Collapsed outsourcer Carillion used suppliers to “prop up its failing business model”, according to MPs investigating the company’s failure.
The Work and Pensions Committee and the Department for Business, Energy & Industrial Strategy (BEIS) Committee have published evidence in a letter from Santander chief risk officer Patricia Halliday, which shows Carillion treated small businesses as a line of credit.
Santander’s letter shows that it has written off £91m Carillion owed suppliers through its ‘early payment facility’, which the bank ran.
The early payment facility – also known as "reverse factoring" and "supply chain financing" –allowed suppliers to be paid earlier, with the caveat of taking a discounted payment.
Despite being signatories of the Prompt Payment Code, Carillion were "notorious late payers", MPs said, and forced standard payment terms of 120 days on its suppliers.
Two credit ratings agencies, Moody’s and Standard & Poor’s, have claimed that Carillion’s accounting for its early payment facility concealed its true level of borrowing from financial creditors. They argue the structure meant Carillion had a financial liability to the banks that should have been presented in the annual account as "borrowing". Instead Carillion chose to present them as liabilities to "other creditors". Moody’s claims that as much as £498m was misclassified as a result.
By doing this, Carillion was able to keep cash owed to suppliers on its books. By classifying the debt as cash “owed to creditors” on its balance sheet rather than borrowings, it did not negatively affect its debt-to-equity ratio and could continue to pay dividends, Moody’s and Standard & Poor’s said.
Santander finally withdrew the early payment facility in December 2017. Carillion collapsed in January with just £29m in reserve and owing around £5bn in debt.
Frank Field MP, chair of the Work and Pensions 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."