There have been extensive media comments lately on the activities of the Royal Bank of Scotland in lending to smaller businesses, and what they did when those businesses got into financial difficulties. The articles printed focussed on two reports on the activities of RBS – a report commissioned by the bank by Sir Andrew Large, and one by Lawrence Tomlinson* who acts as a consultant to the BIS Department. Both reports, but particularly the latter one, were quite damning about the activities of the Global Restructuring Group (GRG) in RBS. This is the department of the bank to which responsibility is transferred for loans that appear to be at risk.
The Lawrence Report suggests that the bank often engineered “defaults” on loans so that they could impose additional conditions and fees. Or they would ask for personal guarantees to be provided and bankrupt the individuals concerned by subsequently forcing the business into administration. The general behaviour of the bank seemed to be a policy of generating profits for the bank rather than helping the business through financial difficulties.
One of the concerns is that the bank effectively acts as a “Shadow Director” and sometimes forces the company to stop paying suppliers or even HMRC, thus destroying the reputation of the company and its viability.
Now this kind of behaviour is not going to be any surprise to anyone who is familiar with the way RBS has operated in the area of pre-pack administrations. It was interesting to see Neil Mitchell on BBC TV news last night (he also got a mention on the front page of the FT). Mr Mitchell was the former Chief Executive of Torex Retail, a large AIM company, which got into difficulties after false accounts were published (later the subject of fraud trials) in 2007. The bankers were RBS and effectively a revised board of directors was put in place that was sympathetic to the bank, no doubt at their behest – it’s easy for a bank to dictate whatever actions they like in such circumstances by simply threatening to call in their loans. What then happened was a deal was lined up to sell the business in an arrangement that protected the banks interests but wiped out the ordinary shareholders, i.e. the interests of other “stakeholders” were not taken into account. Even though other approaches were made to refinance the business so that it could continue without administration, these were ignored. This in essence was a typical “pre-pack” administration which ShareSoc has repeatedly criticised in the past for the secrecy involved, the lack of open marketing of businesses and the abusive process that is involved.
One of the interesting aspects of Torex Retail was an attempt by shareholders who could see that the board was not acting in their interests to remove the directors and replace them. The EGM called to do that was pre-empted by the directors putting it into administration.
Now yesterday we coincidentally had the case of Hibu where again a move by shareholders to place more directors on the board and get some questions answered about past behaviour via an EGM requisition has been thwarted by the company being put through a pre-pack administration. The assets have been disposed of to a “new holding company structure to be controlled by the Group’s lenders” to quote from the announcement. Needless to point out that RBS are one of the bankers to the company although several other banks are also involved. Hibu ran up enormous debts and was in a much poorer overall financial state than Torex and it was always going to be difficult to see much value remaining for ordinary shareholders but they will now definitely get nothing. But the major concern is that the directors will avoid being accountable to the shareholders for past actions as a result of this tactic.
RBS has been particularly active in supporting the existing pre-pack administration process, no doubt because it enables them to intervene in this way to ensure they protect their interests and even potentially make a profit from the “restructuring” of companies. In addition the administration typically avoids any examination of past events by those concerned because administrators have no duty to anyone but the creditors (shareholders are not creditors).
In conclusion, the actions of RBS might be legal (although the SFO is considering investigating), but their general approach to dealing with businesses in difficulties, from the evidence of the many cases reported, suggests they are the unacceptable face of banking. Bankers surely have a moral duty of care to deal with their customers in a fair and honest manner. But RBS, and other banks, have repeatedly ignored this principle. The example of selling interest rate swaps to unsophisticated business customers who simply did not understand the implications of those contracts is another example.
As regards the treatment of businesses in financial difficulties, as ShareSoc has said before, it would be good to get a complete overhaul of the insolvency regime (including the administration process with pre-packs being banned). The existing UK legislation puts too much power into the hands of lenders and there is no independent supervision of their activities. Individuals and companies involved also find the legal complexities baffling and action too expensive to protect their interests. It’s surely time to develop a new approach with fairer and simpler rules.
* The Lawrence Tomlinson Report can be read in full here: http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf