Carillion Collapse

Carillion, which employed 43,000 people in defence, education, healthcare and

transportation, collapsed in January 2018 and became the largest bankruptcy in
British history. The consequence of a huge loss was that the company's creditors and
pensioners suffered heavy losses and endangered thousands of jobs. Carillion, the
second largest construction company in the UK, had reached a critical point, lost
support from banks and collapsed. The aggressive growth strategy and
diversification of the corporate portfolio increased the complexity of its internal
structure. In combination with poor supervision of daily activities, catching up with
flagship projects and a fuzzy corporate governance structure, the company received
a £ 1.5 billion debt[ CITATION Col18 \l 2057 ]. It can be said that the disappearance of the
construction giant was the inevitable consequence, but one may wonder if that was
really the case.

After the collapse Carillion, many reports said that the NAO increased spending on
the economy, Carillion customers, staff, supply chains, and lenders. When it was
wound up in January with debts of £ 1.5 billion, the company had around 420
contracts with the British public sector. Since then, almost two-thirds of its staff have
found a new job in the UK after the collapse. This was too fortunate for them after
facing a tragic loss[ CITATION New18 \l 2057 ]. According to the NAO, 11,638 Carillion
employees currently work in the UK, around 64% of the total, currently elsewhere. Of
the remaining 2,332 - 13% of the total - layoffs and the remaining 3,000 still work at
Carillion. It is unlikely that non-state lenders will pay back Carillion most of their
investments. In addition, the substantial pension obligations of the company
amounting to £ 2.6 billion at the end of June last year had to be offset through the
European Investment Fund’s pension protection [ CITATION BBC18 \l 2057 ].
NAO leader Amyas Morse said “the government should "go further" in defending
public interests in matters such as Carillion”. He added: "The government must
understand the financial health and sustainability of its main suppliers and not create
relationships with people who are already weak." Meg Hillier, chairman of the Public
Accounting Committee, agreed that further work was needed. She told the BBC
Today program: "My committee is investigating broader relationships between the
government and major suppliers and there are 27 other companies with large
contracts throughout the government. We really need to look at these relationships
between these major outsourcing companies and the government. We will talk to
these major suppliers in the coming weeks and publish our findings by the summer."
One of these companies, Mitie, after processing exceptional costs, recorded a loss of
£ 8 million against a loss of £ 40 million in the previous year [ CITATION Fed18 \l 2057 ].

Managing Director Phil Bentley told Segodnya's program: "We made it clear that it
was not just about prices, but also about the process." He insisted that we might think
we are very different from Carillion, which is getting smaller in construction contracts,
but we are not in this business. Several commentators believe that Carillion was
forced to liquidate, not the administration, because there was no longer any property
to sell. There were contracts, but they were too complicated or unprofitable for the
banks. Carillion's pension deficit was one of the largest of the FTSE 350 companies,
it was the 15th or 7th largest. Carillion had 13 defined benefit plans in the UK with
27,000 members. Most of them had to go through the evaluation period of the
Pension Fund for protection (PQ 129456, 28 February 2018). PPF was established in
2005 to compensate members of the pension scheme, who did not have sufficient
resources in the event of the bankruptcy of an employee [ CITATION Nin18 \l 2057 ]r. As a
rule, persons older than the retirement age on the date of insolvency initially received
a benefit equal to 100% of their pension, the global limit. Carillion retirement plans
had an estimated PPF deficit (deficit compared to what is needed to pay PPF
compensation levels) of between £ 800 and £ 900 million (commission for work and
pension restrictions, (January 26, 2018, Financial Times, January 15, 2018) . Four
government agencies are investigated Carillion's collapse: The Insolvency
Department, the Financial Conduct Authority, the Financial Reporting Council and the
Pension Regulator. Andrew Bailey, head of the Financial Conduct Authority (FCA),
stated in a letter to MPs that he investigated the allegations that people related to the
company had and exchanged their shares, using their internal knowledge, before
warning Carillion of its enormous winnings, on July 10, 2017. The shock warning
caused a series of events that led to the collapse of the company. It included £ 845
million on three gigantic public-private partnership projects - contracts for the
construction of Royal Liverpool and Midland Metropolitan hospitals, as well as
bypassing Aberdeen. CEO Richard Howson left and the company acknowledged that
it had huge and growing debts and that the share price fell by 40% in one day. It is
clear that FCA has not yet agreed whether the accusations can serve as a basis for a
formal investigation, but Mr. Bailey said he had made "good progress" after a series
of interviews and meetings with Carillion Managers, key advisors and
shareholders[ CITATION San18 \l 2057 ]. In January, FCA announced that it would fear
that Carillion had manipulated the financial statements for the years before the
collapse but refused to provide details. "Hundreds of employees lost their jobs and
thousands of contractors were out of work. The company's huge professional
pension fund shortfall meant it was saved from the industry-supported lifeboat
system which was its pension protection fund.
Ministers were criticized for maintaining a close relationship with the cabinet and
inviting them to take part in public procurement contracts, although the company was
about to go bankrupt. The bankruptcy report of the incriminating company, compiled
by two small committees and published last month, showed that under the influence
of "negligence, shame and greed", Carillion had abandoned some of the managers
who had given their own financial rewards to others interests. Three committees of
inquiry in the Lower House also launched three Carillion investigations and related
matters. The report said that Carillion relied in many ways on suppliers with a
strategy called 'reverse factoring'. The agreement involved a financial entity such as
a bank that agreed to pay Carillion debts to the supplier more quickly for the order,
while the company agreed to repay the bank the full amount due at a later
time[ CITATION Phi18 \l 2057 ].
"Carillion's approach to the reverse factoring system had two major shortcomings: the
balance sheet did not reflect the amount of the obligation and the cash flow
statement was not a major source of cash flow generated by the company," said
Piper. "The company's balance sheet for 2016 did not provide a clear picture of the
scale of liabilities to banks”, he added. Royal Bank of Scotland (RBS), HSBC,
Santander, Lloyds and Barclays were among the most vulnerable, who provided £
140 million emergency loans in September 2017, as well as creditors of an updated
credit line of £ 790 million. These five British banks suffered heavy losses on their
Carillion loans after irreconcilable differences between the company and the
creditors. The government had the British construction and service group on Monday
liquidated, according to sources, £ 1 million in emergency loans to £ 140 million in
September 2017. The funds included a secured credit line with collateral for an
amount of £ 40 million with a maturity of 27 April 2018 and a fully used and
unsecured credit line with a maturity of a maximum of 100 million pounds sterling,
which amounted to 60 million dollars, and 1 January 2019. According to various
sources, the £ 790 million revolving credit line from Carillion was fully utilized in
November 2015[ CITATION San18 \l 2057 ].
As Carillion's collapse becomes more obvious, it is tempting to attribute their
shortcomings to a lack of strategic leadership and sound financial management.
Carillion's disappearance asks us to wonder if the board members were honest with
themselves and their employees with regard to the financial situation of the company
and in particular its debt. Before the recipient's official report, we did not yet know
what information was available to the Commission and whether it worked ethically.
What is more clear is that departments usually did not receive business status
information as part of their contract management processes, or even
recommendations for due diligence procedures at launch of new contracts with the
company in question. It is also unclear what ministerial councils did and the guidance
they offered, which created no separation between policy and business goals when
ordering complex facilities[ CITATION She18 \l 2057 ].
The problem with the working of companies nowadays is that most of its directors
and managers often work according to a set of parameters that are no longer applied
during a financial crisis, which means that they cannot effectively control slowness.
The board of directors often benefit from cheap, generally available financing, which
in the short term exaggerates the poor performance of the company, as the adverse
conditions are temporary and there is no return to a normal life. If the main problems
within the company are not resolved, the money can eventually run out and this
process repeats itself even if additional money is introduced. We witness the
recovery and failure of companies countless times in our life [ CITATION TUC18 \l 2057 ].
In these circumstances, it is useful to use external auditors to study the structure of a
company without any flickering or biased business knowledge.
In the case of Carillion, the adjustment specialist worked internally with the board of
directors and senior management and implemented a recovery plan. At this point the
specialist had prepared a business plan and talked to creditors and other key
stakeholders. This forced liquidation of Carillion created an uncertain future for
dozens of thousands of employees and subcontractors working under Carillion
contracts, facilities, construction and transport infrastructure. Too often managers
and insolvency officers do not consult with trade unions and employees
representatives in the event of insolvency[ CITATION The181 \l 2057 ]. Employees and
their representatives are often the last people discover that their business is in a
difficult financial situation and that their work is being threatened. Due to this lack of
quick and meaningless consultations, employees has no voting rights in their future
and can suffer significant financial losses when their business collapses.
The British corporate governance system is based on the priority of shareholders
where corporate law requires directors to promote business success in the interest of
shareholders. To avoid the tragic collapse at such lengths for future companies
businesses will have to take certain steps[ CITATION Ste181 \l 2057 ]. These might
include the following: the starting threshold for information and consultation
negotiations should be considerably reduced, employers must participate in
discussions regarding important decisions of the company, at non-public workplaces,
a request for five employees must suffice start negotiations, sanctions in the absence
of a manager or advisor should be significantly decreased, in line with the defensive
payments that are payable in dismissal, the courts should have the power to rule
commands that prohibit employers from acting or requiring review of decisions for a
substantial consultation. Political culture has changed. The forces of economic
globalization mean companies have more options to shape and influence the
societies in which they work. Before starting a project, company’s’ stakeholders must
ensure that the client has a good financial situation. They must be able to show the
latest verified accounts, as well as the latest accounts. If a project costs £ 500,000
and the contractor earns £ 5 million a year, it can be difficult to finance the contract
and delays may occur as a result. The framework agreement covers long-term
projects, usually for large customers. If subcontractors have these, it may be useful to
consider the possibility of communicating with their customers to understand their
past results.
Carillion has been the most impressive company crash for some time. The price will
be high, at work, business, trust and reputation. Most companies are not driven by
the reckless nature of Carillion in the short term, and most managers are much more
concerned about the wider implications of their actions than the Carillion Board of
Directors. However, this should not overshadow the fact that Carillion has become a
gigantic and unstable time bomb for companies in a legal and legal environment that
is still in force. People who have not managed and challenge, advise or regulate
Carillion often acted solely for their personal reasons. Carillion can breed quickly.
Instead of being a source of despair, this can be an opportunity. The government can
seize the initiative with an ambitious and far-reaching set of reforms that redefine our
corporate social responsibility systems in the long-term public interest. We would
support us.
Bibliography
Anon., 2018. The Continuing Importance of Ethical Standards for Public Service Providers. Committee
on Standards in Public Life, May .

Bradley, S., 2018. LPC-UK banks bear the brunt of Carillion's collapse. Reuters, 18 January.

Collinson, S. & Qamar, A., 2018. Part A Carillion's Collapse: Cause.

Inman, P., 2018. FCA investigates allegations of insider trading at Carillion. The Guardian, 28 June.

Mor, F., Conway, L., Thurley, D. & Booth, L., 2018. The collapse of Carillion, s.l.: BRIEFING PAPER.

News, B., 2018. Carillion collapse to cost taxpayers £148m. [Online]

Available at: https://www.bbc.com/news/business-44383224
[Accessed 1 April 2019].

News, B., 2018. Carillion: Six charts that explain what happened. [Online]
Available at: https://www.bbc.com/news/uk-42731762
[Accessed 1 April 2019].

Smith, S. D., 2018. The Collapse of Carillion - a Failure of Ethical Standards?. Categories: Ethical
standards, Ethical standards for providers of public services, 1 February.

Trentmann, N., 2018. Carillion Collapse Highlights Accounting Shortcomings — Moody’s. The Wall
Street Journal.

TUC, 2018. What lessons can we learn from Carillion – and what changes do we need to make?.
Lessons from Carillion report, pp. 1-5.

Wainwright, S., 2018. Lessons to Be Learnt From the Collapse Of Carillion. Global Banking and
Finance Reviews, 14 05.