The case of Carillion – what to do when a contractor goes insolvent

Even a cursory look at the statistics published by the Insolvency Service shows that the construction industry is still a sector which suffers from one of the highest number of insolvencies. The latest statistics reveal that, on average, 2,600 companies go insolvent every quarter. These are both small companies and, as recent events have shown with Carillion, large national companies. When this happens, the disruption to the projects and services the insolvent contractor has been providing can be very significant. If you are an employer of an insolvent company, it is important to put together a plan to minimise and manage this disruption. The plan will develop as further information becomes available but there are a number of key points which need to be considered straight away.

From a legal perspective, these include:

• considering whether this insolvency has given rise to a health and safety issue
• establishing the type of insolvency process and keep constant dialogue with the appointed insolvency practitioner
• reviewing the terms of the contracts and service agreements in respect of the insolvency and termination arrangements
• considering the payment position and the likely cost to complete the project
• considering  if any notices should be given in respect of any security documentation such as bonds and guarantees (parent company guarantees are unlikely to be of assistance)
• reviewing any offers from the alternative contractors or service providers who are in dialogue with the appointed insolvency practitioner
• checking the termination provisions of any JV agreements, contract or subcontracts you are a party to, to see whether the provision calls for automatic termination of the relevant agreement.

It is important to quickly establish the current situation on site or the services which the insolvent company was in the process of carrying-out – in particular, whether there are any urgent works or services which need to be carried out for health and safety reasons. If there is anything under this category, then these works and services should be carried out and a record of why they needed to be done and what has been done should be produced. Also, with health and safety in mind, the site or other facilities should be made secure so you have control of the site and facilities. Once the site and facilities are stable from a health and safety perspective then other aspects can be looked at.

During the first few days of a company becoming insolvent, it is sometimes difficult to find out the facts. Often, comments made in the press and media tend not to be technical in nature and as such, can be unreliable. Therefore, it is important to establish the type of insolvency process the company has entered into through the official channels, like the London Gazette, as the process will determine your relationship with the authorised insolvency practitioner. Also, it is likely to dictate what you are entitled to do under the particular contract.

It is also important to review the current payment arrangements in light of the insolvency, and consider whether monies which were going to be paid should be stopped and issue ‘payless’ notices accordingly. It is relatively common for contracts to state that no further payments are due and payable upon insolvency but the terms of the actual contract must be reviewed. This is also the time to look at the terms of any bonds which are in place and the mechanisms needed to commence calling on the bonds.

As the commissioner of the works or services, it is very likely that you will be contacted directly by the insolvent contractor’s supply chain. This can be particularly tricky as the supply chain will be looking to you to pay unpaid monies directly to them. Of course, both you and the supply chain are both creditors under this insolvency. As such, proper advice should be taken on whether a direct payment should or could be made.

Of course, the fundamental questions arising from a contractor’s insolvency are:

• who is going to continue with the works or services?
• how should a new contractor or service provider be found?

If you decide that you need to re-procure the works or services and are classified as a ‘contracting authority’ then the ‘EU Regulations’ need to be considered. It is relatively common for the authorised insolvency practitioner to receive offers from other contractors who wish to take-over all or some of the projects or services. If the authorised insolvency practitioner is willing to look at this option then it is likely that the proposed new contractor will approach you confirming they are in discussions with the insolvency practitioner in respect of the particular project or services. It is then a question of whether the offer from the replacement contractor or services provider is attractive enough for you to agree to the transfer of the contract to the new contractor or service provider. In respect of providing alternative services, it is worth considering whether this is an opportunity for all or part of the services to be carried out in a different way, for instance by directly employed employees. This approach was taken by a number of organisations when several services providers became insolvent a few years ago. Those organisations set-up subsidiary companies and are no longer exposed to situations like this. 

This issue can also be urgent where you are in a direct contractual relationship with a consortium where one of the shareholders is the insolvent party or one of its subcontractors is the insolvent party. Some Joint Venture agreements and subcontracting agreements would provide for termination in the event of insolvency of one of the parties and the main trigger for this would be most likely to be liquidation (whether voluntary or compulsory, as is the case with Carillion). However the insolvency of a shareholder may not give you an automatic right of termination. In these circumstances it is important to understand what impact that insolvency may have on the consortium – are funders entitled to enforce security due to the insolvency and how will this impact on the consortium’s ability to continue to deliver under your contract. Similarly where a major subcontractor is the insolvent party what are the consortium doing to ensure the continued delivery of service. As with all situations involving insolvency, it is important to check what security you have. For example, by way of collateral warranties.

Clearly, there is lots to consider when a contractor becomes insolvent and a plan will develop as more information is known. In respect of Carillion, we understand that it is applying for, or has applied to the Court for, a compulsory liquidation. As such, the liquidator’s function will be to collect and realise the company’s assets. As a creditor you will be asked to provide a ‘proof of debt’ which will subject to the liquidator’s assessment and payment (if any) will be made to the creditors from the income and assets. Having said this, the Court could be asked by the liquidator to make an administration order.  If so, then the administrator’s function will be to seek to rescue the company as a going concern or, seek a better result for the company’s creditors as compared to a winding-up. 

Either way, a proper plan needs to be put in place to deal with both the legal and practical aspects so that the extent of the delay and disruption is minimised as much as possible.