Carillion Liquidation: Facing the risk of failure
2 Feb 2018

The collapse of Carillion this January has put thousands of suppliers, sub-contractors and stakeholders at risk. Although The Federation of Small Businesses has called for payment protection to ensure suppliers are paid, the second largest construction firm in the UK still owes roughly £800m, with much likely to go unpaid.

With the news of the liquidation still hot off the press, the Shadow Secretary for Business Energy and Industrial Strategy, Rebecca Long-Bailey said in a recent interview that the Government should have seen the company’s demise coming. The Secretary also said that following the profit warnings they shouldn’t have been awarded the three new contracts by the Government.

In our experience, profit warnings are not predictors of insolvency, but are a good marker of business performance; for example, Tesco issued five profit warnings 4-5 years ago yet there is no sign of them going into liquidation anytime soon. On the topic of contracts being awarded, this is a difficult one, as they would have been awarded at the end of a long period of consideration, with Carillion being considered a suitable fit, right up to the point of their first profit warning in July 2017.

If the Government was seen not to award contracts immediately after a profit warning, then they would have been blamed for causing the insolvency of the company. In addition to this, Balfour Beatty issued profits warnings from 2013 to 2015 yet still secured many new contracts and is recovering as a whole. Interserve also issued profit warnings last year and has a recovery plan in place which is expected be resolved by the end of Q1 2018.

In another interview about the demise of the construction company, David Lidington defended the Government’s position against questioning that they should have seen this problem coming. However, short of absolute state control of all Government contracts, how can this realistically work? For example, if a small cleaning company working for a local primary school goes bust, should there be questions in the House?

We believe that it is because of the size of Carillion that this issue being flagged up, but unfortunately it’s just a case of the “the bigger they are, the harder they fall”. A harsh reality is that business is a cut throat world and companies need the risk of insolvency to keep them competitive. Although it may sound Darwinian, if the fittest are to survive, then the weakest must face the risk of failure – however painful that is to stakeholders.