Carillion’s liquidation – What happens when a giant collapses?

Carillion, even a fallen giant casts a long shadow

The breaking news in the insolvency world this week (and likely to be big news for some time to come), was the collapse and compulsory liquidation of Wolverhampton based construction, outsourcing service provider and holder of numerous Government contracts: Carillion.

There have been reports that the collapse came about as Carillion overstretched itself and already having large loans, found lenders reluctant to lend more in support of its business plan. Ostensibly being unable to service its financial commitments, Carillion was forced into compulsory liquidation yesterday (on the 15th of January, 2018).

Small businesses are likely to suffer

We recently wrote about the impact late payments can have on the cashflow of companies. In particular, the difficulty small businesses face when their bills are regularly left until well past due before being satisfied.

Carillion is an extremely large organisation and engages the services of innumerable other businesses. Businesses which might now be at very real risk of being paid late, if at all, for work they’ve already done, or goods they’ve already supplied. According to reports, Carillion had already imposed 120 day payment terms on its suppliers.

Worse still, there’s the risk that at the end of the long drawn out process of reclaiming funds from Carillion’s liquidated assets, businesses which have had Carillion as a client may only be able to recoup a percentage of the money they’re owed. Given that some of these companies may find such a delay, or loss hard to cope with on their own cashflows and the prospect of simultaneously losing the business of what’s likely to be one of their most important customers, it won’t be a surprise that they may themselves be pushed into insolvency.

The banks will be out of pocket

Large firms are likely to obtain finance from numerous sources and the press has reported that £2 billion is owed to at least four major banks, who are likely to have to write down the value of those loans. When banks lose money, it’s not unlikely that they’ll attempt to recoup those losses via other means, which might well include raising charges elsewhere.

Taxpayers will suffer

It’s been in the news already that the Government, despite knowing that Carillion had issued three separate profit warnings last year, continued to award them with lucrative public sector contracts reportedly worth roughly £1.7 billion. No doubt searching questions and a public enquiry will follow.

In the meantime, it’s likely that the Government will have to pump additional funds into the various projects Carillion was engaged in to make sure that various works carry on while a longer term solution is sought.

Employees face uncertainty

Carillion directly employs around 20,000 staff in the UK alone. Each and every one of them now having an uncertain future. As mentioned above, in the short term at least, some of them will be able to continue working while the Government steps in to fund its own projects. However, in the long run, it’s possible that all 20,000 will need to seek employment elsewhere. That’s a lot of people to find jobs for and those that are unable to find work will likely find themselves having to seek assistance from the State. This is another way the collapse of Carillion will affect the taxpayer. Additionally, urgent questions will need to be raised in respect of a pension deficit equivalent to about £600 million.

The future and the lesson?

It’s likely that the process of liquidation, establishing reasons for the failure of the business and the inevitable finger pointing will go on for some time.

One lesson that can be taken from the insolvency of Carillion is that no company, large or small can afford to ignore cashflow.

Take a look at your company finances. If significant borrowing is continually relied on to maintain trading, then consider what might happen if your funding sources dry up. If that paints a picture that’s more stark than you’d like, then learn from Carillion’s demise and seek help. There’s no shame in sharing the burden and the sooner we’re involved, the better your outcome will be.

Speak to us, feel better.