The construction firm Carillion, which is involved in a host of major government projects including HS2, has gone into compulsory liquidation.
What went wrong for Carillion?
Carillion relies on large contracts, some of which have proved much less lucrative than it thought. Last year it slashed the value of them by £845m, of which £375m related to public-private partnerships (PPPs) such as Royal Liverpool university hospital.
As its contracts underperformed, its debts soared to £900m. The company needed a £300m cash injection, but the banks that lent it money refused to put more in. The government also refused to bail it out. That left the company unable to continue trading, forcing it to go into liquidation.
Why liquidation and not administration?
Administration aims to help a company repay debts to avoid insolvency if possible, while liquidation is the process of selling all assets before closing down the company completely. Carillion has been forced into liquidation because it does not have the short-term funding needed to keep trading during an administration process. The Cabinet Office minister, David Lidington, has promised an orderly process, avoiding a fire-sale of assets. Shareholders will go empty-handed.
It is rare for a company of Carillion’s size to opt for a liquidation. It suggests there is little, if anything, of value to be saved, according to David Birne, an insolvency partner at HW Fisher & Company.
Who is handling the liquidation?
David Chapman, a civil servant working for the Insolvency Service, has been appointed as liquidator. He is being advised by six “special managers” from PricewaterhouseCoopers. They will take over the day-to-day control, selling assets, dealing with creditors’ claims and investigating the cause of failure. The directors will no longer be involved. The costs of the liquidation are paid from the assets.
What does it mean for staff? Will they get paid?
The government has urged staff to go to work as usual and promised they will be paid via the Official Receiver.
What does it mean for jobs?
Up to 43,000 jobs are at risk worldwide at Carillion, including almost 20,000 in the UK. There is hope that some of its employees can be moved over to other contractors, particularly where they are working on state contracts, such as HS2 and Crossrail. Lidington said some services would be taken in-house while others would be handed to rivals. Carillion’s small business suppliers are also at risk, jeopardising more jobs.
What does it mean for Carillion trainees?
The Construction Industry Training Board said it would step in to secure the future of Carillion’s 1,400 apprentices, offering grant and apprenticeship transfer incentives to other employers.
What happens to the company contracts?
Lee Causer, of the accountants Moore Stephens, said customers would have signed clauses allowing them to break contracts, conditional on Carillion’s financial strength and solvency. While some customers may have contingency plans, delays in delivering project appear inevitable, along with disruption in the supply chain. Customers themselves may face claims for breach of contract or damages for delays encountered.
What about subcontractors?
Experts are predicting turmoil for subcontractors who relied on Carillion business. Thousands of small firms are owed millions of pounds, according to Begbies Traynor. Causer said: “Carillion’s collapse could trigger a number of insolvencies across the construction sector, in an industry that already experiences the highest levels of insolvency per year in the UK. The ramifications of the failure of Carillion could be huge.”
Andy Street, the former John Lewis boss who became the first mayor of the West Midlands last year, is starting a taskforce to support Carillion staff and subcontractors affected.
What does it mean for school dinners?
The government will provide funding necessary to keep public services provided by Carillion staff, subcontractors and suppliers, including school dinners and prison maintenance. Oxfordshire county council said it had taken over Carillion services such as school meals. If workers don’t turn up, firefighters are on standby to get Oxfordshire’s children fed.
What will happen to the pension fund?
Carillion has 13 pension schemes with a total deficit of £580m, but the liability will balloon to more than £800m because the firm no longer has a solvent business. The Pension Protection Fund (PPF) will take over. The PPF has a surplus of more than £6bn, so it should be able to cope with this hit.
Will pensions be covered in full?
People who have already retired will receive their pensions in full, but those yet to retire will see cuts of typically between 10% and 20%, according to pension experts. Tom McPhail, of Hargreaves Lansdown, said there would be an initial reduction of 10%, plus the possible loss of some inflation proofing. Higher earners may be affected by the PPF cap on payouts, which currently is £34,655.05, though for long-serving employees with 20 or more years’ service it is higher. Assuming the PPF takes on the Carillion scheme, the assessments could take months or even years.
Where can employees get help?
The government says anyone worried about their pension can ring the Pension Advisory Service (TPAS) on 0300 123 1047 for free guidance. TPAS has also set up a special helpline number for members of Carillion’s pension schemes: 020 7630 2715. Employees can also contact JobCentre Plus through its rapid response service.
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