The investigation in the UK into the collapse of Carillion Plc by a House of Commons select committee provides rare public access to the restructuring plan for a large company. Would the plan meet the requirements of Australia’s Safe Harbour regime?
The Collapse of Carillion
Carillion was a UK-headquartered construction company with worldwide operations employing 43,000 staff. It was placed into liquidation on 15 January 2018 following the UK government’s refusal to provide emergency funding,
With only £29 million in cash and creditors of more than £4.6 billion the position was so dire that – according to the select committee report – the company was forced into liquidation because it could not find a administrator prepared to take on the job in light of uncertainty about whether there was enough money to cover their costs.
Investigations into the conduct of the directors and auditors by the Insolvency Service, Financial Reporting Council, Financial Conduct Authority, and the Pensions Regulator are underway. In addition, the House of Commons Work and Pensions Committee launched an inquiry within a fortnight of the collapse.
As discussed here, the 16 May committee report (available here) is scathing in its criticism of directors, auditors, and regulators. The Inquiry has also made public a large number of documents which would not ordinarily be available – most notably including the 100 page turnaround plan.
Australia’s Safe Harbour regime
Australia’s severe insolvent trading laws make company directors personally liable for debts incurred when a company is insolvent.
By comparison the UK’s ‘wrongful trading’ regime imposes liability if directors ‘knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation’ and did not take ‘every step with a view to minimising the potential loss to the company’s creditors.’
The Australian Safe Harbour regime provides company directors with protection against insolvent trading claims but only if their conduct and actions, and the conduct of the company, meet minimum standards.
Would the Carillion plan meet the Australian Safe Harbour requirements?
The plan does articulate an appropriate objective that is clearly a better outcome than liquidation, and it does identify the use of a big 4 accounting firm as an appropriately qualified adviser.
However the plan is silent about any steps the directors had taken to conclude that they are properly informed about the financial position of the company, or that they proposed to take to stay informed. The document identifies a number of actions that have been taken, but it doesn’t really set out a future action plan, identify those responsible for each action, or set milestone dates.
Those omissions may not be fatal – perhaps there were other documents that provide appropriate detail. The biggest difficulty that the directors would have in meeting the Australian criteria is that the forecasts in the plan exclude employee pension contributions from the company budgets, and paying employee entitlements ‘as they fall due’ is a key requirement of the Australian regime.
Too little, too late
Of course the Carillion turnaround plan was never designed to meet the Australian requirements, so it’s not a huge surprise that it doesn’t. But nonetheless, that ‘failure’ highlights that it is essential for directors seeking to access safe harbour to ensure that they have a plan that is fit for that purpose.
In the case of Carillion, history shows that the plan was too little, too late: the company was in liquidation within a fortnight of the plan being finalised.
First published here
Australian Loan Restructuring Issues 