Carillion directors face probe as fallout continues for suppliers, workers, banks

Business secretary Greg Clark called for a "fast-track" investigation by the Insolvency Service into the conduct of Carillion’s directors, past and present, and pushed for the Financial Reporting Council to probe the preparation of the company's accounts and the actions of auditor KPMG.

"In particular, I have asked that the investigation looks not only at the conduct of the directors at the point of its insolvency, but also of any individuals who were previously directors. Any evidence of misconduct will be taken very seriously."

Earlier, Chancellor Philip Hammond told Parliament on Tuesday that he was not aware of any credit exposure for the government and said the Treasury has provided a line of credit to the official receiver for provision of public services, which can be recovered from other government departments that have contracted for services.

A witness statement filed at the High Court by Carillion's interim chief executive Keith Cochrane revealed the expected recovery for creditors in the liquidation is 0.8p to 6.6p in the pound. At the time of going into liquidation, the statement showed the company had £2.2bn of financial liabilities, including £1.3bn of bank debt and the defined benefit pension deficit of £587m.

Cochrane, Sky News reported, said RBS tightened the terms of its funding three days before the liquidators were called in, representing "unilateral action which in the company's view undermined the group's efforts to conserve cash".

The group's cash preservation in the last 19 years had seen it pay out more than £726.64m to shareholders since its demerger from Tarmac, according to calculations from Reuters.

Attention should be spent on the corporate governance of the company, agreed analyst Michael Hewson of CMC Markets, particularly why directors and shareholders was felt it was prudent to allow the payment of a dividend at a time when the pension deficit more than doubled to £663m at the end of 2016 from £317m in 2015.

While long term debt remained fairly steady at between £508m in 2012 to £592m in 2016, the amount of short term debt started to rise quite sharply from £263m over the same period to £760m in 2016.

"This it turns out was as a result of the company accessing a government scheme called the 'Early Payment Facility' in order to pay its suppliers on time as cash flow dried up due to some contractual disputes on a number of its contracts," Hewson said. "This meant that rather than Carillion owing its suppliers its banks paid the suppliers and acted as a bridge for the slowdown in cash flow."

CONTRACT COMPLICATIONS, BANK LOSSES

Although on Monday the government guaranteed payments for all Carillion employees working on public sector contracts, workers under contracts to private sector firms would be given until Wednesday for Carillion's client companies to decide what to do with the contracts and employees.

Meanwhile, construction work on Carillion's private finance initiative contracts, including Midland Metropolitan Hospital, has being dogged by complications. The Times reported that the future of the company's PFI contracts would be led by banks rather than the official receiver, with the National Audit Office expected to publish a "damning" report into PFI schemes on Thursday.

Further listed companies came out on Tuesday to reveal how they would be affected by the collapse of the UK's second largest construction group, including public private partnership investor John Laing Infrastructure Fun, sub-contractor Van Elle and lighting and sprinklers specialist Premier Technical, following announcements from Speedy Hire, Balfour Beatty and Galliford Try a day earlier.

Banks that had lent to Carillion were also expected to face losses running into hundreds of millions of pounds, analysts said. The 13 lenders were led by Royal Bank of Scotland, Barclays, Lloyds, HSBC and Santander, with an estimated exposure of £1.6bn debt exposure. Analysts also calculated that there are up to 30,000 suppliers and subcontractor businesses owed around £1bn in unpaid costs from Carillion.

Trade unions called for the government to set up a task force to protect workers and to conduct a risk assessment of other firms that could be exposed to collapse.

TUC General Secretary Frances O’Grady said: “We urgently need a national task force involving unions to safeguard jobs, services, and pensions. Workers can’t be left at the back of the queue. Each and every worker at Carillion needs to know where they stand. They have bills and mortgages to pay, and deserve certainty on their future.

“And we have to ensure that there aren’t more Carillions on the horizon," she added. "That means an immediate risk assessment of all large outsourcing firms with government contracts. Public services are already under pressure, and can’t take another hit like this.”

SUBCONTRACTOR VAN ELLE EXPOSED

Van Elle said that it has carried out regular work for Carillion as a specialist lead sub-contractor, principally in respect of rail improvement and maintenance work where Network Rail is the end customer, with outstanding debt and work-in-progress exposure of roughly £1.6m.

"The group will engage with Carillion and its advisers (including the Official Receiver) to determine the status of outstanding payments, but shareholders should note that, in the event that Van Elle is unable to recover any monies owed, there would be an adverse financial impact on the group."

Furthermore, Van Elle's order book included £2.5m of expected work from Carillion for the remainder of the current financial year and beyond, though management felt was too early to say what the result will be.

John Laing Infrastructure Fund said it had nine operational public private partnership projects where Carillion is the provider of facilities management services, four of which are schools projects, four are emergency services projects and one road project. The value of these projects is approximately 8.5% of the total portfolio value and approximately 9.6% of the net asset value as of 30 June last year.

Using contingency plans put in place last year, JLIF is seeking to appoint alternative FM providers on all of the nine projects to replace Carillion, which is expected can be achieved with minimal service disruption and minimal additional cost.

JLIF said it has no projects currently in construction where Carillion are the contractors but owns one project where Carillion are still liable for any construction defects found on the project, with the construction period having completed over 10 years ago. A recently completed routine defects survey has not highlighted any significant areas of concern.

Niche specialist services company Premier Technical Services Group said expected impacts from the liquidation of Carillion, of which the firm undertook an estimated £800,000 worth of work for per year, would be "minimal", with the work to be taken on by existing Premier clients.

The firm had an outstanding net debt of £300,000 due from Carillion which had been fully accounted for in its 2017 balance sheet.