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Directors are not immune from consequences of poor management decisions

17th July 2023


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On July 3, the former finance director of collapsed outsourcing company Carillion was banned from serving as a company director for 11 years.

The sanction came over his role in the company after it handed out dividends of more than £50 million while misstating its financial position by over £200 million.

Not only is it the longest ban imposed on an executive of a listed company by the Insolvency Service, an arm of the Department for Business and Trade, in 60 years but also a clear warning that the agency is keen to pursue its efforts to ensure that directors of listed companies do not view themselves as immune from the consequences of poor management decisions.

So why was former Carillion chief financial officer Zafar Khan singled out and what does it mean for other company directors?

Carillion’s collapse in 2018 was one of the most dramatic and high profile failures in British corporate history. It cost 3,000 jobs and plunged 450 public sector projects, including those for hospitals, schools and prisons, into chaos.

The Insolvency Service, which was responsible for managing Carillion’s collapse, has since been pursuing action against former directors including Khan, a former Ernst & Young accountant who joined the company’s senior finance team in 2011 and was promoted to chief financial officer in August 2016 to replace the long-serving Richard Adam.

However, he only remained in post for nine months as the company’s financial troubles sparked a boardroom clear-out.

More than five years after the company’s collapse, the Insolvency Service confirmed that Khan had been disqualified from acting as a director for 11 years, citing his conduct as Carillion misled the markets about its financial position.

Agency slams financial reporting

The agency said that Khan had caused Carillion to rely on “false and misleading financial information” during the preparation of its financial statements for 2016, which meant that the accounts “did not give a true and fair view” of the company’s financial health.

This included misstating the value of key construction contracts such as Battersea Power Station, Royal Liverpool University Hospital and the Midlands Metropolitan Hospital.

Carillion had declared a pre-tax profit of £146.7 million when in reality it had lost £61.7 million, a cumulative misstatement of £208.5 million.

Carillion subsequently made a shareholder dividend payment of £54.5 million in June 2017, which could not have been justified if the company’s financial statements had been accurate.

This was “not in the interests of [Carillion], its members or its creditors and was not one that [Carillion] could reasonably afford to make in view of its true financial performance”, the Insolvency Service said.

Sudden fall from grace for Carillion

Carillion was established in 1999 after being spun out of construction giant Tarmac. It predominantly specialised in building and operating government buildings and infrastructure and for much of its near 20-year tenure appeared to be in good financial and governance health.

However, Carillion’s fall from grace was both quick and dramatic. On January 15 2018, in what was the largest such action of its kind in UK legal history, it was placed into compulsory liquidation by the High Court, triggering investigations by the National Audit Office and by parliamentary committees.

Those parliamentary findings said that the directors had “misrepresented the reality of the business” and described the company’s fate as “a story of recklessness, hubris and greed…its business model was a relentless dash for cash”.

There had been previous high-profile actions against directors, including those of the MG Rover Group who were disqualified for between three and six years in 2011, while in 2021 the Insolvency Service also brought an ultimately unsuccessful case against the trustee directors of the controversial Kids Company charity.

Carillion directors face long bans

However, this time round the remaining directors of Carillion face the prospect of longer bans, especially now that the former finance director has accepted his punishment instead of awaiting the court hearings.

This may well indicate that he agrees that there is enough evidence to show that he behaved in an unfit manner as a director.

The Insolvency Service continues to pursue legal action against the remaining seven directors, with a civil trial expected to begin week commencing October 16.

The move sends a clear signal that the government is serious about punishing corporate wrongdoing in a court case that serves as fair warning to all company directors about how they conduct their business and the value of transparency.