As construction behemoth Carillion entered liquidation, so too did the playing field for UK firms shift irrevocably. Long-running issues such as outsourcing risks and late payment epidemics reached an explosive climax after years bubbling under the surface, likely resulting in devastating consequences for thousands of businesses as they strive to avoid liquidation and dissolution.
Which events led to this watershed moment? How could your business prepare itself for sizable aftershocks in the coming months and what are the wider implications for major and minor players across all sectors?
What’s past is prologue – a crisis timeline
Until the government and other regulatory authorities complete their respective investigations into the primary causes behind Carillion entering liquidation last month, we cannot know for certain which events and business decisions truly led to the downfall of a company employing more than 40,000 staff and working with 30,000 suppliers. Nevertheless, so as to gain some perspective on how this landmark crisis came about and assess its resultant implications, let us first examine the late firm’s recent history in chronological order…
- 2013 – Carillion investors began betting against the construction business’ shares as early as five years before its demise, according to BBC News
- December 2016 – The firm posts sales of £5.2bn for 2016, with £162m worth of dividends paid to shareholders over the past 12 months and its pension shortfall increasing almost twofold to reach £587m by the end of this period
- July 10th, 2017 – Despite holding a promising market capitalisation in the region of £1bn at the time, Carillion issues its third profit warning in just five months
- July 17th, 2017 – Nevertheless, the outsourcer secures another major contract just a week later, tasked with completing the £1.4bn works required for the government’s HS2 railway alongside its ongoing projects at Midland Metropolitan Hospital (£350m), the Royal Liverpool Hospital (£335m) and the Aberdeen bypass (£745m)
- Autumn 2017 – The Pension Protection Fund, a government-created organisation which helps resolve defunct company pension plans, places Carillion’s 13 pension schemes – subscribed to by 27,500 members – on a risk-list
- November 6th, 2017 – Carillion secures a further contract to instigate the electrification of the London-Corby railway route for £130m
- December 2017 – Further signs of the firm’s £1.5bn debt come to light as its finance team ask banks and other lenders for additional time to repay their dues, only to meet with alleged reluctance from the former group
- January 15th, 2018 – Having amassed a £900m debt pile and £600m pension deficit, Carillion officially enters a state of liquidation
- January 29th, 2018 – As per BBC News, the government’s Work and Pensions Committee raises doubts surrounding whether Carillion’s “dividends and bonuses were paid out at the expense of pension fund contributions”. Meanwhile the Financing Reporting Council launches an investigation into professional services business KPMG’s 2014-2016 audits of Carillion’s finances
Does this affect my business’ immediate future?
Easily the most pressing concern for any suppliers or businesses contracted by Carillion to work on HS2 and other projects is, quite rightly, the matter of payment. What will become of those unsecured creditors whose transactions with the beleaguered construction icon weren’t covered by trade credit insurance, and who therefore aren’t entitled to the £31m of incoming payments forecasted by the Association of British Insurers?
Spearing Waite’s Piet van Gelder paints an unsettling landscape for businesses asking as much. The Leicester law firm’s construction and engineering partner warns that consultants and contractors who have “a direct contract with Carillion […] are unlikely to get paid in the near future” due to the industry behemoth’s liquidated state showcasing their inability to do so. What’s more, he adds that lost payments could leave businesses awaiting debts unable to pay their own dues – thus creating a destructive “ripple effect” across the supply chain.
But that’s not to say van Gelder can’t offer any plan of action. “It is important that you check your contracts,” he says, “And, if necessary, issue notices of termination so that you can stop incurring further costs until the future of what project you are engaged is in determined and possibly a new contract put in place.” One possibility he raises involves ‘novating’ contracts to other clients than Carillion, yet the Spearing Waite partner subsequently emphasises that the Public Contract Regulations 2015 forbid this action for public sector clients.
Wider implications of Carillion’s demise – business integrity and Supplier Code
With some of the contributory factors which sealed Carillion’s fate in mind, businesses should acknowledge the key issues at hand and endeavour to learn from them going forward.
Since Carillion’s liquidation, several business groups have argued that a “late payment epidemic” plagues not only the construction sector, but Britain’s businesses overall. According to the Specialist Engineering Contractors’ Group’s chief executive Rudi Klein, despite joining schemes aimed at combatting late payments, Carillion often took up to 120 days to pay suppliers. This reliance on extended payment terms to bolster an aggressive cash management strategy undoubtedly was damaging in the long term to all parties within the supply chain racing to succeed.
Indeed, as we discussed last September, the UK’s present late payments crisis represents one of the greatest challenges facing businesses today. The Federation of Small Businesses estimates that 50,000 firms find themselves pushed against the wall every year by delayed transactions, setting the UK economy back £2.5bn as a result. It’s safe to say, then, that any firms looking to thrive this year must assess their cashflow levels to ensure they can remain strong enough to mitigate late payment damages, whether through funding lines, accountants, independent business reviews or otherwise.
Moreover, supplier code must be fair and well-defined, considering financial protections and mechanisms. These could include trigger charges or discounts based on the timing of agreed payments; stipulated terms aligned with the firm’s cost cycle; assignment of debt recovery costs and / or rights to verify compliance through assessments; and systems to ensure standards are transparent and continuously improved.
Solutions for underperforming and distressed businesses
It’s also important for businesses to consider their asset management in light of private equity groups and buyout firms’ ongoing race to secure Carillion’s distressed assets. The Financial Times described organisations such as UK private equity firm Endless and Canadian fund manager Brookfield as “circling” the fallen construction business’ cheap holdings, hoping to “cherry-pick” those assets which held the greatest value to their own enterprises.
• Take action to reduce challenge and risk
This fate needn’t befall every business currently in possession of distressed assets and / or in need of recovery support. Capita, an outsourcing and professional services company audited by KPMG – the same accountancy firm which audited Carillion, has taken strategic evasive action to reduce its debt burden, by announcing plans to issue new shares worth £700m in the months ahead to counteract its downscaled profit forecasts, as well as making cost cuts and selling loss-making businesses.
Actions can be taken to combat liquidity issues, however business mobilisation is needed to prepare for turnaround or restructuring options which could prove vital for an upturn. While operational and financial options are available, stakeholder backing and efficient planning time is crucial to product selection and maximising value.
• Turn for assistance
Firms lacking the industry experience and financial expertise to assess their alternatives do have the option to seek turnaround consultation. For example, industry-specific action management expertise, governance and legal experience is available to help with recapitalisation, debt restructuring or analysing future capital requirements.
Alternatively, if it’s decided that the path forward is sale as a going concern or wind down and exit, unique and distinct challenges await which would be better overcome with specialist assistance, especially with regards to devising a suitable and efficient strategy, valuation, contractual obligations and sales processes.
• Accounting considerations
Accounting and financial reporting will be crucial aspects of any of the different options available for companies in distress, since a business’ direction, scale and scope, existing debt and cashflow arrangements will inevitably change over time.
BBC business reporter Dominic O’Connell says that a new accounting standard set to come into effect this year will “force companies to be tougher, matching reported profits much more closely to actual cash flows”. Had IFRS 15 been in place during Carillion’s lifespan, this would’ve provided a more accurate depiction of their welfare at an earlier stage, but more importantly, businesses employing / working with accountants should keep in mind the requirements of this new legislation – available to read here – when reporting their firms’ finances going forward.
If any of the issues mentioned here have affected your enterprise in the past year, then there’s never been a more urgent time than now to seek help. Get in touch today with Touch Financial on certain funding options, or alternatively with turnaround specialists SFP Restructuring if you are suffering from cashflow problems, or our sister company Just Accountants, if you are seeking an accountant right for your business.