House of Commons - Public Accounts

Select Committee on Public Accounts Forty-Sixth Report

2 Conflicts of interest in the operation of EBT

6. The extent of conflicts of interest in this case is shocking. EBT assisted a number of companies which had a pre-existing relationship with Mrs Townsley's accountancy practice. Mrs Townsley's husband owned shares in two (Arcom and Fusion) of the ten companies supported by the EBT Venture Fund. In both instances Mr Townsley's interests were acquired between the date the EBT investment was approved and the date the investment was completed.[10]

7. The role of the Townsleys' company, MTF, was to provide independent and objective financial advice to the EBT Board. It is clear that, in the case of Arcom, Fusion and a number of other EBT clients, the capacity of MTF to provide independent and objective advice was fundamentally compromised because of conflicts of interest.[11]

8. The evidence session focussed on clarifying the relationships between Mr and Mrs Townsley and Arcom. These are set out in the timeline at Figure 1. MTF had a business relationship with Arcom dating back to 1995. In August 1999 Mr Townsley was offered a 10% share in Arcom, an offer he asked to be put on hold. Two months later Arcom applied for an EBT loan. Mrs Townsley appraised the loan application. The Loan Fund approved a £20,000 loan in November 1999.[12]Figure 1: The relationship between Arcom and EBT

Date Event

1995 to 1998 Mr and Mrs Townsley's firm, MTF, acts at various times as consultants and accountants to Arcom.

August 1999 Mr Townsley is offered 10% share in Arcom - he asks for the offer to be put on hold.

October 1999 Arcom applies to EBT Loan Fund. Its application was appraised by Mrs Townsley.

November 1999 EBT Loan Fund approves a £20,000 loan to Arcom.

April 2000 EBT Venture Fund Board approves, in principle, an equity investment in Arcom.

September 2000 MTF and its subsidiary, Disorder Digital Media, carry out consultancy work for Arcom.

November 2000 Mr Townsley is appointed a director of Arcom and purchases 10% share in Arcom for £2,500 (£1.08 a share).

December 2000 EBT Venture Fund agrees to purchase 10% of Arcom for £50,000 (£19.49 a share) plus £20,000 of preference shares.

December 2002 Mrs Townsley recommended to the Board an additional £25,000 loan under the Department of Trade and Industry's Small Firms Loan Guarantee Scheme (SFLGS).

February 2003 SFLGS loan of £25,000 is paid.

September 2003 Arcom Liquidator is appointed.

Source: C&AG's Report, Appendix 1

9. EBT's Venture Fund approved, in principle, an equity investment in Arcom in April 2000. In November 2000, Mr Townsley was appointed to the Board of Arcom and purchased 10% of shares for £2,500, each share costing £1.08. Less than three weeks later, EBT Venture Fund purchased £20,000 of preference shares and 10% of ordinary shares for £50,000, each share costing £19.49. In our view Mr Townsley's actions amount to 'insider trading'. During this period Arcom also had a business relationship with a company called Digital Disorder Media, a subsidiary of MTF Technology Limited of which the Townsleys were shareholders and Directors.[13]

10. In December 2002, Mrs Townsley recommended to the EBT Board an additional fast track loan of £25,000 to Arcom, although the company's draft financial statements and management accounts showed that it was in financial difficulties. The loan was made in February 2003. Arcom went into liquidation in September 2003 with a potential loss to EBT of £100,000. The possibility of civil proceedings in relation to the quality of MTF advice on the fast track Arcom loan had not been considered.[14]

11. Mrs Townsley acted as Company Secretary for both the EBT Loan Fund and the EBT Venture Fund from their establishment. Boards of Directors have a right to expect the Company Secretary to give impartial advice and to act in the best interests of the company. In this case the Accounting Officer told us that the Board would have looked to the Company Secretary to provide advice on conflicts of interest. It is obviously unsatisfactory that the person charged with advising on conflicts of interest was the main source of the conflicts.[15]

12. A Liquidator has been appointed to examine the circumstances in which EBT went into voluntary liquidation in 2005. This will include consideration of the performance and conduct of the Directors, including Mrs Townsley. Directors of insolvent companies may be disqualified, for between 2 and 15 years, if there has been 'unfit conduct' such as negligence, incompetence or lack of commercial integrity.[16]

13. Mrs Townsley had considerable experience of the public sector. She was on the Boards of the Health and Safety Executive, LEDU and Invest Northern Ireland. She was also on the Department's Audit Committee, Chair of the LEDU Audit Committee and the Health and Safety Executive Audit Committee and a Member of the Senate and Honorary Treasurer of Queen's University Belfast. These are all appointments where a commitment to the principles and values of public service, as described by Lord Nolan, and an understanding of conflicts of interest are vital. The Department has concluded that there is no basis for criminal charges in this case. However, there are questions about whether behaviour was ethical. Mrs Townsley is a member of the Institute of Chartered Accountants in Ireland. All accounting institutes require their members to operate within a framework of ethical standards. The Department has asked the Department of Finance and Personnel to consider what action would be appropriate.[17]

14. The Accounting Officer has written to the Committee explaining that Mrs Townsley no longer holds any public appointments. We note that at the time of our evidence session on 13 February 2006 she was Honorary Treasurer of the Queens University of Belfast. However, she resigned from this position on 22 February 2006.[18]



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