Carillion: PwC appointed as special managers – what happens now?

Carillion: PwC appointed as special managers – what happens now?

Carillion has collapsed and PwC partners have been appointed as special managers by the High Court. What happens now?

Integrated support services company Carillion entered insolvency on Monday, with PwC appointed as special managers by the High Court.

Carillion had approximately 450 government contracts, including the provision of infrastructure and housing services for the Armed Forces and facilities management for schools across the UK. The company had also been awarded contracts on the HS2 railway.

The company issued three profits warnings between July and November in 2017 ahead of the collapse.

In September 2017, the release of H1 results for the six months ending 30 June 2017 revealed that the company’s underlying pre-tax profits were down 40%, leading interim chief executive Keith Cochrane to describe the results as “disappointing”.

At the time, he said: “No one is in any doubt of the challenge that lies ahead. We have made an encouraging start and the ambition is there to build on that progress. At the heart of this company, there is a strong core. Supported by an operating model that manages risk much more effectively and led by a fresh management team with a mandate to drive cultural change, I am confident that a strong business can emerge.”

Company collapse

On 12 January 2018, Carillion issued an update, notifying that it had met with creditors to present its business plan, and that the company continued to engage in “constructive discussions with a range of financial and other stakeholders” to reduce debt and strengthen the balance sheet.

The company said that any agreement was “likely to involve the raising of new capital and the conversion of existing financial indebtedness to equity which would result in significant dilution to existing shareholders”.

However, in a statement issued on 15 January, the company said that discussions to secure short-term financial support had not been successful and that the board had “no choice but to take steps to enter into compulsory liquidation with immediate 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.”

What happens now?

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.

PwC said that there was “no prospect of any return to shareholders” given the liquidation appointments.

Green said that the government would provide “the necessary funding required by the Official Receiver to maintain the public services carried on by Carillion staff, subcontractors and suppliers.

Minister for the Cabinet Office David Lidington said that the government would deliver all public sector services following the insolvency. He said that the government had been “closely monitoring” events since the company issued its first profit warning last July and that the government had been “hopeful” that a solution could be found while “putting robust contingency plans in place to prepare for every eventuality”.

Lidington assured Carillion employees and those already receiving pensions that they would continue to receive payment – the company employs 20,000 people across the UK.

Pensions in the spotlight

Pensions are once again in the spotlight following the Carillion collapse. Nigel Green, chief executive and founder of deVere Group, said that the liquidation should “trigger alarm bells” for UK pension savers.

Nigel Green said: “The UK woke up to the news this morning of Carillion being forced into compulsory liquidation. This should trigger alarm bells for pension savers across the UK as it puts a huge question mark over the fate of yet another major pension fund.

“The government’s pensions lifeboat, the Pension Protection Fund (PPF), is now to take over payment of pensions for the company’s retirement scheme members. It can be reasonably expected that those members who are not yet drawing their Carillion pension could now experience a drop of at least 10% to their retirement income.”

He added: “Whilst the PPF is an important and valuable support, UK final-salary pension schemes have an enormous deficit blackhole, which raises the inevitable question, ‘how many more big hits can the PPF take?’”

Liquidation effects

Nathanael Young, senior associate in the commercial litigation and dispute resolution team at SA Law, commented on what the effects of the Carillion liquidation were likely to be.

He said: “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.

It said it would make a further statement shortly.

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.

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