Zafar Khan, the former finance director of collapsed mega-contractor Carillion, has been banned from being a company director for 11 years. It is the longest ban imposed on an executive of a listed company by the Insolvency Service (IS) in 60 years, raising the prospect of lengthy bans for seven other former directors being pursued in relation to the collapse.
Khan, 54, is a former Ernst & Young accountant who joined Carillion’s senior finance team in 2011. He was promoted to chief financial officer in August 2016, replacing the long-serving Richard Adam, though he only remained in post for nine months as the company’s financial troubles prompted a boardroom clear-out.
The government said that Khan’s disqualification was for several reasons, including causing the company to rely on “false and misleading information” that led to a material misstatement of profits in various projects to the tune of at least £209 million. He also sanctioned a £54 million dividend payment that couldn’t be justified because it was based on financial statements that did not give a fair view of the company’s position.
Khan has yet to respond to the announcement. The fact that only his disqualification has been announced suggests that he may have reached an agreement with the IS, perhaps in exchange for a lighter punishment. The remaining directors, including former chief executives Richard Howson and Keith Cochrane, as well as Richard Adam, are due at the high court later this year to defend the IS’s disqualification actions against them.
Khan, Howson and Adam have also been fined a total of almost £1 million by the Financial Conduct Authority for issuing misleading statements to investors about Carillion’s finances. They are reportedly appealing – again, it will be interesting to see whether this still includes Khan.
The scale of the wreckage
Carillion was created in 1999 after being spun off from construction group Tarmac. It mainly built and operated government buildings and infrastructure, and appeared to be in good health for much of its corporate life.
It was hard to see how the company could suffer from liquidity issues, particularly when it reported a record annual dividend of £79 million as recently as 2017.
However, Carillion’s fall from grace was swift and dramatic. On January 15 2018 it was placed into compulsory liquidation by the high court, the biggest of its kind in UK legal history.
As well as the loss of jobs, this had huge ramifications for Carillion’s many ongoing building projects, including schools, hospitals and roads – not to mention a facilities management business providing, amongst other things, school meals to children.
The government’s Official Receiver was put in charge of the liquidation, but appointed PricewaterhouseCoopers (PwC) to help oversee the process. This has involved things like completing schools and motorways, transferring hospital jobs and numerous contracts. PwC has earned more than £50 million in fees as a result.
Meanwhile, the 27,000 members of Carillion’s defined benefit pension scheme have seen their pensions reduced, and roughly 30,000 suppliers are likely to have lost most of the billions of pounds owed to them by the company.
The collapse initially triggered investigations by the National Audit Office and by several parliamentary committees. The parliamentary findings did not mince their words, finding that the directors “misrepresented the reality of the business”.
The report described the company’s collapse as, “a story of recklessness, hubris and greed … its business model was a relentless dash for cash”.
The state of play
There have been previous high-profile actions against directors. The directors of the failed MG Rover group were disqualified for between three and six years in 2011, while the IS brought an unsuccessful case against the trustee directors of the Kids Company charity in 2021.
The difference with Carillion is that the directors face longer bans, and now the former finance director of all people has accepted the punishment instead of waiting for the court hearings. It may indicate that he agrees that the evidence is sufficient to show that he behaved in an unfit manner as a director.
It looks as though the IS has stuck to its guns over Carillion and is potentially heading for a significant success in its efforts to ensure that directors of listed companies do not see themselves as immune from the consequences of poor management decisions.
It hopefully sends a signal that the government is serious about punishing corporate wrongdoing. The big question now is what happens with the rest of the directors.