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Why liquidation and what can Carillion's subcontractors do now?

Simon Underwood

To anyone keeping a close eye on one of the government’s largest contractors over the past year, the news of Carillion’s collapse is unlikely to come as a complete surprise.

However, for the organisation’s many thousands of employees, complicated supply chain and numerous subcontractors, worries about future continuity and cashflow will be at the front of their minds.

While it is somewhat surprising that the company has been placed into liquidation as opposed to administration, the may have been driven by the complexities around the number and types of high-profile contracts in which Carillion was involved.

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 meant finding a large insolvency practitioner free of any conflicts 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 the 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.

“In the short term it may be possible to ease pressure on cashflow by agreeing ‘time to pay’ arrangements with HMRC”

After a lengthy period of uncertainty last week as Carillion negotiated with its banks and sought government help, subcontractors will now 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 subcontractors are tied into contracts and have had little option but to wait and see what happens next.

What Carillion subcontractors can do

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.

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 subcontractors must recognise this quickly, taking steps to renegotiate terms with their own suppliers – either informally or through a rescue process like a Voluntary Arrangement.

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.

Simon Underwood is business recovery partner at Menzies LLP

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