The FT carried a story on Saturday (11/6/2016) which was a blast from the past. It reported that Neil Mitchell, a former CEO of Torex Retail, had filed a claim in the high court against Royal Bank of Scotland (RBS), Cerberus and KPMG in relation to the sale of the company at the time it went into Administration.
This case goes back to 2007 when Torex Retail got into financial difficulties after some fraudulent accounting came to light (which resulted in subsequent convictions of some of the management). Neil Mitchell was the CEO at the time, reported the matter to the Serious Fraud Office and supplied a wealth of evidence (dumps of the corporate servers I believe) to support his claim. He was then sacked as the CEO.
The main bankers were RBS and effectively the company fell under their control and they proceeded to arrange for sympathetic directors to be appointed. The company continued to trade normally and clearly was a very valuable business – it was one of the largest AIM stocks at the time. But it was then sold via a pre-pack administration to Cerberus at what many considered an unreasonable “knock-down” price – about a third of what it had been valued only recently before by the market.
Now I know quite a lot about this case because I tried to block the fire sale of the business which was clearly taking place after it became apparent that the directors seemed unwilling to consider alternative offers to one they were working on. Indeed I attempted to requisition an EGM to remove the directors and replace them by others for which we got the necessary number of shareholder signatures. However that requisition was pre-empted by the company being put into a pre-pack administration (where the company is put into administration and instantly sold). RBS were and are very keen on pre-packs because it enables creditors to push through what they want – in this case a sale to Cerberus even though others might have offered more. In addition the interests of shareholders could have been protected by a suitable refinancing which is all that was required. In this case RBS retained warrants and hence a future interest in Torex Retail which traded very well subsequently.
Mr Mitchell’s case is that his claim for unfair dismissal under whistle-blowing laws was thwarted by the sale.
I and ShareSoc have complained repeatedly in the past about the abusive use of pre-packs of which this was a typical example. There was no open marketing of the business and a secret deal was done with one buyer and other offers ignored. In the ShareSoc manifesto we suggest pre-packs should be prohibited and the Government has considered changes in this area but never pushed through necessary reforms.
Another aspect of this case is that there have been a number of complaints about RBS’s Global Restructuring Group which took over loans when companies were in difficulties. It is alleged they sometimes forced companies into Administration unnecessarily for their own advantage. Other legal actions on those claims may yet be pursued and the FCA is producing a report on them.
RBS denies the claims of Mr Mitchell and will apparently defend against it, and KPMG also refuted the claims.
All I can say is that the pre-pack certainly thwarted serious approaches from other investors for the business and the sale via a pre-pack meant the ordinary shareholders got nothing as is usual which should not have been so given that there were other viable options that were available to the directors. An altogether disgraceful example of how bankers can operate and how the law on pre-packs help them to do so. So I wish Mr Mitchell has success with his legal action.