This week’s announcement of the liquidation of construction giant, Carillion, has plunged the financial stability of a significant number of SMEs and contractors in the company’s supply chain into uncertainty.
Although the Government announced that it would be stepping in to fund public sector contracts awarded to the company, most of the company’s contracts came from its private sector operations. And with these only receiving Government support for two days, the outlook for them is less certain. This could have significant implications for the construction supply chain, where 86 per cent of employment is dependent on small and medium-sized sub-contractors.
While it’s too early to have any details on payments to unsecured creditors and for contractors, with many specialist sub-contractors at risk of not getting paid – Carillion is said to have had just £29m in cash and more than £1.3bn of debt when it filed for administration earlier this week – this puts jobs and companies under threat. One analyst has estimated suppliers may receive less than 1p for every £1 they are owed.
So what should those 30,000 businesses, many of them SMEs, caught up in the debacle be doing now? Nick Johnson, Managing Partner at Glaisyers Solicitors, advises…
Says Nick: “In short, unfortunately there’s not a lot they can do. Many of the processes of Carillion’s liquidation will be the same as those seen in all liquidations, which results in a degree of investigation into the affairs of the liquidated company, collection of assets and payment of liabilities. This can carry on for years after a company’s initial demise. With many contractors working on 120 days terms, they will already be at the limit of their cash reserves.
“If these businesses are reliant on contracts from Carillion, or is a significant creditor, there is a risk that they too could also end up insolvent. Particularly because those smaller businesses may lack the cash to continue to pay their own creditors.”
While unsecured creditors will no longer be able to pursue or enforce their own claims against the liquidated company, they will be entitled to share in any distribution made to the unsecured creditors by the liquidator later in the process, subject to any funds being available for them after secured and preferential claims are taken into account. However, the likelihood is that no one is going to get anything out of this.
Advises Nick: “I’d advise anyone who has a contract with Carillion to dig it out now to check the small print, and if necessary take advice on the effect of liquidation. Contracts may not automatically be discharged, but often contractual clauses will allow for termination in the event of insolvency. This could include a retention of title clause, sometimes known as a Romalpa clause or as a reservation of title clause, which allows the supplier to retain ownership over any goods supplied until certain conditions are met, thus providing them with a form of security. For example, if it is stated in the contract, the supplier may retain the title to the goods until full payment is received. When valid, the supplier’s claim to any unused goods will be binding against any trustee or liquidator subsequently appointed.”
While it is too early to say how many subcontractors and suppliers are directly affected by outstanding payments or loss of work, many contractors, particularly those awaiting longstanding payments from cash retentions, will already be writing off the cash. In those circumstances, the business owners need to take urgent professional advice, both to see if the business can be saved and to avoid personal liability in the event it cannot. Also the banks have said they will give support but this is likely to be limited.