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Insolvency Series Special Edition: Too big to fail (not!)

17 January, 2018Keith Pond

constructionHindsight is the most marvellous tool.  Those who “saw the signs” of failure of the construction giant Carillion have been much in the media over the past few days.  Few, however, acted on those “signs” and now many face loss, uncertainty, hardship and a possible domino impact of insolvency.

Some canny creditors and investors got out early – reportedly refusing trade credit as Carillion extended its payment times or selling shares as profit warnings emerged.  These will be amongst the unscathed, many will not.

Unlike some of the banks that failed to come to an accommodation with Carillion last week this flagship of government policy (PPI, HS2 and other acronyms) was not “too big to fail”.  If there is perceived to be a moral duty on government to soften the blow – or on banks to consider those SMEs and smaller creditors who will see the biggest losses – this may well be in the musings of commentators only.  I doubt we will see it in reality.

But this is speculation. 

What do we know for certain?

  • The Official Receiver (OR) is appointed as liquidator of Carillion companies (Insolvency Service, 2018).
  • PWC partners are appointed as special managers to support the OR (PWC, 2018).
  • The ORs duty is to secure the best outcome for creditors.  This is, of course, subject to the contractual priorities of senior and secured creditors, preferential creditors (largely wages), and the validity of any floating charges that Carillion might have given.  So, some creditors will receive a better outcome than others…
  • The OR (aided by PWC) will investigate the conduct and actions of the Directors in order to decide whether referral under Directors Disqualification legislation and even prosecution is called for.  This actually happens in all insolvencies and so Carillion’s directors should not feel singled out.
  • Various committees of creditors and their representatives will be appointed to oversee the work of the OR.  There will be much public interest in both the deliberations of the liquidation committees and the investigation of directors.  Much information will, however, be confidential unless a prosecution is made.
  • The OR will extract fees according to a published scale (Insolvency Fees Order, 2016) and pay them (to him or herself) in priority to most creditors.
  • The special managers will be paid unspecified fees in priority to most creditors.

We also know that Carillion failed because, very simply, it ran out of cash.  Or, at least, it was unable to meet its cash obligations as they fell due.  Where the cash evaporated to, who was paid at whose expense remains to be shown by the liquidation report.

But is this the end of the story?

Probably not.  UK insolvency law and practice allow for liquidations to end if compromises or company voluntary arrangements (CVAs) can be agreed.  PWC well recall that its part in the Enron saga began in 2005 but published its final CVA report in 2014.

The scope for individual Carillion companies and SPVs to offer different avenues out of liquidation is still open.  In liquidation the liquidator can propose a CVA (Insolvency Act, 1986 S1(3).  If the proposal is agreeable to 75% of creditors, by value, then the CVA can go ahead.  CVAs can be shown to preserve asset value and jobs in a way that liquidation does not.

REFERENCES:

PWC, 2018, website information, available at: https://www.pwc.co.uk/carillion

The Insolvency Service, 2018, Press Release – Carillion declares insolvency, available at: https://www.gov.uk/government/news/carillion-declares-insolvency-information-for-employees-creditors-and-suppliers

The Insolvency Proceedings (Fees) Order, 2016, available at http://www.legislation.gov.uk/uksi/2016/692/made/data.xht?wrap=true

Dr Keith Pond is the author of the Insolvency series, view the other articles in the series.