Simon Lewis, a partner in the Construction and Engineering team at Womble Bond Dickinson, considers the implications for the supply chain following Carillion’s demise.
While the collapse of Carillion was looking increasingly likely over the course of last year, from the issue of the profit warning for a staggering £845m in July to the final demise on 15 January this year, nevertheless the nature and extent of the collapse and its ramifications is still shocking.
The relatively small amount left in the Carillion reserves available to address the enormous number of companies seeking to recover at least some of the monies owed to them shows the nature and scale of the crisis which had engulfed Carillion. While public sector projects may, to some degree, be protected, the private sector faces the bleak prospect of what would appear to be very little chance, if any, of recovering any significant sum from the liquidation of Carillion.
There has been, and no doubt will continue to be, any amount of analysis of what went wrong at Carillion and, hopefully, an increased awareness of the warning signs in other major contractors who are known to be facing difficulty. I suspect a combination of wafer-thin margins, too much debt, too great a diversification across sectors and a wilful blindness to the risks of this strategy lead to the feeling that the only way to address these risks is to keep getting bigger and bigger in the hope that the consequences can, in some way, be outrun.
A number of problem projects which in their own might not have been enough to cause such devastating effects is the final straw. The financial market had seen this coming for some time, even before the profit warnings. Hedge funds and other financial speculators had been betting the firm would get into trouble (known as ‘shorting’ the Carillion shares), demonstrating a lack of confidence in Carillion’s future. The huge debt plus a massive pension fund deficit of about £580m (though that figure may yet increase) meant that, ultimately, despite apparently having reached an agreement with its creditors, Carillion found that its banks refused to lend it any more money.
Of more immediate concern to Carillion’s suppliers: will I get paid? Given the very limited amount of cash reserves available, the signs for those involved in private sector contracts are not good. As is always the case when a major contractor collapses, the ripples spread down the supply chain with companies expecting to be paid or expecting to be able to recover their retentions now finding that they cannot.
There are signs, however, that steps will be taken to try to lessen the impact of this crisis: a group of banks has made more than £225m available to help businesses put at risk, and across the country there is a concerted effort by employers (including us) to try to find jobs for those who will be out of work as a result of the collapse.
The unions will continue to exert pressure on the government to do what it can to help those affected. Large employers such as Nationwide and Centrica have indicated that they will directly employ Carillion staff working on their projects.
HMRC has indicated it will provide practical advice and guidance to those affected by the Carillion collapse through its Business Payment Support Service (BPSS) and that ‘time to pay’ tax arrangements may be available to those affected by this collapse (www.gov.uk/government/news/ practical-support-for-businesses affected- by-carillion-liquidation).
In addition, a number of banks are currently working with the government and trade body UK Finance to provide financial assistance to SMEs (by way of overdraft extensions, payment holidays and fee waivers) through what will inevitably be a difficult period.
The priority for the Official Receiver and his team of Special Managers is likely to remain focused on Carillion’s public services contracts and the necessity to continue the services it provides on its many substantial infrastructure projects. Those projects that are the subject of Joint Ventures (JV) are likely to see the other JV partners taking over Carillion’s share.
Notwithstanding the measures outlined above, it is Carillion’s private sector contracts that will suffer most. There may be opportunities to retender these contracts after a period of time so that they can be continued with a replacement contractor, but this will not avoid the difficulties with cashflow and payment owed for work already carried out to subcontractors and suppliers.
The demise of Carillion is a tragedy for the construction sector on many levels. It is a tragedy that a contractor of Carillion’s size, ability and scope has collapsed, a tragedy for those directly employed by Carillion but equally a tragedy for its many subcontractors and suppliers who will be directly affected through no fault of their own.
As always, you hope that this will not happen again but, as always, you fear that it will.