Oral evidence: Carillion, HC 769
Oral evidence, 6 February 2018.
Witnesses
Zafar Khan, Keith Cochrane and Emma Mercer.
Chair
Thank you very much for coming to give evidence to our Select Committees this morning about what happened to Carillion. We have a number of questions, and we have two evidence sessions this morning, from you and then from some of your colleagues, so we will get started straightaway. Antionette Sandbach will ask the first question.
Antoinette Sandbach
Carillion’s 2016 annual report was published in March 2017, and it gave a very optimistic outlook. Just two months later, Carillion revealed that it was making an £845 million provision against contracts. Are you surprised, based on what you found when you assumed your roles on the board, or as the chief executive and the chief financial officer particularly?
Keith Cochrane
Perhaps I could start in answering that question. First of all, can I say how devastating the failure of Carillion has been for employees, for customers, for pensioners and for suppliers. I am truly sorry for the impact. It was the worst possible outcome. This was a business worth fighting for, and that is certainly what I sought to do during my time as chief executive. To your question, you are correct: I was a non-executive director for two years prior to taking over as chief executive. As we look back at the 2016 annual accounts, there were a number of references to the opportunities that the business had and the very strong pipeline. At the same time, we did highlight some of the challenging markets, particularly internationally, which the business was looking at, and we did highlight very clearly a desire, which was driven by a number of board discussions, to bring down average net debt as a critical factor in the coming year, in 2017.
Antoinette Sandbach
You are claiming, as a whole, that the report filed in March 2017 flagged sufficient concerns. My question was around the £845 million provision thereafter. When had KPMG been asked to do the review of critical contracts?
Keith Cochrane
The critical contracts review was kicked off around the end of May, and was driven largely by a deterioration in cash flows on a number of major contracts, which occurred particularly as we went through Q2, in the second quarter of this year. As I said, we were aware of a number of challenging contracts. We were certainly not aware of the quantum that subsequently required to be provisioned against, but, if I may, it is also helpful to understand the context of that £845 million provision.
Antoinette Sandbach
What would you say to the suggestion that that review had actually begun earlier? We have had evidence that that had begun by around December 2016?
Keith Cochrane
I am not aware of that review. All contracts are looked at as part of the annual audit process. I was a non‑executive at that time, so others may be able to give their own perspectives, but the board commissioned that review, essentially, at the end of May, recognising some of the concerns that the board had at that juncture over contract performance, over the direction of travel of the cash flow, and indeed around net debt.
Antoinette Sandbach
Mr Khan, what role did you have in the run‑up to the preparation of the accounts, prior to taking up your role as CFO?
Zafar Khan
Prior to taking up the role of the CFO, I was the group financial controller, and in that role I would have supported the then group finance director in terms of the ongoing financial reporting within the group.
Antoinette Sandbach
Were you aware of the concerns flagged by the FRC in relation to the accounts in 2015, and the auditing of the accounts then?
Zafar Khan
Yes, I was, and we dealt with all of the points that the FRC had raised on the 2015 accounts, as part of our preparation, and they were substantively addressed in the 2016 annual report.
Antoinette Sandbach
Did any of the matters raised by the FRC raise questions with you that indicated that you might need to look a little deeper into some of the issues in the company?
Zafar Khan
No, there were not. The bulk of the points arising out of the FRC review essentially related to disclosure points within the 2015 financial statements, and there were some points around further disclosure in trends, judgments and estimates applied in arriving at revenue recognition, and also minor disclosure improvements elsewhere in the annual report. All of those, as I say, were fully addressed in the 2016 annual report.
Antoinette Sandbach
Did you have any disagreements with the auditors at all, in terms of the sign‑off of the accounts that were lodged in March 2017?
Zafar Khan
No, we did not have any disagreements with the auditors. As always, the audit focused on key risks, estimates, and judgments applied, and, generally speaking, our policy always was to ensure that to the extent that there was disagreement, we addressed those disagreements prior to finalising the numbers.
Antoinette Sandbach
The report suggests that Carillion’s order books were so complex that the Government had to use an outside organisation to consolidate and understand them. Was that your experience of Carillion’s order books?
Zafar Khan
No, that is not my experience. I did not think that the order book was particularly complex.
Antoinette Sandbach
What is your view of the evidence of the Insolvency Service, which told us of an incredibly poor standard of the company’s own record‑keeping?
Zafar Khan
I have been out of the company since September, and I am not aware.
Antoinette Sandbach
Mr Khan, you worked for the company for nine years, did you not?
Zafar Khan
It was actually six years, but in the time that I was with company, I had no issues around record‑keeping within the business.
Antoinette Sandbach
So the records were in a good state, where you could instantly identify where the risks were to your cash flow, where the risks were on your debt rating, and where the risks were on your increasing debt in your pension fund.
Zafar Khan
That would be my view. If you look at the 2016 annual report, and if you look at the key risks identified within that, my view is that the setbacks and issues that we experienced in 2017 were largely related to the risks that we had set out in the 2016 annual report. What was not anticipated at the time was the number of risks that crystallised in the end, and also the quantum of the impact that we had to deal with. Some of that was around market conditions, and some of that was, again, deteriorating contract performance.
Antoinette Sandbach
Mr Cochrane, were you aware that a significant investor in Carillion had raised concerns with the Carillion chief executive and chairman in relation to weak cash generation due to working capital outflows, restructuring costs, pension contributions and capital expenditure needs as far back as 2014?
Keith Cochrane
No, I was not aware. Obviously, I joined the board in July 2015, but, as I said in a reply to an earlier question, the board was very focused on working capital management.
Antoinette Sandbach
When in 2015 did you join the board?
Keith Cochrane
July.
Antoinette Sandbach
There were meetings in September 2015 and December 2015 to discuss management and corporate government arrangements. Were you made aware by the CEO and the chairman of those meetings with then, at that time, one of the major investors in Carillion, holding a greater than 10% share?
Keith Cochrane
I cannot recall the specific details of those meetings. Having said that, the board was updated on investor meetings more generally, in terms of the general feedback coming out of meetings and concerns that were being expressed by shareholders.
Antoinette Sandbach
What were those concerns?
Keith Cochrane
Essentially, the concerns were around the net debt position. That was obviously a growing concern. There were concerns around the pension deficit and the treatment of the pension deficit.
Antoinette Sandbach
We are talking about 2015 here, are we?
Keith Cochrane
We are growing into 2016. From memory, these were lesser concerns in 2015, but certainly as we went through 2016, we recognised the importance of addressing these issues, and, very much as a board, tasked management with coming up with a plan as to how they would address these concerns. The appointment of a new finance director at the start of 2017 enabled us to look afresh at how we disclosed and how we articulated our position to our investors.
Antoinette Sandbach
Following on from the £845 million provision, did any major investors in Carillion argue that that disclosure should have been made earlier?
Keith Cochrane
I think I only met two or three investors post 10 July. There was obviously a lot of concern around the provision. There was a lot of desire to understand what had given rise to it, rightly. It had crystallised over a fairly short period of time. Of course, part of that provision—and this is a very important point to make—was an explicit recognition of the group seeking to exit from certain key markets, and, as it sought to exit from certain key markets and start to refocus itself on its core, that required us to take a different perspective on our ability to collect outstanding receivables in those markets. Once one has gone public, in terms of saying you are going to exit a particular market, inevitably it becomes more challenging to collect cash in those markets from particular customers when they know your leverage is somewhat more limited. That accounted for just over £400 million of the £845 million provision, essentially linked to our businesses in Canada and the Middle East.
Antoinette Sandbach
Were there indications prior to July 2017—indeed, prior to May 2017—that you may have difficulty collecting cash?
Keith Cochrane
Collecting cash was a topic that came up at every board meeting. The board was aware of specific challenges around particular contract positions.
Antoinette Sandbach
At what point?
Keith Cochrane
It was ongoing. If one were to look at the board minutes, you would see that there was ongoing discussion about some of the nature of what I would describe as more of the qualitative challenges. The board also received a quarterly financial update on the position on each of those contracts.
Antoinette Sandbach
Going how far back?
Keith Cochrane
I can only go back as far as myself joining the board, but certainly every quarter. Of course, that was then validated at the full year and the half year through the work of our external auditors, and we also were fortunate to have Deloitte undertaking our internal audit function. They were out across the business, looking at individual contract positions as well.
Antoinette Sandbach
Do you think if there had been earlier engagement with investors, to recognise problems that were present at Carillion, we may not be in the position that we are in, sitting here today?
Keith Cochrane
I do not believe that that was a critical factor in the timeline of where we have got to today. As I said, the board did acknowledge the issues. It sought to address them. Indeed, we sought to move forward with a capital-finance-raising in June 2017 to resolve these issues, but ultimately were unsuccessful in being able to achieve that.
Antoinette Sandbach
What was your state of knowledge of the overrun, or the requirement to write down millions and millions of pounds, when you tried to issue that capital or go out to the market for that capital issue in June 2017?
Keith Cochrane
One of the reasons that the capital-raising did not go ahead was the advice from our brokers about the scale of the contract provision, the investor proposition that we would be able to articulate off the back of that and the nature of our share register.
Antoinette Sandbach
So you knew in June. When in June did you know the scale of your write‑down?
Keith Cochrane
The first time I heard of the size of the number was at the end of June. The first time I saw the papers was the weekend before I was appointed. That was when I had the detail, because prior to that, it had been work in progress. Indeed, as the board minutes will show, I increased the provision through my own review that weekend, as I was appointed chief executive. I felt we needed to take further provisions, because if we were going to take a provision, it was all about materially de‑risking the position.
Antoinette Sandbach
Can I ask about materially de‑risking? I want to give a quote to you, and I would like to ask you to comment on it: “It was felt that management was not giving sufficient weight to the probability that trading may deteriorate further, or to the downside risk of this scenario, given the high level of debt. The board showed no inclination to drive the management change”. This was from a major Carillion shareholder that substantially divested itself of Carillion shares during 2015-16. Do you recognise that comment, and do you accept it?
Keith Cochrane
No. From my perspective, I do not accept it, because the board was actively engaged both in testing and challenging management’s assumptions.
Antoinette Sandbach
That is clearly not right, is it, if you look at the subsequent write‑down?
Keith Cochrane
With the benefit of hindsight, should the board have been asking further, more probing questions? Perhaps. From our perspective, against the backcloth of the management environment and the information that we received, and the testing and challenging of management, we believed that there was no basis at that time for not accepting the view that management put forward.
Frank Field
In your first weekend, you changed the advice and made the write‑down bigger. To Antoinette’s question, why was that grip not shown elsewhere in your leadership?
Keith Cochrane
From my perspective—and I can only speak from my own perspective here—I was a non‑executive director, and the role of non‑executive director is very different from the role of chief executive, as I am sure the Committee appreciate.
Frank Field
Your previous role was to challenge.
Keith Cochrane
It was to challenge, and indeed I sought to challenge in an appropriate manner against the backcloth of receiving perspectives from a number of different sources as to the control environment across the business, be that the external auditors, the internal auditors, or exposure to leadership across the business. Indeed, the two senior divisional MDs were attending every board meeting, so again they were giving us a direct perspective.
Frank Field
You failed, then, in your challenging role. How much did you get for your challenging role, please?
Keith Cochrane
£60,000 a year.
Chair
Can I just follow up, Mr Cochrane, on a couple of your answers to Antoinette Sandbach’s questions? In May 2017, KPMG were asked to look at your contracts, and that is when you say that you found that there were problems with your cash flows. Were there no problems with your cash flows before May 2017?
Keith Cochrane
There were growing problems with our cash flows through that period. There were two specific exercises undertaken. An internal reporting issue came to the board’s attention.
Chair
When was that?
Keith Cochrane
The beginning of May 2017.
Chair
What was that problem that was brought to your attention?
Keith Cochrane
Essentially, what was flagged to us was that it looked as if there had been some netting‑off between receivables and payables. Rather than the gross values being stated on our balance sheet, they had been reversed, so they would reduce the value of receivables and reduce the value of payables. It was essentially a presentational issue. Once the board became aware of it, it commissioned an independent review. It invited KPMG to look at it, because our concern at that point was to ensure that our year‑end financial statements remained appropriate, and that exercise took place over the course of May. The executive team will be able to give you more details around that.
Chair
Only two months previously, you had published your annual report, and two months later, you are saying that there were some ways in which it was presented that were not accurate or not the right way to do it.
Keith Cochrane
To be clear, the presentation was very much in the internal reporting. The reporting as stated in our annual reports was confirmed as being in compliance with accounting standards, but naturally, when one is made aware of an issue such as this, you want to follow through on it and investigate it. The end result was that it re‑confirmed our year‑end position, but on the back of that, together with the cash flow deteriorations that we saw, we believed it appropriate to essentially move from a look‑back perspective to a look‑forward perspective, and commission KPMG to do a more detailed review of the largest contracts across the business at that juncture.
Chair
Do you stand by the idea that the cash flows deteriorated between March and May, and that when you published your annual report in March 2017, at that point there were no deteriorations in the cash flow that you should have put in your annual report?
Keith Cochrane
Clearly, when one signs off an annual report, and indeed gives guidance to the market—and the guidance is both in terms of the profits that, as a business, you are going to expect to generate in 2017, and in terms of the direction of travel of net debt—the board receives an updated forecast from management. It tested and it challenged that forecast.
Chair
Before March 2017, there had been no deterioration in the cash flow. It all happened after March 2017. That is the question I am asking, Mr Cochrane.
Keith Cochrane
Let us be very clear: net debt at the end of 2016 was too high. The board tasked management with developing a plan to drive a reduction in net debt. Again, in the investor presentation, in the announcements that we put out at the beginning of March, management indicated at that juncture that we would be targeting a reduction in average net debt, albeit second‑half‑loaded. That was on the back of management presenting to the board a credible self‑help plan.
Chair
I am sorry to keep asking the same question, but it is because I do not feel that I have had an answer to it. There is a difference between debt issues and liquidity issues, and I am asking about the cash flow, because that is what you said that you were worried about in May: there had been a deterioration in the cash flows. What I am asking is whether there had been any problems with cash flow before March 2017.
Keith Cochrane
I will need to think for a second. If I recall, trending was broadly in line with the budgeted position for the first couple of months of the year, but that is just a recollection. I would need to check the papers specifically, Chair, on that question.
Chair
Okay, if you could get back to me on that. Finally, in answer to Antionette Sandbach’s questions, you said that you met with two or three investors after July 2017 to explain what was happening in the business, and how you were focusing on the core business, et cetera. What two or three investors did you speak to, and what did they do in terms of their shareholdings with Carillion in the months after those conversation?
Keith Cochrane
I spoke to Kiltearn, which was a major shareholder, and I spoke to a substantial shareholder, which I have forgotten the name of, based in Quebec, in Canada.
Chair
You spoke to Kiltearn after July 2017. What happened to their shareholdings with Carillion after your conversation?
Keith Cochrane
There was no change to their holding at that point.
Chair
What was the change in their holdings between July 2017 and the end of the year?
Keith Cochrane
If I recall, towards the end of the year, they started to sell down their position, but for the several months after the July warning, there was no change—from memory—to their shareholding. Again, I would just need to reconfirm that, but that is my recollection.
Frank Field
What did the company that you cannot remember the name of do?
Keith Cochrane
They did the same. They held on to their position.
Frank Field
You are presenting us with a picture, are you not, that somehow the public face you presented was pretty or hunky‑dory, and then within a couple of months you began to drive the company into the ground? Is that the image you meant to put over to us?
Keith Cochrane
I am trying to present a balanced image as I saw it. I have also articulated, since I became chief executive, that the business faced a number of challenges. Let us be very clear: the business got itself into this position.
Frank Field
The business did not. It does not have an identity. The directors did.
Keith Cochrane
The company: the directors, the board, the management, the collective.
Frank Field
It is like these lads say: “I did not stab that person with a knife; it was the beer”. You were in charge. You were taking money. The company had no personality on its own that could have done this.
Keith Cochrane
From my perspective as a non‑executive director during this period of time, the role of the board was to challenge on the basis of information that was provided to it from management. That is what we sought to do. Clearly, with hindsight—and I recognise that a lot has happened—it is a question I ask myself. There was a lot of challenge that I believe I provided, but should I have challenged more? Again, back to the context, the environment and the backcloth of what I saw, what I heard and what was presented to me, we sought to challenge. Clearly, the business did have issues, undoubtedly. Do I wish we had done something about it sooner? Absolutely. I recognise that, again, with the benefit of hindsight, but I can assure you that, at the time, all of the decisions I took were very much seeking to do the best thing for the business at that juncture.
Frank Field
You had a challenge, and you were not up to it. Is that not right, really?
Keith Cochrane
I would not agree with that comment. I believe I challenged appropriately as a non‑executive director on the basis of the information that was provided to me by management.
Frank Field
Then we have a crash, yes.
Chair
Mr Cochrane, you met with Kiltearn some time after you took over in July 2017. By the end of the year, their share in Carillion fell from more than 10% to less than 5%, and by the beginning of January, they had divested of Carillion stock completely. Is that correct?
Keith Cochrane
Yes, that is my broad recollection.
Chair
It would be good to know—and perhaps you could give us this in writing—which other investors you spoke to and what impact your reassurances had on them.
Rachel Maclean
Emma Mercer, you were the CFO for the four months prior to the collapse. Is that correct?
Emma Mercer
Yes.
Rachel Maclean
When you came into the company, did you think that Carillion was pursuing an aggressive accounting approach to recognising revenue?
Emma Mercer
I have worked for Carillion for some time, but I spent four years leading to March 2017 in the Canadian business, returning to the UK in April 2017.
Rachel Maclean
How long were you in the Canadian business?
Emma Mercer
For just over three years.[1] I returned to the UK in the construction division, and spent a very short time in there before taking up the CFO role. When I returned back to the UK in April 2017, what I saw at that point was a slightly more aggressive trading of the contracts than I had previously experienced in the UK before I left.
Rachel Maclean
In another company?
Emma Mercer
No, in Carillion before I left the UK. I would not say that I necessarily disagreed with many of the individual contract positions, because all sorts of judgments have to be made, but the overall tone had become a little bit more aggressive than when I left the UK previously.
Rachel Maclean
You were the CFO. Was that down to your judgment?
Emma Mercer
No. This is when I returned to the UK in April 2017. I was part of the construction division during that time.
Rachel Maclean
Somebody else had been adopting this slightly more aggressive tone.
Emma Mercer
Yes.
Rachel Maclean
Who was that?
Emma Mercer
From a divisional perspective, my predecessor in the construction business, and then as a management team, the management team before that, so Zafar Khan as CFO, and Richard before that. During that time, we looked at a lot of contracts, and I would not disagree with the position that we traded the financial statements of 2016, but they had become more aggressive than in previous years. During 2017, in the construction business itself, I contributed to supporting the contracts review that we did during that time. By the time that I took up the post in September, the clear focus of that was that we had done the contracts review across the construction business. As part of Keith’s strategic review, we had changed the way that we were looking at some of the services contracts, and that resulted in an increased position at the end of September, in terms of an additional £200 million of provision. Our key focus, as we went through September right up until the last part of the business, was driving to get a successful restructure for this business.
Rachel Maclean
You are saying that you inherited this practice of aggressive accounting from your predecessor Zafar Khan and other predecessors, and you came in and started to look at that with a fresh approach. Is that what you are saying?
Emma Mercer
I am not saying that I disagree necessarily with the positions that they took. What I am saying is that they were more aggressive in tone than what I had seen in the UK previously.
Rachel Maclean
Can you explain how?
Emma Mercer
Then, during my tenure in the construction division, from April through to when I took up the post of CFO, we did see some really significant deteriorations across some significant contracts in that business, some of which have been cited publicly. We had some significant operational difficulties on those contracts, and as part of that, we had to generate the provisions that we did during July, and then more latterly increased those in September.
Rachel Maclean
I understand that, but obviously accounting does require professional judgment and the use of assumptions.
Emma Mercer
It does, yes.
Rachel Maclean
That ultimately does come down to subjectivity to some degree, and that is led by the person ultimately responsible for that, because they can say that they did not agree with that assumption or not. Can you explain to the people who are not accountants, in your view, what exactly the difference was between the aggressive tone that you saw and what you saw before?
Emma Mercer
Having a number of construction projects means that you have to exercise judgment over all sorts of things: when the contract is going to get finished; how much we are going to receive; if we are claiming against anybody; what entitlement we may have. What I saw when I returned to the UK is that both the number of contracts we were taking judgment on and the size of those judgments had increased. What that meant is that when we saw the deterioration in the first part of 2017 and into the second—when we saw those huge deteriorations on those contracts—because we were already at a more aggressive position, it was very difficult to withstand those deteriorations on those projects.
Rachel Maclean
Zafar Khan, do you agree that this was the start of a slippery slope under your tenure, where legitimate earnings management could have descended into earnings manipulation?
Zafar Khan
I do not believe that there were any instances of earnings manipulation. I signed off the 2016 annual report. The numbers within that were audited by KPMG, and in terms of how we have managed the business, we have a whole range of contracts. You have contracts in Canada; you have contracts in the Middle East; you have contracts in the UK. You have finance directors, managing directors and commercial directors in each of those businesses, who take into account all of the available information at that point in time, and come to a judgment. As a central management team, you would not necessarily be looking to second‑guess a lot of the judgments that are taken on contracts. I do not agree that there was a concerted effort to adopt aggressive accounting as such. To my mind, the numbers that were reported in March 2016 were appropriate, based on the information that was available at that point in time.
Rachel Maclean
Your judgment is different from your colleague Emma Mercer.
Zafar Khan
Emma has a long history with the group. I had not spent time in the UK construction division previously and then spent more time in it to make a comment on whether it was better or worse than before. I did not have that sort of perspective, but, to my mind, the group had appropriate structures, processes, and policies in place to make sure. If you look at the business as a whole, it does depend on every single contract, on judgments and estimates. Whether it is a services contract or a construction contract, you are dependent on the team on that contract to come to a view on what the position is at a particular point in time.
Rachel Maclean
Mr Khan, if you had come to a different view—shall we call it a more conservative view?—maybe something more like Emma Mercer, what would have been the impact on the investors, in terms of the earnings that you could show?
Zafar Khan
I am not sure what different view you would have taken in March 2016 if you had had somebody else in that position. We are second‑guessing what an alternative approach might have been.
Rachel Maclean
Are you saying that it would not have been possible to take a more prudent or conservative view at that time? It is judgment.
Zafar Khan
It is judgment. At the end of the day, it is judgment, and you are dependent on the professionals and experts and people running those business units to come to a conclusion on those. There was no effort in the time that I was in the business, in any part of it, to push people to come up with a more aggressive position.
Rachel Maclean
Did you inform the Government of the company’s weaknesses at this point? At what point did you inform the Government of the company’s weaknesses?
Zafar Khan
Which weaknesses?
Rachel Maclean
The weaknesses that we have seen: the profit warnings and the write‑downs.
Zafar Khan
Of course, we had regular dialogue with the Cabinet Office through our crown rep, essentially, and as part of that, we would cover a whole range of issues. The last session I was sat in covered governance, audit arrangements, cash flow performance and the pension deficit; it was a very broad agenda in terms of the topics that were of interest to our crown rep. Again, I think we were always open in terms of where the business was, where it was headed, and anything of interest to the Government. Clearly, the Government were a key customer for the business, and we were keen to make sure that we had an open and honest approach, and that the Government understood what our key issues and concerns were. Just going back, in terms of Keith’s comments on the cash flow deterioration, as we sit here, it does look odd that things can deteriorate so dramatically over a short period of time. We need to bear in mind that, by and large, Carillion had some quite large contracts that we were working with, and cash flows on those can change over a short period of time. I picked up the role of the finance director, effective 1 January 2017. We had a budget, and the process that we adopted to arrive at that budget was no different to the one we had adopted in the past. It was no more challenging than we had come to expect.
Frank Field
Did you not think that you should have protections in place so that we did not have this terrible collapse? You are telling us this as though it came down Mount Sinai: “It hit us all and we are absolutely surprised. We walked away from the wreckage”. It is your job, surely, to have in place procedures that prevent this outcome.
Zafar Khan
In terms of the controls, processes and risk management disciplines, the business has operated with everything you would expect to see within it, essentially. With the cash flow issues that we experienced in 2017, there were a number of factors. We were forecasting some reasonably material receipts from the Middle East that continued to be promised on a monthly basis but never arrived. Another factor that I do not think has been given enough attention is that, going into 2017, we had a number of large‑ish contracts in our UK construction business that were coming towards completion. For a contractor, it is very important in terms of cash flow that you replace the volumes that are coming off. If you see a contraction in volumes, that is bad news for cash flow. In the UK business, we had a number of contracts that were essentially coming towards completion, and our working assumption was that we would replace those volumes. We had a good pipeline of opportunities to do that, with contracts where we had signed up as preferred bidders.
Heidi Allen
Could I just interject on that? You need volume if your margins are so tight that you are not going to earn money. If you have reasonable margins and have costed them properly, then you do not need to be so desperate and hungry for new business. That is what I would suggest. Did you look at the margins of these companies?
Zafar Khan
We did, absolutely. I do not think we are talking about volumes for the sake of volumes.
Heidi Allen
But it was volumes, though, was it not? It seems to me, at least, that Carillion was taking on excessive numbers of contracts purely as a means to keep the cash flow going. These were not profitable pieces of business; they were just there to milk a cash cow.
Zafar Khan
I cannot comment.
Heidi Allen
You were the financial controller.
Zafar Khan
I am not aware of any contracts having been taken on purely for the volume historically. That is the position.
Frank Field
But you were aware, were you not, that this was a house of cards that could fall down at any moment? That is really Heidi’s point. There was no real fall‑back position. If you just failed somehow to get these contracts, the whole thing came down.
Zafar Khan
We had challenges in 2017 with the number of things coming together at the same time, and not replacing those volumes. Coming into the year, as I say, we had some contracts that we were preferred bidders for, but they continued to drift out to the right because of the Brexit‑related uncertainty. That was amplified by the general election announcement, and that had an impact on our ability to replace the contracts that were coming off.
Chair
Zafar Khan, Emma Mercer said that whilst she was in Canada, accountancy practices became more aggressive. Carillion declared revenue and profit based on forecasts—based, perhaps, on optimistic forecasts. Whilst Emma Mercer was in Canada, who made those changes to the accountancy practices, to make them more aggressive?
Zafar Khan
As I said, I do not believe that there were any changes made to adopt a different stance to those forecasts.
Chair
So Emma Mercer is wrong to say that it became more aggressive in her absence, is she, Zafar Khan?
Zafar Khan
As I said, Emma was commenting on her experience of the UK construction business prior to her going to Canada, versus coming back and going into that business. I am not aware of any change in policy.
Frank Field
You said to Rachel that it was not excessively aggressive, so you accept that your accountancy procedure was aggressive. They were your words. They are on the record: “I refute that we were excessively aggressive”, in a reply to Rachel. It was just aggressive.
Zafar Khan
I do not believe that we were aggressive. With the way the numbers are put together in our business, in terms of coming up with the forecast, you are essentially dependent on the professionals and experts making judgments on those contracts.
Antoinette Sandbach
Mr Khan, can I ask how you balanced your duties under Section 172 of the Companies Act, which requires the board to take decisions in the long term, to take into account the interest of the company’s employees, the need to foster the company’s business relations with suppliers, customers and others, and the need to act fairly—in other words, to act in the interests of shareholders and creditors of the company, which included the pension fund? Can you explain how, if this was not aggressive accounting, the board balanced those obligations?
Zafar Khan
In my time on the board, I believe that the board was mindful of taking into account the interests of all stakeholders, in terms of the way that the business was run.
Antoinette Sandbach
Demonstrate that. Where do we see that?
Zafar Khan
The way you run the business is to make sure that you understand the key risks around the business, and you are putting in place plans to address those. As Mr Cochrane said earlier, coming into 2017, the key issue that we were looking to address was the net debt position. The net debt, when I came into the role, was thought to be at a level that was undesirably high. We made a public commitment to look at reducing our net debt. Getting net debt down is clearly good news for the pension fund, because it means that it has a better covenant.
Frank Field
Only if it works.
Zafar Khan
These were public commitments that were set out in our 2016 annual report, and I talked about these at length in the investor presentation back in March.
Chair
Mr Cochrane, in an answer to an earlier question, said that he wished that he taken action sooner, and that mistakes had been made. Zafar Khan, do you wish you had taken different decisions, or taken them sooner, and if so, what?
Zafar Khan
As I say, I picked up the Finance Director’s role at the beginning of 2017.
Chair
Yes, but you have worked for the company for six years, Mr Khan. You were there in a crucial position at a crucial time for the business. Just answer the question, Mr Khan. Do you wish you had done things sooner, and do you wish you had done things differently? If yes, what?
Zafar Khan
To my mind, one of the issues that contributed to where we ended up was the fact that our debt had grown over the past few years, essentially. That, combined with the number of challenges that we faced in terms of four large contracts underperforming significantly, in terms of the market generally for support services having become very difficult, and the construction market in the UK being difficult, meant—
Frank Field
As you have not answered Rachel’s question, can I just ask one? Were you surprised, therefore, that the whole thing crashed? Rachel says, “Would you have done something different?” You cannot answer that question. Were you surprised?
Zafar Khan
Yes, I was surprised. I was surprised at the outcome that eventually came to pass.
Chair
Do you feel perhaps, Mr Khan, that you were asleep at the wheel? You were surprised; you would not have done anything different.
Zafar Khan
No, I do not believe I was asleep at the wheel. As soon as I came into the role, we were looking to tackle the issues, and the key focus of my time in the role was to bring net debt down.
Chair
You feel, then, in the nine months that you were in the business, that you did the right things at the right time.
Zafar Khan
I believe I did everything that I could have done, essentially. Debt was high; we said at the outset that we would look to reduce that. In the context of that, there was a lengthy debate around the dividend in January and February, before that was passed.
Chair
We will come on to that shortly. Four months after you left, the company went into liquidation, with just £29 million left, leaving thousands of people potentially without jobs and thousands of people saving for their pensions without the pensions that they had expected, but you did everything right at the right time. Well done, Mr Khan.
Stephen Kerr
Mr Khan, just remind us: what was your role before you became CFO?
Zafar Khan
I was the financial controller.
Stephen Kerr
You were the financial controller for the entire business?
Zafar Khan
Yes, for around three years.
Stephen Kerr
So what you discovered when you became CFO could not have come as a surprise to you. It was not like you turned the page and discovered something that you did not already know.
Zafar Khan
No. We spelled out the issues that I felt needed to be addressed.
Stephen Kerr
But you knew of those issues long before you became CFO.
Zafar Khan
The net debt position had built up over a period of time. The markets we were operating in were difficult, and were gradually getting more difficult.
Stephen Kerr
Soon after you joined the board, there was a full review of contracts. Was that instigated by you?
Zafar Khan
With support from the board, yes.
Stephen Kerr
Why did you choose to do that?
Zafar Khan
Why did we choose to do that? Coming into the role, we felt that the key issues were that some of our overseas markets had gradually got difficult, such as the construction market in Canada, and in the Middle East. We were looking to review how much longer we wanted to continue to play in those markets. As we went through the year, we saw deterioration in cash flows on a number of significant contracts in the UK. Putting those together, it made sense to have a broader look at the contract positions across the group.
Stephen Kerr
The three specific UK deals that got into difficulty were the Royal Liverpool University Hospital, Midland Metropolitan Hospital, and the Aberdeen bypass, correct?
Zafar Khan
Yes.
Stephen Kerr
Should this review of contracts not have happened much earlier, and been thorough, to the point that this did not just sideswipe you? It is coming across as this suddenly arose as an issue, but these projects had been going on for some time.
Zafar Khan
The projects had been going on for some time. Part of the problem with construction contracts is that you do not always have complete visibility or certainty in terms of where things may land.
Stephen Kerr
What does that tell you, and us, about controls within the organisation, in terms of managing these very expensive contracts?
Zafar Khan
Again, the view is that the business had the right structures and processes in place.
Stephen Kerr
It had the right structures and processes, but could not foresee that these longer‑term contracts were suddenly going to effectively capsize the business.
Zafar Khan
We did not.
Stephen Kerr
Does that not reflect something on the controls within the business?
Zafar Khan
Again, we had controls, good processes and structures in terms of people on projects, in terms of those fitting into the divisions and in terms of regular review of those. You do get contracts going on, and it is not always possible to predict everything at a particular point in time.
Stephen Kerr
You have this book of contracts with wafer‑thin margins and not a lot of room for error. Notoriously, in construction, things take longer and cost more. Everybody who has ever done anything in their own home knows that. You are working on wafer‑thin margins. Tell me what happens after July 2017, then, because you gather in some more contracts—not enough, according to what you said earlier. Is there something different about the way you assess the viability of the contracts after July 2017?
Zafar Khan
We had addressed the lessons learned from the contracts review, and, on the back of that, the conclusions were that we exited the construction markets overseas, and we were exiting the PPP market.
Stephen Kerr
Were there any lessons in relation to the control of the projects?
Zafar Khan
There was increased selectivity, not bidding for certain types of contracts. Part of the problem with construction in the business model that we were operating within construction was that you were often left as the last man standing, essentially.
Stephen Kerr
Why, because there was so little margin?
Zafar Khan
Not necessarily because of the margin, but if your supply chain does not perform, and you are signed up to deliver your contract at a particular point in time, you have to supplement that and fund the costs until you can get some sort of recovery of them. That recovery, again, is subject to lengthy debate, discussion and negotiation with the supply chain. If your customer makes changes as you go through the contract, again, you are obliged to act on those changes, because if you do not you are going to be late delivering the contract, but again, the compensation for that takes time. You have all of these dynamics. You are boxed in, where you have to deliver but in terms of your ability to make a sensible return or keeping hold of the cash, you are dependent on people doing the right thing.
Stephen Kerr
I understand that, but you have been described as the person calling the shots. Do you recognise that as a description of your role on the board—that you were calling the shots?
Zafar Khan
I do not know where that description comes from. When I came into the role, I sought to address the issues that I saw within the business.
Stephen Kerr
As a very key person—someone who has been described as the person calling the shots—did you change anything about the way you bid for these contracts?
Zafar Khan
Yes, we did.
Stephen Kerr
What did you change?
Zafar Khan
As part of the lessons learned, we exited the PFI market, which to my mind was probably the riskiest form of contract, and had been responsible for some of the damage that we suffered during 2017. Also, we were looking to limit our exposure to fixed‑price, lump‑sum contracts going forward.
Frank Field
Your answer to Stephen was that everybody let you down, you could not rely on suppliers, it was all moving around, and so on. It was nothing to do with you; it was all these other terrible people you had to rely on to deliver your contracts. They all let you down.
Zafar Khan
No, I was describing the structure of the construction contract. You are left holding the baby a lot of the time, and that contributes to these issues.
Frank Field
That is why you need good margins, is it not?
Zafar Khan
Yes.
Stephen Kerr
And good control systems. Why were you sacked in September 2017, after fewer than nine months in your job?
Zafar Khan
Post the 10 July trading update, we had committed to a range of initiatives to improve the position of the business. Key within those was the continued focus on improving the cash flow, and also delivering the revised forecast. As we went through July and August, trading conditions did not improve much, and things continued to be difficult for us.
Stephen Kerr
Was that going to be changed by sacking the CFO?
Zafar Khan
That was a decision by the board. Again, it was not really for me to debate. I provided the board with a further update in September. Not long after that, I was asked to step down from the board.
Stephen Kerr
Their consideration was that your performance had been below the standard that they expected, I presume. Is that what you were told?
Zafar Khan
I had a very short conversation with Mr Cochrane, and in the conversation I was told that the update I had provided to the board had spooked the board, and certain lenders were unhappy.
Stephen Kerr
The messenger got the bullet.
Chair
Maybe Keith Cochrane would like to answer that question.
Keith Cochrane
Just coming back on that last point, part of the reason for appointing Emma and replacing Zafar was recognising where we are in terms of the degree of financial restructuring that the business required to undertake. As part of a series of broader management changes that I announced at the same time, I appointed a chief transformation officer, essentially to drive the restructuring programme. Lee Watson was seconded in from Ernst & Young. I also wanted someone in the CFO role, given that that was going to be very focused on the external‑facing work, dealing with all of the financial stakeholders—and he had experience in that area—and we needed someone to focus very much on the business units. Clearly, you have heard earlier about the challenges in UK construction, so Emma, I felt, was best placed, given her knowledge of the UK construction business, to take on the role and to drive that cash generation. May I, Chair, just come back to one of the earlier comments that Mr Khan made, and the challenge of Mr Field in terms of what else went wrong in terms of cash generation? Post 10 July, coming in as the interim chief executive, I have made a number of comments in my investor presentations, but at its heart, part of the challenge around the cash generation was that this was a business that sought to do the right thing for the customer. Indeed, in terms of the customer feedback that I received throughout my six months of tenure, there was a huge recognition of the support, engagement, and capability of Carillion employees right around the world. That should be acknowledged, but what that meant was that we incurred the cost upfront, and then sought to recover it later.
Chair
But in your accountancy, you did not do that, Mr Cochrane. In your accounting practices, you were already banking revenues and profits. You are right in reality: that is what you did. You incurred a cost and hoped to recover the revenues later, but in your accountancy, that is not what you did, and that is part of the reason why you are in the difficulties that you are in, Mr Cochrane. Is that not right?
Keith Cochrane
With respect, Chair, that is not quite right. Clearly, we incurred the cost, and we recognised the receivable associated with it. We did recognise the receivable, although not always 100% of the receivable, recognising that there will always be a debate around these things. From a cash point of view, this gets back to the point that if you look at the bulk of the provision that we recognised, it was non‑cash. The reality is that the cash had been spent already, and it was all around how quickly we could collect the cash. With some of it, sure, the business made mistakes. The business did not do things as efficiently as they had assumed in the bid, but if you take the Qatar job that has been reported in the press in recent weeks, this is a job that had doubled in size. It had 2,500 design variations to it, and essentially we were not paid for 18 months prior to the business failing. Should we have done something differently about that? I think that is a fair question to ask.
Chair
That is not just a fair question, Mr Cochrane. If you were not paid for 18 months, that is even worse payment than you offered to your small businesses, your subcontractors, and that was pretty poor: 120 or 126 days. You had not been paid for 18 months. Why did you carry on doing the work? Should you not have put an impairment in? Should you not have accounted for this much? It is not a question of, “Perhaps we should have done”. You should have done, Mr Cochrane, should you not?
Keith Cochrane
Again, in terms of the specifics, one of the roles of the previous chief executive was to have direct engagement with a number of key customers. I do recall a board meeting in April 2017 in Manchester when Richard Howson came back and said, “They have agreed that they are going to pay all their bills”. There was this expectation of getting paid. Having said that, six weeks later the world had changed, for a variety of reasons, and it was not paid.
Chair
But it is not just six weeks, Mr Cochrane. It was 18 months. Surely at some point earlier, an impairment should have been put in, or a warning should have been put out there for those revenues that had already been banked and had already been put on your balance sheet. Should that adjustment not have been made sooner?
Keith Cochrane
Again, it is a judgment call.
Chair
Did you make the right one, Mr Cochrane? Did Richard Howson make the right one?
Keith Cochrane
All I can say is that I looked at that contract and, certainly over my tenure as chief executive, I sought to achieve a settlement as well. We had the ups and downs of those negotiations, ultimately failing, but the reality was that there was a substantial change in scope in that contract, so undoubtedly there were sums due to Carillion.
Frank Field
We are not disputing that. Contracts change. Rachel’s question is about the money. You can change the contract 1,000 times, but they were not paying you the money, and you still went on. There does not really seem to be an answer to that. Can I just ask how much Mr Khan got as a pay‑off after his stewardship, please?
Keith Cochrane
Mr Khan received his contractual entitlement: essentially 12 months’ salary. That was paid, as it was for all senior executives, on a monthly basis, and that was a very conscious decision by the board.
Frank Field
What does 12 monthly payments equate to, please?
Keith Cochrane
From memory, I think his salary was £425,000.
Frank Field
You sacked him, and then paid him £425,000. Thank you.
Ruth George
Mr Khan, was the writing not on the wall from the 2016 accounts? 84% of your balance sheet was made up of goodwill. There was only £300 million‑odd of actual assets within the company, whereas your debts were around £600 million net. Would that not say to you, as someone coming into the role of chief finance officer, that this company is in serious trouble?
Zafar Khan
We acknowledged that the net debt in the business was on the high side, at an undesirable level.
Ruth George
More than the assets.
Zafar Khan
That is not particularly unusual.
Ruth George
You do not think that 84% of the balance sheet as goodwill is unusual.
Zafar Khan
The background to goodwill is that that balance had arisen over a number of years, essentially on the back of acquisitions.
Ruth George
This was the most shorted stock on the stock exchange. How much is goodwill worth in that sort of situation?
Zafar Khan
The way that goodwill is dealt with in financial statements is pretty well‑prescribed in the accounting standards.
Ruth George
Your annual report says that your auditors raised queries about that, and that the company decided to override them.
Zafar Khan
I do not believe that that is the case.
Ruth George
That is what the 2016 annual report says regarding the valuation of goodwill and amortisation.
Zafar Khan
I am not aware of any disagreements with the auditors in terms of the carrying value of the goodwill. Goodwill is one of those things where the carrying value has to be assessed by reference to future cash flow forecasts, and in the process we adopted in arriving at the valuation, we followed what the accounting standards ask you to follow in determining that value.
Ruth George
That was queried. With the accounts based on that, and the worsening cash flow situation, you signed off a dividend that was higher than the previous year. Was that a responsible thing to do, do you feel?
Zafar Khan
The decision around the dividend is a board decision, at the end of the day, and I felt that we had debated that at length, both at the January board and at the February board, as well as with our external advisers. From my point of view, it would have been helpful, given that we were committed to debt reduction, to not pay the final dividend, but at the same time, we had a budget that showed that in 2017, we could service the dividend, we could put more money into the pension scheme, and achieve a small reduction in the average net debt. Those were two relevant reference points. We had a long‑established policy of paying dividends in line with earnings growth. Our earnings had gone up by 1% in the prior year, and the final dividend was only increased by 0.8%.
Ruth George
“Only”, but only based on that valuation of goodwill. You paid the dividend on 9 June, you issued a profit warning on 10 July, and then you gained some contracts on 17 July, just after that. Does that not seem as though it was manipulation of when that profit warning came in? You have been saying that there were concerns raised over the contracts in 2016. That work was being done much earlier in the year. Was that not rather late in the day to be issuing a profit warning, and did you not have a responsibility, to the company’s employees and the Government’s contracts that were being made on the back of it, to issue that profit warning much sooner?
Zafar Khan
To my mind, there was not any manipulation of timelines, or sequencing having been done to achieve certain timelines. The contracts review was launched as soon as we were aware of the merits of the contracts review. That was launched around the end of May or early June, essentially.
Ruth George
Emma was saying that she was working on it in March, when she came back from Canada.
Zafar Khan
Emma had come back from Canada into the UK construction business, and started her review of the UK construction business, essentially. The group‑wide contracts review was initiated around the end of May, and continued through the month of June. The results of that, again, were finalised around the weekend of 8 and 9 July.
Ruth George
The profit warning came in; the shares dropped 75% in value. Mr Cochrane, when you came in, was it not obvious from the balance sheet from 2016, from that shared valuation drop, that the company was basically insolvent in July?
Keith Cochrane
No, it was not obvious, because the cash flow forecasts at that juncture and our ability to comply with covenants on 10 July suggested that this was a problem linked to specific contracts. It required us to look afresh at the business and its focus, the shape of the business, its overhead structure and the like, but there certainly was not a thought in my mind when I took on the role on 10 July that ultimately, we were going to end up in insolvency. There was, at its heart, a very good business here. Yes, things had gone badly awry in a number of contracts, but that did not take away from the fact that there were a number of very good businesses within Carillion, as well.
Heidi Allen
I am interested in the mechanics of the organisation culturally, and how it felt about debt and borrowing. I am conscious that you were all relative latecomers to your senior roles. Perhaps just very briefly, what were your thoughts on how the company dealt with debt and borrowing?
Keith Cochrane
Perhaps I could start. Clearly, when I took on the role as chief executive, my focus was very much all about cash generation. As part of that, I brought in EY.
Heidi Allen
I am talking about debt, how the company felt about debt, and whether it was comfortable with debt and borrowing.
Keith Cochrane
From my perspective—from a board seat as a non‑executive director for the prior two years—the board had recognised that the net debt position had got to a point where we needed to do something proactively about it.
Heidi Allen
It was £242 million in December 2009, and it was £1 billion by January 2018, so it had now got to a position where you needed to do something about it.
Keith Cochrane
Clearly, a lot happened between July and January, in terms of sequence of events. I am very happy to take you through some of those events that drove what happened in the last few months, but if you look at it in the context of the year‑end 2016 position, as we have said earlier, the debt was too high. The board had challenged management, and indeed management had come forward with what we believed at that time to be a credible self‑help plan. The board then sought to do a fund‑raising, to substantially reduce net debt, which would have been launched in early July. Because of, as I said earlier, the scale of the contracts provisions and because of that that meant for the investor proposition—
Heidi Allen
Do you genuinely believe that the debt could have been dealt with, that it was just about contracts and a few things going wrong, and that it was not a systematic issue with the organisation?
Keith Cochrane
If I can then add a bit of hindsight as chief executive, as I came into the business, there was a lot of focus on reported debt across the business. Was there the same focus on collecting cash, day in, day out, with the relentless attention that we applied post 10 July? Did that appear to be the case before 10 July? No.
Heidi Allen
What did you do about it when you came in?
Keith Cochrane
When I came in, as I say, we appointed EY. We initiated weekly cash flow forecasts. We revamped the cash flow forecasting process to ensure that it was robust.
Heidi Allen
Did you think about pushing for more equity?
Keith Cochrane
We did. That is something that we contemplated. Indeed, it was something that we seriously contemplated.
Heidi Allen
But you did not do it.
Keith Cochrane
We did not do it, for a number of reasons. One was that at the end of September, which would have been the natural point to do so, when we announced our half‑year results and the results of our strategic review, the market capitalisation of the group was such that raising equity in itself would not have fixed the problem.
Heidi Allen
You were still strong enough to do it then, but you chose to—
Keith Cochrane
No, the advice from our brokers was that it would not be possible to get a successful equity issue away, particularly against the backcloth that I was an interim chief executive. We had not yet, at that juncture, appointed a permanent successor, and investors will always want to know, “Who are we backing?”
Heidi Allen
You are the one in the hot seat.
Keith Cochrane
I was.
Heidi Allen
“Interim” means that you are doing the job.
Keith Cochrane
I am, absolutely. I agree with that, but that was the advice from our brokers and our financial advisers. Alongside that, at the end of September, we were also in advanced discussions to sell our Canadian business, against which we had a very high confidence level, and indeed, on the back of that, there was the potential for that buyer to take an investment in the PLC company as well.
Heidi Allen
Emma and Zafar, can I turn to you two, and particularly, perhaps, Zafar, given that you say that when you came in, a key part of your remit was to bring the debt down? I do not see how that happened, and you were there nine months. I would be interested to know why you left so soon, but perhaps starting with Emma and then turning to Zafar, what are your views on the decisions to raise more debt—essentially, it seems to me, to keep dividends going—and not raising equity to make sure that the number of shareholders, and therefore the beneficiaries of dividends, was kept to quite a small pool? What are your views, Emma, first of all, on whether or not that was the right approach?
Emma Mercer
Within the company, the cash control mechanism and the way that the businesses forecasted cash was very well‑controlled. Under all of the CFO reigns of Richard, Zafar, and then myself, the attention to detail in cash forecasts in the business was huge, and a lot of effort went into that across all of the different businesses.
Heidi Allen
I am talking about the strategic decisions, about going for equity rather than debt as a means of keeping cash flow going.
Emma Mercer
I cannot comment on the board decisions, or what the board looked at in order to decide around dividend distributions or equity raises. I do know that equity was looked at earlier in the year, which Zafar can touch on as well. From my perspective, the way of getting the debt down was two‑fold. First, there were the routes of other mechanisms like debt for equity, for example, or even raising additional equity, but, more importantly, it was collecting the debt that we were due from our customers. That was all around the world. We talked earlier about one particular contract, and it would be nice to pin this thing to one instant completely, and say, “It was that that broke Carillion”, but actually, this is a series of unfortunate events on some very large contracts that meant that there was huge cash pressure. The drive of getting those receivables back from organisations was, for me, on an operational level in a division, the key to trying to make a success of this business in terms of cash flow. We talked about Qatar. Huge amounts of money were owed there on one particular contract, and there was a huge amount of effort to try to drive and collect that cash. Actually, that was viewed at that point in time as one of the easiest things to do: to get the receivables that we were due from our clients.
Heidi Allen
We have obviously heard that Brexit was another big issue—let us blame everything on Brexit—but apart from that, Antoinette has reminded me that the Qatar contract was only about £200 million, so I do not really think that that was going to transform your fortunes.
Emma Mercer
Across the largest contracts in our group, if you take the ones that were mentioned in the contract provision alongside the Qatar thing, we had huge amounts of debt locked up in each of those contracts.
Heidi Allen
What I am trying to get to the heart of is the company’s approach generally to how it raised funds, going for more loans. £242 million in 2009, rising to £1 billion in January 2018, is not just about how successful we are in collecting our cash from our customers. Zafar, can you say something about your view on how the company behaved in terms of debt and triggering dividends, as opposed to pushing for equity, for example?
Zafar Khan
By the time I had started my discussions with the board through the selection process, debt was the number one topic.
Heidi Allen
Did they make the right decisions? Did they prioritise the right way of dealing with that?
Zafar Khan
Historically, things had developed to the point where we understood that we had to reverse the trend on that. Dealing with that through the time that I was on the board, the key priority for me was to get the debt down.
Heidi Allen
Did you do that?
Zafar Khan
Yes, we did.
Chair
What was the debt when you came into the business as CFO and when you left?
Zafar Khan
The year‑end debt would have been, I think, around £218 million, but the year‑end position is not always reflective.
Chair
What happened to debt, Mr Khan? You just said that you got the debt down.
Zafar Khan
The debt increased through 2017.
Chair
So you did not get the debt down. You just said to Heidi Allen that you got the debt down, but actually the debt went up.
Zafar Khan
We were unable to get the debt down.
Heidi Allen
Did the debt go up or down when you were in the position?
Zafar Khan
But it was not because we were oblivious to—
Chair
Mr Khan, you are a CFO. You just said to Ms Allen that the debt went down. Did the debt go down, Mr Khan?
Zafar Khan
No, it did not. No.
Chair
I just wondered, because you said to Ms Allen that it did. It did not.
Zafar Khan
No, the debt did not go down.
Heidi Allen
What was the reason, do you think, that you left after just nine months? Although you had a handsome pay‑out, so that must have been helpful.
Zafar Khan
We discussed the reason why I left. Keith touched on his perspective of it.
Heidi Allen
What is your perspective?
Zafar Khan
Post the July trading update, we were continuing to focus on a range of initiatives to try to improve the overall position of the group. Trading continued to go against us, and the next update that I gave to the board showed a deteriorating position again.
Heidi Allen
Can I turn your attention to a more general question, about suppliers? We have talked a lot about the importance of cash flow and collecting from customers. What about suppliers? You signed up in 2013 to the Prompt Payment Code, yet notoriously you were known within the industry for being exceptionally late payers to your suppliers—around about 120 days’ payment. No business can exist like that, as you indeed have proven yourself. Perhaps we can start with Keith.
Keith Cochrane
From my perspective, all I can really comment on is my period as chief executive.
Heidi Allen
You keep saying this. Just answer the question, please. Every time anybody answers a question, you start with, “In the time I was there”.
Keith Cochrane
There were very different roles, with respect, in terms of being a non‑executive director and being chief executive.
Heidi Allen
When you were chief executive.
Keith Cochrane
When I was chief executive, I was very clear: no instruction was issued to change payment terms to suppliers. Indeed, in discussions with Government, they highlighted their sensitivity, and I reported back to the divisional MDs that we should take particular care to continue to meet the payment terms of our suppliers. Clearly, maintaining supplier confidence over that six‑month period was going to be critical to secure the future of the business, and therefore, from my perspective, we made no changes and there was no change in the approach taken.
Heidi Allen
Did you think that paying in 120 days was acceptable?
Keith Cochrane
Perhaps I could let my colleagues explain. That was not my understanding of the basis on which we paid.
Heidi Allen
But you were. Emma?
Emma Mercer
There are a lot of facts around this, and I would like to take a moment to explain some of the facts behind this, because I think it will be useful for the Committee to understand. We have two ways of paying our supply chain: first, through direct payment to them, and, secondly, through our supply chain factoring scheme, where we have arrangements with various different banks. Effectively, invoices go onto the system and they can draw down at will over whatever terms they want.
Heidi Allen
Suppliers pay extra for that privilege, do they not?
Emma Mercer
I will come back to that. Not quite, no. Effectively, we give suppliers the choices of being on either. With those that go on to the supply chain factoring, we do ask them to sign up to terms of 120 days, but they have the ability to be able to draw down a payment within 45 days—which I will come back to in a second—or anything above 45 days is not at their charge. We get the benefit of the working capital facility associated with that up to 120 days.
Heidi Allen
Does that mean that you were using suppliers like a loan? You were borrowing.