Carillion’s former finance director sold nearly £800,000 of shares after retiring last year shortly before the firm’s collapse, according to evidence published by MPs.
Richard Adam, who had managed Carillion’s finances for a decade, offloaded £534,000 of shares on 1 March last year, three months after stepping down from the company, before selling a further £242,000 of stock handed to him in May as part of a bonus scheme.
Soon after the second sale, auditor KPMG performed a review of the company’s key contracts that eventually forced it to slash their value by £845m and issue a profit warning, beginning a rapid descent into liquidation that rendered shares in the firm worthless.
Details of the share sales emerged days after evidence submitted in a parliamentary inquiry revealed that the chair of the Carillion’s pension trustees believed Adam considered payments into its ailing pension scheme a “waste of money”.
Work and pensions committee chair, Frank Field, who is leading the inquiry along with the business committee chair, Rachel Reeves, said Adam’s share sales were indicative of his view of the company’s prospects.
“Mr Adam presided over Carillion’s finances for a decade,” said Field. “He, more than anyone else, ought to know the merits of Carillion shares as a long-term investment in the light of his lengthy and lucrative tenure. His assessment? Dumping the last of his shares at the first possible moment because he is – with his own money at least – ‘risk averse’. What conclusions are we to draw from that?”
Carillion relied on major contracts, some of which proved much less lucrative than it thought.
Earlier this year it slashed the value of them by £845m, of which £375m related to major public-private partnerships (PPPs) such as Royal Liverpool University hospital.
As its contracts underperformed, its debts soared to £900m.
The company needed a £300m cash injection, but the banks that lent it money refused to put more in.
The government also refused to step in and bail the firm out.
That left the company unable to continue trading and forced it to go into liquidation.
In a letter to MPs conducting the inquiry, Adam said: “I sold the shares on these dates because they were the days that I was invited to do so by the company.”
The committee also published evidence from Adam’s successor, Zafar Khan, who has claimed in evidence to MPs that he was sacked in September 2017 after he “spooked” the rest of the board with a presentation warning that the company’s finances had worsened.
In a letter to the inquiry, Khan said he could not understand the board’s reaction as it “should have been apparent to the board by then that the company was struggling to improve both its net debt and profit positions”.
Field said: “The other directors appear keen to set up the hapless Zafar Khan as the fall guy for the collapse. It is not lost on us, however, that he inherited Carillion’s mountain of debt.
Khan told MPs that while the deterioration in key contracts had been an important element in Carillion’s demise, the “principal contributing factor” was the level of debt that had built up before his brief tenure as finance director.
He said that by the time he became a director on 1 January 2017, the board had “over a number of years, allowed Carillon’s debt to get, in my view, far too high, and had not addressed the reduction of debt as a priority”.
Carillion’s average net debt on a monthly basis increased from £41.8m in 2010 to £586.5m by 2016, Khan said.
Khan and Adam were among former directors branded “delusional” by MPs after they gave evidence about the circumstances leading up to Carillion’s failure.
How did the company get into trouble?
Companies like Carillion have to keep projects on budget and keep winning new contracts. When one of those fail, problems loom.
Carilllion shocked the market in July with a massive profit warning, writing down its value by £845m, all related to key contracts. Two more profit warnings followed and the company admitted it needed cash quickly not to breach bank loan terms
At the start of 2017 shares were changing hands at 240p. This weekend they were 14p.
With debts of £900m it has been trying to arrange a £300m cash injection. However, lenders will not provide the cash without government guarantees.
What happens to the pension scheme?
Carillion has a £580m pension scheme deficit. If it collapses the government-backed Pension Protection Fund would take over the scheme, although the liability would swell, to £800m. While the Fund provides a safety net for millions of workers, there are limits on what it can pay out.
Who runs Carillion?
Chief executive Richard Howson quit after the July profit warning, with the new boss yet to start. It has been run by engineering industry veteran Keith Cochrane and the group’s chairman Philip Green, the former boss of United Utilities. Sally Morgan, who was director of government relations for Prime Minister Tony Blair, is also a director.
