Legal blog: What should Carillion subcontractors do next?

For construction businesses working with Carillion, as their worst fears have been confirmed, it brings the question, what now? As you may expect, with such a sudden and serious financial impact, an array of disputes will erupt which could be a significant waste of costs at a time when resources are so limited.

We might see subcontractors trying to make claims against employers, JV partners and public bodies without any contractual links to justify the same. Instead, for subcontractors who are unsecured creditors, a first step could be to submit proof of what you are owed and why your contract should continue to the special managers who are assisting the Official Receiver. This will mean getting a cohesive claim that substantiates what you are seeking and explains the detail of your contract works. This is more difficult than it sounds, as it can often be the case that record keeping is not managed well and documentation is difficult to retrieve at short notice.

However, it is advisable to make your submissions quickly as decisions are going to be made by the special managers in the next few days and any delay could mean the difference between there being funds available for allocation to ongoing projects and the funds being exhausted. There is an indication that payments will be made for work carried out during the liquidation but that will not necessarily apply to sums already owed. It is easy to see that such a distinction in itself is going to be ripe for dispute but clear advice would be to get yourself in a position to get some money in and then deal with what can be done about debts.

It is advisable to make your submissions quickly as decisions are going to be made by the special managers in the next few days

For employers, it would be prudent to understand what payments could be requested by the Official Receiver. There is a hierarchy of payments when there is an insolvency event with secured creditors being a priority and unsecured creditors receiving a proportion of whatever remains. As most subcontractors will be unsecured creditors, employers are often caught in the middle, facing claims from subcontractors and from the insolvency practitioners progressing the liquidation.

This means that the employer is stuck deciding whether to pay subcontractors at the risk of making an unlawful payment in an insolvency context and being asked to make the same payment again, this time to the Official Receiver. For large projects, this can be a huge employer risk with many subcontractors being desperate for payment. In this context it employers must avoid offering guarantees of payment or suggesting they can underwrite subcontractor costs, even on a temporary basis, as this is a common cause of legal disputes.

It will be important to understand exactly what payments were made to Carillion in advance of the liquidation 

Therefore, it will be important to understand exactly what payments were made to Carillion in advance of the liquidation and even more important to be able to prove this to the Official Receiver. Disputes that have been commonplace with previous high profile insolvencies have been subcontractor claims for monies that had already been paid by the employer to the insolvent contractor that were then swallowed up by the liquidation. In addition, in the next few months it will vital for parties to understand the contractual processes that are triggered by an insolvency event. For example, it can be unclear whether the employer is free to immediately continue works with a new contractor.

Subject to any procurement rules there could be automatic termination of the insolvent entity’s appointment leaving the employer free to move on or you may be required to serve notice and wait for a prescribed period of time. There also may be a wholly different payment mechanism that becomes relevant and may impact on the timing of future and final payments and whether extra over costs of project completion and defects can be set off against monies otherwise due. Usually there will be prohibitions on assignment, copyright and intellectual property ownership issues and records held by the insolvent company that will need collecting so that the project can continue without substantial delay. One common problem we have seen is site condition surveys, corporate intelligence and IT interface information being lost following the chaos insolvency can bring which can frustrate progress and compromise what could have been a valid defence to further payments.

Following this, the lessons from previous insolvencies is to secure whatever payments you can, anticipate claims from the liquidators, share information willingly and negotiate. Incurring costs when the main party is insolvent can be a real waste of money when your resources would be better directed elsewhere.