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Affected by the insolvency of Carillion?

Affected by the insolvency of Carillion?

18 January 2018

See the RIBA response to the Carillion collapse by Executive Director Adrian Dobson

Carillion, Britain's second largest construction firm, entered insolvency together with several subsidiaries on Monday 15 January 2018 with debts of about £1.5bn.

The company, which employs 20,000 people in the UK alone, was hit by cost overruns on big projects, problems with contracts in the Middle East and a large deficit in the company pension scheme, according to BBC News.

Fears run high that Carillion’s insolvency will cripple or adversely affect a substantial number of its extensive network of local suppliers and subcontractors in a significant way, the majority of which are SMEs.

Trade body Build UK estimates that between 25,000 and 30,000 businesses are owed money by Carillion. According to press reports, Carillion was holding more than £800m in payments owed to the supply chain. How much, if any, of this money, will be paid out to its creditors remains unclear.

Noble Francis, Economics Director at the Construction Products Association (CPA), commented following a meeting with the Secretary of State and the Minister for Small Business:

‘At this stage, we don’t know the full impacts of Carillion being liquidated. The key impact will be on around 20,000 sub-contractor firms that work with Carillion. The last significant bankruptcy in construction was ROK in 2010, which has a revenue of £715 million compared with Carillion’s £5,200 million, so this is very much a different scale.

'Government will be covering Carillion’s costs on public sector service contracts hereon to ensure that public services on schools, hospitals and defence continues. However, that still leaves public construction work and private sector construction, which is not covered. Work on joint ventures will be assigned to the other firms on the joint venture and other contracts will need to be reassigned by the receiver, PWC.’

The new Royal Liverpool University Hospital, under construction in 2014. The project for a new facility with 646 beds, the biggest single-bedroom hospital in England, contributed to the demise of Carillion following the discovery of asbestos on site and cracks in the new building

What happens now?

The High Court appointed the Official Receiver (OR) as liquidator, with support by senior PwC personnel as Special Managers.

The government says all companies will continue to operate to provide continuity of public services, until further notice.

Supplier contracts will be reviewed and any affected companies contacted soon with further instructions. For further information and contact details please refer to the PwC Carillion page.

There is an automatic stay of legal proceedings against a company or its assets in the case of compulsory liquidation. Anyone wishing to bring or pursue legal proceedings against that company must first apply to court for permission. If the claim is for monetary relief only, the court is unlikely to grant permission; generally, only claims of a proprietary nature are allowed to continue.

What does the Carillion compulsory liquidation mean for affected RIBA members?

Any outstanding payments that RIBA members may be due are subject to insolvency law as set out in the Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016.

A creditor’s place in the order of priority of payment will often determine the return to them. Usually, the order in descending priority is:

  • fixed (secured) charge holders
  • fees and expenses of the insolvency process
  • preferential creditors (such as employees)
  • floating charge holders
  • unsecured creditors
  • interest
  • shareholders

A secured creditor is generally a bank or other asset-based lender that holds a fixed or floating charge over a business asset. When a business becomes insolvent, sale of the specific asset over which security is held provides repayment for this category of creditor first.

Unsecured creditors can include suppliers, customers, HMRC and contractors. They rank after secured and preferential creditors in an insolvency situation.

‘Most RIBA members will likely find themselves in the category of 'unsecured creditors'’, explains Robert Stevenson, Partner at BLM Solicitors.

‘In practical terms, the only time a RIBA member is likely to be a secured or fixed or floating charge creditor is when they have agreed to lend money to the company that has gone into liquidation, alternatively if they have a judgement against that company and managed to register a charge before it went into liquidation.

In all other instances RIBA members are likely to be preferred creditors because they are employees, or simply unsecured creditors.’

Claims by unsecured creditors are paid on a pari passu basis. The pari passu principle means that all unsecured creditors in an insolvency process must share equally any available assets of the company, or any proceeds from the sale of any of those assets, in proportion to the debts due to each creditor. Unsecured creditors may receive a dividend paid pro rata at the end of the liquidation, and possibly also an interim dividend. However, in some cases the dividend to unsecured creditors will be just a few pence in the pound, and it may be nothing at all.

What to do now if you are affected

Robert Stevenson advises: ‘Employees should receive early notification from the liquidator whether he intends to continue to employ them. This is realistically only likely if they are engaged on a government connected contract.

If they are unsecured creditors they should immediately terminate their appointments if they have RIBA terms under clause 8.2.2 and should give notice of suspension of any licence pursuant to clause 6.3.2 if there are sums outstanding and due to them, or once those sums become outstanding and due.’

Finella Fogarty, Partner at DWF LLP, further qualifies this advice. She recommends contacting PwC ahead of doing this to gain clarity on the plans for their contract.

‘This advice may be good on a case by case basis depending upon the nature of the project or contract. It may be that the Liquidators, via its Special Managers are intending to complete the contract if that is in the best interest of the creditors of the insolvent entity (there will be a financial benefit) and where there are funds to do so. I believe at present this is the intention in relation to many public sector contracts. As a general rule, liquidation does not automatically terminate contracts of a company (BCCI v Malik [1996] BCC 15) or excuse either party from continuing to perform, if there is no express provision to that effect in the contract.

However, in this case, there is often a contractual right to terminate under the contract and your members should review their contracts in this regard. Your members should first check which Carillion entity they contract with as it may be that the entity is not yet in liquidation. Below is a list of the Carillion entities which are now in Compulsory Liquidation:

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

You can keep a check on PwC's website for additional entities which may also enter into insolvency in the days and weeks ahead.’

Fogarty urges creditors to ‘contact the liquidator at the earliest opportunity to make them aware they have a claim. They will then be sent a proof of debt form for completion. As will any other creditors of which the liquidator is aware from his review of the company books and records. Before making any distribution of monies, the liquidators will also advertise to catch any creditors of which they are not already aware to give them the opportunity to 'prove'.’

The liquidator will then assess all the proofs of debt and may either accept a claim in whole or part or reject it.

Providing proof of debt swiftly means a creditor can challenge any rejection of their claim early on, and get a general idea of the status of the liquidation and the likelihood of any financial compensation. Creditors are entitled to receive reports on the progress of the liquidation from the liquidator.

James Hutchinson of Beale & Company, in an article for the CIC Blog, advises firms that have exposure to a Carillion group company to 'immediately conduct an internal review of your exposure to Carillion, its subsidiaries and related joint ventures. Collate all contractual documentation to enable you to review your legal options' and 'be extremely cautious if asked to enter into a new contract with the liquidator, paying close attention to the contractual terms.

If already in a contract with Carillion, ensure that payment notices are served on time. This is essential for maintaining your contractual entitlement to payment.'

Lodging a claim

If you are owed money by Carillion you should contact the OR to be added to the list of creditors if you haven’t been contacted already. Information on how to claim money bank from a bankrupt company in compulsory liquidation is available on gov.uk, along with a proof of debt template.

Tax relief for Carillion creditors

Business Secretary Greg Clark has been quoted to say that the government will urge HMRC to use leniency when collecting taxes from Carillion suppliers owed money. What this might mean in practice remains to be seen.

As a general principle, six months after writing off a debt in their accounts, a company may be able to claim VAT bad debt relief from HMRC. Finella Fogarty cautions that, in this instance, the tax position can be complex, depending on the group structure, but that suppliers may nevertheless be able to claim relief from VAT on supplies of goods or services made but not paid for.

Potential implications for professional indemnity cases

Mark Klimt, Partner at DWF LLP, who specialises in the field of professional indemnity, reflects on the wider implications for architect's of Carillion's demise:

‘On a number of projects (past and present) there will now possibly be one less (accessible) target for bringing a claim in the event of a problem being experienced. In theory, the delineation between design error and workmanship error should mean that a designer will continue only to be called to account for its shortcomings. However, in practice, the shape and emphasis of claims tends to be influenced by the accessibility and attractiveness of the targets.

There will also be issues around guarantees that may no longer be valid, and where there is more than one party responsible for a loss, the application of joint and several liability. Indeed, the net contributions clause in the RIBA standard appointment documentation, limiting the architect's liability to the proportion of total loss which fairly reflects its contribution towards that loss, came into existence precisely to address this sort of situation - where a major member of the construction team suddenly disappears.’

Thanks to Noble Francis, Economics Director at the CPA; Robert Stevenson, Partner at BLM Solicitors; Finella Fogarty, Partner at DWF LLP; and Mark Klimt, Partner at DWF LLP.
Other sources: uk.practicallaw.thomsonreuters.com and www.lexisnexis.co.uk

Disclaimer: This Professional Feature has been compiled with the best sources available at the time of writing. It should be considered broadly informative and we cannot be held accountable for the accuracy or completeness of the information provided. It should not be considered legal advice, you should seek appropriate counsel for your own situation.

Text by Gesine Kippenberg. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas

RIBA Core Curriculum Topic: Compliance – legal, regulatory and statutory framework and processes.
As part of the flexible RIBA CPD programme, Practice News counts as microlearning. See further information on the updated RIBA CPD Core Curriculum and on fulfilling your CPD requirements as an RIBA Chartered Member.

Posted on 18 January 2018

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