What next for Carillion and the government?

Deputy Business Editor evaluates Carillion’s liquidation process

LAST WEEK CARILLION plc, one of the UK government’s largest suppliers, entered immediate liquidation in an unusual move that raises huge questions for its thousands of workers, suppliers and customers. But what is next for the company tasked with closing the firm down, and how will it approach the massive task of distributing what is left of the failed corporation?

On 15 January, multinational professional services firm PricewaterhouseCoopers were appointed as ‘special managers’. This role relieves Carillion directors of their duties and passes the responsibility of managing the business over to PwC. The firm has chosen to undertake a complete liquidation, which involves the company being closed down with almost immediate effect. The special managers are responsible for organising the financial affairs, workforce, and the overall closure of the firm. Usually, firms may seek a period of ‘administration’, where a buyer is sought for attractive elements of the business. The fact that Carillion is closing down altogether highlights the severe financial problems of a company that only three years ago was valued at over £1bn.

The liquidators of the firm have now started the lengthy process of identifying potential credit agreements that they may be able to release money from. Preferential creditors (typically the largest banks) are the institutions that the liquidators concentrate on paying the most with any funds generated. Smaller suppliers and firms who are owed money from the failed construction company will only receive payment once preferential creditors are satisfied – this is something that in a business of such size is very unlikely. Unite the Union has estimated that over 30 000 other companies are reliant on contracts tendered to Carillion, so the government have understandably been interested in the effect that the collapse will have on the labour market. PwC will be trying to secure new deals to ensure employees are given security when contracts are eventually re-tendered, but there is no legal obligation for them to do so.

The government have not only expressed concerns relating to job losses, as Carillion possessed hundreds of government contracts that Whitehall are now having to take in house or re-tender. This is a logistical nightmare, considering the firm once provided services for a multitude of different departments including defence, health, and education. This has caused extreme criticism from the Labour opposition who have argued that the Conservatives acted irresponsibly by awarding eight contracts to Carillion in the aftermath of profit warn ings last year.

The Insolvency Service announced last week that the highly contentious pay of ex-Carillion CEO Richard Howson would be blocked under regulations preventing excessive liquidation deals. The highly criticised businessman was set to receive in excess of £600 000 until the end of 2018 in a package agreed when he left the firm at the end of last year. Many employees were reportedly infuriated with the development as their own future is unclear. Theresa May acknowledged their frustration in Prime Minister’s Questions last week saying that it was the government’s responsibility to seek the “best value” for taxpayers and noted the government are continuing to liaise with the liquidators to seek a positive deal.

It seems that No. 10 is becoming increasingly interested in the activities of the Carillion board. Last week the Cabinet Office announced that it had fast-tracked an investigation into the behaviour of the company’s executives which is likely to look into the management of their financial affairs which ultimately ended in disaster. Meanwhile, several major banks have created special support schemes for companies struggling after losing Carillion contracts.

The future seems unclear with regard to the public sector contracts that Carillion were awarded. The failure of the multinational firm was largely caused by their constant bidding for unprofitable schemes. This was required as they used payments for future schemes in order to fund previous credit responsibilities. This is the key difference between the failure of the group and the success of firms in similar predicaments such as Balfour Beatty and Serco, who were able to restructure by concentrating on profitable schemes. Carillion was plagued by the huge costs of large infrastructure schemes such as HS2 and could not escape collapse. One thing that is certain is that the liquidators in charge have a difficult and highly politicised task ahead.

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