Carillion used suppliers' cash as ‘credit line’, MPs claim
Carillion used suppliers to “prop up its failing business model” according to MPs investigating the collapse of the failed contractor.
The Carillion joint enquiry published evidence from bank Santander, which operated an Early Payment Facility (EPF) for Carillion, just days ahead of its final report on Carillion, due on Wednesday.
Carillion forced standard payment terms of 120 days on its suppliers, the committee said, but also operated EPFs – also known as “reverse factoring” and “supply chain financing”.
Santander was one of several banks that provided types of EPF programmes to Carillion.
Under the scheme with Santander, Carillion's suppliers could opt to receive a discounted early payment from Santander of the amount due to them, with Santander assuming Carillion's credit risk for the invoice until the invoice payment date.
But Santander withdrew its facility in December 2017 and it was this action that Carillion’s directors listed as one of the reasons for the firm’s demise.
Now the Carillion joint enquiry has published a letter from Santander describing the 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”.
Santander’s outstanding exposure to the invoices purchased from suppliers under the programme is £91m.
Meanwhile, credit ratings agencies Moody’s and Standard & Poor’s claimed that Carillion’s accounting for its EPF hid its true level of borrowing from creditors.
They claimed that the EPF structure meant Carillion had a financial liability to the banks that should have been presented in the annual accounts as “borrowing” but instead Carillion presented these as liabilities to “other creditors”.
Moody’s claims that as much as £498m was misclassified as a result.
Frank Field, chair of the Work and Pensions Committee, which runs the Carillion joint enquiry along with the BEIS Committee, 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."
Rachel Reeves MP, chair of the BEIS Committee, added: "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."