Richard Brackenbury

Head of Construction

Construction Law


Carillion - Subcontractors and Insolvency

Richard Brackenbury

The liquidation of construction giant Carillion has been making headlines this week. A lot is being said about the impact upon government contracts including prison and school management, as well as the new HS2 line. But what of Carillion’s subcontractors?

 

In the Carillion case, the insolvency firm’s new website should be the first port of call as this seems not to be a usual insolvency process. Some subcontractors are being asked to continue working, and have been promised that they will be paid for work carried out from now on – but no such promises have been made in relation to work carried out before the liquidation and the prospect of recovering outstanding debts looks bleak.


By the time secured creditors (the banks) and the liquidator have had whatever assets there may be, there will be precious little left for the poor old subcontractors. And of course, this means the sub-subcontractors who operate further down the contractual “food chain” will also be affected.

 

Whilst the Carillion horse appears to have bolted, this is a useful time to take stock of those steps subcontractors can take to shut the stable door against this happening to them the future. Remember, if you have any questions, please don't hesitate to get in touch. You can ask a question here

 
1. Check credit references and contract clauses carefully

 

If ever there was a good example of the need to carry out proper credit reference checks and to review the terms of your contract before entering into it, this is it. Just because the name is well known does not mean it is well financed, or even solvent.

 

Sub-subcontractors tend to be in a better position in these situations because they are further down the chain and can claim from the subcontractor. “Pay when paid” disappeared nearly 20 years ago and so that sub-subcontractor should be paid. However, this does not mean that sub-subcontractors can be complacent about the solvency of the main contractor. Depending on how badly the  “main” subcontractor has been damaged by not getting paid, the cash may simply not be there. As those of us around in 2008-10 remember, these situations can quickly create a domino effect. Equally, if that subcontractor has a clause in its terms that allows it not to pay its sub-subcontractors in the event of insolvency further up the line, then that’s an exception to the general principle of “pay when paid” and the subcontractor can lawfully refuse to pay.

 2. Keep on top of your account

 

The critical advice is never to let your account get to a point where you could be caused serious damage by an insolvency further up the chain. Take advice quickly if you’re not getting paid. The process of adjudication can be a quick and effective way of pressurising payment and in some cases, we have used winding up petitions to do so as there is no point in hanging back and letting others get in first. Consider suspension but once more, it’s critical to take advice as getting the process wrong can badly backfire.

   

So what are the lessons?

 

  • Always carry out credit checks before signing – no matter how big the name

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  • Always check your contract. You might not be able to exclude an insolvency-linked “pay when paid” clause, but at least be aware of its existence; that way you can at least price in the risk.

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  • Do not let your account build up. Know and operate the payment provisions. If monthly applications don’t get paid quickly take advice as to how to speed up the process. A reputation for being “fast off the mark” is better than your own insolvency

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  • If the financial situation of a main contractor is obviously deteriorating and you are not getting paid, it can be worth considering trying to arrange a direct payment from an employer. However, this is a last resort because your relationship with the main contractor will probably never recover. Of course, if the main contractor goes the way of Carillion, that may not be an issue.

 

Disclaimer.

This note contains general background advice only and should not be acted upon without first taking full legal advice

If you are interested in any of the topics raised in this article, or for further information, please contact Richard Brackenbury. Alternatively, you can call 0115 9888 777 to speak to a member of our team. 

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