Article published in The Times, 25 January 2018

The collapse of the construction group Carillion is a tragedy — but it is also emblematic of the state of the nation’s public and private sectors (given that Carillion straddled both). Short-termism, big talk but modest achievements, and pensioners left in the lurch.

On all these counts we can expect investigators to burrow into the company’s record. The House of Commons work and pensions committee is bearing down on the board along with the official receiver, the Insolvency Service, the Pensions Regulator and the Financial Conduct Authority.

The critical question they will be examining is whether it was incompetence or negligence that led to the company’s crash. “This is capitalism,” says Dean Fuller of Fox & Partners. “If a board is incompetent, then the company will suffer. But if it is negligent, then it may be breaking the law.” This raises questions, he adds, about the non-executive directors. Were they experienced enough and did they allocate enough time to scrutinise how the company was being run?”

Exactly how far the present board should take the rap is open to discussion. Some members — such as Alan Lovell, a non-exec who served on the audit, remuneration, nomination, sustainability and business integrity committees — joined very recently. Yet the problems were long-standing.

Even so, the situation could hardly have been handled worse, with pensioners particularly hit. As Anne-Marie Winton of ARC Pensions Law points out: “Given the speed at which Carillion collapsed, there appeared to be no time to attempt to save the company by separating it from its 13 defined benefits schemes through the use of a regulated apportionment arrangement, as most recently agreed, for example, in the British Steel pension scheme.”

Was there chronic delusion among board members or deliberate dissimulation? Perhaps some members genuinely did not believe they would be felled by the crisis. The big questions are over the upbeat statements about prospects for the company in the early part of 2017, followed by the first profit warnings shortly afterwards. “It is the proximity of these two events which has triggered the scrutiny of the FCA,” says Simon Bushell of Signature Litigation.

More immediately, however, are the inquiries of the official receiver. “It has a duty to investigate the causes of failure of the company in liquidation, [including] the conduct of the directors and others involved in the management of the company,” says Lee Ranford of Russell-Cooke. “One area of focus in the case of Carillion is likely to be whether the directors allowed the company to continue to trade when it was insolvent, resulting in an increased loss or deficit. Such conduct would be likely to lead to further action against the directors, such as a claim for misfeasance, or wrongful trading, as well as action for disqualification.” When a company appears to be insolvent, the priorities of the directors must shift; rather than having a first duty to the company, directors must focus on the best interest of the creditors. “Allowing the company to trade while insolvent and increasing the deficit to creditors would be a breach of that duty,” Ranford says. Breach of fiduciary duty could result with a claim by the official receiver for misfeasance. “The remedies for misfeasance include compelling the wrongdoer to repay, restore or account for any money or property.”

This could be the route for clawing back bonuses, a particularly sensitive topic at Carillion, given it appeared to introduce rules protecting bonuses from being clawed back in 2016.

“In the context of insolvency those changes are unlikely to have a significant impact,” Ranford says (although they may be regarded by the small businesses bankrupted by the company’s collapse as an outrageous reward for failure).

There is probably little point in taking action against the directors individually, Fuller warns. “There is plenty of precedence for businesses wasting large amounts of money going after the directors.” When Equitable Life launched a £3.7 billion negligence suit against nine of the fifteen former non-executive directors, it managed to rack up a legal bill of £45 million without achieving a result.

It is vital that lessons are learnt from this sorry tale. Among them, says Bushell, should be an examination of the notion of “goodwill”. “One of Carillion’s key assets was £1.5 billion of goodwill, which would have had a significant impact on the balance sheet,” he says. “In the context of an infrastructure company, what does goodwill mean? In the end it was meaningless. When signing the accounts, the directors will have relied on advice from the company’s auditors.”

Among all this, it is worth reflecting on the Carillion corporate values statement. One bullet point reads: “We deliver. We set ourselves stretching goals, taking pride in doing a great job and helping our customers and partners to succeed.” You might think you couldn’t make it up. But Carillion did.

 

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