The Carillion Crisis - What you Need to Know

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The Carillion Crisis - What you Need to Know

The Carillion Crisis - What you Need to Know

The news couldn’t have escaped you, Carillion, one of the UK’s largest construction companies has collapsed following an application for compulsory liquidation.

What this means at present is that there are 43,000 jobs worldwide hanging in the balance and the company will almost certainly be dissolved. The Government has promised to continue to pay those among Carillion’s 19,500 UK staff who work in public sector jobs, such as NHS cleaners and school catering. However those workers who provide services to private-sector firms face having their wages stopped unless another employer is willing to step in.

Carillion had specialised in construction, as well as facilities management and ongoing maintenance contracts. As the UK’s second largest main contractor, it had famously worked on big private sector projects such as the Battersea Power station redevelopment, Anfield Stadium expansion and more recently HS2. Carillion’s business model relied on large contracts, some of which proved much less lucrative than it expected. As the contracts underperformed, its debts soared to £900m. What is emerging from the news is that Carillion overreached itself, taking on too many risky contracts that proved unprofitable. The company needed a £300m cash injection, but the banks that lent it money refused to advance any further sums. In addition, the government refused any further bail outs to the company which was unable to continue trading, forcing it to go into liquidation.

Liquidation v Administration
Those familiar with the insolvency procedures would have picked up on the fact that the company entered into liquidation rather than administration. Administration allows a company to continue to operate, as the administrators attempt to find a buyer for viable parts of the business. In contrast, liquidation means a company ceases trading, and the liquidator tries to realise any remaining assets and distribute them to creditors. It is also known as the “death” of the company. What is unusual about this liquidation is that PwC has been appointed as “special managers”. As special managers, PwC will work with the liquidator whose role is to secure the best outcome for all of Carillion’s creditors while ensuring that public services continue. All employees, agents and subcontractors are being asked to continue to work as normal and have been told by PwC that they will be paid for the work they do during the liquidation. One opinion in the press is that PwC is likely to collect around £50m from the liquidation process.

Directors’ duties
The question in most of our minds is why did Carillion keep bidding for further work and why did it not stop bidding years ago, write off bad contracts and attempt to restructure when its competitors (the likes of Serco and Balfour Beatty) were doing the same thing. In the UK, if a company is close to becoming insolvent, it is important that directors are aware of their duties and potential issues that could arise, especially when dealing with company assets. The Companies Act 2006 sets out the general duties owed by UK directors. In summary the directors must act in the best interests of the company. Duties are owed not just by registered directors, but also by shadow and de facto directors. If the insolvency of a company is likely, the directors’ duties shift to those of the interests of the creditors, not the shareholders. If the company does enter a formal insolvency process, the conduct of the directors in the period leading up to insolvency will be considered, and the company’s transactions investigated. No doubt, as part of the insolvency process the conduct of Carillion’s directors and the transactions entered into will be scrutinised. Business Secretary Greg Clark has already written to the Insolvency Service and the Official Receiver asking that the statutory investigation into the conduct of Carillion's directors is fast-tracked and extended. Directors could be held personally liable and ordered to make a financial contribution to the company. They could also face director disqualification.

How we can help
Our insolvency and restructuring team are experienced in advising directors, managers, lenders, shareholders, investors and suppliers with astute and above all commercial advice. The team have strong relationships with insolvency practitioners, turnaround professionals, lenders and other financial institutions and investors.

Should you need advice in relation to an insolvent company, please do not hesitate to contact Kam O’Neill, or you can give us a call on 0345 070 6000.