As we reported here last week, the Secretary of State withdrew his action to have the former directors of Farepak Food & Gifts Limited (Farepak), and its parent company European Home Retail Group PLC, disqualified as directors.
The former directors had been widely blamed in the media and by action groups for the collapse of Farepak, a company that ran a Christmas savings club and whose collapse in 2006 led to over 100,000 customers losing almost all of their deposits.
The judge presiding over the disqualification action, Mr Justice Peter Smith, made a statement following the withdrawal of the disqualification action last week. In that statement he made clear that blame had been wrongly attached to the directors:
“The defendants, the directors of the companies, have received a huge amount of criticism over their conduct. The depositors believed that the directors were responsible for their losses and that this trial would explain how they came to lose their money and what role the defendants had in that loss. fact, as the Secretary of State has in effect conceded and the evidence showed, not only did the directors do nothing wrong, but they made genuine strenuous efforts to save the group and the depositors.”
Instead, the judge found that it was the actions of HBOS, the Farepak’s group bankers, that led to the collapse of the group and the loss of customer deposits. HBOS refused the Farepak directors’ requests for depositors’ money to be placed in a protective trust, as HBOS knew – as a secured creditor – that those monies would be available to the bank in the event of the Farepak group entering administration or insolvency:
“…during this period [of growing financial difficulty] HBOS were fully aware that the overwhelming likelihood was that there would be an insolvent solution…they were equally aware during this period that deposits were continuing to be received at a time when if the group went into insolvency would be lost…they were also aware that in effect all of the deposits that were being received in this September/October period would only benefit HBOS and nobody else.
This is despite the fact that come the end of August the directors were concerned about the continued collection of these deposits and asked HBOS on at least two occasions in that period to allow them to protect future deposits in a trust, or more drastically to tell people not to give any more money. The bank refused both proposals. This meant that the directors, unless they put the company into immediate insolvency, whilst there was a potentially viable offer to save the group on the table, were in effect obliged to continue to receive the deposits and pay them over for the bank.
The end result was, therefore, that during this period all the deposits were not only lost to the depositors, but it was known by HBOS that it was overwhelmingly likely they would be lost to the depositors, but those deposits benefited HBOS in the two ways that I have identified.”
In his statement the judge found the former Farepak directors “vindicated”, and severely criticised the way in which the Insolvency Service had conducted the action against the directors. His strongest words, however, were for HBOS. Observing that the bank played “hardball” with Farepak throughout 2006, the judge noted that the only likely beneficiary of Farepak continuing to accept depositors’ money in late 2006 was going to to be the bank:
“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, that at a time when they believed there would be an insolvent solution; they had missed it in August, but they expected it to happen later. During that period, as I have said, their exposure was reduced by £4 million, of deposits that came in in that period, and £6 million was used to carry on trading the companies, which were then sold in the pre-pack and secured a maximum return for HBOS.
HBOS knew that those deposits would be paid and would be lost if their expected solution went out and that the only beneficiary of those deposits would be HBOS.
It is striking that during the whole of the period it appears, in rough and ready terms, that further investment from the bank of between £3 to £5 million would have probably saved the Group, but the HBOS was not prepared to make it. It of course was perfectly entitled to do what it did and to continue to require the company to collect deposits, knowing full well that those depositors would not get their money back if the companies went into insolvency and knowing full well that those deposits would have benefited the bank alone.
This is of course in my view completely contrary to the way in which these defendants conducted themselves. They did everything, as far as I can see, possible to save the group.”
The judge went on to suggest that HBOS (now part of Lloyds Banking Group) should make a “substantial payment” to the Farepak compensation fund to reflect the benefit the bank received from Farepak continuing to accept deposits in late 2006.
And then the judge applied the knife to HBOS:
“It is ironic that if the bank’s reputation for playing hardball had been repeated by the government two years later, HBOS would not be here and that is something else that HBOS might like to think about.”
UPDATE 12 December 2012: Financial Reporting Council files disciplinary Formal Complaint in relation to the conduct of Mr William Rollason as director of European Home Retail plc and of Farepak Food & Gifts Ltd – FRC press release
See also: HBOS defends itself following judge’s criticism – Scottish Daily Record