Carillion Group – In Compulsory Liquidation

Published January 2018

Given its timing, we could not let the biggest piece of news in the insolvency sector this quarter pass without a mention –the compulsory liquidation of the Carillion Group, the second largest construction group in the country.  Following the unsuccessful attempt at restructuring the debts of the Wolverhampton-based business, it entered compulsory liquidation on 15 January 2018, with the Official Receiver being appointed liquidator, supported by a team of special managers from PWC.

The history of Carillion can be traced back to the Tarmac Group which had by the late 1990s merged a number of well-known companies: Tarmac Construction, Wimpey Construction, Cubitts and Mitchell Construction.  In 1999, the Tarmac Group de-merged into a building materials company (‘Tarmac’) and a second company focused on support services and construction services (‘Carillion’).  Since 1999, Carillion has gone on to acquire further well-known companies: Mowlem (acquired in 2006), Alfred McAlpine (acquired in 2008), Vanbots (acquired in 2008) and Eaga (acquired in 2011) and had become the second largest construction business in the UK.

Latterly, Carillion won 10 separate contracts worth over £1.3bn after issuing the first of three profit warnings, beginning last July, which flagged its eventual demise.  Carillion has lost huge sums on large contracts and built up debts of over £1.5bn which, as reported, includes a possible £1b pension shortfall and £900m owed to Banks.  It will be a while however before the total value of the liabilities is known.

The liquidated Group consists of:

  • Carillion Plc
  • Carillion Construction Limited
  • Carillion Services Limited
  • Planned Maintenance Engineering Limited
  • Carillion Integrated Services Limited
  • Carillion Services 2006 Limited

The size of the failure will have a significant impact on employees, sub-contractors, suppliers and other creditors, clients and customers.  All continue to be desperate for news from the liquidator and special managers as to what the future is going to look like, although early reports suggest there will be little or nothing for the unsecured creditors.

Why Liquidation and not Administration?

Firstly, the purpose of administration is to enable a company to continue to trade whilst the administrators attempt to find a buyer for any viable parts of the business.  Liquidation is the insolvency process adopted when it is accepted that the company is to cease trading. It is the job of the liquidator merely to realise any assets that may exist and distribute the proceeds to creditors.

The fact that Carillion went straight into compulsory liquidation suggests that, in the view of those advising the board of directors, there was no business to rescue and that there was nothing that could be sold on a “going concern” basis.

Also, as this is a compulsory liquidation, the Official Receiver is automatically appointed as the liquidator.  The Official Receiver is a civil servant and possibly, given the high level of government involvement, was it that the government wanted their “own man in the saddle”? However the Official Receiver does not necessarily have the practicable experience or resources to handle what will be a very complicated liquidation, which is why special managers from PWC were appointed to assist him.   

Who will be affected?

The liquidation of Carillion will be felt worldwide.  It had 20,000 employees in the UK and another 23,000 outside of the UK, working on both Government and private projects globally.  One of the most high profile projects in the UK was the HS2 high speed rail line. Carillion was one of a number of private companies working on the project. They were also the lead contractor on a number of major public-private partnerships such as the unfinished Royal Liverpool University and Metropolitan Midland hospitals.

The Federation of Small Businesses (“the FSB”) originally said that it is vital that small business suppliers are paid what they are owed, or some could find themselves in jeopardy - putting even more jobs at risk.  The problem is that there is a strict hierarchy of payments to creditors in a liquidation. A liquidator cannot unilaterally decide which creditors should get paid and which should not.  The FSB also dismissed the offer by the banks to help as no more than a “sticking plaster”.

Although the Government is playing it down, there is no doubt that somewhere down the line the tax payer will also suffer costs, which could run into £millions. The first of these costs is the footing of the immediate wage bill for those working on Government supply contracts.

Carillion Creditors and Sub-contractors – Practical actions

By number, the largest creditor group left being owed substantial sums will be the unsecured creditors, in the form of suppliers and sub-contractors.  As a class, unsecured creditors rank lowly in the dividend payment order, ranking behind secured creditors such as banks and preferential creditors such as employees.  In some cases a pool of money known as the prescribed part may be available for unsecured creditors. At this stage, it is too early to confidently predict what the dividend prospects will be.

The special managers are working with some creditors and sub-contractors and have set up a website where they can be contacted at https://www.pwc.co.uk/carillion  Creditors and sub-contractors should make email contact with the special managers as soon as possible through the above link.

Any creditor or sub-contractor asked to continue work for the special managers needs to ensure they get a new purchase order from them to ensure payment for the future work done.  In rare circumstances a supplier or sub-contractor may be in the privileged position that there is no one else that can supply particular goods or services, in which case, it may be possible to negotiate revised or higher rates to continue to supply such goods or services.

The liquidation of Carillion prevents the usual legal remedies to recover a debt being available. No new legal proceedings can be taken and any existing legal proceedings are suspended, with neither being able to be taken forward without the permission of the court.

There may have been two way trading between a creditor or sub-contractor and Carillion. In this case, in certain circumstances, it may be possible to claim set-off. This means that a creditor or sub-contractor that owes money to Carillion can offset that liability against money it is owed.  It is important to note however, that there can only be set-off between individual companies and not across the Group.

Any contracts held need to be reviewed as it is likely there will be liquidation termination clauses, setting out what happens on the liquidation of either party.  It is probable that the contract terminates on liquidation.

The terms of any contract should also be reviewed to check whether they contain a Retention of Title Clause.  This may allow the supplier of goods that have not been paid for, or in some cases thathavebeen paid for, to recover or repossess the goods supplied. They could receive payment for them by the special managers if they are still required.  It is vital that early contact is established and a physical inspection undertaken and documented to identify any such goods.  A fuller description of Retention of Title can be found at:

https://www.insolvencydirect.bis.gov.uk/casehelpmanual/R/RetentionOfTitle.htm

Employees

Employees are a special type of creditor. Unpaid wages, holiday pay, pension contributions, redundancy and pay in lieu of notice will be paid up to statutory limits by the Government through the Redundancy Payment Fund.  Details of the statutory limits that will be paid can be found at:

https://www.gov.uk/your-rights-if-your-employer-is-insolvent/claiming-money-owed-to-you

Carillion Shareholders

Unsurprising, the special managers have already confirmed that there is no prospect of shareholders recovering any of their investment. It is recommended that shareholders speak to their accountant or other advisers to see if there may be any capital loss reliefs available.

Further Help

It is important that directors of companies affected by the liquidation of Carillion take early advice as to their position.  Speaking to an experienced Insolvency Practitioner will enable a director to understand their individual circumstances and how best to maximise recoveries, or discuss damage limitation options to protect their own business.  

The Insolvency and Restructuring team at Cranfield Business Recovery is on hand to speak to any director that needs help. Any initial meeting is free of charge and without obligation.  Do not wait until it is too late to obtain the vital information required to make the correct decisions, call one of our three Licenced Insolvency Practitioners; Tony Mitchell, Brett Barton or Philip Ballard on 024 7655 3700

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