Carillion subcontractors and other small firms which might be at risk due to the failure of the construction giant are being urged to seek professional advice at an early stage to help safeguard their future.
Paul Barber, North West chair of the insolvency and restructuring trade body R3, says firms which are owed money need to assess what impact it will have on their business and clearly understand their options.
Subcontractors and suppliers are usually classed as unsecured creditors, and come behind secured creditors, such as banks, and employees in the queue for payment. Firms are being told to contact the liquidator for information on their specific case.
Paul Barber, who is also a partner at Begbies Traynor, says firms could be affected in a number of ways. “For subcontractors awaiting payment for work carried out, there will be an immediate impact on cash flow. They will of course still be expected to pay any outstanding labor or materials costs for the work they have incurred or purchased and make VAT payments due to the crown authorities which may in some cases include their invoices to Carillion.
“But also in the period ahead, there will also be an impact on their balance sheet. Bad debts and work in progress may have to be written down, weakening the balance sheet strength. If not risking insolvency, in practical terms it could affect their credit rating, making it harder for them to raise finance, or their ability to win future work since, in many formal tendering processes, the balance sheet is used as a partial measure of their stability.
“Many small subcontractors do not have cash reserves or assets to fall back on so will be in a vulnerable position. It is all the more galling as with this type of work it can be that the sub-contractor has carried a lot of the risk inherent in the main contract as often seen by way of low margins and extended payment terms of 90 days or more.
“Those which might be at risk should take professional advice as soon as possible and understand that the best option might be – for example, raising finance to overcome immediate cashflow problems, negotiating with their own creditors or even a formal insolvency procedure.”
See also our guide to compulsory liquidation which explains how the process works and the role of the liquidator in cases like that of Carillion.