Carillion – issues for recruitment and staffing companies in the Carillion supply chain

As has been widely reported, Carillion companies are being liquidated. This will affect their suppliers and the extended supply chain, including suppliers of contract workers and CIS subcontractors.  There will be a lot of focus on debt and enforceability of things like pay when paid clauses  (which, contrary to popular belief, are not always enforceable).

• The following companies were all placed in compulsory liquidation this morning, with the Official Receiver as liquidator:
  • Carillion Plc
  • Carillion Construction Limited
  • Construction Services Limited
  • Planned Maintenance Engineering Limited
  • Carillion Integrated Services Limited
  • Carillion Services 2006 Limited
• We are monitoring the situation to identify if any other Carillion group companies are placed into an insolvency process.
• The insolvency of a group with such breadth of operations is rare.  Carillion’s operations across the public sector are significant and its insolvency will cause disruption with forecast knock-on effects for sub-contractors, suppliers etc.
• The choice of liquidation as the insolvency procedure is also unusual where the companies continue to trade.  However, the circumstances of this insolvency are exceptional and that has, and will, likely drive the choices made in it
• Insolvency practitioners from PwC have been appointed as special managers to support the Official Receiver.  Ultimately, the special managers’ powers are defined by the court order appointing them.  We have not yet seen a copy of this but would expect it to be extensive.
• PwC has set up dedicated web-pages to provide further information about the liquidations, which we are monitoring for updates. Those pages advise that the companies are continuing to trade (see in particular PwC’s guidance to suppliers).  We can expect further developments as the situation unfolds.

• The PwC website states that: “The Official Receiver’s priority is to ensure the continuity of public services while securing the best outcome for creditors. Unless told otherwise, all employees, agents and subcontractors are being asked to continue to work as normal and they will be paid for the work they do during the liquidations” and “…we are encouraging all parties to contact and engage with the Companies in the normal way”.
• It appears from news reports that the government intends to provide funding for certain on-going public contracts.  In the coming days, therefore, we might see a different approach being adopted in the liquidations between projects and contracts with a public-sector angle and those which are purely private sector.
• Staffing companies who supply contract staff to Carillion entities or to sub-contractors of Carillion entities are advised to check their contractual terms to identify who their contractual counterparty is and their rights (and obligations) in the current circumstances.
  For companies supplying staff directly to one of the above Carillion entities:

   

  • The PwC guidance is that “Unless advised otherwise, all agents, subcontractors and suppliers should continue to work and provide goods and services as normal, under their existing contracts, terms and conditions.”
  • PwC further advise that such suppliers will be paid for goods and services supplied from the date of the Official Receiver’s appointment onwards.
  • Outstanding amounts owed as at the date of the Official Receiver’s appointment would generally rank as unsecured claims in the insolvency process but we await clarity on this.
• For companies supplying staff to sub-contractors of these Carillion entities:
  • The guidance referred to above suggests that such sub-contractors should continue to work and provide goods and services as normal.
  • However, we would recommend that you liaise with the relevant sub-contractor to ascertain their response to today’s news and to seek assurances that you will be paid for any continued supply.
  • If your contract with the sub-contractor contains a “pay when paid clause” we can advise on the enforceability of such clauses (there is a lot of law to take into account and those clauses will not necessarily be enforceable, which is bad news for some but possible good news for others).
  • To the extent that the sub-contractor provides services to the affected Carillion entity following the appointment of the Official Receiver, PwC’s current guidance is that the sub-contractor will get paid for such services.  Again, however, outstanding amounts owed to sub-contractors as at the date of the Official Receiver’s appointment would generally rank as unsecured claims in the insolvency process.
• Credit insurance arrangements will need to be reviewed.
• Invoice financing arrangements involving supplies to Carillion will need to be reviewed.
• It is possible that, as has happened in other major corporate failures in the last few years, some contract workers/CIS subcontractors will be left out of pocket, for example if pay when paid clauses are used against them. We would expect at least some of those to consider claiming employment status to help increase their chances of recovery, which could lead to a range of other tax and regulatory risk.

If any client would like specific advice about any Carillion matter, they should contact their usual OC contact or a member of the Restructuring & Insolvency team and we will be pleased to help.