Yesterday construction giant Carillion announced it was going into compulsory liquidation after all efforts to save it failed.
Following three dire profit warnings and an almost 90% drop in its share price the once-stable firm, which holds 450 government contracts and had been a major player on HS2, collapsed under the weight of its £900M debts.
Despite last minute talks with its bankers, the firm could not secure the extra funding it needed. Carillion has also left a £580M pension deficit which will now be dealt with by The Pensions Regulator (TPR).
Accountancy firm H W Fisher & Company insolvency partner David Birne said it was “extremely rare” for a company Carillion’s size to opt straight for liquidation, suggesting there is little – if anything – of value in the company to save.
“For Carillion it [liquidation] will mean huge breach of contract penalties that could dwarf anything demanded of it by creditors,” said Birne.
“And there will undoubtedly be a knock-on effect for companies that supply Carillion that will go all the way down the supply chain to the smallest firms.”
Answers will be demanded over the coming months as to exactly how Carillion’s collapse was allowed to happen, but we already know of several factors that contributed to the crisis.
One was the shock of its initial profit warning in July last year, which led to an £845M write down and the loss of its then-chief executive Richard Howson.
Earlier this month financial watchdog the Financial Conduct Authority announced it was investigating Carillion over announcements it made in the seven months prior to its first profit warning.
Keystone Law construction lawyer Louise Garcia said it raised the question of whether auditing processes for large companies should be reviewed, saying it wasn’t the first time a major company which is fully audited had suddenly announced financial problems.
Garcia said that shareholders, pension fund investors and subcontractors must be able to rely on “robust” auditing.
Carillion’s auditor KPMG said it had acted appropriately and responsibly in its work with the company, saying its work helped uncover the financial problems.
Three Public Private Partnership (PPP) problem contracts helped throw Carillion off balance. These reportedly included the Aberdeen Western Peripheral Route and work on two hospitals, including the Royal Liverpool Hospital.
Around £375M of its massive £845M July 2017 write-down was attributed to these three schemes; although its £5bn turnover may appear large, Carillion was unable to cope.
Former Capita director John Tizard said over-ambition was one reason for Carillion’s failure. What started as a straightforward construction company in 1999 had branched into government outsourcing contracts, and Middle Eastern markets which had experienced a slowdown.
“There will be many reasons for Carillion’s spectacular collapse but it is likely is that it both overstretched itself in terms of its operations and in terms of its corporate revenue goals,” he said, pointing to significant differences between construction and running public services.
Law firm Burges Salmon infrastructure group chair Will Gard said Carillion’s longer term contracts which were not as profitable as hoped must be taken into account when asking why it failed, adding lower bids and higher labour and materials costs added pressure.
“We are talking about an industry that can be a bit hand to mouth in terms of turnover, profitability etc.,” he said.
His colleague Richard Adams, senior associate at Burges Salmon, stressed that all underlying reasons for Carillion’s collapse are not yet clear.
He said: “What actually was happening behind the scenes, we might not ever know. But it is quite interesting that between the middle of July and now, it’s gone so badly wrong.”
The Financial Reporting Council could investigate Carillion, it announced yesterday. Meanwhile the Public Administration and Constitutional Affairs Committee has launched an inquiry into how the Government and public sector manages the risk of outsourcing the delivery of public services, including the risks of concentrating a large number of contracts with a single company.
The system of payment for directors at Carillion was also called into question, particularly former chief executive Richard Howson, who is understood to have continued to draw his £600,000 salary after he left the firm.
Institute of Directors head of corporate governance Roger Barker said that the liquidation suggested effective governance was “lacking” and questioned whether the board and shareholders exercised “appropriate oversight prior to the collapse”.
He said: “There are some worrying signs. The relaxation of clawback conditions for executive bonuses in 2016 appears in retrospect to be highly inappropriate. It does no good to the reputation of UK business when top managers appear to benefit in spite of the collapse of the organisations that they are responsible for.”