The collapse of Carillion is causing much distress in the construction sector but the effects could be much wider reaching unless businesses take urgent action to protect themselves and deal with the fall out.
Carillion was too big for the effects not to be far reaching, the very nature of its business means it will impact various and diverse sector groups. The construction sector could be in trouble, we’re already hearing how comments and speculation about other major competitors are seeing share prices tumble.
Carillion, the construction giant, entered liquidation on 15 January 2018. The collapse of this firm has put thousands of jobs at risk as well as raising concerns about who would be able to service the public contracts it owns and the impact on the supply chain.
With a rescue or turnaround plan seemingly not possible the choice of liquidation over a more rescue oriented insolvency process, such as an administration or company voluntary arrangement, appears to be a sign of just how difficult the situation had become and how a lack of funds has limited the options. While the government has acted swiftly to protect vital services to the public sector, the prospects for many creditors appear to be bleak.
What we can see with the liquidation of Carillion is that there simply was not enough money left for the business to continue to operate as a going concern. While directors will need to explain why they allowed the company to reach the position it did. What advice were they getting or what where they being told by key stakeholders that led them to believe they could continue for as long as they did?
If there is a recovery from the insolvency process for ordinary creditors it will take time and sitting back and waiting will not be the key to survival for Carillion’s creditors. However, there will now be many opportunities for those companies fleet of foot and able to quickly meet the needs of the numerous contracts the company was engaged in.
Who is affected?
Businesses that think they might be affected need to act fast and get ahead of the problems. People need to realise that even if their direct supplier or contractor is not Carillion it is highly likely that somewhere along the chain, Carillion will be the major influence in a particular business. In all likelihood that business is going to be badly affected and potentially fail itself.
It’s the domino effect and we see it every time a big business suffers. There are the immediate companies who have a significant part of their business with the company in liquidation. These businesses will struggle to continue to operate and need to get the right advice in straight away. Businesses need to think beyond their direct exposure to Carillion and look into their own customer base and supply chain to find those risks.
Two to three months down the line there will be those businesses that are perhaps not directly contracting with Carillion but are directly affected by the contagion stemming from the collapse. Rapid action now could help mitigate losses and identify problems while there is a better chance of finding a more constructive solution.
What should businesses do?
There are some immediate steps that affected businesses can take. For example, if you are a direct creditor of Carillion then now is the time to review the agreements and contracts you had with them and work out if the company that is legally responsible for your debt is one of the nine companies in liquidation and/or if there are any other parties who have an obligation to pay you following Carillion’s failure. It is also worth checking other elements of the contract like penalties. If you have supplied goods you will also want to check whether you have any right to have them returned to you if they have not been paid for.
If your debt is with one of the companies in liquidation then make sure that you submit details of your claim now. This has two benefits. Firstly, although it is not clear whether there will be a return to creditors yet it would be better to know now the full extent of your losses or potential losses and secondly, if there is a dividend later you don’t run the risk of missing out because of needing to find information a year or more later.
Once you know what the size of the loss is you can start to plan how to deal with the cash and profitability implications of it. Early discussions with funders and creditors could give you greater leeway and if there is a risk of your own business running out of cash or into other problems it pays to get advice immediately if you want a more constructive solution that helps your business survive.
If you didn’t supply Carillion directly but you lend or supply to, or even buy from businesses that did, then now is the time to open a dialogue with them and find out how they are exposed and how they plan to cope with it. You might need to review how you trade with them and if you have a large exposure you may need to come up with a plan to manage it.
There will be opportunities as well as challenges in the coming months for those affected by Carillion’s failure. Those who are pro-active, well advised and creative will achieve the best outcomes.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.