Q&A: Carillion’s liquidation

Why did Carillion opt for liquidation rather than administration? When most companies fail, administrators are appointed to run it until a buyer is found (a similar process was applied to Railtrack in 2001). However, there were concerns about whether Carillion had enough cash to pay any administrators. With this uncertainty, the decision was made to liquidate the company. What is the difference between liquidation and administration? Administration seeks to sell a business or parts of it as going concerns, keeping as much as possible going. Liquidation seeks to raise as much money as possible from a company’s remaining cash and assets to pay creditors - the business is no longer regarded as a viable going concern. Why has Carillion gone bust? In short, because it did not have enough cash to pay its financial backers. It has blamed delayed payments for some contracts for its cashflow problems, but ultimately it has entered liquidation because backers lost confidence in its ability to pay them. A bid for around £300 million of emergency funding was rejected by backers and government. This sounds rather like the collapse of Jarvis in 2010. Is it? There do appear to be similarities with the collapse of Jarvis, in the sense that it was a major company with extensive rail activities that failed.

However, Jarvis exited the rail maintenance business in 2003, following a buffer stop collision at London King’s Cross. Jarvis later suffered from cuts in renewals contracts by Network Rail.

The difference was that Jarvis entered administration and later failed - Carillion went straight into liquidation. How will the railways be affected? Network Rail (see separate story) says renewal activities will be unaffected as it has contingency plans. Equally, any train operators who use Carillion for facilities maintenance and other services ought to be able to find replacements as there are other companies offering similar services. But what about staff and contractors? This is where the waters become muddier. At the time of writing, staff have not been made redundant (although some are being given the opportunity to transfer in joint venture contracts), but whether they will be paid or receive any pension they have paid into is unclear.

For sub-contractors working for Carillion, the picture is even more complex. Many are owed payments from the company, and it is uncertain whether their work will continue or if they will ever be paid.