Carillion Plc is a large multinational facilities management and construction services company headquartered in the UK. It is the second-largest construction company in the UK and is one of the UK government’s biggest contractors. The company is listed on the London Stock Exchange and has some 43,000 employees (c.20,000 UK based). This is the largest liquidation in the UK in the last 50 years.
BACKGROUND
Over the last few years the financial position of the company has been deteriorating:
• Cash flow management – Since 2013 Carillion has been taking 120 days to pay subcontractors
• Profitability – In 2017 Carillion made a number of profit warnings.
• Share value – In 2016 Carillion’s share price was valued at £2 billion and by mid-January 2018 it was £61 million. The share price has fallen by 90% since July 2017 to January 2018.
The Financial Times reported that Carillion had just £29m in cash when it collapsed on the 15th January, and would have run out of cash by 18 January 2018. The UK Government has made a public statement that it would not bail out the company.
On 15 January 2018, Carillion went into liquidation when the company issued a notice to the London Stock Exchange stating that it was taking steps to enter into compulsory liquidation with immediate effect. The company’s debts have been estimated as being in excess of £900 million. The Pension Fund Protection Fund have estimated that the full cost of taking on all of Carillion Group’s 13 retirement schemes could be up to £900 million.
A civil servant from the Insolvency Service, has been appointed liquidator of Carillion and is being advised by six “special managers” from PwC. They will assume day-to-day control of the company, selling assets, dealing with creditors’ claims and investigating what caused the company’s collapse.
CORPORATE GOVERNANCE RELATED ASPECTS:
Executive pay issues:
• Bonuses – In 2017, the CEO received a £1.5 million pay package – including a £245,000 bonus and a £346,000 share-based award the year before the construction group went into liquidation. Were these payments appropriate given the financial performance of the company?
• Clawback – In 2016 the remuneration committee revised the bonus clawback and malus provision to avoid directors’ repayment to exclude “corporate failure” and this was reported in the 2016 Annual Report on p68 in small print (and approved by the shareholders). Were these changes appropriate given the financial performance of the company?
Public sector governance issues:
• Budget overruns – Many of Carillion’S projects were in the public sector and some were significantly over running their budgets. The 3 largest government overrun projects are reported as being: Aberdeen bypass (£745 million over run), Midland Metropolitan Hospital Birmingham (£350 million over run) and Royal Liverpool University Hospital ((335 million over run). Should these major capital projects have had stricter oversight by Carillion’s board and by the Government?
• Continued public sector support in 2017 – A week after its first profit warning Carillion secured £1.4 billion worth on HS2. Carillion later won half of a £158 million contract from the Ministry of Defence and a £62 million contract with network rail. Should these major capital projects have been awarded given the financial performance of the company?
Investigations
• Carillion’s Directors – On 16 January 2018, the UK Government ordered a fast-track investigation into the directors at the construction firm to look into possible misconduct.
• Carillion’s auditor – The role of Carillion’s auditor, KPMG, will be examined by the Financial Reporting Council