The construction firm Carillion, which is involved in a hоѕt of major government projects including HS2, has gone into compulsory liquidation. Carillion Plc is a British multinational facilities management and construction services company, head-quartered in Wolverhampton in the United Kingdom. It is the second largest construction company in the United Kingdom, is listed on the London Stock Exchange, and (in January 2018) had some 43,000 employees (around 20,000 of them in the United Kingdom). The company experienced financial difficulties in 2017; and went into compulsory liquidation on 15th January 2018, the most drastic procedure in British insolvency law.
What went wrong for Carillion?
Carillion relied on large contracts, some of which have proved much less lucrative than expected. Last year it slashed the value of them by £845m, of which £375m related to public-private partnerships (PPPѕ) 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 rеfuѕеd 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. Various business commentators have suggested that Carillion went into compulsory liquidation rather than administration because it had no real assets left to sell. It had contracts, but they were either too complex or insufficiently valuable for the banks to lend against.
Why Carillion failed as a buѕinеѕѕ and went into liquidation
What the Carillion saga demonstrates is the rampant indiscipline in the contracts themselves. The company’s demise is attributable to favouritism, cost escalation, excessive risk, obscene remuneration and reckless indebtedness. Carillion and its bankers clearly thought it was too big to fail. The business is going straight into liquidation for two likely reasons. Firstly, it does not even have enough cash to keep trading during an administrative process and secondly because the public services run by Carillion need funding from the government to carry on and only the official receiver, who oversees liquidations, can deal with such payments.
On 10th July 2017, Carillion announced that its profits would be hit by £845 million. Consequently, its chief executive resigned and there would be no dividends that year. The shares lost 70% of their value over the announcement and the two days that followed. Although the July 2017 profit warning marked the beginning of the end for Carillion, poor decisions in the years lеаding up to it were what caused the company serious trouble. Of the £845m charge, Carillion said that £375m related to the UK (mostly three PPP projects) and £470m to overseas markets (mostly exiting markets in the Middle East and Canada).
Over the eight years from December 2009 to January 2018, the total owed by Carillion in loans increased from £242 million to an estimated £1.3 billion – more than five times the value at the beginning of the decade.
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Little valuable invеѕtmеnt
Carillion’s borrowing was mainly not used to invest in the company. In fact, while Carillion’s debts rose by 297%, the value of its long-term assets grew by just 14% between 2009 and 2017.
Carillion’s declining rеvеnuе
Nor did Carillion manage to grow its revenue. The group’s revenue fell by 2% between 2009 and 2016. Revenue is likely to have fallen further in 2017 – by as much as 12% compared to 2009 if one projects the 2017 interim results linearly. At the lowest point, in 2013, revenue was 26% lower than in 2009.
Aggressive bidding and accounting
Carillion has been criticised for its aggressive bidding and accounting. ‘Aggressive Accounting’ is the practice of declaring revenue and profits based on optimistic forecasts before the money has been made. All is well if the forecasts are correct. But if costs rise and revenues fall (say, because of delays and defects), expected profits turn into actual losses.
Because aggressive accounting means declaring profits before receiving the money, it shows up in company accounts as a fall in the actual cash that the company makes compared with the profits it declares. Carillion’s accounts are an example of this.
Dividends раid out
Carillion’s aggressive accounting also drove it’s borrowing. Dividends illustrate this well. Dividends are a distribution of profits and there are great pressures on companies to, at the very least, maintain dividend payments. While declared profits can be based on expectations, dividends are paid out in hard cash. When dividends are paid on the basis of expected profits, the company is effectively borrowing money to pay its shareholders.
There are key lessons to be learnt from such a large enterprise going into liquidation.