On Monday 15 January, Carillion plc, one of the UK’s largest construction companies, announced it was to go into liquidation. The collapse of Carillion has had wide ranging implications and serious questions are being asked in the UK as to how this collapse could have happened.
Prior to Liquidation, Carillion employed 43,000 staff globally, with around half of these in the UK. It was responsible for some landmark projects in the UK, including the Royal Opera House, the Channel Tunnel and the Tate Modern museum. As well as construction, it also helped operate an array of government services, including running prisons, delivering school lunches, and maintaining schools and courthouses.
Carillion is also a key member of a consortium which is delivering a number of school projects in Ireland under a state-funded public private partnership programme.*
1. Why liquidation rather than administration (UK equivalent of examinership)?
Under administration legislation in the UK, a company can continue to trade while “under administration” as the administrators seek to find a buyer for the assets of the company, similar to an Irish examinership. While an Irish examinership has a 100-day time limit there is no such time limit in an administration and so it is a widely used restructuring process in the UK.
Carillion did not however seek the appointment of an administrator, and instead applied to the High Court to have the company placed into liquidation immediately. It can be assumed therefore that there were very little valuable assets left in Carillion which could have been sold by an administrator. It appears the main assets of the company were its contracts, where the margins were apparently too low to meet its ongoing liabilities or even too low to be considered as saleable assets.
2. How did Carillion get its self into this position?
The company had nearly £900m of debt on its balance sheet in addition to a pension deficit of £587m. They were able to run up this debt on the basis of the strong contracts the company had, many of them long-term contracts with the UK government. However, many of these contracts proved to be much less profitable that everyone expected and in 2017 they were forced to write down their value by £845m. It appears that Carillion were bidding for contracts at very low margins in order to win contracts, which in turn provided the necessary cashflow to pay its current suppliers and lenders. Eventually the banks stopped providing support and when the UK government also failed to support the company in early January, there was no option left but to liquidate. Put plainly, the company simply ran out of cash.