“The state also has a role to play when things go wrong and companies fail, as Carillion did last week. Not by bailing out the directors with a blank cheque – it will be the shareholders of Carillion, not taxpayers, who pay the price for the company’s collapse – but by stepping in and supporting those affected.”
Prime Minister Theresa May
By David Bryan
Carillion, the United Kingdom’s conglomerate found itself in dire financial straits because responsible banking institutions decided they will no longer fund the lifestyle of ‘the mind and management’ of the company. They therefore rejected a 300 million pound tranche of financing to sustain its operations in the short term. In simple terms, the maths did not add up at Carillion, especially taken into consideration; it held a large portfolio of the UK’s Government services.
It is obvious, that Carillion used its leverage and future generating contractual income in its fixed term contracts with the government to secure funding for its cash flow over time, but it’s quick fixes ran out as fast as the cash came in; creating a financial vacuum whereby, coupled with its mammoth 900 million pounds debt the company operations became unsustainable.
By that, it meant in real terms, the company had no money to pay for its day to day operations, salaries,expenses,creditors and debt- enter liquidation. We have all seen this scenario before, during the Great Recession in the USA and Europe. To invoke the cliche: there is no need to re-invent the wheel; only to tweak it according to the particular circumstances as with the case of Carillion.
There are now many companies who can boast that they were in the same position as Carillion in that era, but have come out of the red and are enjoying healthy returns on investment and once again profitable. This success did not happen overnight. It was painstaking and laborious , diligent and industrious work put in on behalf of the stakeholders; the government and the management.
It was a plan that saw companies in the automobile industry and financial sector recover from the brink of collapse , which too can be adopted by Carillion.
Prime Minister Theresa May has stated it correctly, that the state has a role to play, when companies like Carillion fail, by stepping in and supporting those effected. How far the state goes must be determined by not only whether the company is too big too fail but that there are too many jobs too lose, which would have a negative direct impact on the economy.
In the case of Carillion, indeed there are Too Many Jobs Too Lose. At present 43,000 jobs are at risk worldwide , 19,500 in the UK alone who work in public sector jobs, such as the NHS, as cleaners and in school catering ; in addition -small suppliers are also exposed- perhaps, approximately some 250,000 jobs indirectly from 30,000 small businesses. The 13 Pension Schemes must be also taken into consideration in the event of insolvency.
It is agreed that there has to be accountability for the mismanagement of Carillion, and the Shareholders have to pay since government will not write a blank cheque to bail out the directors.
However the Government, in the circumstances, must consider ‘bailing out’ the company and not the directors; given the mass amount of lay-offs envisioned if Carillion is eventually liquidated.
It is believed that the wrong approach is being applied to Carillion, and the overall strategy should be saving Carillion; if there is to be continuity of the company to pay back the government; which has already intervened by continuing to pay directly UK’s Carillion’s staff, but what about the other ‘273,000 employees’?
The government intention must be therefore; to save the company from going under,to help retain as far as possible all 293,000 jobs directly and or indirectly associated with Carillion.
Re-calibrate Carillion’s plan of liquidation and the selling off its assets, by maintaining the company as a going concern, return it too profitability and or sell it to a new entity thereafter. By so doing it will preserve the company, its employees, contracts, assets and pension schemes.
The State has already intervened by paying salaries, the question here, is quantum. The state therefore needs to secure any future injection of taxpayers’ money, which at the end of the day will be lost on the company being made insolvent.
Thus, the government should seek a comprehensive plan to inject the require liquidity, but not before the removal of all current directors of the Board of Carillion, appointing a new Board and management, the issuance and allocation of shares in favour of the government, securing the ‘loan’ by way of debenture over the assets of the company until such time the company is able to repay all monies invested by the government. At that juncture, the state will have a option to sell its shares back or to a new entity.
Such an arrangement can be facilitated by independent management agreements which can go hand in hand with any judicial actions by the government appointed ‘liquidator’ whose primary focus now is not to sell the family silver but preserve it in order for the company to:-
- keep the current jobs of all the employees including those of the suppliers;
- pay outstanding creditors;
- return the company to profitability through disciplined management; (i) Quarterly reporting of company’s performance (ii) Monthly financial reports etc
- carry out a forensic audit;
Prime Minister May alluded to her government’s stance on the fat cat syndrome which no doubt has plagued Carillion. Mrs May stated:-
And, for the first time, businesses will have to demonstrate that they have taken into account the long-term consequences of their decisions. Too often, we’ve seen top executives reaping big bonuses for recklessly putting short-term profit ahead of long-term success. Our best businesses know that is not a responsible way to run a company and those who do so will be forced to explain themselves.
The English common law provides numerous examples were directors are obliged to refund that part of money paid which was not a ‘genuine award of remuneration’ but a disguised gift out of capital’ and as unauthorised return of capital, a sale of land made at undervalue by a company to another company controlled by its principal shareholders. [Aveling Barford Ltd. Perion Ltd (1989)]
Finally, any action of government intervention during this time “effects the best prospects for preserving the company’s future and maximising the realization of the company’s assets for the benefit of its” employees, creditors[Re: Harris Simons Construction Ltd (1989) 1WLR 368] and the economy of the United Kingdom.