Carillion Insolvency – An unsecured creditor’s guide to avoiding bad debts

The squeaky wheel.

On 15th January 2018, construction specialist Carillion confirmed that it was entering compulsory liquidation. It had debts estimated at £900,000,000; much of which was owed to unsecured creditors who will now receive nothing.

For any of the 30,000 suppliers unlucky enough to have been in business with Carillion and still be owed money; there is no realistic prospect of recovering their bad debts. Despite this, they will no doubt be extremely anxious to avoid any future recurrence of the same situation. Companies not exposed to Carillion will also be very keen to ensure they do not face similar issues in the event that one of their employers becomes insolvent.

4 ways to avoid bad debt in business:

What, if anything, could Carillion’s sub-contractors have done to avoid or reduce their exposure?

1. Understand your contracts: When dealing with massive companies such as Carillion, it is not always realistic to expect to have any influence over the terms and conditions that will apply to the works on offer. It is often a case of accept the terms or miss out on the contract. This does not; however, mean that the applicable terms and conditions should be ignored.

Understanding the processes set out within a contract is critical to ensuring that claims for payment cannot be easily dismissed. Early identification of deficiencies in tender / design documents, proper notifications of delay and disruption and correctly formulated variations (to name but a few) mean that any disputes that may arise are much more likely to be decided in your favour.

In Carillion’s case, even though standard payment terms had been extended in many cases to 120 days, some of Carillion’s former contractors complained that its representatives had still raised spurious arguments concerning completed works, to avoid making payments that would otherwise have fallen due. If you are faced with such a situation in business, accurate and comprehensive record-keeping is essential to substantiating disputed accounts. It is also very important to take prompt action, rather than allowing the gap between applications for payment and notified sums to simply keep on increasing after each payment date passes.

2. Know the warning signs: If communications with your employer deteriorate, calls repeatedly go unanswered without a legitimate excuse, meetings are missed and/or it becomes increasingly difficult to speak with decision-makers and have queries answered and resolved; alarm bells should begin to ring loudly. If key employees such as site/project managers and quantity surveyors keep chopping and changing, it may be an indicator of a business or contract under stress. If other contractors leave a project and you are asked to pick up the slack or the nature/scope of the works begins to change unexpectedly, it may again be a sign that something is going wrong.

3. Take immediate action when it becomes clear that a problem exists: If you recognise any of the above warning signs or you believe, for any reason, that a problem exists with an employer or contract, do not simply carry on and hope for the best. Ask for a meeting to discuss your concerns, seek written confirmations about any changes that have occurred, do not accept being fobbed off, make sure you speak with a decision-maker and satisfy yourself you can continue to work securely.

4. If you are in a hole, stop digging: When it becomes clear that a problem does exist, do not fall into the trap of becoming the most helpful contractor on-site; in the hope that you will be paid first if disaster strikes.

The reality of companies in severe financial difficulties / facing potential insolvency and bad debt is that they often have to try and continue operating on very limited resources. One way of doing so is to push contractors prepared to continue working, despite overdue accounts, to carry out more and more work on the basis that they ‘will be seen right ’ in due course. Unfortunately, in many cases, all that happens is that the value of the bad debt increases and no additional payments are forthcoming.

Even though financially stressed employers are very unlikely to pay all of their contractors on time and in full; they are equally as unlikely to not pay anyone anything. There will almost always be some payments made to some contractors and the trick is to ensure that you are part of the group that gets paid. One of the ​most effective business strategies for getting paid is to ensure that you are the loudest and most difficult contractor to avoid paying. This might be achieved by being in constant communication about any problems. It might require the threat of adjudication, litigation or winding up proceedings. It may even necessitate formal proceedings being issued.

There is no one rule or method to guarantee payment, but the squeaky wheel is certainly most likely to get the oil!

For more information on Construction Law, please contact ORJ’s specialist Mike Smyth on 01785 223440 or email him directly on Mike.Smyth@orj.co.uk. Further reading can be found in our relevant articles on Construction Law.