Eight Years of Carillion: a Memento Mori for Construction Giants

Eight years after the monumental collapse of construction juggernaut Carillion, the UK’s accountancy regulator has banned five of its former executives for acting recklessly. Breaking Law casts an eye back to the failure of the listed multinational and the lessons learned in its demise. 

On 12 May, the Financial Reporting Council announced that it had imposed sanctions on Richard Adam and Zafar Khan, two former Group Finance Directors of Carillion, as well as three unnamed senior accountants. The FRC found that the former officials had “acted recklessly and failed to act with integrity in connection with the preparation of accounting information” for the company’s financial statements prior to its collapse.

Adam and Khan have been barred from the Institute of Chartered Accountants in England and Wales for 15 and 10 years respectively. They also receive combined fines of £775,000 – reduced to just over £280,000 to account for fines already imposed by the Financial Conduct Authority and a settlement discount. 

The unnamed accountants have been barred from their relevant supervisory bodies for between 2 and 8 years, and face fines totalling nearly £100,000 after settlement. 

All six individuals have also been issued with “a severe reprimand”.

But what kicked all of this off?

Let’s go back to the beginning of 2017. Carillion is one of the biggest multinational construction companies in the UK, employing around 45,000 people globally. It’s a key public contractor with around 420 contracts with Theresa May’s government. It offers facilities management services for its projects, which include prisons, school dinners, traffic control and hospitals. It also has operations across the world and supplies construction services to the government of Canada.

It has an impressive roster of projects on its books. The Royal Opera House, the Tate Modern, the doughnut at GCHQ. Even the plans for the HS2 railway line have fallen into Carillion’s lap. And last year, those books looked really good – sales of £5.2 billion and a market capitalisation of nearly £1 billion. 

Fast forward to July 2017. Carillion issues a profit warning, announcing an expected provision against its construction contracts of around £845 million. Two months later, it gets worse: the company reports a further provision of £200 million and a first-half loss of £1.15 billion. And another two months later, we get a third profit warning and a disclosure that it will probably breach its banking obligations in December. 

By the time the calendar rolls into 2018, Carillion has no choice but liquidation. Last-chance rescue talks have failed. The banks have refused to give it more money. The government has refused to bail it out with a £223 million loan to convince the banks. Carillion is over. In the middle of January, it files for liquidation with the High Court. 

No insolvency practitioner is willing to act as an administrator. The High Court therefore appoints an employee of the government’s Insolvency Service and the Official Receiver to manage the liquidation. Employees of PwC also step in to act as “special managers” in support of the Official Receiver. 

What happened next?

Crisis, dismay…and some English stoicism. Carillion’s shareholders receive nothing, and the government is staggered. After the shock of the first profit warning in July 2017, the Cabinet Office started contingency planning, but had not been able to establish a complete list of the government contracts that might be affected until at least December. 

But as Carillion collapses, the government tells the company’s staff to report for work as usual. Many of the larger projects are taken over by Carillion’s joint venture partners, and government departments begin to establish companies to run the facilities management contracts.

And it’s a diamond mine for lawyers

The collapse was a lucrative business for lawyers (and not just the insolvency ones – Dentons was reportedly advising the Official Receiver at the time). The failure of Carillion triggers instructions left, right and centre. 

The company had around 11,500 subcontractors, many of whom found themselves looking down the barrel of non-payment or delayed payment. The impact on the supply chain was therefore widespread, with contracts being varied or terminated all over. 

The collapse also gave rise to litigation, with Hogan Lovells instructed in 2023 for a three-year term to pick up the pieces. 

Creditors were unlikely to be paid out after the liquidation. 

Construction and projects lawyers 

What lessons can we take from the collapse of Carillion?

I

Insolvency practitioners. Absent any funding, 

FCA investigations into timeliness and content of stock market announcements prior to the first profit warning

impact on creditors – Pension Protection Fund

Pensions 

Construction and projects lawyers

Redundancies – around 13% of employees laid off without new jobs 

Pensions advice

Litigation – Hogan Lovells appointed in 2023 to provide litigation services relating to Carillion

Govern

Corporate governance: accounting strategies to shelter poor financial forecasts, a focus on dividends, ignorance of pension deficit

Employment law

Project finance: public-private partnerships

PFIs: a refresher

Importance of the disclosure of financial information

Facilities 

And now financial misreporting

KPMG sued in 2022 for £1.3 billion: https://www.theguardian.com/business/2023/feb/17/kpmg-pays-13bn-to-settle-negligent-auditing-claim-by-carillion-creditors 

Sanctions against KPMG LLP, KPMG Audit plc and two former partners

The collapse of Carillion: lessons for company directors | Keynote