Much has already been said about the demise of Carillion and the impact of its liquidation on the various parties with whom it contracted. In this article, I would like to examine what light the demise of Carillion throws on themes commonly encountered within insolvency and whether there are lessons to be learned for everyone.
Having read the various reports in the press, it is clear that whilst Carillion entered into multi-billion pound government contracts, the contracts had extremely small profit margins, ultimately rendering the business unsustainable.
In addition, there are suggestions that despite the financial difficulties, the directors continued to pay huge dividends to Carillion’s shareholders, as well as big bonuses to themselves. No doubt the liquidator of Carillion will examine the conduct of the directors in the period leading up to Carillion’s liquidation and whether the directors have breached any fiduciary and statutory duties, with a view of taking action to recover funds from the directors personally under the misfeasance provisions contained within the insolvency legislation.
Lesson number 1: Focus on profit margins, rather than turnover.
It would appear that many of the parties who contracted with Carillion relied on the fact that Carillion had entered into big government contracts. They put unjustified faith in the viability of Carillion as a consequence.
Lesson number 2: Do not put too much faith in the status of your customer, but assess your contractual relationship on the value it actually brings to your business.
I understand that by the time Carillion went into liquidation, it was offering 120 day payment terms to most of its contractors and suppliers, which even before the demise of Carillion, would have put their cash flow and as such their businesses under severe pressure.
Lesson number 3: The pushing back of timescales for payment is one of the crucial signs that your customer is in financial difficulty and should act as a critical warning bell.
As is often the case, one insolvency leads to many more and it is envisaged that many sub-contractors will suffer their own demise as a result of Carillion’s liquidation, as Carillion was, if not their only, main source of income.
Lesson number 4: Being too reliant on one source of income, is a potential recipe for disaster.
So what to do next?
For anyone directly involved in the demise of Carillion, it is vital to seek early professional advice to safeguard their future. Do not leave it until the effects take hold, but be pro-active. Insolvency practitioners are often seen as the grim reapers, but seeking their advice early on, means that vital steps to re-structure your business or rescue plans can be put into place.
For everyone else, now may be time to take stock of your business and carry out a business review and to consider:
- What are the profit margins of the contracts that you are operating under?
- Do any contracts with small profit margins put any unduly pressure on your cash flow and ability to service more profitable contracts?
- Do you have effective terms and conditions in place?
- Do they contain a retention of title clause, which will allow you to take back your goods, in the event of your customer’s insolvency?
- Are your terms and conditions properly incorporated and do they form part of your contracts with your customers, so that you can rely on them when you need to?
- What does your aged debtor ledger look like? Remember that the older a debt, the more difficult it is to collect.