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Carillion Liquidation – What Next?

30/01/2018

At a glance

What Did Carillion Do?

Carillion was the UK’s second biggest construction firm. However, the focus of the headlines since its demise has been its supply of services to the public sector.

Carillion worked on big private sector projects such as the Battersea Power station redevelopment and the HS2 high speed railway line. It maintained 50,000 homes for the Ministry of Defence, managed nearly 900 schools and maintained 50 prisons.

What went wrong?

In 2016, Carillion had sales of £5.2bn, and until July 2017, its market capitalisation was close to £1bn. It is now said to be worth just £61m.

Carillion relied on high volume, low margin contracts. Some of those contracts underperformed and customers delayed in paying, resulting in reported debts of £1bn and a £600m pension deficit.

The company’s creditors (mainly banks) refused to bail it out without government support, which was also refused. As a result, on the morning of 15 January 2018, it was announced that Carillion would be placed into compulsory liquidation.

Memery Crystal previously commented that Carillion’s immediate placement into liquidation (which results in the “death” of the company), rather than administration (which would allow the company to try to trade out of its difficulties) was surprising. In all likelihood, this decision was made because:

  • Carillion had insufficient cash to enable it to trade during the administration;
  • there was no viable business left to sell; and
  • the Official Receiver (“OR”) can work with the government to procure funding for the continuation of the public services run by Carillion.

What happens now?

The OR (i.e. the government appointed insolvency practitioner) is handling the liquidation, with the assistance of six special managers from PwC, who will take over the day-to-day control (selling assets, dealing with creditors’ claims, investigating the causes of failure etc.).

The OR’s primary role is to collect in, realise and distribute the assets of the company to its creditors. How might the OR seek to maximise the company’s assets? His powers include the ability to review the company’s past transactions and, in the right circumstances subject to certain criteria being fulfilled:

  • disclaim onerous property (e.g. unprofitable contracts, including leases)
  • apply to court to set aside transactions at an undervalue (e.g. payments of dividends
  • apply to court to set aside a preference (e.g. paying an unsecured creditor in priority to other creditors, or repaying a director’s loan account)
  • apply to court to set aside, or vary the terms of, an extortionate credit transaction (e.g. if the terms of a loan agreement require grossly exorbitant payments to be made in respect of the provision of the credit)
  • claim that a floating charge in respect of an existing debt created for no new, or inadequate, consideration is invalid
  • apply to court to set aside a transaction that will defraud creditors (e.g. a transaction at an undervalue where the purpose was to put assets beyond the reach of creditors, or to otherwise prejudice a creditor’s interests)

The OR also has a duty to investigate the reasons for the failure of the company and to report on its directors.

If the directors of the company knew or ought to have concluded at some point before the commencement of the liquidation that there was no reasonable prospect that the company would avoid going into insolvent liquidation, the OR can seek a court declaration that the director make a contribution to the company’s assets.

Separately, if Carillion’s collapse can, in part, be attributed to bad management or poor professional advice, the directors or professional advisers could find themselves on the receiving end of a misfeasance or breach of duty claim. Today it has been reported that the FRC will investigate KPMG’s role as Carillion’s auditor.

Trade Creditors

As many as 30,000 small businesses are thought to be owed money by Carillion. In the first instance, trade creditors should file a proof of debt with the OR. Thereafter, they may wish to take advice on any proprietary claims that they may have against Carillion, their ability to form or participate in a liquidation committee, or even a potential purchase of the insolvent company’s assets.

How can Memery Crystal help?

Memery Crystal’s insolvency team has extensive experience of advising creditors, insolvency practitioners and directors. If you or your business has been affected by the Carillion collapse or require advice or assistance in relation to the matters discussed in this article, please contact Jenni Jenkins using the details below.

Find out more about what we are thinking at: http://www.memerycrystal.com/what-we-do/dispute-resolution/

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