The Carillion File
Explaining the Carillion Group liquidation in the UK, and what it may mean for Canada.
Where did this Carillion thing come from?
Carillion PLC is another one of the largest companies that you will have never heard of until a few days ago. At best, you may have a vague recollection of seeing the name on the side of a truck as you hurtled along a highway. Today, it is headline news as yet another company that should be too big and too well-connected to fail…….fails.
As I am in the unique position of being the only Licensed Insolvency Trustee and exam qualified Insolvency Practitioner in the both Canada and Britain, I have been asked to try and explain what is going on with the Carillion PLC in the UK, and what it may mean for the Canadian entity. Due to the size and complexity of the matter, the article has simplified some issues for both brevity and ease of understanding.
What is Carillion?
Carillion PLC is a publicly listed company on the London Stock Exchange, although it is temporarily suspended. Carillion PLC sits at the head of a number of companies, collectively known as the Carillion Group (“Carillion”). Carillion is headquartered in the UK, although it has arms in Canada, the Caribbean and in the Middle East in places such as Dubai, Abu Dhabi, Oman, etc.
Carillion was effectively a large construction company, the second largest in the UK. Being a construction company does not mean what it used to, and now involves providing facilities and services to public and private organizations. This can involve activities as diverse as maintaining or constructing highways and bridges, cleaning offices and hospitals, building stadiums, homes and offices, providing school meals, service stations or accommodation for military personnel. The list of activities is almost endless, but it always involves some type of infrastructure activity that would have been performed by governments in past generations.
The 2 big questions
- What will be the outcome in UK and Canada?
- How can such a large international company, diversified across continents with differing government contracts, become insolvent?
I shall address each in separate articles.
What will be the outcome?
The outcome in the UK is already known due to the type of insolvency mechanism used. It is a liquidation, which means that this is not a restructuring and Carillion will not re-emerge having shed some debt. Carillion is going out of business, and its shareholders will not see a penny. It is likely that some viable business elements of Carillion will be sold to other companies, but Carillion, as a whole, is gone.
The Carillion situation is not just a business problem in the UK, but a huge political problem too. The use of a compulsory liquidation as the mechanism to deal with Carillion, has resulted in the government’s insolvency agency, the Official Receiver, taking the lead role as liquidator. The Official Receiver is not capable of handling large corporate insolvencies, so the Court appointed PWC to be a special manager, effectively managing the day to day insolvency procedures during a controlled wind down and sell off of assets. To me, this indicated that decisions would not only be made on an economic and business basis, but that political will would be paramount.
Jobs will be lost, and the threat to other small businesses that supplied Carillion is grave. Even though several UK banks have created funds to support small businesses, this support cannot mask the underlying problem that revenue will be reduced, and it will take time for the lost revenue to be replaced. Whilst the assets of Carillion are liquidated and funds realized, there will be no quick payment, if any, to Carillion’s small business creditors for amounts owed. Larger creditors with security over assets should fare better. For ongoing projects that the government has elected to fund to completion, then cash on demand payments may be made for critical supplies. It is also possible that competitors who purchase some of Carillion’s operations in due course may continue with the small business suppliers, but they will already have their own suppliers in place.
The domino effect will be twice felt. Once, as individuals lose their jobs, their spending will be reduced which particularly affects local businesses. It is expected that many small businesses who relied upon Carillion purchases for profitability will cease to trade. In the UK, once a company ought to be known to be insolvent, then directors bear personal liability for ongoing losses. Carillion suppliers will quickly have to find replacement customers or else they will make losses. Thus, there is no appetite for companies to trade out of insolvency, and numerous companies will cease to trade because of Carillion’s collapse.
As the UK government struggles to determine which infrastructure projects should be completed, this will add to the uncertainty regarding the economy because the Brexit deal is not yet settled. Uncertainty means that risks are higher, and the markets will dictate higher costs for new and ongoing projects. As such, future infrastructure projects may be delayed or cancelled, with a spiraling effect upon the economy. That is a worst-case scenario, but as noted above, with the government making the policy decisions on Carillion’s liquidation, the government will seek to limit the damage that may reverberate.
What does this mean to Canada?
In terms of Carillion Canada, its future depends on its exposure to the whole Carillion group, whether this be in the way of inter-company loans or guarantees of some sort. Its future may also depend upon the support that federal and provincial governments provide. The support may be to protect Carillion Canada itself or the workforce (together with their pensions) and it can take many forms, not the least of which would be to continue entering into medium and long-term contracts. However, if the exposure to the Carillion group is significant, any support may be futile. One thing is certain, the Official Receiver in the UK will seek to get the greatest return to UK shores from Carillion’s overseas group.
The level of exposure of Carillion Canada is not clear yet, and again this means that uncertainty has now entered its market. It is not known what funds may be removed from Canadian operations, and whether this could ultimately reduce it to illiquidity. The cost of financing its projects should also rise because the perception will be that there is increased risk to dealing with an entity that may be brought down in due course. In addition, other than the government seeking to provide more projects as support, other possible customers may be scared away because they want to know that their projects will be completed. Politicians may also be scared away from allocating contracts through their departments because if a failure occurs, even if through no fault of Carillion Canada’s operations, the politician will not want to be seen as one who promoted a risky project. As such, the dangers are high to Carillion Canada because of the uncertainty.
As for creditors, they will want to reduce their exposure and will be diligent in acting to collect amounts owed. They may also decline to continue supplying, figuring that it is better to take a reduced profit than a bigger loss in due course. There may be competing interests between creditors, and they will each seek to put themselves at the head of any possible recovery. Such creditors will not permit minor events of default to be waived, and it can be anticipated that they will seek to enforce as soon as possible in order to limit their potential losses. Replacing expiring finance will be tough and can be expected to be at higher rates.
As such, Carillion Canada have a hard task to ensure that the market maintains confidence in its ability to continue long-term operations. It is not impossible, but during these unclear times, it is difficult.
How can the UK impact Canada?
If the Official Receiver in the UK decides that it will take action regarding Carillion Canada, then liaison between the UK and Canada jurisdictions could actually be comparatively straight-forward because both have signed on to the Model Law on Cross-Border Insolvency (“Model Law”) developed by the United Nations Commission on International Trade Law (“UNCITRAL”);
The Model Law seeks to promote international cooperation in cross-border insolvency in three major ways:
- setting a framework for the courts to coordinate and cooperate with each other;
- limiting the scope of local bankruptcy proceedings when foreign proceedings have commenced; and
- granting local relief to foreign representatives.
The Official Receiver in the UK could seek to appoint a foreign representative in Canada who has standing to continue or begin proceedings. This standing could enable the foreign representative to appoint receivers, or have Carillion Canada enter other insolvency and restructuring proceedings.
Any relief granted to foreign representatives is not intended to be an automatic acquiescence to foreign laws. However, laws governing environmental, tax, foreign exchange, pension protection and insurance requirements vary greatly from country to country and these cannot be flouted by relief granted to foreign representatives. One cannot exempt oneself from laws in a country on the basis that operational headquarters are located elsewhere. The Model Law contains a general public policy exemption so that courts need not make an order if it is “manifestly contrary to a public policy” of that country.
Realization and Priorities
If Carillion overseas assets are to be realized, then the best return will be if Carillion Canada can be shown to be profitable within its own sphere of operations and acquired as a going concern by another contractor. It is probable that such a realization would require some form of insolvency protection.
Then we enter the most contentious area in international insolvency; that of priority – who receives what allocation and when. There are rules to ensure that all creditors receive equitable treatment and share distributions from an insolvent estate equally, as per their priority ranking. A distribution to creditors being calculated in a home jurisdiction must take account of other payments made in respect of the same claims in foreign jurisdictions, to ensure all creditors in a class receive an equivalent distribution.
There are great differences within the various insolvency regimes themselves, and even priorities supposedly established over many years can suddenly be reversed upon an unexpected judicial decision. Not only is one then competing between jurisdictions, but one also has to consider the established priority of claims within a domestic environment before seeking foreign recognition. Watch out for the “Hotchpot” Rule, which is another topic worthy of exploration at a later date.
A priority ranking entitlement may be fought between governments, employees, company pensioners, secured creditors, trade creditors, bond holders. Suffice to say, it is beyond the capacity of this document to review all the differing entitlements by jurisdiction,
So even though there is a mechanism for the Canadian and UK jurisdictions to deal with each other, given the amounts in play and recent history on cross-border insolvencies, I would not bet on straight-forward solutions being implemented.