Company held back payments
Carillion used cash owed to suppliers to hide debt
Failed construction giant Carillion used money owed to its suppliers, many of them small businesses, to hide the true level of its debt, an inquiry has revealed.
The company collapsed into administration in January under a mountain of debt after banks refused to provide any further financial support.
A damning report to be published this week will show how the company ‘ripped off’ its suppliers, forcing them to wait up 120 days for payment and in many cases demanding they take a discount if they wanted to be paid early.
Carillion had a financial liability to the banks that should have been presented in the annual account as “borrowing”. Instead it presented them as liabilities to “other creditors”. Credit agency Moody’s claims that as much as £498 million was misclassified on the company’s balance sheet.
Frank Field MP, chairman of the Work and Pensions Committee, which has led a joint inquiry into Carillion’s demise, said: “Carillion displayed utter contempt for its suppliers, many of them the small businesses that are the lifeblood of the UK’s economy.
“The company used its suppliers as a line of credit to shore up its fragile balance sheet, then in another of its accounting tricks ‘reclassified’ this borrowing to hide the true extent of its massive debt.
“This knocks down for good the stance of the Carillion board that whingeing and blaming others can be any defence.”
The Work and Pensions and BEIS committees will issue their final report into Carillion’s demise on Wednesday.
Ahead of publication, they issued a statement saying that despite being a signatory to the Prompt Payment Code, Carillion was a “notorious” late payer which forced standard payment terms of 120 days on its suppliers.
It used an Early Payment Facility – also known as “reverse factoring” and “supply chain financing” – to allow suppliers to be paid earlier – as long as they agreed to a discounted payment.
Both Moody’s and fellow credit agency Standard & Poor’s have claimed that Carillion’s accounting for its EPF concealed its true level of borrowing from financial creditors.
Rachel Reeves MP, chairman of the BEIS Committee, said: “The collapse of Carillion left small businesses and sub-contractors out-of-pocket with many left unpaid for months and facing ruin.
“It’s a bitter irony that while Carillion were fully signed up to the Government’s Prompt Payment Code, they were making their suppliers hang on for 120 days or more to be paid.
“Carillion’s early payment facility ripped off their suppliers, forcing them to accept a cut in what they were owed, and was a blatant attempt by Carillion management to prop up their failing business model.”
Carillion’s financial statements did not highlight the EPF, but some analysts spotted it. Carillion’s board minutes in April 2015 refer to “disappointing” analysis by UBS that had factored both the pension deficit and the EPF in Carillion’s total debt position.
The May 2015 minutes state that shorting of Carillion’s shares was up significantly and that the “bulk had followed the UBS note in March”.
The group’s bank, Santander, finally withdrew the discounted early payment facility in December 2017. Although it was just weeks before the company was forced to apply to for liquidation, Santander’s decision to terminate this facility has featured on the long and varied list of excuses given by Carillion’s directors for its failure.
In the letter published today, Santander describes a series of events which “undermined Santander’s confidence in Carillion’s financial position”, including “lack of progress with the restructuring plan” that Santander had provided new bridging finance for, and the expected “detailed business and restructuring plans” being further delayed.
The bank’s “outstanding exposure to Carillion in relation to the invoices purchased from suppliers under the programme is £91 million. This is “separate from Santander’s committed exposures to Carillion for which we have taken significant additional bad debt provisions.”