Dec 18, 2018 Last Updated 11:34 AM, Dec 18, 2018

Carillion – clutching at straws?

Published in Talking Point
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Although the news that Carillion has been wound up by the court is not unexpected, given the recent coverage in the press, the full impact of its liquidation will come as a surprise to key creditors, stakeholders and employees.

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Here Benn Richards, Partner in the restructuring and insolvency team and Stuart Wilson, Partner in the construction team, at national law firm Clarke Willmott discuss the news and the expected next steps.

The legal position

Benn Richards said: “Carillion (including the PLC and certain subsidiaries) has been wound up by the court (on petitions presented by Carillion’s own directors). The High Court has appointed the Official Receiver to act as liquidator and a group of licensed insolvency practitioners from PWC to act as special managers.

“Although it is too early to say, the possibility of the liquidation being converted into administration cannot be ruled out, especially if it transpires that there is a willing purchaser for the business/assets of Carillion. However, the fact that Carillion has been wound up, as opposed to entering administration, could be evidence that there is no sustainable business to save. Nevertheless, it is highly likely that the special managers will be seeking to identify and sell any parts of Carillion’s business or assets that have any value.

“In the short term, the function and role of the Official Receiver (alongside the special managers) will be to realise assets and to ensure there is a continuity of service while the longer term options are considered.”

Impact of the liquidation and remedies available

Stuart Wilson said: “The impact of the liquidation of Carillion will be wide-reaching, particularly given it has a number of high-profile Government contracts, including the HS2 High-Speed Rail Line, maintenance contracts for a number of schools and prisons, maintenance services for National Rail and maintaining over 50,000 homes for the Ministry of Defence. The starting point for key suppliers and stakeholders will be to consider the rights they have against Carillion, and to what extent (if any) those rights can be exercised or used to secure an improved position.

“The obvious first step will be to consider whether specific contracts can be terminated, meaning that the contractual counterparty is free to find an alternative provider for the service Carillion was providing. Although this may help to minimise further losses, it is likely that in significant cost will be expended in obtaining new contracts.

“For more significant contracts, there may be a wide-ranging reach of remedies available to the contractual counterparty. These could include rights allowing the contractual counterparty to step into Carillion’s shoes in any relevant sub-contracts in order to direct and control the service. This may not be as straightforward as it seems as the sub-contractor will need to be paid for all services it has previously carried out, even where Carillion has already been paid itself but failed to pass the monies through the supply chain.

“The Official Receiver may also exercise a right to cause Carillion to perform its existing contractual obligations, with this remedy likely to be most relevant for Government contracts where the services being supplied are essential. Those contracts may be performed by the Official Receiver using Carillion’s funds to pay for those works. The alternative would be that the contractual counterparty funds the Official Receiver to perform the contracts; the funding being provided on a “quistclose”/specific purpose trust basis, where the funds are ring-fenced and are only to be used for the purpose of performing the contract. However, such arrangements will be costly and contrary to the Official Receiver’s likely intention that Carillion should not be caused to trade for a prolonged period of time.”

Benn Richards continued: “It is reported that the sums owed by Carillion to its creditors could total billions of pounds and the contractual counterparties, banks, the crown, employees (including their claims they will have for their pension rights and redundancy payments) will need to consider the steps required to limit their losses. It is perhaps the suppliers to Carillion who are likely to find themselves under the most immediate financial pressure, both being owed significant sums from Carillion, as well as losing their major supplier and source of revenue.”

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