The collapse of the outsourcing giant, Carillion, is the second big business failure, following Monarch Airlines, which has impacted thousands of employees, customers, and suppliers in the last three months[1].

Latest estimates state around 30,000 businesses are owed around £1 billion in unpaid costs, and many are expected to go under themselves due to being unable to bear the cost of never being paid[2]. Banks may also face around £2 billion of losses and 43,000 workers, (19,500 of whom are in the UK) face an uncertain future.

The fact Carillion went into liquidation (whereby a liquidator tries to realise any assets distribute as much as possible to creditors), as opposed to administration (whereby the company continues to operate while a buyer is found for viable parts of the organisation), illustrates the depth of the construction giant’s problems. It is estimated it only had £29 million in cash when it collapsed, and the decision to liquidate means there was no part of the company worth buying.

The effect of a giant such as Carillion collapsing is catastrophic. There was talk that the UK government, which outsources many contracts to the failed organisation, would not allow Carillion to go under as it was “too big to fail”. However, Ministers made the decision that taxpayers could not be asked to bail out the stricken private company.

The question on many lips is “what are the rights of suppliers and contractors when a company falls into liquidation?” Are they doomed to go down as well, or is legal redress available?

The Insolvency Act 1986 and the position of unsecured creditors

Suppliers of large organisations who go into liquidation are often incredibly vulnerable. Andy Bradley of Flora-Tec was forced to lay off ten staff the day after Carilion made its announcement, illustrating the disastrous “domino effect” the failure of such a large organisation can have[3]. Flora-tec is owed around £800,000 by Carillion for providing ground services work to schools and hospitals. This figure represents around 10% of Flora-tec’s annual turnover.

The UK government, which has been criticised for still providing contracts to Carillion despite three profit warnings, told small firms who worked for the construction giant on private sector contracts that they would only receive two days of government support[4]. In addition, Carillion was reported to have extended its payment terms to suppliers in 2016, meaning many outstanding invoices are months old.

Hauntingly, trade body ‘Build UK’ told the BBC that in the past, when other big contractors have failed, around 18% of businesses who were creditors did not survive the next five years[5].

The Insolvency Act 1986 states who gets paid first when a company goes into liquidation. The hierarchy is as follows:

  • Liquidator fees and expenses
  • Secured creditors with a fixed charge
  • Preferential creditors
  • Secured creditors with a floating charge
  • Unsecured creditors
  • Connected unsecured creditors
  • Shareholders

Suppliers are usually unsecured creditors; therefore, often end up with little or nothing after everyone above them gets paid.

You may be thinking the best way to get around the hierarchy is to sue for breach of contract. Unfortunately, it is very difficult to bring legal action against an insolvent company. The Insolvency Act, section 130 limits any claims or actions against an insolvent company by virtue of a statutory stay of proceedings. The stay means that no action or proceedings can be brought, or continued with, against the company without the leave of the court.

What factors will the court take into account when considering whether to lift a stay of proceedings in an insolvency situation?

The purpose of a liquidation stay is to ensure that all creditors of an insolvent company are treated equally and no one “jumps the queue”. It acts to prevent any of the organisation’s assets being dispersed following litigation and prevents the liquidator having to appear in proceedings when the matter can be dealt with effectively via the liquidation process.

A creditor can make an application to have the stay lifted. The main concern the court will have when considering such an application is whether one creditor will obtain an advantage, or the liquidation process will be interrupted.

It is imperative that you engage an experienced civil litigation solicitor if you plan to challenge a liquidation stay. If the case is not ‘genuinely arguable’ is likely to be instantly dismissed. Even if this threshold is passed, the court retains the discretion to do what it believes is just and fair in the particular case.

Situations in which the court may allow litigation against an insolvent company include if:

  • the insolvency has been going on for some time
  • court proceedings would assist in clarifying a complex issue related to the insolvency
  • there are a large number of claimants

It is important to note that even if a liquidation stay is lifted, the court can state that a judgment cannot be enforced against the company without a further court order.

In summary

If you are an unsecured creditor of a large organisation which has fallen into liquidation, it is crucial you seek professional advice to discover your position. Failure to do so could see your business suffer greatly and perhaps meet the same fate.

Saracens Solicitors is a multi-service law firm based in London’s West End. We have dedicated and highly experienced civil litigation solicitors who can advise you on all civil litigation matters. For more information, please call our office on 020 3588 3500.

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[5] Ibid