The fall-out from the collapse of Carillion is set to claim many victims. It is also set to shine a light on many aspects of business where diligence and shrewd judgement are required.
The huge facilities management and construction services group collapsed and went into compulsory liquidation in January, with the likely loss of 43,000 jobs; 20,000 of which were in the UK.
Carillion’s demise has major implications for some of the biggest building projects in the UK and means uncertainty for many companies that were in its supply chain.
It also raises many issues about how things went wrong and what happens now.
The end of Carillion has seen calls for the Big Four accountancy firms to be put under closer scrutiny. MP Frank Field, the chair of the Work and Pensions Committee, asked whether KPMG, PwC, Deloitte and EY should be broken up in the wake of the firm's collapse. KPMG had handled Carillion's accounts since 1999 and signed off its figures last March, four months before the firm issued its first profit warning.
Stephen Haddrill, head of the accountancy watchdog the Financial Reporting Council, agreed that the UK's four largest firms needed more competition. The FRC is to open an examination into KPMG’s audit of Carillion’s accounts between 2014 and 2106 and its work last year.
Four years ago, the FRC’s predecessor, the Competition Commission, stated that the Big Four’s overly close relationship with company bosses had created a "tendency for auditors to focus on satisfying management rather than shareholders' needs".
Last year, the FRC said it had found faults in a third of the accounts it examined from the UK’s six largest audit firms. The FRC is looking to come down hard on those it feels are not meeting their obligations. It can impose unlimited fines on accounting firms if it establishes wrongdoing. Carillion is just one company that has failed after auditors had given it a clean bill of health – leaving the auditors with difficult questions to answer.
But while auditors come under scrutiny when a company goes under, it is the senior figures in that company who will come under greatest examination by the authorities. The government has already asked for the Official Receiver to fast track its investigation into Carillion’s collapse and to examine closely the conduct of its directors. Issues such as wrongful trading and fraudulent trading are certain to be considered.
Wrongful trading is a civil offence, where a company director knows, or should have realised, that the firm was going into liquidation but continues trading. Fraudulent trading is a criminal offence, where a company director knows or should have realised that the firm was going into liquidation but continues trading with the intention of defrauding creditors.
Section 214 of the Insolvency Act 1986 allows a court to order a director of a company in liquidation to contribute personally to the assets in the liquidation if they are found guilty of wrongful trading. That person can also be disqualified as a director.
Much will depend on how much a director knew about the company’s situation at the time of the alleged wrongful trading. A director’s defence team must use all available evidence to establish the facts. A director will be liable under S214 if he or she allowed trading to continue when the company could be seen to be insolvent on its balance sheet, failing to pay its debts or not meeting its tax liabilities.
Fraudulent trading can carry up to 10 years imprisonment under the Companies Act 2006. It is regarded as a more serious offence than wrongful trading. But, as with wrongful trading, defending an allegation involves assembling the relevant evidence – such as accounts, business plans and relevant correspondence - to challenge the claims and assumptions made by the authorities.
What must also be considered is that the nature of an investigation can change over time. This may present new challenges for anyone who is the subject of that investigation.
The collapse of a company may be followed by the Insolvency Service or the Official Receiver asking a director for answers to written questions or to give oral testimony. If later on, however, a criminal investigation begins into the collapse, different rules apply regarding issues such as self-incrimination and the right to silence.
Anyone questioned about the demise of a company must, therefore, take advice on how to answer questions from the very moment they suspect any kind of investigation is about to start. Having in-depth experience of investigations, involving the likes of the Official Receiver and the Serious Fraud Office (SFO), that have followed the collapse of major organisations, we can say that early engagement with a specialist legal team is essential.
Such engagement is the only way to protect your interests; whether in a civil or a criminal investigation. The likes of the SFO, the Department for Business, Innovation and Skills, the Financial Conduct Authority, the National Crime Agency and regional and City of London police will not hesitate to become involved if they suspect wrongdoing when a company has “gone to the wall’’.
It is vital that those who held senior positions in that company take the right steps to protect themselves.
When it comes to Carillion, we are yet to know whether the matter is one of fraudulent trading, other regulatory offences, wrongful trading or other civil /criminal enforcement issues.
The demise of a company is a distressing time for staff, however senior they are. But the fact remains that when it comes to placing the blame for its problems, the authorities will be looking at the behaviour of those at the top of the company.
Depending on the nature of the investigation and any findings made, there is the possibility that any number of directors or senior executives could be questioned, arrested or even charged. For many who find themselves in these positions, the prospect of being interviewed by the authorities or having to watch while their workplace or even their homes are searched for potentially incriminating evidence is a worrying one. Especially if they believe they have done nothing wrong.
It is important, therefore, that anyone who believes they face such a prospect is proactive. They need to seek the appropriate legal advice as soon as possible and keep notes or copies of anything that could help if they do need to mount a defence against any allegations.
It is the only way to protect yourself in the fall-out from a company’s collapse.
Nicola is known for her fraud, civil recovery and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.
Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.