Carillion - Why Compulsory Liquidation?

After months of financial turmoil and one setback after another, Carillion is now set to be placed into compulsory liquidation. The government contractor is the second largest in the country dealing with many construction, facilities management and maintenance contracts across schools, hospitals, defence and infrastructure. With a historic debt burden in excess of £1.5 billion, it was anticipated that the company risked going into administration. However, with the news that the company is now due to enter compulsory liquidation, this article will examine why.


What now for Carillion contracts, subcontractors and employees?

What went wrong for Carillion?

Whilst diversification can be good for many companies, overstretching can be catastrophic. With 20,000 employees in the UK and 42,000 worldwide the company had expanded its operations to Canada, the Middle East and the Caribbean. However through this, Carillion effectively came out as a jack of all trades and a master of none. Many of the contracts the company took on proved unprofitable, with significant penalties for late delivery on government contracts and delays in payments on contracts from the Middle East having a significant effect on cash flow.

In July 2016, Carillion had a market value of £1 billion. The company issued 3 profit warnings in the second half on 2016 as well falling under investigation by the FCA in relation to the HS2 contract. All of these culminated in the market value of the company plummeting to £61 million. The company funded its expansion through bank finance, however, in December the company’s banks were not willing to provide further lending due to the downturn of the company.

Carillion compulsory liquidation

Carillion approached the government for a bailout, but the government was not willing to do this and did not want a repeat of the banking crisis. Instead, it has agreed to fund the continuity of the public sector contracts and will manage this through Carillion being placed into compulsory liquidation and dealt with by the Official Receiver.

Why has Carillion gone into compulsory liquidation?

Many commentators anticipated that Carillion would enter the rescue process of administration. This is not the case and the main reason for this appears to be the sheer reliance on government contracts. With the government needing to take action to preserve the public sector contracts, it is anticipated that the funding of this was agreed to be managed through the Official Receiver rather than a private insolvency practitioner.

The biggest asset of Carillion is the value of the public sector contracts, however, with the declaration of insolvency, it is envisaged that these would immediately terminate leaving very little left to rescue the company. When Carillion formally enters liquidation, the Official Receiver will take over the business and will have a series of difficult decisions to make in relation to the existing employees and how to maximise the return to the company’s creditors. The GLAS Trust Corporation, which has advanced a series of loans to Carillion, holds fixed and floating charges over the company’s assets and will be paid first in priority to unsecured creditors which includes the company pension fund.

The compulsory liquidation will also facilitate a government investigation into the conduct of the directors of Carillion. This will be led by the Secretary of State who will investigate whether the board acted appropriately and whether their actions led to any unjustified harm to creditors for which they may be required to contribute to the insolvent estate.

What is the effect of Carillion’s liquidation on public sector contracts?

With the promised interim government funding, the effect on public sector services is unlikely to be immediately noticeable. In the long term however, there will need to be a decision as to whether these contracts are nationalised or outsourced to alternative service providers. This will be a time for reflection for the government in relation to this, but at the end of the day they must make the decision that will cause the least possible disruption.

With the number of contracts managed by Carillion, the process of tendering these contracts could take years. I would anticipate that in the short term at least maintenance and facilities management will be dealt with by the public sector with construction contracts inevitably being delayed and tendered back out to the private sector.

What does the liquidation mean for employees?

The normal position in a compulsory liquidation is that all employee contracts are automatically terminated on the making of the winding up order. Carillion however, is unlikely to be a run of the mill compulsory liquidation. With the government funding continuity of these contracts, government minister, David Lidington has made the following statement.

“All employees should keep coming to work, you will continue to get paid. Staff that are engaged on public sector contracts still have important work to do,”

It therefore appears to be the case that at least in the short term, jobs will be maintained directly by the government and any redundancies will be individually notified. If public sector contracts are renationalised, it is anticipated a lot of these employees will then be taken on directly by the government, the NHS or relevant local authorities directly. Depending on the way any transfer is dealt with, due to the automatic termination of employment, it is still unclear whether TUPE will apply to these transfers.

Any employees who are made redundant will be able to make claims to the redundancy payments office against the national insurance fund. This is not the case at present and the insolvency service will put out information specifically for all stakeholders in the Carillion insolvency.

In terms of pensions, there is currently a pension deficit of £587 million in arrears of pension contributions. The pension protection fund will be an active stakeholder in the insolvency to push for the maximum return to the pension fund, however, it is anticipated that the shortfall will result in a 20% reduction in employee pension pots.

What about Carillion subcontractors?

Some of the biggest losers in the Carillion liquidation are likely to be the subcontractors employed by Carillion. With many aspects of the work being subcontracted out to these smaller companies and traders, there are now several thousand jobs at risk in the supply chain.

It is likely that many subcontractors rely on the work from Carillion for their continuity of business. With the pending liquidation, it is not anticipated any balances due to subcontractors will be paid and will likely need to be written off. These write-offs may not be bearable for many of these smaller firms who will need to consider their own futures.

If you are a subcontractor of Carillion who may now be facing financial difficulties our Business Rescue Experts are available to provide free advice to help you move forward.

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