U.K. Plans Law to Prevent Repeat of the Carillion Crisis

(Bloomberg) -- The U.K. is planning legislation to prevent a repeat of the contagion that followed Carillion Plc’s collapse.

When the construction giant failed in January, it left its 30,000 suppliers some 2 billion pounds ($2.6 billion) out of pocket after it took up to four months to pay its bills. The shockwaves reverberated through the U.K. economy, damaging confidence already battered by the Brexit process.

Now, Conservative lawmaker Peter Aldous is seeking legislation that would ban the “retention” of payments, which he says costs small- and medium-sized companies an average of 31,901 pounds a year.

Business Minister Richard Harrington will hold a meeting Thursday to discuss the proposals with Aldous and industry officials. Harrington said in an interview that while he has reservations about the backbench member of Parliament’s proposed law, his intention is to legislate.

“I will have to,” Harrington said. “A voluntary code only works for people who agree with it. I’m not going to faff around. We’ve got to decide in the next few weeks which way to jump.”

Any financial restrictions will be eyed with suspicion by Britain’s large contractors, which are already under pressure because of a slowdown in London’s housing market. The effects of Carillion’s collapse reached further than just the construction industry, though. Official figures put the cost to the taxpayer at a minimum of 148 million pounds, with a spike in building company insolvencies and roads, schools and hospitals left incomplete.

Homebuilders’ shares were mixed on Wednesday, with Barratt Developments Plc falling as much as 1.2 percent and Berkeley Group Holdings Plc rising 1.3 percent. That compares with a 0.7 percent gain in the FTSE 100 Index as of 11 a.m. in London.

Carillion’s ‘Contempt’

Prime Minister Theresa May is under pressure to tighten rules so that suppliers and contractors of big businesses are never treated with “contempt” again. That was the word used by the cross-party Public Accounts Committee about Carillion. The MPs delivered a damning verdict of the company’s accounting regime, finding that suppliers could be paid within 45 days, but had to pay for the privilege.

The Business Department has already published proposals to end late payments to small businesses by larger ones across the economy as a whole. But Aldous’s bill -- and Harrington’s meeting -- focus on compulsory measures, specifically in the construction industry.

Aldous’s draft law seeks to change the Construction Act to allow a government-controlled ring-fence around “retained” payments that are held back until a job is deemed complete, the lawmaker said in an interview. These usually amount to 5 percent to 10 percent of the contract. Ostensibly, the money is held as security in case a firm fails to return to rectify defects. In practice, though, they’re often withheld to bolster the working capital of the contractor.

Lawmakers’ Support

The backbencher said he has the support of 250 lawmakers from all parties and more than 80 trade bodies representing 575,000 businesses and sole traders.

Yet Harrington pushed back against Aldous’s bill, saying that while it’s a “good idea,” it’s “not sophisticated enough to deal with a very sophisticated problem.” The minister added that he’s worried about “unintended consequences.”

Instead, he said he’s seeking the views of industry; hence the round-table meeting this week. After that, he said he’ll bring forward his own government bill to tackle the problem.

Harrington says he’s concerned Aldous’s proposal would be expensive for industry, with contractors having no option but to go to court when there are disputes. He also pointed to the difficulty in finding a third party to act as deposit holder and administrator of any ring-fenced fund.

To contact the reporters on this story: Alex Morales in London at amorales2@bloomberg.net;Kitty Donaldson in London at kdonaldson1@bloomberg.net

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Paul Armstrong, Stuart Biggs

©2018 Bloomberg L.P.