Shockwaves from collapse

News Posted 12/02/18
Many sectors of the construction industry are reeling from the effects of the collapse of Carillion, with companies of all sizes feeling the knock-on effect.

We are devoting the majority of this section to the issue and have asked specialists in the region to comment.

The collapse of the UK’s second largest construction company in January prompted a National Audit Office (NAO) investigation into the working of the Private Finance Initiative (PFI), which has been used by all governments since the 1990s to provide public resources such as hospitals, schools and bridges.

In simple terms, the scheme works by establishing a private finance company to borrow funds for the construction project and the taxpayer picks up the bill over the life of the contract – usually 25 to 30 years. These payments cover debt, financing costs, maintenance and other services which occur. Professor of Accounting and Public Management at Kent Business School, Robert Jupe, has studied PFI and says the collapse of Carillion has lessons for the construction industry and elsewhere.

He told us: “Its demise raises many questions about the company’s directors and management, its auditors and the extent of government supervision. The fundamental question for the public sector is whether there is a genuine transfer of risk to the private sector.

“Ultimately, the risk reverts to government. This was confirmed on 15 January, when the Conservative government made clear that it would ‘provide necessary funding required by the Official Receiver to maintain public services’.”

Prof Jupe added: “There needs to be a fundamental re-assessment of both PFI and the outsourcing of contracts, such as hospital cleaning and the provision of care homes to the private sector, together with an honest debate about the level of taxation required to support properly funded public services.”

Banks have offered assistance to companies suffering in the aftermath of the Carillion collapse. Lloyds announced a £50 million emergency fund specifically to help small companies in the supply chain.

MD of Lloyds’ commercial banking unit dedicated to helping SMEs, Gareth Oakley, told us: “We know how critical it will be for businesses within Carillion’s supply chain to receive support with their cashflow, to help them through the temporary challenge to their business. These measures will ensure small businesses have the financial support they need to get themselves back on track.”

His colleague Jo Harris, MD of business banking with Lloyds, added: “Small businesses don’t normally have the cash reserves that larger businesses do, so any interruption to their cashflow can have a significant impact on their ability to survive. By supporting our small business customers during this difficult time, we hope we can help as many businesses as possible to get back on an even keel as quickly as possible.”

For more specific advice for companies hit by the collapse of Carillion, we asked representatives of various sectors to share their expertise.

Partner and head of restructuring at Brighton accountants and business advisers Kreston Reeves, Andrew Tate, focused on two specific issues.

“Contractors who have been working with six Carillion companies which have gone into liquidation could find their business impacted in two ways,” he says.

“The first is not being paid for work already done for Carillion and the second is a lack of work in the immediate future if the contracts they have been working on are cancelled. Both could affect their business and personal income. My advice is to discuss this with their bank as soon as possible. Banks have been requested by the government to deal with such situations sympathetically. Contractors may also wish to discuss the situation with their accountant or a restructuring expert such as a licensed insolvency practitioner to work out how to deal with debts they may not be able to pay on time.

“If the contractor has property on site and cannot get access, my advice would be to contact PWC who are helping the Official Receiver with the liquidation process. They should ask for immediate access to site to remove their property. Provided they can prove it is owned by them, there should be no issue with allowing them to remove the property.

“There may well be opportunities to renegotiate contracts if the old Carillion contracts are terminated because the company has gone into liquidation. The contractors’ knowledge of the site will put them in a strong position, but they should read their contract with Carillion carefully and take legal advice if they are in any doubt about their rights.”

Regional chairman of the Federation of Small Businesses Brian Woods said the issue had “laid bare the frailties of the Prompt Payment Code”, adding “while it is fundamentally a good idea, it does not work when it is most needed – as shown with Carillion’s behaviour since July 2017.

“Although they were signatories of the PPC, Carillion were able to use their dominant position to squeeze smaller firms to mask their own financial failings. This irresponsible behaviour has put many small businesses in jeopardy, with countless people fearing for their jobs.

“Government must step in immediately to strengthen the PPC by making it mandatory for all FTSE 350 businesses and introducing a tough penalty regime for those companies flouting the rules. Companies taking advantage of small businesses for their own gains should have no right to public sector contracts.

“The Small Business Commissioner needs to be given responsibility to toughen up the Prompt Payment Code. Parliament is announcing it will scrutinise these issues in a cross-party way, which we hope helps government to chart a new way forward to tackle poor payments.”

Negotiating the maze of contracts for supplied goods and services in the wake of the Carillion collapse requires careful thought and actions, warns Graham Bushby, head of restructuring with audit, tax and consulting firm RSM.

He said: “Suppliers and sub-contractors to Carillion have been urgently seeking confirmation as to whether PWC, the special managers appointed, require them to continue to supply for goods or services. Affected businesses need to tread carefully here. Ceasing supply without agreement could unwittingly lead to a breach of contract, so taking advice is strongly recommended.

“If continued supply is required, suppliers should seek undertakings that PWC will put Carillion into funds to pay for any goods or services supplied during the period of the liquidation. Regrettably, suppliers will be highly unlikely to be paid sums due to them in relation to the period before the liquidation.

“If PWC/the Official Receiver decides it does not require continued supply, affected suppliers will need to take action to seek the return of any goods provided, if they have a valid retention of title claim. Again, it may be worth seeking advice first.

“Businesses should also submit a claim to the Official Receiver for all unpaid bills, but in all likelihood, many will simply have to presume that they won’t be paid for outstanding work. As a result, many will suffer a painful hit to their cashflow.”

Tax advisers Qdos Contractor have called on the government to protect the many independent contractors working on Carillion projects across the UK.

CEO of Qdos Contractor Seb Maley said: “Each party in Carillion’s supply chain will be impacted hugely by its liquidation. This is a worrying time for all independent contractors engaged with the company and its subcontractors. Much of the attention so far has been focused on the threat this puts Carillion’s permanent employees under, but without the safety of employment rights, every independent contractor engaged by Carillion – or through any of its sub-contractor companies – will be fearing for their livelihoods, too.

“Contractors contribute over £119 billion to the economy each year. Amid the confusion and uncertainty, the government and Carillion’s liquidators must consider the wider impact that simply cutting ties with its independent contractors would have on UK contracting and the economy.”

Sub-contractors caught up in the Carillion collapse are urged to seek professional help quickly, to safeguard their future, says Mike Pavitt, southern committee chairman of the insolvency and restructuring trade body R3.

He said: “Firms which are owed money need to assess the impact on their business and understand their options. “For subcontractors awaiting payment for work carried out, there will be an immediate impact on cashflow. “They will, of course, still be expected to pay any outstanding labour or materials costs for the work they have incurred or purchased and make VAT payments due to the crown authorities which may in some cases include their invoices to Carillion.

“But also in the period ahead there will be an impact on their balance sheet. Bad debts and work in progress may have to be written down, weakening the balance sheet strength. If not risking insolvency, in practical terms it could affect their credit rating, making it harder for them to raise finance, or their ability to win future work since in many formal tendering processes, the balance sheet is used as a part measure of their stability.

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