Subcontractors left stranded by Carillion's complex payments system

More details are emerging about the way bust contractor Carillion managed payments to its supply chain with banks that were supposed to be underwriting invoices now refusing to honour pledges to suppliers.

Building has discovered banks are not paying suppliers’ invoices even when they were certified and approved by Carillion prior to its collapse.

Under the terms of Carillion’s supply chain finance system, it is understood while banks agreed to underwrite payments in this way, they were not legally liable to pay if Carillion went under. “The banks won’t get [invoices] honoured from the bust business either,” one source said.

UK banks last week said they will support Carillion suppliers with emergency measures such as overdraft extensions and payment holidays following pressure from the government to do so.

But North London firm K&M Decorating, which is owed £230,000 for work carried out on the first phase of housing at the Battersea Power Station development, which completed just before Christmas, said that Lloyds, the bank that financed the prompt payment of his bill, was refusing to honour the invoice – despite it being signed off and approved by Carillion prior to its fall.

The £8m turnover firm’s managing director Kevin McLouglin, who yesterday praised clients for sticking by subcontractors in the crisis, said: “We thought this finance scheme was a good way of getting money, it was safe, it was ring-fenced – at least that’s what we thought. But the bank says they’re not accepting the invoice.”

Lloyds Bank declined to comment on the specifics of K&M’s situation.

RBS confirmed that some suppliers could expect not to be paid following Carillion’s liquidation. A spokesperson said: “We honoured all payments until the point of liquidation filing early on Monday morning.

“The fact that a supplier may have an invoice approved by Carillion doesn’t guarantee payment in these circumstances. If the supplier didn’t load it into the system before the system closed on Friday 12 January then it would not have been capable of being loaded until Monday morning which would have been after the point of liquidation.”

Santander said all invoices sent to it before Carillion went bust “have been funded by Santander and paid”. A spokesperson said firms that had been expected to be paid by Santander’s supply chain finance scheme for Carillion should get in touch with the bank promising to investigate.

Rudi Klein, chief executive of trade body the Specialist Engineering Contractors’ Group (SEC), admitted the issue was a growing concern amongst his members: “We’ve heard this quite a bit from our members. People thought they were protected because they signed an agreement with the bank, but with one or two exceptions, the banks are saying no.”

Klein (pictured) said that scores of his members had also reported having retentions withheld and of “rebates” to Carillion being demanded for work already done.

And he added Carillion had previously tried to avoid using a project bank account on a Crossrail scheme at Paddington as set out in the contract. It was eventually discovered Carillion had set up its own bank account with the name ‘Project Bank Account’ – but which wasn’t independent of the contractors and didn’t allow suppliers to access their money. “Carillion in the end was forced to set one up,” said Klein.

A spokesman for Crossrail said: “Project Bank Accounts have been successfully used on all Crossrail tier 1 contracts. Crossrail set up each of the accounts for the payment of contractors and sub-contractors on Crossrail.”

Suzannah Nichol, chief executive of industry group Build UK, said in future government needs to be much harder on firms that draw up payment plans out of sync with its own.

She said government rules designed to ensure 30-day payment to suppliers, introduced in February 2015, have been ignored. She added: “If on every new government project it is clearly indicated that these are the rules, the requirements for government work, then everyone knows the rules of play. Carillion publicly had 120-payment terms, yet that never seemed to be questioned by government. It needs to be very clear what happens if 30-day payment isn’t met.”

Klein wants 30-day payment policed by a “yellow card” and “red card” system, where contractors in breach are first warned and ultimately excluded from government work for two years if they don’t reform.

He also wants the government to support the Aldous Bill, currently before Parliament, which aims to ensure the ring-fencing of retentions in a similar fashion as PBAs protect payments overall.

In a House of Commons debate on Carillion’s collapse last Monday, Peter Aldous, the Tory MP behind the Bill, said: “In preparing for that Bill, it very quickly became clear that Carillion was one of the worst offenders.” And one of the bill’s sponsor MPs, the SNP’s Alan Brown, added: “Hundreds of subcontractors risk losing money as a result of cash retentions on the part of Carillion. The government could have legislated previously to end that practice.”

The first reading of the Aldous Bill was held four days before Carillion’s collapse. Its second reading is due at the end of April.