The inevitable recriminations surrounding the collapse of Carillion have only just begun, with a Parliamentary committee sitting, an FRC investigation into the audit, consternation about the payments to former directors, the deficit in the pension schemes and the award of large Government contracts to an apparently failing company.
Carillion was a huge company having swallowed up some well-known names in the construction industry such as Tarmac, Mowlem, Wimpey and Alfred McAlpine. Total revenue reported in the last accounts was £5.2 billion with four main segments of work, facilities management which formed the largest part of the business, construction services in the UK and Canada, Middle East construction services and public private partnership projects which was the smallest sector with revenue of £313 million (but a huge jump on the previous year when revenue for this sector was £192 million). It reportedly had 43,000 employees worldwide.
How could this business go so wrong? All insolvency practitioners will be familiar with the problems experienced by construction companies leading to failure of the business. It often starts with disputes on one or two contracts leading to payments being withheld exacerbated by the costs associated with sorting out the dispute. Overrun on projects for which the client refuses to pay is another common factor, coupled with a failure to ensure the agreement for additional work is recorded properly. For the smaller business the lack of funding to overcome these hurdles will mean things can spiral out of control very quickly.
Looking at the reports about the Carillion failure it seems that all the above factors were present, but magnified many times. It is reported that there were three projects in the UK worth a combined £1.4 billion which had run into problems, plus a dispute over payment on a contract in the Middle East. A new board of directors was appointed during 2017 presumably to try and turn the business around, but how do you get control of a business of this size? Add in pressure from the pension trustees to make good a multi-million pound deficit and the banks finally running out of patience and it can be seen that the business was being squeezed from all sides.
The actual process being used has surprised many. Administration was the expected route, but instead the various Carillion companies have been placed into liquidation by a court order with PWC appointed Special Managers. This means that the Official Receiver, part of the Government funded Insolvency Service, is acting as liquidator and will deal with creditors and staff, with PWC responsible for the commercial aspects of the winding up, dealing with the assets and looking for buyers for any parts of the business or contracts.
An Administrator would have been responsible for the whole company with enormous practical and cost implications for having to manage such an enormous entity. The head of the Insolvency Service, Sarah Albin, has told the Parliamentary committee that the assets probably will not be sufficient to cover the costs of the winding up which means the bill will be picked up by the taxpayer.
What will the impact be down the supply chain? Much of the major construction work undertaken by Carillion was on joint contracts which means that the partners in the projects can take over the parts formerly undertaken by Carillion with a minimum delay and cost. It appears that this may have prevented an immediate domino effect of failures, but there will be significant losses to be absorbed somewhere so there is bound to be an impact on smaller businesses. It is far too early to say what the final outcome will, but the shareholders will be in no doubt about their position with a stark message on the PWC website; “Unfortunately, as a result of the liquidation appointments, there is no prospect of any return to shareholders.”