The British government scrambled on Monday to contain the fallout from the collapse of Carillion, one of its biggest contractors, reassuring employees working on hospital, school and military contracts throughout the country that they would continue to be paid.
But there was no such relief for workers on Carillion’s purely private-sector contracts. David Lidington, the Cabinet Office secretary handling the company’s liquidation, said the private companies employing Carillion would have only 48 hours of government support.
He said the move would “give time for the private-sector counterparties to Carillion, to decide whether they want to accept termination of those contracts, or themselves to pay for the ongoing costs”.
Earlier in the day the government had stepped into reassure Carillion’s staff working on public-sector contracts they would continue to be paid under the terms of the deal agreed with the government’s Insolvency Service.
Carillion, which managed hundreds of vital public services for the government, collapsed into liquidation early on Monday in one of the most dramatic corporate failures of recent years. A last-ditch rescue attempt failed to raise the £300m needed to keep the company operating as it staggered under the weight of £900m in debt and a £587m pension deficit.
Mr Lidington faced angry questions from MPs in the Commons about the impact of the collapse, Carillion’s recent relaxation of bonus conditions for executives and why ministers had continued to award contracts to the company despite three recent profit warnings.
He insisted that there had been no “bailout” for the company, which employs 19,000 workers in the UK, and that its shareholders and lenders would bear the “brunt of the losses”.
However, the government is underwriting the cost of Carillion’s public-sector contracts to ensure the continuation of “vital” services, even if the company’s assets do not cover those costs. The process is being managed by PwC, the accountancy firm.
The remainder of Carillion’s 43,000 staff, mostly in Canada and the Middle East, work for subsidiary companies that are still operating and are not yet in liquidation.
Most public services appeared largely unaffected on Monday as 90 per cent of Carillion’s services are subcontracted to smaller suppliers. In some cases contracts are held in partnership with other large contractors such as Amey, which has taken over Carillion’s share of the work managing housing barracks for the Ministry for Defence.
But work on some of Carillion’s construction sites came to a halt as subcontractors were told to go home at lunchtime. They included workers on a £71m student housing development in Manchester as well as the £335m Royal Liverpool Hospital, which has been beset with problems, including cracks in its concrete beams. The word “Bust” was scrawled on a Carillion sign on the fence surrounding the hospital site.
There were concerns that Carillion owed hundreds of subcontractors and smaller businesses millions of pounds, raising fears that they could go bust.
Banks are also facing heavy losses on their £2bn exposure to Carillion in the form of loans and drawn credit facilities. The losses will be spread across 13 banks, but the biggest hits will be taken by the five big UK lenders — Royal Bank of Scotland, Lloyds Banking Group, Barclays, HSBC and Santander UK.
Last year, several of the banks took provisions against their Carillion loans, including RBS and Lloyds. Now that the company has gone into liquidation, there are likely to be more provisions recorded by the banks when they report annual results next month.
About 5,900 of the 27,500 members of Carillion’s 13 UK pension schemes have been transferred to the industry lifeboat, the Pension Protection Fund.
Questions were also mounting on Monday evening about corporate governance failures. Roger Barker, head of corporate governance at the IoD, said: “The relaxation of clawback conditions for executive bonuses in 2016 appears in retrospect to be highly inappropriate.”
The company’s pay policy was tweaked that year to make it harder to demand the repayment of executive bonuses in the event of the company going bust.
Richard Howson was chief executive of the embattled outsourcing company from 2012 until last July, when he stood down amid the first of three shock profit warnings.
Mr Howson, who enjoyed £1.5m in pay and perks in 2016, stayed on in senior management for several months before leaving the company in the autumn. Carillion is continuing to pay his £660,000 salary and £28,000 benefits until October.
Mr Lidington told the Commons that the official receiver had the power to impose penalties if it uncovered any misconduct.
The City’s watchdog, the Financial Conduct Authority, has already launched an investigation into why Carillion’s directors made bullish statements about the company’s future from December 2015 through to its full-year results in March and its annual meeting in May — only then to unleash July’s huge profit warning.
Additional reporting by Andy Bounds and Josephine Cumbo
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