Carillion collapse: The week so far and industry reaction

Carillion, the integrated support services company, collapsed earlier this week after failed attempts to secure short-term financial support from creditors.

The company had announced three profit warnings between July and November 2017.

Here’s how the week has unfolded since the collapse.

Monday 15 January

After news broke of Carillion’s collapse, company chairman Philip Green issued a statement, describing events as “a very sad day for Carillion, for our colleagues, suppliers and customers that we have been proud to serve over many years”.

The Official Receiver was appointed as liquidator of Carillion with PwC appointed as special managers. PwC said that there was “no prospect of any return to shareholders” given the liquidation appointments. At the time of liquidation, Carillion was reported to have had debts of £1.5bn.

As the government came under scrutiny for continuing to issue contracts to the company despite profit warnings in 2017, minister for the Cabinet Office David Lidington said that the government would deliver all public services following the collapse and that employees and those receiving pensions would continue to receive payment.

Graham Randall, partner at Quantuma, said that the government had some explaining to do over the collapse and that awarding public sector contracts to other contractors was likely to “increase costs significantly”.

“The government is facing increasing calls from opposition figures to explain why it awarded £2bn of contracts to Carillion after the distressed contracting company issued a number of profit warnings,” Randall said.

“The failure of Carillion will have a serious impact on employees and its supply chain, putting the financial future of many people and smaller businesses at risk,” he added.

The fact that Carillion won contracts after profit warning were issued also sparked questions around due diligence.

“This raises significant questions over the judgement of government officials and their handling of the due diligence process that took place when these contracts were awarded,” said Randall.

Tuesday 16 January

While the government vowed to provide support for public sector contracts, concerns rose over whether small businesses would be paid.

National chairman of the Federation of Small Businesses (FSB) Mike Cherry said that it was “vital that Carillion’s small business suppliers are paid what they are owed”.

Failure to pay the businesses could result in firms being in jeopardy, putting even more jobs at risk, said Cherry.

He flagged that he had had previous communication with Carillion, writing to the company in July 2017 after hearing from FSB members that small suppliers were waiting 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.”

Peter Kubik, partner at UHY Hacker Young, said that any company affected by the Carillion collapse should “conduct a health check” to ensure that they are a “viable going concern”.

Kubik said: “There will be a huge knock-on effect amongst smaller firms, especially as many creditors can expect to receive less than 1p for every £1 they are owed by Carillion.

“A prescribed £600,000 will be spread extremely thinly amongst trade creditors who are owed more than £100m in total.

“The secured creditors, which are mostly banks, are owed roughly £900m and will get first bite of the company’s remaining assets as it gets liquidated.

“Those construction companies and sub-contractors that derived the lion’s share of their income from Carillion are facing some tough months ahead. Many of these firms may not have trade insurance either as this would have been difficult for them to obtain amid a flurry of recent profit warnings from Carillion.”

Brendan Sharkey, construction partner at MHA MacIntyre Hudson said that moving forward, the government should “insist on ring-fencing the outsourcing operations big public sector service providers perform for schools, prisons and local authorities from the costly and risky construction projects these giant companies also undertake”.

He likened the proposed regulation to that of banks following the financial crisis.

“After the financial crisis the government forced the banks to separate consumer banking from their riskier loans and financial operations. Regulating giant service providers in the same way would prevent the profits generated providing school meals and housing from being used to shore up over-budget construction programmes.”

Wednesday 17 January

The Insolvency Service issued an update, announcing that the Official Receiver had been “very pleased with the level of support shown by Carillion’s private sector service customers”.

“Over the past 48 hours all of the company’s private sector service customers have been contacted to determine their ongoing needs,” a spokesperson said.

“Over 90% of these customers have indicated that they want Carillion to continue providing services in the interim until new suppliers can be found and will provide funding which enables the Official Receiver to retain the employees working on those contracts.

“Work has paused on construction sites, pending decisions as to how and if they will be restarted.”

Meanwhile, Mike Cherry, national chair of the FSB, said that emergency measures put in place by banks following the collapse would provide “some respite at a desperate time for hundreds of small firms.”

Business secretary Greg Clark, economics secretary to the Treasury John Glen and small business minister Andrew Griffiths had met banks earlier in the day to “seek assurances” that they would support small businesses affected by the collapse.

Clark said: “I chaired a meeting this morning of high street banks to ensure that they are in contact with customers impacted, that they have in place the advice and support needed and that any individual cases are escalated and dealt with sympathetically, swiftly and appropriately.”

Stephen Pegge, UK Finance managing director, commercial finance, said that emergency measures were being put in place by banks, including overdraft extensions, payment holidays and fee waivers “to ensure those facing short term issues can be helped to stay on track”.

Cherry issued calls for a Carillion task force, which would be “dedicated to helping all affected small firms and workers to recover and get back on their feet”.

“Following Rover’s collapse in 2005, I was involved in a similar initiative where we successfully supported suppliers and found new opportunities for all of the firm’s apprentices,” he said.

The Carillion collapse had demonstrated that the “government’s reliance on a small number of huge outsourcing firms poses a risk to the nation’s economic stability,” said Cherry.

He added: “As things stand, our procurement regime is stacked against small firms. Providing small businesses and the self-employed with more opportunities to secure public contracts will mean less risk and better return for the taxpayer. At the very least we need to see the reinstatement of the target date for achieving 33% of all public sector procurement with smaller businesses, to 2020.”

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