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The solvency position of the other entities and joint ventures in the Carillion group is unclear at this stage. The fact that a particular Carillion group company is not yet in an insolvency process does not mean it will not subsequently enter one once the impact of the wider group position becomes clearer. 

Counterparties should consider this carefully in relation to any ongoing relations with (or payment obligations to) Carillion entities that are not, as yet, in an insolvency process.

What is compulsory liquidation?

Compulsory liquidation is a formal, terminal, insolvency process. Carillion has been ordered to be wound up by the court on the grounds of its insolvency.  The terms "winding up" and "liquidation" are used interchangeably and mean the same thing.

In a typical compulsory liquidation, the company's business and affairs are shut down, the assets realised and the proceeds returned to creditors by means of a dividend.

It is fair to say Carillion's winding up is not, however, a typical compulsory liquidation

Who is in charge?

The powers of the directors ceased from the date of the order.

The Official Receiver is the appointed liquidator in Carillion's winding up and has control of the Companies. 

In addition, the special managers from PwC have been appointed by the court to assist and advise the Official Receiver. 

The special managers act as agents of the Companies, and have powers necessary for the orderly operation and / or shut down of their businesses. Ultimately, however, they act on the Official Receiver's instructions.

Although the role of the special managers may appear broadly analogous to that of "administrators" or "liquidators", it is important to note they are not the same.

This is not a typical arrangement for a large corporate insolvency, although it has been used before.   We consider later in this note why this arrangement may have been used for Carillion.

Are the companies continuing to trade in liquidation?

Yes, the special managers have confirmed that the Companies are currently continuing to trade. 

A company trading in liquidation is unusual.  The Official Receiver has the power under statute to carry on the business of the Companies in liquidation so far as may be beneficial for the winding up.

We understand the special managers are also exploring opportunities for a sale of all or part of the businesses and assets of the companies involved.  To the extent Carillion's assets comprise contracts (service contracts and construction contracts), many of these are likely to be low margin or loss-making.  It is therefore unclear at this stage whether much value can be realised from them. 

Conversely, it is clear that solutions will need to be found for continuation of the services that Carillion provided under contract to public sector entities, for example in hospitals and prisons. Also, in its private-sector contract portfolio, many of its private sector counterparties are working hard to ensure uninterrupted services.  Many construction contracts, however, have been paused temporarily while decisions are made.

Are the directors likely to face consequences?

We have already seen a lot of media and political attention paid to the circumstances leading to the failure of Carillion. 

As in any liquidation, there will be an investigation into what went wrong leading up to the insolvency, and the conduct of the directors.  Sometimes these investigations can lead to claims being brought and, in extreme cases, disqualification proceedings against directors.

What should I do if I want to explore sale opportunities with the liquidators and special managers?

The failure of Carillion is producing a host of opportunities for competitors in relation to activities Carillion can no longer carry out.  The liquidators are obliged to consider approaches in relation to assets or business lines that remain a going concern and are looking to transition contracts to new owners rapidly

Parties should engage quickly and decisively if they wish to explore opportunities to purchase the business or assets of any of the Carillion entities.  Interested parties are also invited to complete and submit the form provided on the PwC website (details below), although Ashurst has established a direct line of communication with PwC in relation to these approaches and is able to assist parties in agreeing the non-disclosure agreements ("NDAs") required by the liquidators/special managers in order to proceed with negotiations.  

What rights do I have under my contract?

How are contracts with Carillion affected by the liquidation?

Compulsory liquidation does not, as a matter of law, terminate a contract.  Contracts entered into with the Companies (or other companies in the Carillion group) may, however, contain contractual rights of termination or other remedies triggered by the insolvency proceedings.  Parties that have contracted with a Carillion entity should review the terms of their contracts as a priority to establish what their contractual rights are, and against which Carillion counterparties.

The liquidator has the power to disclaim unprofitable contracts entered into by the Companies (see more on disclaimer below).

What happens if my contract is "disclaimed"?

In respect of Carillion's private sector contracts, an analysis will be done to determine which ones are profitable and which are not.  Attempts will be made to transfer profitable contracts to other contractors for value.  Unprofitable ones may ultimately be "disclaimed".

Disclaimer is a power that enables the Official Receiver, as liquidator, to terminate any contracts that are unprofitable.  The Official Receiver does this by issuing a notice to the relevant contracting parties and any affected parties.  Disclaimer will operate to terminate, from the date of disclaimer, Carillion's rights, interests and liabilities in respect of the contract, and replace them with a claim for damages equivalent to the loss suffered by the other contracting party as a result.  The resulting damages claim will be an unsecured claim in the relevant Company's liquidation.  Disclaimer does not, however, except so far as is necessary, affect the rights or liabilities of any other person (such as a guarantor or another JV partner).

Is there anything I can do about disclaimer?

Yes.  If you have a contract with one of the Companies, and are worried that it might be disclaimed and you want certainty, you can issue a notice to the Official Receiver requiring him to decide, within 28 days, whether to disclaim or not.  If he does not exercise his power to disclaim during this period, then he loses it and the contract cannot then be disclaimed.  However, this needs to be approached with caution because issuing such a notice could have the opposite effect and bring about disclaimer and the end of the contract sooner than it might otherwise happen. 

Also, the fact that the contract is not disclaimed does not mean that Carillion will ultimately honour its longer-term obligations under the contract.  The Companies are in insolvent liquidation, and are only being traded to achieve an orderly wind-down. So trading will eventually cease, and all contracts will need to be transferred or terminated one way or another. 

Disclaimer can be complex and legal advice will be needed.

Information for counterparties/creditors

What do counterparties/creditors need to do now?

It is crucial to check the terms of your contracts with Carillion so you know your rights. In particular:

  • Which Carillion entity have you contracted with?  Has this entity been put into liquidation?
  • What contractual rights are triggered by the liquidation of the Companies (for example, do you have termination rights, step-in rights, or retention of title to goods or assets)?  
  • Even if the Carillion contracting entity has not entered into an insolvency process, there may be cross default provisions or other rights triggered by the liquidation of the Companies which you may wish to exercise. 
  • Consider if you wish to give notice to the Official Receiver requiring him to decide if he is going to disclaim the contract.
  • In due course, creditors will be required to submit a proof of debt to the Official Receiver containing the prescribed information required under the Insolvency (England and Wales) Rules 2016.  However, at this stage the priority should be to collate all the documentation regarding your relationship with Carillion and be aware of / consider your contractual rights and protections. 

Should you require legal advice on your rights, strategy or submission of a proof of debt, please contact one of our team below.

Where can counterparties/creditors find more information?

The situation is still developing.  The most reliable source of information and updates is the PwC website which contains email contact details for the special managers.  Note that creditors are being asked to contact their usual contact at the Carillion in the first instance.

The Insolvency Service is also issuing announcements with updates on the situation.

Why was compulsory liquidation used instead of administration?

Carillion is in compulsory liquidation, but is continuing to trade.

Administration is the insolvency process that is most frequently used where an insolvent company continues to trade.  The sale of a business as a going concern (where possible) can produce a better outcome for its creditors than a break-up sale in liquidation.

By contrast to administration, the purpose of liquidation is simply to wind-up the company's affairs: i.e. collect in the company's assets and realise them in order to return a dividend to creditors.  This usually produces a lower return for creditors than a going-concern sale in an administration and is appropriate where a going concern sale is not an option.  Typically, companies in liquidation do not continue to trade.

The use of compulsory liquidation, with special managers, for Carillion, which is continuing to trade during the insolvency process, is therefore unusual. 

There are a number of potential reasons why compulsory liquidation may have been used in this case.

Purpose of administration not achievable? 

For a company to enter administration, there has to be a reasonable prospect of achieving: (i) company rescue; (ii) a better outcome for creditors than liquidation or (iii) if neither of these is possible, then realisation of secured assets for a return to secured lenders. 

It appears that none of these objectives would have been possible if Carillion had entered administration, and so administration may not have been an option at all.
Lack of funding? 

Press reports have suggested that there was insufficient cash at the bank on day one for an administration. 

Carillion needs to trade for a period of its insolvency in order to transfer its public service contracts and any viable private sector contracts to someone else.  However, many of these contracts are loss-making and so the insolvency trading period will probably be loss-making. 

This loss needs to be funded, as do the insolvency office-holder's fees. The government's announcement that it will underwrite the cost of the public service contracts to ensure continuation of vital services may not have fitted comfortably with a private sector administrator appointment.

Office holder personal liability 

Administrator appointments are personal to the appointed individuals.  For the most part, administrators have statutory protection from personal liability (provided they comply with their duties and use their powers appropriately) but there are some types of liability from which they cannot be protected: e.g. some environmental liabilities and health and safety duties. 

If those liabilities, which might perhaps arise in the case of major construction contracts or some of the public service contracts Carillion holds, are so large as to be uninsurable it can be difficult for private practice  insolvency officeholders take the appointment.  This occurred with the failure of Sahaviriya Steel Industries UK (SSI) in 2015 because of its large (and environmentally risky) coke ovens. 
Government need for control The government may have wanted to maintain a higher than usual level of control over the insolvency process, given the public interest in Carillion's contracts and the public funds being spent on the liquidation process.  The appointment of the Official Receiver (who is a public official and sits inside the Insolvency Service, which is part of the Department for Business, Energy and Industrial Strategy) achieves this. However, the Official Receiver is not resourced to run a major insolvency process and so the special managers from PwC were appointed to do this, accountable to, and under the instructions of, the Official Receiver.
The power of disclaimerLiquidators have the power to disclaim unprofitable contracts (see above), whereas administrators do not.  This power may come in useful in dealing with Carillion's loss-making contracts.

1.   Summary information from the 2015 Annual Return of Carillion plc, for illustrative purposes only

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.

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