Avoiding the Carillion ripple effect

Shocking news about the scale of the Carillion collapse and its insolvency. Many thought that it was too big (or too important) to fail. Significantly, the huge PLC has gone straight into liquidation which means that it ceases to operate and is to be wound up rather than the alternative insolvency procedure of administration where the company continues to operate (at least in part) so that any viable parts of the business can be hived off and sold on as a going concern.

The role of the Liquidators is to realise the company's assets and to distribute the proceeds to the creditors. Although ordinary creditors (including suppliers and subcontractors) are treated equally, it follows from an insolvent liquidation that they are never paid in full and they will only receive a pro rata percentage of their outstanding debt. Also, the process will obviously take a very long time to produce any payments at all.

Unless there are other contractual guarantees or retention of title on goods/materials supplied, there is generally nothing that a creditor can do at this stage other than register the debt with the Liquidator and wait to find out how much they will recover. In the meantime any VAT on that bad debt can be reclaimed from HMRC.

Many people will be personally affected by the collapse of such a big company, including almost 30,000 pension fund members. Particularly ironic that that Carillion's mission statement is "making tomorrow a better place". Amongst those affected will be unpaid suppliers and sub-contractors who in turn have their own employees and suppliers to pay so the cash flow ripple effect moves down the chain.

There are some suppliers who might have devoted a large proportion of their time and resources to Carillion projects and they will be waiting to find out who might take those over and whether they will be still be retained on the project. Although this will almost certainly involve a fresh contract, it is very unlikely that the new main contractor will accept any liability to pay for work that has already been done or that the employer (which in many cases in Carillion's UK business means the government) will make additional payments when they will still be liable to pay the Liquidators for work completed and materials already supplied. The fact that Carillion and has gone into liquidation might enable its subcontractors to avoid paying their own suppliers and subcontractors for the work which they in turn have not been paid for, but that will depend upon there being a valid "pay when paid" clause in the sub-subcontract. All very messy and, at the moment, very uncertain.

There will be a lot more detail to come out of the Carillion collapse and no doubt a great deal more comment to follow but what might suppliers have done differently? There are two basic preventative measures that any business can take to minimise the risk of bad debt. Firstly credit control: keeping on top of late payment and taking early steps to recover unpaid debt. Anyone who has got in and secured payment of outstanding invoices prior to the appointment of the Liquidators have had a lucky escape which might actually be down to the positive action that they took to ensure that their payments were prioritised. The second is to tighten up terms of business to ensure that appropriate contractual protections are in place such as reservation of title and payment cycle/credit terms.

Our litigation team can provide advice on credit control and debt recovery procedures, particularly involving construction contracts and in situations of potential insolvency- contact Jon Wilby on 02476 493116. Our corporate team can review terms of business and bespoke contracts to ensure that full contractual protection is in place- contact Sean Byrne on 02476 237370.