has been appointed as liquidator and a number of partners from global accountancy firm PWC have been appointed as special managers to assist the official receiver in the liquidation.

Special managers are officers of the court whose powers are conferred upon them by the court. They will be expected to carry out an initial evaluation and review within a few days, covering matters such as cash flow projections, trading accounts, potential recoveries and protection of creditors’ interests.

The official receiver’s priority will be to ensure the continuity of public services while securing the best outcome for creditors. All employees, agents and subcontractors are being asked to continue to work as normal on the basis that they will be paid for the work they do during the liquidations. However, any monies owing to parties by the companies prior to the date of liquidation will be claims against the companies and will, at best, attract a dividend payment only in due course. Any attempt to enforce payments or other contractual terms against any of the companies will almost certainly fail as a result of the liquidation. The special managers are encouraging all parties to contact and engage with their usual contacts at the various companies in the normal way. For matters that require urgent attention from the special managers, various PWC email addresses are given so that disruption can be minimised:

  • Central Government: government.carillion@uk.pwc.com
  • Infrastructure: infrastructure.carillion@uk.pwc.com
  • Corporate and Regions: corporate.regions.carillion@uk.pwc.com
  • Building and Construction: building.carillion@uk.pwc.com
  • Employees: employees.carillion@uk.pwc.com
  • Shared Services: sharedservices.carillion@uk.pwc.com

The special managers will be exploring any potential sale of the businesses and assets in whole or part, though the prospects of a successful sale are unclear at such an early stage of the process.

General

Against that backdrop, if you have any contract with a Carillion entity, you will, of course, be concerned to ensure that your rights and finances are protected. We can offer guidance depending on your circumstances.

Understandably, you may be thinking immediately about your rights to suspend or terminate your contract. As a word of caution, you first need to identify the relevant Carillion entities involved. The current insolvency may or not be relevant to the entity with whom you are in contract, so taking premature action to either suspend or terminate at this stage may cause more harm than good. As you probably know, an un-lawful exercise of a termination right may very well give the other party the right to terminate and claim damages (which may, for example, include loss of profits on the overall project or the cost of engaging others to complete works and claiming the difference from you). As outlined below, there may be other ways to protect your position and it would appear that the special managers are looking at ways to ensure that projects are not jeopardised in practice.

Sub-contractors

You may want to enter into discussions direct with the ultimate employer (or via the special manager con-tact details above) to explore your options and ensure that you continue on site with the project and continue to be paid.

In parallel, you should consider whether you have the right to suspend or terminate in order to prevent wasted irrecoverable expenditure on contracts. If you have sub-suppliers, they will also be concerned to protect their interests and you should expect pressure to be exerted in practice.

If you have the right to suspend or terminate, then remember to check the terms of any collateral warranties or direct agreements that you may have entered into, as these may require you to serve notice on, for example, the employer or funder before exercising any such rights. They may have step-in rights and you may be required to honour these. Some contracts provide for novations and we can advise on the wording of these to protect your interests.

If there is an ability to make any claims under the contract, then you should consider taking action to crystallise these now, albeit recognising that your ability to recover will likely be affected by the solvency of the Carillion entity. Likewise, any payment applications linked to due dates or payment milestones should be processed as soon as possible.

Conversely, if there are potential claims against you, you should consider carefully the ability to set this off against any liability the Carillion entity may have to you under the terms of the sub-contract.

While you should be doing this as a matter of course, it would be prudent to check that any insurances that are required to be implemented on the project by the Carillion entity are in force and that there is cover-age/waivers of subrogation for you (as appropriate).

If you have large supply contracts, you should check the payment terms and retention of title provisions to ensure that you are not left out of pocket in the event of any termination of the contract.

In more international contracts, there may be rights under the contract to obtain evidence of adequacy of funding arrangements in place. These should be explored, as they may be linked to termination and suspension rights as well. Likewise, some jurisdictions allow “leapfrog” claims against the ultimate employer of the Carillion entity and these rights should also be explored in practice.

Employers/Developers

You may want to enter into discussions direct with the special manager above to explore your options. Obviously, you should consider whether you have the right to suspend or terminate as soon as possible given that the relevant supply chain entities will also be looking to protect their interests.

Any payments you make may not, in practice, find their way down the supply chain, so if you need to exercise any step-in rights or need to agree contracts with anyone in the supply chain, you may end up paying twice. The use of a project bank account arrangement might be a sensible step to consider and would be welcome news to the supply chain in practice. Remember that termination has very serious repercussions on any project, not least building out and issues about anyone else taking over responsibility.

You should consider your funding and joint venture arrangements (if any), as well as sale agreements to see whether this gives rise to any events of default or other rights for those entities. If the Carillion entity is part of a consortium, you will need to consider whether your rights are protected or jeopardised by this in practice.

Own users or purchasers/tenants will be particularly concerned with their ability to pursue the main con-tractor for defects claims in the event of concerns over their solvency (assuming the entity is not currently insolvent). Depending on the stage of works, you may wish to consider incepting decennial liability cover to protect the marketability of your asset/rights to recover in the event of any issue.
You should, in any event, look at your contracts to obtain up-to-date design documentation, reports, programmes and the like to ensure that if you have to terminate and engage others, you have all the relevant information you need in order to finish the project.

If there are key sub-contractors, you may have rights under any collateral warranties to step in and take control. This should be exercised with caution and you should be aware that often you will take on liability for any outstanding or unpaid amounts. Engagement with the supply chain should be undertaken carefully.

You should consider any bonds, bank or insurance guarantees, parent company guarantees and the rights under the relevant contracts. Remember that the ability to make a call under a bond may be regulated by the underlying contracts, some of which have indemnity provisions for a wrongful call. Any parent company guarantee may be effectively worthless in practice and the effects of this under the contract should be explored.

A number of bank or insurance-backed guarantees may not actually be able to be called in the event of in-solvency, as these may not be default triggers. Again, before taking any action, these should be carefully reviewed.

In more international contracts, sub-contractors may have “leapfrog” claims against you in the event of in-solvency of the contractor. You should explore whether this is a possibility in practice, as this may involve uncertainty as to whom payments should be made.
While you should be doing this as a matter of course, it would be prudent to check that any insurances that are required to be implemented on the project by the Carillion entity or their subcontractor chain are in force and that there is appropriate coverage for design and/or works.

Funders

You may want to enter into discussions direct with the special manager above to explore your options.

You should consider your facility agreements and associated funding documents to ascertain whether this gives rise to any rights under those agreements and whether and how you might wish to enforce those rights.

While these should be in place with proper due diligence and application of conditions precedent/subsequent, consider and make sure that the sub-contractor collateral warranty and direct agreement packages are in place should you need to consider step-in rights. Remember that sub-suppliers will also be concerned to protect their interests and you should expect pressure to be exerted in practice and the project to be in jeopardy as well.

Consider the agreements that your borrower has with any purchaser or end user to ascertain whether finances needed for repayment are at risk.

If there is any monitoring surveyor involved in the project, ensure that up-to-date design documentation, reports, programmes and the like are obtained to ensure that if you have to step in, you have all the relevant information you need in order to finish the project.

While you should be doing this as a matter of course, it would be prudent to check that any insurances that are required to be implemented on the project by the Carillion entity or any subcontractor are in force and that there is appropriate coverage for design and/or works.

Conclusion

Given the current state of affairs, it is important to take stock and consider your rights and potential exposures and make contingency plans. This is necessarily only a short note and does not cover all the issues you should consider.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

This analysis was first published on LexisPSL Restructuring and Insolvency.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

What is a special manager and when to appoint one?

What is the process for appointing a special manager and what evidence is required?

 

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

 

Area of Interest