×

UPDATE 5-Britain's Carillion collapses after banks pull the plug

* Carillion goes into liquidation

* Carillion has debt and liabilities of 2.2 billion pounds

* PM May's government under pressure over fate of Carillion

* Carillion won state contracts since July profit warning (Adds background)

LONDON, Jan 15 (Reuters) - Carillion collapsed on Monday when its banks pulled the plug, triggering Britain's biggest corporate failure in a decade and forcing the government to step in to guarantee public services from school meals to road works.

The 200-year-old business went into compulsory liquidation at 0600 GMT after costly contract delays and a slump in new business left it swamped by debt and pensions liabilities of at least 2.2 billion pounds ($3 billion).

Its demise threatens to hurt smaller suppliers, merchants, rivals and Britain's biggest banks. The British government was left to ensure there was no disruption to public services.

The collapse poses a headache for Theresa May's government which had employed Carillion to work on 450 projects including the building and maintenance of hospitals, schools, defence sites and a high-speed rail line.

May's government also faced questions from the opposition Labour Party about why it awarded the company 1.3 billion pounds of state contracts after Carillion fell into financial difficulty in July last year.

"In recent days we have been unable to secure the funding to support our business plan and it is therefore with the deepest regret that we have arrived at this decision," Chairman Philip Green said.

KEEP ON WORKING

The government's priority is to ensure that public services are not disrupted, said David Lidington, the minister in charge of the Cabinet Office which oversees the running of government.

He urged Carillion staff to continue to work and said the government would pay their salaries. Some contracts handled by Carillion would in time go to alternative providers, he added. But despite the short-term support, the government stopped short of bailing out the company as it did with major banks during the financial crisis in 2007-09.

Employing 43,000 people around the world, including 20,000 in Britain, Carillion has been fighting for survival since July when it revealed it was losing cash on projects and had written down the value of its contract book by 845 million pounds.

With banks refusing in recent days to accept the latest restructuring plan, May's senior ministers met around the clock, under pressure from the Labour Party and unions not to use taxpayer money to prop up the failing company.

Ministers, top bankers and company bosses scrambled to find a way to save the company in last ditch talks over the weekend.

Carillion has committed debt facilities of around 1.6 billion pounds to banks which include the country's five biggest -- RBS, Santander UK, Lloyds, HSBC and Barclays -- and others. It has a pension deficit of 580 million pounds.

GOVERNMENT UNDER PRESSURE

Spun out of Tarmac nearly 20 years ago and including such construction names as Wimpey and Alfred McAlpine, Carillion operates in Britain, Ireland, Canada, the Middle East and North Africa. Its projects include London's Royal Opera House, the Suez Canal road tunnel and Toronto's Union Station.

In July last year, a week after its initial profit warning, it was named as one of the contractors on Britain's new High Speed 2 rail line, a flagship project that will better connect London with the north of England.

Richard Howson quit as chief executive at the time of the profit warning after five years in the role. Its shares have lost more than 90 percent of their value over the past six months.

At its headquarters in Wolverhampton, central England, a handful of workers could be seen holding meetings.

Shares in rival businesses such as G4S, Interserve , Balfour Beatty and Kier Group advanced on hopes they would pick up some additional work.

However, Balfour, which worked with Carillion on three British road projects, said the collapse would probably cost it between 35 and 45 million pounds.

Many of Britain's service providers have been hit in recent years after they took on work during the financial crisis at low prices for long-running, fixed-price contracts.

The contracts left little room for delay or failure and have led to problems for groups including Capita, Mitie and Interserve.

The company's demise comes at a difficult time for May who is trying to negotiate Britain's exit from the European Union.

The Labour Party questioned why Britain had handed over so much of its public service work to private companies.

Britain began outsourcing public services in the late 1980s under Margaret Thatcher and enjoyed a boom period under Labour's Tony Blair and Gordon Brown. It is now the world's second largest outsourcing market after the United states.

"We're ... asking for a full investigation into the government conduct of this matter," Labour's business spokeswoman Rebecca Long-Bailey told BBC TV. ($1 = 0.7258 pounds)

(Reporting by Kate Holton; editing by Guy Faulconbridge/Keith Weir)