Carillion liquidation reaction

PwC has been appointed as the special managers to troubled outsourcing giant Carillion, which has announced it is going into compulsory liquidation with immediate effect, putting thousands of jobs and major government infrastructure projects, including the new HS2 high-speed rail link, at risk

This weekend saw crisis talks between the company, key financial stakeholders and government representatives, with Carillion asking for limited short-term financial support, to enable it to continue to trade whilst longer-term engagement continued. Yesterday morning the company put out a statement saying these discussions have been unsuccessful, and the board concluded that it had no choice but to take steps to enter into compulsory liquidation with immediate effect.

Carillion said “An application was made to the High Court for a compulsory liquidation of Carillion before the opening of business and an order has been granted to appoint the official receiver as the liquidator of Carillion. We anticipate that the official receiver will make an application to the High Court for PricewaterhouseCoopers to be appointed as special managers, to act on behalf of the official receiver, and we further anticipate that an order will be granted to that effect.”

Philip Green, chairman of Carillion, said “This is a very sad day for Carillion, for our colleagues, suppliers and customers that we have been proud to serve over many years.  Over recent months huge efforts have been made to restructure Carillion to deliver its sustainable future and the Board is very grateful for the huge efforts made by Keith Cochrane, our executive team and many others who have worked tirelessly over this period. In recent days however we have been unable to secure the funding to support our business plan and it is therefore with the deepest regret that we have arrived at this decision.  We understand that the government will be providing the necessary funding required by the official receiver to maintain the public services carried on by Carillion staff, subcontractors and suppliers.”

As well as the HS2 contract, Carillion is the second-biggest supplier of maintenance services to Network Rail, has a number of contracts across the UK for managing schools and prisons, and maintains 50,000 homes for the Ministry of Defence. The company has 43,000 staff worldwide, with 20,000 in the UK. According to Cabinet Office figures, Carillion held approximately 450 contracts with the government, representing 38% of Carillion’s 2016 reported revenue. Key central government contracts are held with DfE, DHSC, MoJ, MoD, and DfT.

The Official Receiver has been appointed as liquidator of Carillion, while Michael John Andrew Jervis, David James Kelly, David Christian Chubb, Peter Dickens, David Matthew Hammond and Russell Downs of PwC have been appointed as special managers by the High Court. PwC said that there was “no prospect of any return to shareholders” given the liquidation appointments.

Nathanael Young, Senior Associate in the commercial litigation and dispute resolution team at SA Law, has commented on what the effects of the Carillion liquidation were likely to be. “While the scale and procedures may be unusual, many of the effects of Carillion’s liquidation will be the same as those seen in the common run of liquidations. In particular”:

• The unsecured creditors will no longer be able to pursue or enforce their own claims against the liquidated company. They will ultimately be entitled to share pari passu in any distribution made to the unsecured creditors by the liquidator later in the process, subject to any funds being available for them after secured and preferential claims are taken into account.
• Any party who has contracts with the liquidated company would be well advised to check the terms of those contracts, and if necessary take advice on the effect of liquidation. Contracts may not automatically be discharged, but often contractual clauses will allow for termination in the event of insolvency. There may also be retention of title clauses, which often become of great importance after a liquidation.
• Even in the case of SMEs, liquidation can have knock on consequences for other businesses. If a business is reliant on contracts from the liquidated company, or is a significant creditor, it too may end up insolvent. In particular, such businesses may lack the cash to continue to pay their own creditors. In those circumstances, the business owners need to take urgent professional advice, both to see if the business can be saved and to avoid personal liability in the event it cannot.
• This is just the start of the story. Any liquidation results in a degree of investigation into the affairs of the liquidated company. The actions of the directors of a liquidated company come under particular scrutiny. This may lead to litigation years after the company’s initial demise”.
  The Financial Reporting Council has said that it has the powers to investigate circumstances relating to the audit of Carillion as well as the actions of the relevant accounting professionals.

In July last year, Carillion hired EY to review its finances following the announcement of its first profit warning. Earlier in 2017, the company had asked its auditor KPMG to look into 58 contracts following concerns over late payments.

Federation of Small Businesses (FSB) National Chairman Mike Cherry, said:  “It is vital that Carillion’s small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy, putting even more jobs at risk besides those of Carillion’s own employees. These unpaid bills may well go back several months. I wrote to Carillion back in July last year to express concern after hearing from FSB members that the company was making small suppliers wait 120 days to be paid.

“Sadly these kind of poor payment practices are all too common among some big corporates. Perhaps if they weren’t it would be easier to spot the warning signs of a huge company in financial trouble. When the dust settles on this sorry saga, there is also a wider lesson to learn about the concentration of public contracts in the hands of a small number of very big businesses. Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system and the Government should prioritise meeting its target of at least one-third of taxpayer-funded contracts going to smaller firms.”

Brendan Clarkson Head of National Creditor Services said that the”Carillion liquidation could have huge ramifications for the construction sector. The liquidation of facilities management and construction services company, Carillion plc, no doubt raises many questions. The organisation has a number of large, long-term projects and contracts, including HS2, and its failure could have huge ramifications across the construction sector. Support for the liquidators to prevent the collapse of the company may still come in the form of funders or even the Government.”