CARILLION FALL-OUT:
A Case-Study
What happened after the collapse? In this article, we look out the legal fall-out and speculate on the insurance coverage position.
Numerous investigations and proceedings ensued involving Carillion and its directors. I have no knowledge of the D&O insurance position and therefore comments about potential coverage are no more than educated guesswork on my part!
​
1. Parliamentary Inquiry
The company had been a household name, holding many government contracts. Straight after the collapse a joint parliamentary committee of the Work and Pensions Committee and the Business, Energy and Industrial Committee of the UK Parliament was formed to investigate the circumstances of the collapse before which former board members appeared.
​
Its report in May 2018 couldn’t have been much more damning:
Carillion’s rise and spectacular fall was a story of recklessness, hubris, and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long.
​
Policy Check - The directors may have looked for coverage of their legal fees in preparing for the parliamentary hearings. Cover would have depended on the definitions of Official Body and Investigation being satisfied. Today parliamentary hearings would typically be covered.
​
2. Disqualifications
​
The Insolvency Service succeeded in June and October 2023 in disqualifying (by undertakings) former Carillion chief exec Richard Howson and ex-Carillion finance directors Zafar Khan and Richard Adam from boardrooms for between eight and twelve and a half years. These are long disqualification periods.
​
In an unprecedented move, the Insolvency Service also went after the non-executive directors. However, in October 2023 the disqualification claim was dropped at the door of the court. If the Insolvency Service had succeeded, it would have reshaped the role of non-execs in the UK. The Insolvency Service’s case was said, in terms, to be that Carillion’s NEDs had breached what amounted to a new duty on directors, namely, a “strict duty to know the true financial position of the company”. The defence team let it be known that it would have submitted that such a duty was inconsistent with directors’ duties under UK company law and in particular s 174 of the Companies Act 2006 (a director must exercise reasonable care, skill and diligence). It was said that the proceedings against the NEDs were dropped because the cost and time of arguing what was a highly novel approach would have been prohibitive for the public purse to justify.
​
Policy Check – Disqualification is a Claim for a Wrongful Act and so the directors would have been confident of coverage for their reasonable Defence Costs, subject to the possible application of the conduct exclusion and/or Insurance Act 2015 remedies for the insurers (see below).
​
3. FRC Investigation
After an investigation and enforcement proceedings by the Financial Reporting Council, KPMG was hit with a record £21m fine in 2023, following multiple serious breaches in the audit of Carillion.
Policy Check - KPMG’s E&O insurance would have been through a captive, reinsured in the commercial insurance markets. Civil fines are generally covered under these policies unless against public policy. Given the findings of egregious conduct on the part of KPMG partners and audit staff, including incompetence and deliberate wrongdoing, it seems unlikely the fine would have been covered.
​
4. FCA Sanctions
In July 2022 the FCA published provisional decision notices against Carillion plc and the executive directors. Mr Howson, Mr Khan and Mr Adam were fined, respectively, £397,800, £154,400, and £318,000. The FCA found that many market announcements in the 2016 and 2017 period were “misleading and did not accurately or fully disclose” the true financial performance of Carillion. The individuals had been knowingly concerned in the breach by Carillion of the UK listing rules and the Market Abuse Regulation.
​
On its website that same day the FCA stated:
The FCA … considers that Mr Howson, Mr Adam and Mr Khan acted recklessly and were knowingly concerned in Carillion’s contraventions. In the FCA’s view, Mr Howson, Mr Adam and Mr Khan were each aware of the deteriorating expected financial performance within Carillion’s UK construction business and the increasing financial risks associated with it. They failed to ensure that those Carillion announcements for which they were responsible accurately and fully reflected these matters.
​
Mark Steward, Executive Director of Enforcement and Market Oversight, said:
​
'Carillion failed to take reasonable steps to establish and maintain adequate procedures, systems, and controls to enable it to comply with its obligations under the Listing Rules. As a result, its true financial position remained hidden over many months and the effects of its collapse were aggravated, causing substantial harm to shareholders and creditors. This is market abuse, and as damaging to market integrity as insider dealing and manipulation, though not often described in this way. It should be.'
​
These are extremely damning findings of deliberate misconduct. The former directors have appealed the decision notices to the FCA Upper Tribunal. The outcome of the appeal will be posted on the FCA website. In the meantime, the penalties will not be enforced.
Policy Check – Carillion would not have been covered in respect of its co-operating with the FCA’s investigation as this would not have counted as a Securities Claim. However, the directors could have been confident of coverage for their Investigation Costs in the early days when there might have been no allegations of wrongdoing. As soon as the FCA made allegations this would have been a Claim for a Wrongful Act, so also covered. Whilst the Defence Costs, including the costs of appealing to the Upper Tribunal should be covered, it must be very doubtful whether the fines will be with the final outcome yet to be decided. If the egregious findings of the FCA are upheld the directors will have to fund the fines themselves. Some would say this is the least they should do given how their conduct directly led to the collapse.
​
5. Criminal and/or Civil Proceedings?
Given the extremely damning findings so far, it is striking that as yet it appears there have been no criminal proceedings, and no civil proceedings for breach of duty by the Official Receiver.Without inside knowledge we can only speculate as to the reasons, but it is possible the outcome of the FCA Upper Tribunal appeal is awaited before final decisions are made about further proceedings.
Also, in respect of civil proceedings, it may be that the amount or availability of Carillion’s D&O insurance may be in doubt given (1) the considerable legal activity so far (with the racking up of Defence Costs and Investigation Costs ) and (2) the potential for triggering the Conduct Exclusion in respect of certain individuals.
Policy Check – Would any future criminal or civil proceedings be covered? They would be Claims for Wrongful Acts so in principle yes. However, as stated above, the Upper Tribunal’s findings will be scrutinised carefully by those advising the D&O insurers to assess whether there has been a final adjudication of deliberate misconduct or fraud, entitling the insurers to assert the Conduct Exclusion in respect of any proceedings based on the same facts.
​
Most D&O policies waive all Insurance Act 2015 remedies for a breach of the duty of fair presentation, so long as not deliberate. In this case, there might be grounds for considering that there had been a deliberate breach of the duty by certain individuals entitling the insurers to avoid the policy against them (only).