Carillion pretended ‘debt’ was ‘credit’. Here’s why that matters

The company classed their suppliers as creditors, which did a great job of hiding just how much trouble they were really in.

Remember the biggest bankruptcy in the history of the UK's construction sector... Carillion? A group of MPs released some more details on how that happened.

What it means: Okay, this is all very technical. Here's the crux of it: Carillion is signed up to something called the government 'prompt payment code', which means you're supposed to pay people on time. Carillion got round this in two ways: one, by doubling its payment period to 120 days after it signed the code (nice move guys), and two, by using something called an 'early payment facility' (EPF) to pay some of its suppliers in advance in exchange for a discount on their bill.

That's the complicated bit. The reason using this 'EPF' works in Carillion's favour is because they could classify their suppliers as 'creditors' – after all, they were providing them with funds ahead of time – rather than 'holders of debt' (which they actually were.) The reason why that's helpful for Carillion is that it makes their 'debt-to-equity ratio', i.e. the calcuation of how much they owe vs how much they have, look a lot better than it actually is.

In fact, they owed £498m to suppliers at the time of collapse. And also £2.6bn in pensions, and £4-5bn in overall debt. Which means this probably won't be the last story we're de-jargoning on the details of how on earth things got this bad.

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