Judge condemns bank benefiting by £10m as Christmas club savers endured loss of hard-earned cash
The Farepak debacle could have been lifted straight from the pages of a Charles Dickens novel.
For a year, 116,400 of the country’s poorest families had been putting aside a little bit of cash, saving up for Christmas.
Unbeknown to them, Farepak, the savings club they were squirrelling their cash into, was in serious trouble. The company had run out of money to buy the vouchers customers had paid for and faced collapse unless it could get some emergency funding.
Farepak’s bosses, who included Sir Clive Thompson, a former president of the CBI employers’ organisation dubbed “Mr Twenty Percent” for his growth record as chief executive of Rentokil Initial, were desperately looking for help but failed to find the funds to stay afloat.
Every solution the directors proposed – including the firm’s major shareholder writing down the value of its holding to zero – ultimately failed, because Farepak’s main lender, HBOS which is now part of the bailed-out Lloyds Banking Group, was in the words of the high court judge investigating the collapse, “playing hardball”.
“HBOS was not prepared to provide any significant positive assistance to solve the difficulties the group came into,” the high court judge Mr Justice Peter Smith said in a statement in open court: “The reason for this was because at all times from the commencement of the troubles HBOS was fully secured and, as was shown in the outcome in October 2006, did not lose anything.”
The judge said Farepak could probably have been saved if HBOS, under the then chief executive Andy Hornby, had lent it an extra £3m-£5m. But, the judge said, it was not in the interests of the bank to save the company and protect the savers.
In fact, the judge said, HBOS “substantially benefited from deposits that were received late in the death of the companies in September/October 2006″.
“The bank had, as I have said, almost a pride in their strong attitude, but they went beyond that of course because they in effect forced the directors to carry on in September/October collecting deposits … at a time when they believed [the bank would go bust].”
The judge said it was a “tragedy” that savers lost their hard-earned money, while the bank benefited to the tune of £10m – £4m of which came directly from savers’ deposits when Farepak was careering towards an inevitable collapse.
While HBOS has done nothing illegal, the judge questioned the bank executives’ morals and implored them to make a further “substantial payment” to the victims, who eventually received back only 15p for every £1 they had given to Farepak. A spokesman for the bank said it had made “entirely reasonable decisions” based on information available at the time but said it would “consider” the judge’s comments.
The most striking element of the dramatic events in court 26 of the high court’s new Rolls Building was that it was not HBOS, but Farepak’s former directors who had been standing trial.
Vince Cable, business secretary, had asked the court to ban the former Farepak bosses from being company directors for up to 15 years. The case against the directors collapsed when it became clear that the company’s former bosses had done everything in their power to save the firm but had been frustrated at every turn by HBOS.
The judge rounded on Cable, and the Insolvency Service, which brought the case, for relying on lengthy witness statements that were unfairly “slanted against the defendants”. Smith said witnesses were forced to retract crucial evidence when it became clear they did not understand – and in some cases did not appear to have read – their statements. He also criticised the length of the some witness statements, some of which ran to 700 pages.
It is the second time this week that the government has been forced to abandon a high-profile case after the Serious Fraud Office dropped its 15-month investigation into the Mayfair property tycoon Vincent Tchenguiz on Monday.
The collapse of the Farepak case is likely to cost the taxpayer about £20m in legal fees. A costs hearing will be heard next Friday but the Insolvency Service is expected to be asked to pick up the bill for the legal costs of all the parties, except those of Lloyds.
The taxpayer could face the prospect of further multimillion-pound payouts in the future as Farepak’s former directors are understood to be considering suing for damages to their reputations and loss of earnings.
Thompson told the Guardian that he also plans to sue three MPs, including the former cabinet minister Jack Straw, for defamation after they publicly attacked him over Farepak’s collapse. Shortly after the collapse Straw branded Farepak’s demise a “truly scandalous situation” and said: “The more we find out about it, the more – bluntly – it stinks”.
He is also considering suing Jim Devine, a former Labour MP sentenced to 16 months in prison for expenses fraud, who branded Thompson the “unacceptable face of capitalism” and Anne Snelgrove, who called him a “modern-day Scrooge”.
Business department drops demand to ban five former bosses from being company directors for up to 15 years
Vince Cable’s attempt to bar the bosses of Farepak, the Christmas hamper business that went bust leaving 116,400 people out of pocket, collapsed at the high court.
The Insolvency Service, part of Cable’s business department, withdrew its case against the directors, including Sir Clive Thompson, a former president of the CBI.
An Insolvency Service spokeswoman said the decision to drop the case was taken on the basis of the evidence given to the court. “The Insolvency Service, acting on behalf of the secretary of state for business, innovation and skills and on advice of counsel, will discontinue the proceedings against the directors of Farepak and [its parent company] European Home Retail. This decision is based on consideration of evidence given to the court to date.” The Insolvency Service, acting on behalf of Cable, had been calling on the high court to ban five former Farepak bosses from being company directors for up to 15 years.
Cable said: “I am deeply disappointed by the day’s events and feel a huge amount of sympathy for those who lost out when the company went bankrupt … Without doubt, we need to reflect on this result, consider what options are on the table and seek further legal advice if needed.”
The Insolvency Service had accused Farepak’s former directors, including Neil Gillis, a former chief executive of Blacks Leisure, and five others, of taking “unreasonable risk” with prudent savers’ money.
Earlier in the case it was claimed that Farepak was taking in about £1m a week from customers on low incomes right up until its collapse in October 2006 even though the company had identified a risk that it might not have enough cash to pay its suppliers as far back as November 2005.
Lawyers representing the former directors of Farepak and EHR told the judge, in written submissions, that evidence had “singularly failed” to establish a case for disqualification. One said: “What it comes down to in the end is essentially the commercial judgment and decision-taking of the defendants.” The former Farepak directors had denied the allegations.
Mr Justice Smith is expected to make a statement to the court tomorrow .
Thompson was the highest profile of the directors facing charges and had been known as Mr Twenty Percent when he was the boss of Rentokil.
At the time of the collapse, Farepak was owed £35m by EHR, which was chaired by Thompson. EHR also collapsed.