To anyone keeping a close eye on one of the Government’s largest contractors over the past year, the news last Monday 15 January 2018 of Carillion’s liquidation is unlikely to have been too much of a shock. However, for the organisation’s many thousands of employees, complicated supply chain and numerous UK-based sub-contractors, worries about future continuity and cashflow will be at the forefront of the mind.
Whilst it is somewhat surprising that the company has been placed into liquidation as opposed to administration, complexities around the number and types of high profile contracts Carillion was involved in, together with only limited cash reserves seems to be the main reason.
Unusually in this case, the Official Receiver, an officer of the Insolvency Service, appointed themselves as the liquidator, drafting in PWC to provide specialist advice. Although not normal practice, the sheer number of projects and sectors Carillion operated in could have meant that finding a large insolvency practitioner without raising a conflict of interest could have been a challenge.
Liquidation vs. administration
Unlike administration, the liquidation process is usually regarded as terminal, with the survival of the business not normally top priority. In comparison to administrations, where the survival of the company is the primary focus, it is more difficult for liquidators to continue trading and protect the business from those clients wishing to exit certain contracts.
With a number of major infrastructure projects and large service contracts, Carillion’s liquidation could be complicated and messy. Despite this, it is unthinkable that the liquidators would call a halt to operations immediately, with so many vital services such as school meals and facilities management dependant on their continued operation.
After a lengthy period of uncertainty and while the company negotiates with its bankers and seeks government help, subcontractors will be clamouring to get their contracts resolved with the liquidators in the hope of easing the burden on their cashflow. There may be parties who can exercise ‘Step in Rights’, effectively taking over the role of Carillion in larger projects, allowing subcontractors to continue operating under normal circumstances.
However, while Carillion’s financial troubles have been common knowledge for some time, with the company posting two profit warnings in the past year, many sub-contractors who were tied into contracts have had little option but to wait and see what happens next or otherwise face the thought of incurring a breach of contract claims themselves.
The knock-on threat is real
For many, the threat of knock-on insolvencies will feel very real and Carillion’s demise has no doubt left a large number feeling exposed and vulnerable.
If affected in this way, suppliers and sub-contractors should seek professional advice immediately. In the short term it may be possible to ease pressure on cashflow by agreeing ‘Time to Pay’ arrangements with HMRC, which allow extra breathing space around the payment of tax liabilities.
The knock-on effects will be felt down the supply chain and sub-contractors should ideally recognise this quickly, taking steps to renegotiate terms with their own suppliers, either informally, or through a formal rescue process like a Voluntary Arrangement.
It’s early days and the dust is far from settled on what has by all accounts been a very significant event affecting British business as we know it. Carillion’s collapse was unique not only because of its size, but also because of the complex web of suppliers who have been thrown into tumult. There’s a lot of work to be done, but any business affected would do well to have some faith in the liquidators, keep a level head and take steps wherever possible to secure contracts and ease cashflow pressures.
Will you be affected by the Carillion liquidation? If so, we can help
The repercussions from the demise of Carillion are yet to be felt fully, but the fall out for suppliers, subcontractors, employees and other stakeholders will become clearer over the coming days and weeks. It is unclear to what extent the Government will intervene and support those affected but the banks have already set money aside to help those affected. Nevertheless, for many businesses down the supply chain or just those that are affected by working indirectly for other companies affected by the Carillion saga, it will leave them in a perilous financial position.
There are always solutions available and Menzies are able to offer advice on the full spectrum of options for individuals and businesses in these circumstances in order for them to be provided with clarity on the route ahead and to obtain assistance with the business recovery process.