The Domino Effect of Liquidation
The liquidation of Carillion may have far reaching consequences for businesses all over the country. The failure of any large company can have a domino effect. Its suppliers will be unpaid, face cash flow problems and may also go into liquidation. They, in turn, have their own suppliers, who will be unpaid and may also go into liquidation, leaving their suppliers unpaid… and so the shockwaves spread. There can also be severe consequences for Carillion’s customers, who face unexpected delays and expenses in finding someone to continue vital work. I have seen estimates that as many as 30,000 businesses are owed money by Carillion alone.
Carillion worked in the construction industry, including many high-profile projects, and also provided support services to numerous large organisations including hospitals and prisons. They held over 450 government contracts. (I will not comment on the political issues arising from that).
They employed more than 20,000 people in the UK. Those employees face an uncertain future. The work that Carillion was doing will still need to be done. The government has said that staff and contractors working on public sector projects will continue to be paid. This should provide some comfort, but many sites stand idle while the position is sorted. Staff employed on private sector contracts are in a very uncertain position. Each project may be taken over by another company who should then take over the work force. Anyone finding themselves in the situation should seek legal advice on their employment position.
Many of the people working on Carillion projects were not employed by Carillion. Much of Carillion’s business model was based on sub-contracting. For example, on a construction project they would provide overall management, but all or most of the work on site would be carried out by sub-contractors, hired in for specific work from laying drains to installing air conditioning. This means that Carillion had many, many suppliers of both work and materials. Carillion was delaying payment of bills by up to 120 days so their poor payment record was already causing cashflow problems for suppliers. Many could ill-afford the additional shock of the liquidation.
What can a business do if it is owed money by Carillion or one of its domino suppliers?
It is important to understand that once a company has gone into liquidation then it can no longer trade and all of its assets are frozen. No court action can be taken against that company without leave of the court, which is only given in exceptional circumstances, unlikely to apply here. In simple terms the liquidator will sell the Carillion’s property and collect money owed to them, then pay his own expenses and distribute the balance amongst creditors who are owed money. In a simple case, if total debts are £100,000 and available funds after costs are £10,000 then all the creditors will get 10p in the pound. In this case there are estimates that creditors will get less than 1p in the pound.
There will usually be many contracts that are halfway through when the blow falls. The customer (for example a land owner with a partially completed development being managed by Carillion) may owe some money for work to date, but will have a large claim for the failure to complete the job, so will refuse to pay anything.
The land owner will be very keen to find that alternative contractor. If a new business steps in to take over the work, it is unlikely that it will want to pay existing suppliers for what has already been done. As a matter of law, that is down to Carillion, nothing to do with the new contractor.
However some suppliers will be in a stronger position. Do they have any negotiating leverage?
Some suppliers include “retention of title” clauses in the terms and conditions of business. The contract might say, for example, that, “All the cement that my company has supplied to you remains my company’s property until you’ve paid all my invoices”.
In this case, the supplier may not get paid, but may cut its losses by recovering its goods and selling them elsewhere. If this is a more specialist product, the supplier may be able to persuade the land owner to pay direct, rather than allow it to be taken away, leaving him to find a replacement elsewhere.
Retention of title clauses are notoriously difficult to enforce and legal advice is required, at the time of preparing your terms and conditions and when attempting to enforce. For example, can you identify exactly which cement on site was supplied by you? Labels on the packaging may be vital. Also, goods supplied to a building site tend to be used quickly. Once cement has been mixed and incorporated into, say, the foundations of the building then it is no longer “your cement” and it is too late.
Even if the cement is there, do your terms allow you to go on site and recover your property?
Land owners are likely to turn to the sub-contractors already working on their project. Suppliers of labour may be in great difficulty, unless they provide highly specialist services. A plasterer is unlikely to have much negotiating leverage. The site owner may want him to continue, but if he refuses to work unless paid to date then another plasterer can be found. This may threaten the first plasterer with bankruptcy.
On the other hand, consider a systems engineer with a sub-contract from Carillion, who had supplied and installed electrical, fire alarm and broadband cables et cetera through most of a new development. The engineer is owed money for the work to date, but the land owner still needs the job to be finished. The relevant wiring etc. is concealed and the engineer has had the foresight to keep hold of all the drawings. The land owner may offer to pay the engineer direct to finish the installation, but does not want to pay for the work that had already been done: that is the liquidator’s responsibility. The engineer can argue that bringing in different contractor to finish the job would be far more expensive than paying for the work to date plus a sensible figure to finish the job. The new contractor would not be familiar with the site, what had been done to date, exactly where all the wiring runs, how the system was planned to fit together etc; there would be huge costs and delays. In these circumstances the engineer can drive a hard bargain with the land owner. This of course assumes that the land owner is not so badly affected by the demise of Carillion that it is faced with liquidation.
This example is entirely fictitious, but there must be many similar situations developing all over the country.
Many businesses may find that there is little prospect of recovering anything from Carillion or its suppliers. If this is on the horizon they should seek urgent professional advice. This may be with their accountants or bankers or from specialist insolvency practitioners, who may be able to take action that would save all or part of the business before it is too late, saving livelihoods for the business owners and its staff.
There are numerous ways in which the consequences of this matter can affect businesses and GA solicitors will be pleased to advise on many of the legal implications. Get in touch with the disputes team by calling 01752 203500 or be emailing me via stephen.allen@GAsolicitors.com.
Stephen Allen, partner