Subcontractors are left counting the cost of Carillion’s demise - what steps should they take?
Thousands of subcontractors have been left counting the cost following the announcement that the UK’s second-biggest construction company has entered compulsory liquidation.
For those involved in Carillion’s public sector contracts, the government has given some assurance that these will continue, and any costs incurred will be paid as an expense of the liquidation going forward. However, for those involved in private sector contracts, the implications are more significant. The majority of subcontractors and suppliers have been informed by the liquidator that they will only be paid for two days.
Carillion’s use of 120-day payment terms and the fact that substantial sums are due to senior lenders, means that many of its subcontractors could be significantly out-of-pocket as unsecured creditors with little prospect of a dividend from the liquidation. So, what can they do to protect their rights and improve their position?
A subcontractor should consider any potential liability towards an employer through a direct contract, or collateral warranty, or indeed an implied contract
The first step for subcontractors affected by Carillion’s demise is to assess the extent of their exposure. This will vary from business to business. For example, a small business with three months’ unpaid invoices, where Carillion contracts represent 50% of their business, could conclude that their business model is unsustainable without some significant restructuring or refinancing. Others may find that some form of mitigation is possible to limit their exposure to financial risk.
When assessing their position, subcontractors should ensure they understand their contractual obligations fully and seek to suspend or terminate supplier contracts as required. Relevant notices should be issued correctly and on time. They should also take legal steps to recover any plant or materials that may have been left onsite and for which they remain unpaid. Finally, records should of course be updated to show the status of works carried out, monies paid and sums still outstanding.
Seeking professional advice to understand any ongoing legal obligations in respect of specific contracts with the employer and their own suppliers is essential.
A subcontractor should consider any potential liability towards an employer through a direct contract, or collateral warranty, or indeed an implied contract. A subcontractor might have a duty of care to an employer or indeed future occupiers and/or owners of the building in respect of personal injury and property damage to the property. A subcontractor may also be liable to the employer by virtue of the drawings and/or specifications or other documents produced by the subcontractor, if those documents have been produced negligently.
The complex nature of many supply chains in the construction sector suggests that the fall-out from Carillion’s demise has only just begun and the situation will continue to develop over the coming days and weeks
It may be possible for subcontractors to withhold payment down the supply chain under the Housing Grants, Construction and Regeneration Act 1996 (as amended). This detail may not have been noted when the contract was signed and some subcontractors could be left counting the cost.
The precise terms of any insurance cover should also be considered closely as the inclusion of creditor insurance could minimise the subcontractor’s financial exposure.
Termination clauses could pose a particular problem for subcontractors and the legal position in relation to title of goods on site for which the subcontractor has not been paid can be particularly complex.
Practically, the liquidator has to ensure that contracts are completed in order to recover certified sums and work in progress. The liquidator can do this by arranging for works to be completed or novating contracts to another contractor with the employer’s consent. If this does not happen, the value of certified sums and work in progress is very likely to be completely eroded by the employer’s termination claims. This presents an opportunity for key subcontractors on valuable projects to re-negotiate terms which may, for example, include a partial or full payment for work completed to date.
The complex nature of many supply chains in the construction sector suggests that the fall-out from Carillion’s demise has only just begun and the situation will continue to develop over the coming days and weeks. The announcement of Carillion’s liquidation will be a cause for concern for many subcontractors and an understanding of their rights, opportunities to leverage their position and areas where potential losses can be mitigated will be crucial during this difficult time.
Rachael Hobbis and Michael Mulligan are construction insolvency specialists at law firm Shakespeare Martineau.