Construction

Carillion Plc goes into liquidation: what is the immediate effect?

David Sawtell (2005) and Oliver Hyams (2012)

Carillion Plc and its related companies went into compulsory liquidation today upon the petition of the companies’ directors. The Court appointed the Official Receiver as liquidator; he will be supported by ‘special managers’, being six senior managers at PwC, who were appointed under section 177 of the Insolvency Act 1986.

This marks an extraordinary demise for a group that, in 2016, enjoyed its highest ever revenues of £5.2bn (£2.2bn being construction projects) and paid record dividends to shareholders.

No surprise

Today’s announcement, however, may come as no surprise.

It was reported in July 2017 that Carillion needed to make £845m provision relating to its construction contracts, and subsequently revealed in October 2017 that this sum included £200m owed for construction work undertaken in Qatar in preparation for the 2022 FIFA World Cup.

The group’s total liabilities are said to exceed £1.5bn, including a pension deficit of approximately £587m. During 2017, the group issued three profit warnings, and underwent a raft of boardroom changes. The board’s decision to petition the Court appears to be the result of a failed recapitalisation attempt, with Carillion’s banks eventually losing faith.

PwC and the special managers have already announced that “there is no prospect of any return to shareholders”.

Effect on the supply chain

The Carillion insolvency raises several issues for the construction industry. As well as the work directly carried on by Carillion, large numbers of contractors and subcontractors were in direct contractual relationships with the company. The Guardian has reported, for example, that Balfour Beatty ‘expect to take a £45m hit‘. Exposure, therefore, will not only come from a direct contractual relationship: it will also come from payment and performance difficulties arising throughout the supply chain, and also from contracting parties whose ongoing working finance may be dependent on Carillion projects.

Immediate action

It is likely, therefore, that many firms and their contract managers will be reviewing their exposure to Carillion and their legal and financial position. Many standard form construction contracts contain clauses allowing for immediate termination on notice in the event of the contractor’s or the employer’s insolvency. For example, clause 8 of the JCT Standard Building Contract represents the latest evolution of a well-tested right to terminate given to both the contractor and the employer in the event of insolvency. Contracting parties might also be considering what security for performance (both as formal security, such as guarantees or demand bonds, or in different forms such as set-off, vesting and retention) they have in the event of any formal insolvency event.

Procurement in the future

Looking into the future, such a significant insolvency is bound to raise questions about forthcoming construction projects and other procurement. During a typical tender process, a tenderer will be asked about its financial strength. PAS 91, a standardised pre-qualification questionnaire was introduced in October 2010 by the British Standards Institute and is now in its PAS 91: 2013 version. Some of the questions are intended to gauge the financial risk of engaging that contractor. There have been, however, criticisms of PAS 91: for example, it does not ask whether a bond, guarantee or similar security has been enforced against a tenderer. Given how many successful Carillion was in tendering processes, there will no doubt be some debate as to how to improve the pre-contract procurement process.

The ‘too big to fail’ point also needs to be dissected. Davies on Construction Insolvency (6th edition) at 2-005 cites the Australian experience following the administration of Perle Pty Ltd, where it was found that while ‘financial assessments were conducted on an individual project basis that did not consider the total impact that this may have on the level of ongoing working capital of Perle.’ The Olympic Delivery Authority for the London 2012 games, as part of its counter-insolvency strategy, ensured that supply chains were not overly reliant on one or two contractors or specialist subcontractors in the event of their insolvency. Ongoing financial modelling, too, is likely to be thrown up as an issue in any review of the Carillion insolvency.

Construction Insolvency Workshop 2018

Lamb Chambers is currently offering its Construction Insolvency Workshop 2018 which reviews the latest developments in the relationship between insolvency law and construction disputes, and in particular, the interplay between adjudication and the statutory moratorium following South Coast Construction Ltd v Iverson Road Ltd [2017] EWHC 61 (TCC), [2017] 1 All ER (Comm) 653 and Bernard Sport Surfaces Ltd v Astrosoccer4U Ltd [2017] EWHC 2425 (TCC), as well as traps and obstacles when bringing disputed claims in the light of Breyer Group plc v RBK Engineering Ltd [2017] EWHC 1206 (Ch). For more information, please contact Mark Rowlands, our Chambers Director.

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