Carillion - Was the writing on the wall?

Carillion - Was the writing on the wall?

On 15 January 2018, Carillion PLC, the UK’s second largest construction company, was placed into compulsory liquidation. The move came after discussions over the weekend between the firm, its lenders and the Government failed to reach a deal to save the company.

Carillion employs 43,000 people worldwide, with approximately 20,000 of them in the UK. In addition to a number of high profile private sector construction projects, the company is also a major supplier to the UK Government, with contracts for the maintenance of schools, highways and prisons. According to reports, Carillion’s sub-contractors and suppliers are owed up to £1bn, and it may only be a matter of weeks before further fatalities are seen along Carillion’s extensive supply chain.

The warning signs

Were there any early indications that Carillion was in financial difficulty and what were the warning signs? Below we take a general look at the key signals that suppliers and customers should look out for to protect against counterparty insolvency. Every business functions differently and will have different warning signs; some of which will be more readily evident than others. However, the most common warning signs of insolvency are:

  • the customer or supplier is paying or performing late (if at all)

In the past, Carillion had been named as one of the worst offenders for late payment in the construction industry, with subcontractors reportedly having to wait an average of 80 days before receiving their money.

  • the customer is seeking extended payment terms or the supplier is seeking shorter payment terms.

In 2013, Carillion extended its payment terms to 120 days and implemented “reverse factoring”, a financial mechanism that allows suppliers to be paid early if they pay a charge to the bank.

  • the management team or your key contact at the supplier or the customer is changing or you sense that there is a high turnover of staff

In September last year, analysts raised concerns about significant departures within Carillion's services management team, including the departure of finance director Zafar Khan and chief operating officer, Richard Howson, who stood down as chief executive in July 2017. Other resignations at the top included the managing director of the construction services arm, Adam Green, managing director of Carillion Services, Nigel Taylor, and group strategy director, Shaun Carter. Whilst a credible turn-around plan will often require a new management team, the timing of the changes raised questions amongst industry analysts given that the firm’s £845m write-down in July only related to construction, with the services business otherwise portrayed as in good shape.

  • you read in the press or hear from competitors or other people operating in the same market that the supplier or customer is in financial difficulty

Carillion’s problems were no secret. Last year, it issued three profit warnings in five months and wrote down more than £1bn from the value of contracts. In November 2017, the firm issued its latest profit warning and said it would breach its debt covenants, prompting its share price to fall by 70 per cent. The firm, which posted a half-year loss of £1.15bn, had warned that its annual profits were set to be 'materially lower than current market expectations', exacerbated by a string of delays and smaller-than-expected improvements to its margins on certain contracts.

  • the customer or supplier operates in a contracting market

A significant amount of Carillion’s business is outsourced and the company faced significant cost overruns on three of its large public sector construction contracts: the £350m Midland Metropolitan Hospital in Sandwell, the £335m Royal Liverpool Hospital and the £745m Aberdeen bypass.

  • the customer or supplier is late in filing its statutory accounts

The specific problem that construction companies such as Carillion face is not so much their ability to file accounts on time, but rather ensuring that the accounts filed are an accurate representation of the financial health of the business. When a construction company wins a contract, it cannot be precisely sure that it has bid the correct amount - there are always the vagaries of ground conditions, technical challenges, even weather. That same problem of revenue recognition, and the taking of profits too early, also applies to long-term services contracts. Other major construction companies such as Amey, Jarvis, Connaught, Rok, G4S, Balfour Beatty, Serco, Mitie have in the past owned up to accounts that were, according to reports, ‘optimistic’, albeit, unlike Carillion, the result in most of those cases was not fatal.

My customer or supplier has gone bust - what next?

  • Find out what type of process the customer or supplier has entered as this will affect what rights you have as a creditor
  • Determine what your contractual rights are, for example, can you terminate the relationship or set-off any amounts owed? Is your claim secured or guaranteed by a third party?
  • Are you able to repossess goods supplied subject to reservation of title terms?

Whether any of the above measures to reduce or extinguish a claim against an insolvent customer/supplier is available, or indeed appropriate, will depend on the facts and circumstances of each case. If after having taken any such steps, you are still owed money, then the insolvency practitioner will ask you to fill in a one-page form known as a ‘proof of debt’ providing details of your claim.

It is important that early advice is taken to establish what rights and remedies might be available in any given case.  Delays in acting could be fatal to a claim.

Contact our experts for further advice

David Steinberg, Anna Perry

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