After profit warnings starting in July 2017, Carillion plc has gone into compulsory liquidation. Cabinet Office Minister David Lidington has now confirmed that government support for private sector contracts will end 48 hours after yesterday’s announcement.
What about the project pipeline?
Carillion’s liquidation has left a huge gap in the market that will need to be filled. Their project pipeline spanned from billion-pound government contracts, like HS2, to providing work for thousands of individual subcontractors. If those contracts can’t be fulfilled, there’ll be a downturn in the construction market.
Carillion’s business model is based on winning large contracts and outsourcing the works to hundreds of smaller subcontractors. In theory, this would’ve created regional economic benefit – by allowing smaller subcontractors, who would have previously been unable to take part in large scale projects, to do so.
Without Carillion’s involvement, those same subcontractors are now stranded – they may be too small to get further work on similar projects. And, in the worst-case scenario, and Carillion doesn’t pay their debts, they could fail.
Who will get paid?
Secured creditors, like banks, will be the first in the queue. With Carillion’s debts mounting up to £1.5 billion, it’s unlikely that any unsecured creditors – like consultants and subcontractors – will be able to recover anything.
What should sub-contractors do?
If you have a contract with Carillion – or you are in a contractual chain with them – now’s the time to act.
You might have money due from Carillion, or money that you’ll soon be due, or a potential claim for further payment under a contract. In any of these situations, you must act immediately.
Check your contracts for what you should do. They will include provisions that deal with Carillion’s insolvency. Check any collateral warranties that have been provided in favour of the end client or funders. There may be provisions in place that allow a beneficiary to step-in to Carillion’s place as contractor.
If there are no such step-in provisions, you’ll have to decide whether to continue working. Your contract will determine what actions you need to take.
You need to look at what you can do to protect your position, both contractual and otherwise. You need to review your contract immediately. We’ve got lots of experience with Carillion contracts, and can do this for you.
What types of contracts are there - and what issues do they face?
There are three different categories of potential projects with Carillion, that each face different issues.
- Public sector contract between a government body and Carillion
Traditionally, a government body would appoint Carillion, who would then appoint sub-contractors to carry out the work.
In this situation, the government may – contractually – have to step-in to the various sub-contracts. This will depend on the type of contract, and on things like whether the main building contract provides for step-in, or whether collateral warranties do.
The contract will determine what happens with payment. But, the government has indicated that it’ll keep paying.
- Public sector contract between a government body and a partnership including Carillion (like the JV dealing with HS2)
In these sorts of contracts, the joint venture partner could carry on with the project. Or, the government body could step-in.
As above, the contract will determine what happens with payment. But, because the contractor is a joint venture, it might be difficult for the government to continue paying, and it might expect some assistance from the rest of the partners.
- Private contracts
These projects could face the most difficulty. The end client may not have the finances or capability to step-in and take over.
It’s possible that a funder, like a bank, may have step-in rights for these contracts, and exercise them.
Again, payment will depend on the terms of the contract. Any payments currently due may not be made, and there could be a ‘clean slate’ going forward with any funder or end client that exercises step-in rights.
For advice on how best to protect your position, get in touch with our Construction team by emailing s.o’firstname.lastname@example.org. We can provide a cost-effective review for a fixed fee.