It should come as no surprise that following the MPs enquiry into the collapse of Carillion the former directors have been heavily criticized and blamed for the firm’s demise. The 107-page report also calls for an overhaul in the corporate culture that led to the firm’s downfall.
The contractor’s collapse was described as “a story of recklessness, hubris and greed”, with directors paying out dividends based on profits that were supported by exploiting its suppliers. The report also said: “The only cash supporting its profits was that banked by denying money to suppliers.”
The inquiry found that Carillion’s executives had painted a false picture of its financial strength to its clients, suppliers and investors by “systematically manipulating accounts” through aggressive accounting and “exploiting its suppliers”.
The big four accountants have also been criticised as having conflicts of interest “at every turn” EY was found to have encouraged payment terms of 126 days to create what was described as a “cash-generative opportunity.
It has always been the case that many contracts in construction are somewhat risky with slim margins. The question then is how these are accounted for. However, it should be mentioned that they were owed £400m by the Qatari Government for work done in that country. The problem in construction is that there is often an excuse to withhold payment – The work has not been done to the required standard or what was agreed etc. Anyone who has employed builders in the home may well have experienced this first hand.
At KSA Group we have also seen such bad practices in small construction businesses as well. If anything the culture change needs to be addressed in the construction industry where subcontractors are constantly being strung along and taken advantage of.
Any business that asks its suppliers to wait for payments for 120+ days is surely a sign that things are not right. In the end, many contractors would not touch them and it is interesting to see that there have not been quite as many companies going bust as a direct result of Carillion as expected. Many suppliers “de-risked” working with them or they had credit insurance/factoring. It should also be noted that only 2000 jobs have been lost out of a workforce of 20,000 so many have been reassigned to other infrastructure projects. This has lessened the impact as well.
MPs have called for the directors to be disqualified but that will be up to the liquidators to decide if they have been guilty of wrongful trading. This is difficult to prove as the accounts were signed off by the accountants and they have taken professional advice!
Carillion impact to date
The MPs inquiry set up to reveal the reasons for Carillion’s collapse listed the resulting damage so far:
- More than 2,000 jobs lost
- £2.6bn in unfunded pension liabilities with 27,000 members facing reduced pensions
- £2bn owed to around 30,000 suppliers who will receive little from the liquidation
- £150m of taxpayer’s money spent to keep services running
- Total liabilities of around £7bn
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.