Was Carillion a zombie company?

A top corporate recovery specialist has likened collapsed facilities management and construction services company Carillion to a “zombie company”.

Charles MacMillan, partner and head corporate recovery at accountant and business adviser Beever and Struthers in Manchester said that the issue of such companies had arisen since the banking crisis of 2008.

“Unlike previous recessions huge numbers of these companies survived and continue to thwart the kind of economic recovery coveted by all,” he told TheBusinessDesk.

“Having lived through more recessions than most I became accustomed to the traditional recovery from recession where assets and intellectual property were recycled, largely via insolvency procedures to businesses which could realistically exploit these opportunities and kick-start the recovery.

“This all happened through natural economic forces abetted by insolvency legislation drafted for that very purpose.

“This did not happen in the years following 2008. There are many reasons cited for this. The upcoming election, the reticence of banks to incur more bad publicity or the reluctance to suffer the pain of surgery have all been quoted as contributing factors.”

And he went on: “There certainly appears to have been a tendency to prefer short-term alleviation than to deal with an elongated problem. Whatever the reason, the nation’s fear of old fashioned remedies allowed the zombies to survive.”

MaMillan said that thousands of companies have been surviving for many years by taking on business at any price to generate cash to survive another day.

“The effect on competitors in their sector is far reaching and ultimately affects their ability to grow and pull the economy onwards and upwards,” he said.

“Equally the extended credit demanded and taken by these businesses is highly detrimental to the cash flow of their suppliers and that of the economy in general. It could be argued that as the effect of each such company is small scale it is not material. But maybe the demise of Carillion will challenge that view.

“Surely Carillion will be an example to all that the UK economy cannot thrive while zombies continue to buy work at unsustainable margins and prevent their stronger and sustainable competitors from thriving.”

He pointed out that Carillion had been accused of contracting at unrealistic prices using new contract receipts to fund old contract liabilities.

“Matthew Vincent of the FT likens their practice to a Ponzi scheme and he could not be more correct; there has to be an Armageddon,” said MacMillan.

But his comments were not all gloom and doom. He added: “The immediate effect of the Carillion downfall will be far reaching but in time, its work will be recycled just like it was in the old days.

“The Government will fund other organisations to carry out its contracts on a properly costed and funded basis and it will be all but forgotten, except for those suppliers which become consequential casualties.

“It will be a costly affair but hopefully, a lesson learned.”