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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 971-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE

 

 

DAIRY FARMERS OF BRITAIN

 

 

Wednesday 16 September 2009

MR STEPHEN OLDFIELD and MR KEVIN ELLIS

Evidence heard in Public Questions 1 - 88

 

 

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Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Wednesday 16 September 2009

Members present

Mr Michael Jack, in the Chair

Mr Geoffrey Cox

Mr David Drew

Lynne Jones

Miss Anne McIntosh

Dr Gavin Strang

David Taylor

Mr Roger Williams

________________

Witnesses: Mr Stephen Oldfield, Joint Receiver and Manager for DFB, and Mr Kevin Ellis, Business Recovery Services UK Practice Leader, PricewaterhouseCoopers, gave evidence.

Q1 Chairman: May I welcome to this first public evidence session of the Committee's inquiry into Dairy Farmers of Britain Mr Stephen Oldfield from PricewaterhouseCoopers, who is the Joint Receiver and Manager for Dairy Farmers of Britain, and he is accompanied by Kevin Ellis, of the same company, from their Business Recovery Services, and he is the UK Practice Leader. Gentlemen, you are very welcome indeed. May I put on record to Mr Oldfield the Committee's appreciation for the briefing you were able to give us as we set out our stall to have this inquiry. You have been kind enough to share with the Committee a copy of your Receivers' Report dated 24 August 2009, a report to creditors, members and ex-members, which has been a helpful summary of some of the information that you were kind enough to brief us about a month or so ago. We are very grateful for that. As we are now on the record I suppose I have got to start with a very simple question, at least in stating it, perhaps more difficult to answer, but what would you summarise as the main reasons for DFB's failure?

Mr Oldfield: It is clearly from the work that we have done in looking into the events leading up to receivership that the liquids division of Dairy Farmers of Britain failed to deliver its promise and as a consequence of the losses in that division it caused a lower milk price than some of the other players in the market, which in turn spiralled into members being disaffected and resigning, which in turn led to concerns from all stakeholders into the status of the co-operative and ultimately led to the failure. It was a spiralling of circumstances that started with the under-performance of the liquids division.

Q2 Chairman: I know that the Receiver's job is to deal with the consequences of companies that run into severe financial problems and that you are not the accountants/auditors for the business that existed before, but as the report shows particularly over time, and you have been kind enough to provide some summary tables in this report which give, for example, indications of the businesses, bank borrowings and overall financial position, I suspect you will have formed a view about the relative financial health of this business. Whilst you have given us a view because of the price and the membership reaction in the short-term, looking back over the period covered by the table on page 23 of the report you produced perhaps you might give the Committee a commentary on the overall financial health of this business. Looking at that table is there anything which on first encounter when you put the numbers together you could look back at and say, "Oh, gosh, that was a bad moment for this company. That was when, if you like, the rot set in"?

Mr Oldfield: It is not so much when the rot set in as that total column. For me, it is the total column that tells the story. The business generated £37 million worth of cash but then it spent it on £24 million of exceptional items, which included costs of closure of some of the dairy businesses and redundancies, some further capital expenditure of another £25 million and the acquisitions of a total of £95 million. As a consequence it spent the thick end of £145 million and that created a cash-funding shortfall of about £50 million. The members were in for £57 million in terms of the increase in their funding of this business during that time. Clearly the co-operative bit off a large acquisition followed by two further ones of £14 million and it then spent a lot of money on capital expenditure and on exceptional costs and that put significant pressure on its funding because it was not generating out of the trading part of its business sufficient to cover those costs.

Q3 Chairman: During your work as the Receiver, did you have any time to talk to members of the co-operative or were you too busy doing the higher level stuff?

Mr Oldfield: Far from it, Chairman. I think it is well known, certainly by the industry, that my first priority on appointment was to go and talk to the members. I met nearly 1,400 members in the first five days of my appointment at meetings in Harrogate, in Stoke, in Carlisle and in St Clears in South Wales. That was really important because I had heard from the membership that they felt they were lacking in communication in terms of what was going on and, therefore, I had to be absolutely front-footed and go outside the box for a Receiver and go and meet some of the people who had lost money and whose livelihoods were at stake as a result of the position that they were facing with Dairy Farmers.

Q4 Chairman: When you said that they were out of the loop in terms of communication, in terms of meeting as many members as you did, did you pick up any feeling about how prior to the demise of the Dairy Farmers of Britain's members had been involved in the evolving financial position of the business?

Mr Oldfield: I think the answer to that is the members who were at those meetings clearly felt that they would have liked more information in the period leading up to the receivership. I have to say though generically in all meetings I have with people who have lost money in insolvencies they always ask for more information in relation to the period leading up to that because, of course, they have lost money and they want to know why.

Q5 Chairman: I suppose my leading question was to try and probe how much the members trusted those who were running the company and suddenly found that trust had been betrayed.

Mr Oldfield: I think as members of a co-operative obviously they looked to the Council of Members, who are part of the governance structure of the co-operative, and also to its Board of Directors and further, because of the way in which this co-operative is structured, to the executive management that were in charge of the day-to-day operations of the co-operative, so three tranches, if you like, of senior personnel that were involved in the stewardships and governance of the co-operative. Clearly from my meetings with the members they felt that there could have been more communication but, as I say, they always say that.

Q6 Chairman: Just to put into context the table on page 23 of your report, one of the things missing from there is what the turnover of the business was. Are you able to help us with that?

Mr Oldfield: The group covered a billion litres of milk, about 10 per cent of the UK supply, and the total turnover was around half a billion, but it had actually fallen. The overall summary was a bit lower than that by the time we were appointed.

Q7 Chairman: Sorry, was that an annual figure of half a billion?

Mr Oldfield: Yes.

Q8 Chairman: Was this the first time that you had been involved in a receivership exercise with a co-op like this?

Mr Oldfield: I was involved not so much in a co-operative situation, Chairman, but in something called United Milk which was a milk processing business in Wiltshire about three years ago which was seen as the UK milk industry's balancing plant. I dealt with that particular receivership.

Q9 Chairman: I suppose I was looking for a point of comparison as to whether there was anything unusual about the state of this particular business when you were called in compared with any others that you had seen. What the Committee is interested to try to establish with some clarity are the reasons for failure. I wonder if you might be able to give a little bit of commentary about the changing nature of the contractual arrangements that this co-operative had with its customers. It seems to have had some difficulties with the Co-op, particularly in the South East and it seems to have had difficulties with Tesco's, all of which were leading to a decline in its business. To go back to the point I was making before, put simply were the main reasons that drove DFB into going out of business effectively problems with its customers, problems with its structure, the cost of restructuring, or a combination of the lot? Did that just overwhelm their ability to finance so many things going on at the same time?

Mr Oldfield: As you say, page 23 points to a lot of financing requirement from a number of activities and some of those activities, as shown in my report, were M&A activities, trying to buy and sell dairies. They closed five dairies and bought two dairies in the period that we looked at. They were spending significant monies on capex and there is a reference in my report to spending capex in anticipation of further customer contracts that did not come through. As a consequence of that it was a combination of factors but, as I said right at the very beginning, a focal point of the difficulty was around the liquids business.

Q10 Chairman: Why do you think the banks took the view that they did? They seemed to have been remarkably supportive. As the business got into even greater difficulties in fairness to them they did not pull the plug and walk away, but when you actually look at the mounting debt levels in this business, and again page 23 of the report shows very considerable bank borrowings, it dips and then starts to rise in 2008 and goes up again in 2009 but that is against a background of considerable bank borrowings against perhaps a growing uncertain commercial backdrop for this business and difficulties with customers, I am just wondering how they managed to convince the banks to stay on board.

Mr Oldfield: I think the short answer to that is they had a number of plans that they wanted to see take place, the resuscitation and in the latter stages the rescue of the co-operative. The bank and their advisers, and we were an adviser for the bank in the months leading up to the receivership, were acutely aware of the importance of this business on the UK dairy industry and, therefore, every single opportunity to try and find a solution was what had to be focused on. I think that meant on a number of occasions the bank had to put further money out, Chairman, in order to try and exhaust the opportunities to try and save this.

Q11 Chairman: I suppose you may not be the right people to ask this question, and this is no criticism of your expertise, but if one goes back beyond the 2008-09 period the banks obviously were convinced that they could still comfortably lend quite substantial sums of money to this enterprise against an ever more difficult trading situation. If they are not certain then banks will put their own teams in, they will ask for independent business reports, they will do all kinds of things to satisfy themselves that their money is "safe". Did you get any impression that that kind of level of detailed analysis had been undertaken by the banks over the period that you analysed?

Mr Oldfield: The report makes it clear that in the autumn of 2008 the Board Minutes were reflecting some difficulties in the business. That is in the report and there to see. As a consequence of that the bank were asked for more money and the bank asked us as a firm to go in and do one of those independent reviews in order to give the bank information upon which to make an informed decision in relation to that request for more money, which they put in.

Q12 Chairman: You obviously gave the bank sufficiently comfortable information at the time to convince them to carry on lending. What made you feel comfortable with the future of this business because one year later it went bang?

Mr Oldfield: I think you have got to look at the circumstances at the time. At the time there were concerns, again in the Board Minutes, over the position of the Co-operative Wholesale Society contract, one of the retail contracts, but it had not been lost. There were concerns over the liquids business but they came up with a project called 523 which was shrinking the number of dairies, making closure plans to try and bring that liquids business back into profitability. There were a number of initiatives being put forward by the Board and by the co-operative which were saying, "We want to fix this, this is how we are going to fix it" and, therefore, it was worthy of continued support.

Q13 Mr Cox: There have been concerns over the years about the governance of Industrial and Provident Societies. I have two questions for you from your experience of this receivership. The first is do you think there was anything about the fact that this was a co-operative and the model that it had that contributed to the business difficulties? That is the first question. Perhaps I can deal with them one-by-one if I may. Do you think there was anything about the particular co-operative model and the fact that it was a co-operative with these types of structures? In looking at your report it does seem to have had a fairly cumbersome structure of accountability, does it not? That is on page 19 of your report.

Mr Oldfield: I do not think there was anything particular in relation to the governance of the co-operative that caused or accentuated its difficulties. The issues that we have reported on are commercial issues, commercial pressures that were brought to bear upon this business that happens to be a co-operative. How that business then dealt with those commercial pressures in terms of how it then shared them with the various stakeholders through those different structures I do not know because I was not involved in the governance of Dairy Farmers of Britain prior to my appointment.

Q14 Mr Cox: I was wondering whether you saw anything in the structure because a limited company, for example, has very, very clear lines of accountability and very, very clear duties, but they are not so clear in the case of Industrial and Provident Societies. There have been some changes recently but there have been some lacuna and I wondered if you had looked at that aspect of it?

Mr Ellis: I think probably one of the most complicated aspects of this being an Industrial and Provident Society was that it is actually outside the Insolvency Act and the Enterprise Act, so as a consequence of that in our duties as Receivers here we did not have to communicate with any of the creditors nor produce reports to any of the creditors. Actually, that was our duty by law. We had to go to court to get clarification of what we had to do and we took the decision that only by communication could we ensure stability of the industry to get to a solution. This falling outside by dint of history, if you like, was a very serious issue.

Mr Oldfield: It was.

Q15 Mr Cox: That leads me on to my second question. Do you see any lessons in this collapse more generally for the dairy industry and particularly co-operatives in the dairy industry? Do you see any ways in which matters could be improved? I suppose another way of putting that is does the collapse of DFB indicate a more general problem that might pertain to co-operatives in the dairy industry?

Mr Oldfield: I think the only thing that I would say in relation to the dairy side of agri-business is it must be hard as a farmer to deal with volatility of raw material prices, both as a purchaser of feed and as a seller of milk. It must be hard as a co-operative or, indeed, as any processor to try and give a stable trading platform to its suppliers because of the volatility of world commodity prices. That is just an observation really. Whether it is a co-operative or a company those pressures are there. The dairy industry has got exposure to world community prices that have been very volatile.

Q16 Mr Cox: But a co-operative has a relationship with its members that a company would not necessarily have with its suppliers.

Mr Oldfield: Yes.

Q17 Mr Cox: In this case you have identified that there was a "membership haemorrhage" I think from about October 2008 onwards.

Mr Oldfield: Yes.

Q18 Mr Cox: Because there were conditions as to resignation, were there not, as there is invariably under these things?

Mr Oldfield: Yes.

Q19 Mr Cox: There is a sense and I have read elsewhere, and it maybe it does not come into your purview as Receivers to look at this kind of broader issue, that there may be some structural problems in the governance and the way in which co-operatives are structured in this country that do not seem to be experienced quite so acutely in Europe. I do not know whether you can comment on that.

Mr Oldfield: I am aware of those same comments from the media but I have no intimate knowledge of the differences between co-ops in Europe and, indeed, in the UK. I am afraid I cannot comment.

Q20 Chairman: Can I just ask in accounting terms as a co-operative do they have to be subject to the normal accounting procedures that, for example, a normal quoted company would be subjected to when audit was undertaken?

Mr Oldfield: I am not an auditor so I do not know the answer to that. What I am aware of is that the filing requirements are into the FSA as the registrar rather than into Companies House. I know in terms of the way in which we would ordinarily be able to get information out of Companies House in relation to a corporate that the process and getting information out from the FSA in relation to an Industrial and Provident Society is different. It is much swifter in relation to the Companies House information because that is what they do day in and day out.

Q21 Mr Cox: In Companies House it is published but I do not think it is the same with the FSA. A company's accounts will be published, will they not, they will be publicly available?

Mr Oldfield: Yes.

Q22 Mr Cox: But in the case of an Industrial and Provident Society I understand they are not, is that right?

Mr Ellis: They are audited. They are still subject to audit.

Q23 Mr Cox: Over a certain threshold of turnover, I think.

Mr Ellis: This was audited.

Q24 Dr Strang: At what point do you think it became clear that Dairy Farmers of Britain could not survive?

Mr Oldfield: I was present at a Council meeting on 27 March when the Member Council of the co-operative were asked by the Board to provide further financial support to the co-operative to the tune of nearly £20 million. At that meeting it was clear from what I observed in the open sessions - there were some closed and some open sessions - as the Council deliberated on the Board's plan that the Council were not prepared to support the Board in an application to the members for the £20 million. For me, as an observer in that meeting, that was a sign that there were significant difficulties because the Council did not feel sufficiently comfortable with the position of the co-operative that they wished to support that application by in effect asking members for a further £20 million to come out of milk cheques, which was when it would have come out, and that was a critical point.

Q25 Dr Strang: You explained in your earlier remarks that it was not uncommon in a situation like this where a firm is going into receivership that people complain that they do not get enough information and are desperate to get more. You have also acknowledged that there is a limit to what the management is prepared to make available because it could become a self-fulfilling prophecy, as it were. So far as what you saw, what is your view of the communication between the co-operative and its members? Do you think it was reasonable or are there reasonable grounds for criticism there?

Mr Oldfield: I did not observe and was not involved in the co-operative's communication with its members. All I can talk about is what happened on 27 March because I was there and my observation of that process was it was all day, it was robust, there was a lot of opportunity for questions and challenges and counter-comment, there was professional advice in the room, the Council had people that it was leaning on for counsel and, similarly, the Board had advisers as well. There was clearly a lot of interaction between the Board, the executive management, which remember were responsible for the day-to-day operations, they were there as well, and the Member Council. The Member Council includes not only a few people but also actually regional representatives from across the whole membership. Indeed, it was that same Member Council that when I was appointed Receiver I then engaged for a further month, I held on to them, because that was the way in which we could get the feeling of the membership because that was the representative body that the co-operative had set up.

Q26 Lynne Jones: Can I just ask in what capacity you were present at the meeting on 27 March?

Mr Oldfield: I was very clearly representing the bank, and that was made clear to the meeting.

Q27 David Taylor: I want to come back to the point my colleague, Gavin Strang, raised. We are trying to identify when the tipping point was, when the collapse was inevitable, and to an extent this is the post mortem on the deceased DFB. Your role as what you might call financial pathologists is rather more straightforward than was that of your professional colleagues in Ernst & Young who just months earlier had signed off DFB as a going concern. You have just said you are not an auditor but you have got a strong core of auditing in your training. Do you not think that particular agreement with the directors' assessment was rather misplaced even at that stage because days later the DFB Board Minutes reflected the Co-operative Group contract being in jeopardy, which was about 30 per cent of all turnover? Do you think that Ernst &Young were up to the mark or are they your pals and you are never going to criticise them?

Mr Oldfield: It is not for me to comment on their audit opinion; it is for them to comment on that if they wish.

Chairman: Let me just pursue something that is in your report which I hope you can comment on. You have said on page 25 where it says "Commercial issues in minutes" in March 2009, "Loss of Co-op contract confirmed. Debt for equity swap occurs. Member capital raising not supported". Those are three things that are, shall we say, out of the ordinary that occurred. Then in May of that year Mr Norman Coward, the adviser, left and two non-executive members of the Board went in June. In spite of these mounting difficulties the business continued to trade on and we know that subsequently as I understand it, and correct me if I am factually incorrectly, the business traded on through May and June but at the end of that the members did not receive any money for the milk that they supplied. I think that a lot of people have asked the question as to why when the business suddenly could see some serious problems occurred it carried on taking in its staple diet of product for two months but at the end of the day was unable to honour its commitments to members and pay them for it.

Mr Cox: Why did the bank finance it?

Q28 Chairman: Why did it do that?

Mr Oldfield: I am a farmer's son, my father is a dairy farmer amongst other farming activities, so I was acutely aware in advising in this position - as I say I was advising the bank back in that March meeting - of the spring flush. It is the time in the UK dairy industry when there is a wall of milk that hits the market. The size of the milk cheque for the April supply was £24 million. In discussions with various stakeholders since my appointment we have talked about the spring flush and we have talked about this March date and the fact that if the Council could not support the capital raising why did it not stop. The considered view of the vast majority of stakeholders I have spoken to suggests that for Dairy Farmers of Britain to have entered into receivership in March would have been a serious, serious blow to the UK dairy industry. My conversations and my advice to the bank talking about the importance of Dairy Farmers of Britain as ten per cent of the UK milk supply and with a £24 million milk cheque in jeopardy was that there had to be a basis for continuing to try and find a solution to this co-operative and avoid its failure during the spring flush. It was very clear to me at that juncture in time it would have been very damaging for the UK dairy industry and it would have been very damaging because it would not necessarily have exhausted all of the opportunities to try and find a solution for the co-operative itself to have seen a receivership in March. What happened was that the bank had to put some more money in. Why would they do that? They did it on the back of some advice from me and an understanding in relation to the UK dairy industry and what that meant in the spring flush.

Q29 Chairman: We have here a commercial transaction, milk is coming in and I presume that there must have been a market for some of that milk, in other words it generated payment from customers. I accept the fact that if there was a normal commercial basis for carrying on trading at that time one should have done it, but what has concerned a lot of people is that if they realised that there was a market for that milk and there could have been what I would describe as an orderly disposal of it, you are going to sell it, as a result of that normal transaction the net result is the suppliers, the farmer members do not get paid. You could have looked at it another way round: if it had gone into receivership and the farmers were left trying to find a way out of a desperate situation, if they had received a nil consideration for that milk they would have been no worse off than they subsequently turned out to be. At what point did it become apparent that that milk which had been taken in was not going to be paid for?

Mr Oldfield: Typically you get situations, and there have been a number in the UK over the last ten years, where dairy companies fail and it is understood by the industry that when dairy businesses fail they often fail on the day of the milk cheque. This business did not fail on the day of the milk cheque, it failed on 3 June two weeks before the milk cheque was due. I understand the bank facilities were due for renewal on 11 June. As a result of that this business went into receivership owing the farmers about five weeks' milk but it could have gone into receivership owing farmers seven weeks' milk. Chairman, it always owes two weeks' milk because that is just the way in which the phasing of the payments for milk work with the farmers.

Q30 Chairman: I suspect farmers would ask this question: was it reasonable for the business to carry on taking that milk in? I understand the timing issue, but as management looked at the worsening financial position there must have come a moment when they knew they were not going to be able to pay for that milk.

Mr Oldfield: The way in which my appointment happened, the Board met with the bank and the Member Council on 2 June and out of that meeting came a decision that the Board's plan could not be supported - they were asking for more money - and rather than the Board continuing to trade through to 11 June when the facilities ran out, they went off, took legal advice and wrote to the bank inviting the bank to appoint receivers and managers to take control of the business.

Q31 Chairman: What happened to the £24 million worth of milk they sold? Where did that money go?

Mr Oldfield: As in all businesses, when you take raw material in and you process it and you sell it out it goes out into cash and it goes into debtors. So it is either sold for cash or it goes into debtors.

Q32 Mr Cox: Presumably the banks were being paid monthly interest? Was HSBC being paid?

Mr Oldfield: The bank would have been paid its interest and charges in the normal course, yes.

Q33 Chairman: Effectively, what the £24 million did, because it would have gone into the company's bank account, was reduce the exposure of the bank.

Mr Oldfield: It would have gone into debtors which then are assets of the co-operative and then would have been applied to the creditors in order of priority and, yes, the bank are the secured creditor in the failure of a co-operative or a company.

Q34 Chairman: Basically what you are saying is that the money came in after the receivership had started?

Mr Oldfield: Yes.

Q35 Miss McIntosh: Just to ask the same question in a slightly different way. If these co-ops were created under a different piece of legislation than the current legislation then they might be covered by the regulatory authority of the FSA. At the moment they are not regulated by the FSA and are not monitored by the FSA. It has also got implications because the bank becomes the superior creditor. There are two ends of the scale, if you like, that have suffered in particular. There is the small hill farmer in the north of England who probably does not have too many other incomes to look to, but then you have got the larger ones who probably put upwards of £50,000 into it who now do not qualify as being a creditor. My concern is whether we have got the right legislative and regulatory framework and could we have avoided it at an earlier stage if we had.

Mr Ellis: As I think I said earlier, it is inappropriate for the Industrial and Provident Societies to be outside of the Insolvency Act but, as I say, it is an accident of history and is something that as this Committee sees it is probably something that should be corrected in the legislation going forward. One thing you do need to maintain stability in such a difficult circumstance as an insolvency is to move very, very quickly and it was not helpful that we had to go to court to get permission. Also, it would not have been helpful to the creditors if we had not found a way of communicating with them.

Q36 Mr Cox: Would you have had problems getting information, for example, as you would from Companies House?

Mr Ellis: Companies House is set up to provide information at a different speed. It is an inappropriate act of history and I think this does need to come under the Insolvency Act and Enterprise Act 2002.

Q37 Miss McIntosh: With the greatest of respect that is probably not the remit of this Committee, it should be a different departmental committee. Broadening the argument for a moment, it strikes me that co-operatives in the agricultural sector, dairy and other aspects, flourish in other countries, and I am thinking particularly of Denmark and New Zealand. There are State Aid provisions that would probably not allow that level of co-operation. Should we also be looking to possibly that area of legislation as well? Are there lessons to be learnt from other countries where these co-operatives do seem to flourish with quite a lot of state or government support, or do you not feel qualified to answer?

Mr Oldfield: As a farmer and an agri-businessman, and that is what I specialise in as a sector, I would say there is a place for agricultural co-operatives in UK agri-business and there are some very successful UK agri-business co-operatives. This one was unsuccessful but their place in the market, if you like, I think is important for farmers and for the industry and anything that can be done to try and enable their effectiveness and competitiveness has got to be good.

Q38 Miss McIntosh: You sound as though you are quite an expert in this field. Do you believe that the State Aid provisions of the EU prevent any kind of further support to allow these co-operatives to flourish?

Mr Oldfield: I cannot answer that question, I do not know the answer.

Q39 Mr Drew: We have rehearsed a number of the arguments with regard to Industrial and Provident Societies and I do not want to go over the same ground, although it was interesting to hear what you said about the insolvency problem, Mr Ellis. Can I just ask two things, and they are quite specific. The first is the way in which there is no separation in terms of those who lost money in this. There is no separation between preferential and non-preferential creditors under the IPS. What specific problems do you think that causes in terms of farmers who have obviously lost both their share capital and, as we said, the milk cheque non-provision?

Mr Oldfield: That is a relatively straightforward question because farmers are not preferential creditors and if this was a company they would not have been either. The only preferential creditors are employees now and the employees have largely - not completely - been supported by the Redundancy Payments Office in relation to the receiver and managership of the co-operative, but there remain significant monies, up to about £1 million, which if this was a company would be a preferential creditor, but because of the IPS there is not recognition of preferential creditors. It is one of the other issues that are relevant to what my colleague has been saying about the difference between insolvency in a corporate situation and insolvency in a co-operative situation.

Q40 Mr Drew: My other point is in talking to someone who was previously on the Board of DFB there is a view that one of the difficulties of the structure of the organisation was it was very difficult to increase the capital, that it was under-capitalised. I would add to that that this is a very difficult market segment with over-capacity in terms of processing. I suppose I am not leading you too far, but to what extent was it bound to fail because of historic and structural problems to do with its organisational form but also the fact that it is in a very difficult market?

Mr Oldfield: Picking up your question on over-capacity, I was surprised by the speed at which customers could switch from their reliance on the dairies, on the liquids part of the division, on receivership to other providers. They switched within ten days and 60 per cent of our customer base disappeared. To go to your question on over-capacity, there must have been capacity out there for them to be able to switch that quickly. Absolutely there was capacity available within the liquids business in the UK. I am aware that a number of dairy companies have invested in what are called the "super dairies" and I know those are big beasts that can bang out an awful lot of milk very efficiently. I am aware of a number of investments in that over the last five or six years.

Q41 Mr Drew: In terms of the structure of the IPS in relation to their ability to raise capital you talk about capex and this is an organisation that needed to radically restructure itself and yet it did not have the capital apparently to be to achieve that. Is that a fair statement?

Mr Oldfield: If you look at the funds flow you can see that there was a funding gap absolutely and the members could only be asked for that much.

Q42 Mr Drew: Is that a specific weakness that you think the IPS put on them or was it just the fact that it was always under-capitalised anyway?

Mr Oldfield: I believe there is a limit in relation to the amount that a member can invest in an IPS. I think that number is £20,000. If that is the case then clearly that provides a cap on co-operatives' abilities to raise capital.

Q43 Chairman: That piece of formula does not apply to the retention of monies from the milk chain, does it?

Mr Oldfield: I think there is a definition, Chairman, called "Members' Interests" and it is what the members' interests cover. I have got some papers on this that I am happy to try and explain to you in a further written submission if that would be helpful.

Chairman: That would be very helpful because I am a little bit confused as to the difference between, if you like, putting money in and money being kept in the co-operative which I thought was part of the members' guarantee arrangements because the sums of money which some members have lost are obviously considerably in excess of the £20,000 limit.

Q44 Lynne Jones: Before I come on to the line of questioning I want to take, in your report on page 28 you say that DFB had invested heavily to support Tesco and the Local Choice brand and yet it seems in early 2009 Tesco was in the process of delisting the Local Choice product. In the Ernst & Young report they tell us that Tesco attended the DFB Council meeting in June 2008 and seemed very bullish about their continuing the Local Choice line and Ernst & Young referred to information on the Tesco website which referred to "Tesco's plans to expand the availability of Local Choice milk". Was there any obvious reason why Tesco suddenly changed their mind on this because that played a significant role in the financial difficulties that DFB were having?

Mr Ellis: Obviously I do not know the specific answer to the question because I was not there and was not, therefore, party to the discussions between the company and Tesco. Just on reflection I would merely say that with the onset of the recession and the difficulties that brought with it for consumers, there was undoubtedly, with my agri-business hat on, a switch to value for food and I do not know to what extent that would have had an effect upon the relative merits of Local Choice or, indeed, one of the other initiatives which I know this co-operative were really pushing on, which was regional milk. I merely reflect that from my knowledge of the industry.

Q45 Lynne Jones: Presumably the Local Choice milk had a price premium on it, did it?

Mr Oldfield: Yes.

Q46 Lynne Jones: A little earlier in response to a question from Gavin Strang about when it first became clear that the future of the business was in jeopardy, which was "At what point was it clear that DFB's survival as a going concern was no longer possible", I think you said it was at your attendance at the meeting in April.

Mr Oldfield: In March, 27 March.

Q47 Lynne Jones: Sorry, on 27 March.

Mr Oldfield: I am saying that was a critical moment in the life of the co-operative because its Member Council had said that it would not go to the members and ask for £20 million. That left the co-operative with a funding gap and what happened was the funding gap was filled by the bank, they put £13 million more in to try and exhaust the opportunities to try and find a solution. That was what happened. It created a funding gap that then had to be sorted out between the Board and the bank, and that was what was then done.

Q48 Lynne Jones: I also have information about a letter which was sent from Lord Grantchester to DFB members on 12 February that said: "DFB has engaged leading corporate mergers and acquisitions advisers from PricewaterhouseCoopers to help us review their approach", that is in terms of their restructuring. Could you outline PwC's role as an adviser to DFB prior to the receivership and when you actually took on that role?

Mr Oldfield: Referring to that letter, we were aware of some activity by the company prior to that date. The company had consistently engaged Smith & Williamson as mergers and acquisitions advisers and in particular ran strategic options. I mentioned earlier that there were a number of projects that the business had engaged on since the acquisition of ACC over a numbers of years and it is referred to in my report. I think I talk about 35 different projects. When it became clear that there was a need for some more impetus in relation to the M&A activity to try and find a strategic solution to the co-operative, and also because they had been approached as well, and I think that letter talks about an approach which the co-operative had received, we consulted with the bank and we were advisers of the bank and they encouraged the company, and the company agreed, that we would be engaged to take on that role to seek to try and find a strategic solution to the difficulties faced by the co-operative. I remember I used the term at the time of turning over the stones, "We have to turn over the stones to try and find a solution for this co-operative". It was felt that our engagement in February would accelerate that process from where it was previously because they had not found a solution up until then and we needed to accelerate that.

Q49 Chairman: When you say, "find a solution", they embarked on Project 523, which was the restructuring of the business. Just fill us in on what it was you were trying to find a solution for because that was prior to this March 2009 worsening financial position. In other words, you came in, they knew that things were not going well so they were asking you to look at the business and see if there was a way out of the mess. What were the options?

Mr Oldfield: Chairman, if you think about February and March, in March they went to the members asking for £20 million. One of the ways to try and reduce the amount of money asked of members was to try and find some buyers for certain of the businesses of Dairy Farmers of Britain. That was in the thinking of the Board and the bank, that in order to fill the emerging funding gap of the co-operative the stones needed to be turned over to see whether there was value in parts of Dairy Farmers of Britain that could help to meet that funding gap. That was where the impetus came from. It came from trying to find some nuggets of value in the Dairy Farmers of Britain's portfolio of businesses to try and help meet that funding gap to avoid asking the members for everything or, indeed, the bank.

Q50 Lynne Jones: Who in PwC took on that role as advisers to DFB?

Mr Oldfield: We had a separate team involved in that. The idea was that there would be a transaction team dealing with that piece of work with a prime duty of care to the bank because that was the way in which that engagement was structured and is typical in these situations. The company had its own advisers - Ernst & Young have been mentioned already in this Committee hearing - and also a firm of lawyers as well who were advising the Board and PwC were advising the bank in connection with what was going on in terms of the transaction team. The information from the transaction team flowed down into two separate camps for interpretation as to what the position was.

Q51 Lynne Jones: So you were not part of this advisory team then?

Mr Oldfield: I was only part insofar as my industry knowledge, and we have already talked about it a number of times this afternoon. All the discussion and all of the M&A work was done by a separate team, absolutely.

Q52 Lynne Jones: How did you ensure that conflict of interest was avoided with yourself as the bank adviser? Okay it was a different team but how rigid were the walls between the two sets of advisers?

Mr Oldfield: There were walls that recognised that our M&A role was with a prime duty of care to the bank who we were working for.

Q53 Lynne Jones: The M&A role for DFB?

Mr Oldfield: The engagement letter is between the company and the bank and ourselves with a prime duty of care to the bank.

Q54 Lynne Jones: Let me just get this clear. So when PwC were appointed as advisers on mergers and acquisitions your prime duty of care was to the bank and not to DFB?

Mr Oldfield: In the event of conflict, yes.

Q55 Lynne Jones: Okay. Can we just go back? You seemed to imply that in March 2009 at the meeting you attended you saw that the writing was on the wall when the members themselves were not prepared to put up money to keep the business going and yet the business did not go into receivership until June 2009 and kept going during a period when the farmers were producing milk which was then being processed, money was being received presumably from those contracts and yet none of that money was paid over to the farmers. Could it not be argued that that advice was to protect the interests of the bank and to keep it going protected the bank's interests and those of the members of the co-operative?

Mr Oldfield: There are three key points. The first key point was remember what I said about 27 March was not that the writing was on the wall, it was that there was a funding gap and it needed to be bridged and that was why the bank put more money in, the £13 million of new funding. That is point number one, there was a funding gap identified on 27 March. I was not saying that the writing was on the wall.

Q56 Lynne Jones: A funding gap to do what?

Mr Oldfield: A funding gap because the company needed more money.

Q57 Lynne Jones: You thought there was a reasonable prospect of that investment actually yielding results?

Mr Oldfield: Remember what I said about the spring flush and the discussion that I did share with the Committee about ---

Q58 Lynne Jones: I heard you say you had got to get over the spring flush and avoid damaging the dairy industry as a whole rather than DFB.

Mr Oldfield: It also gave the opportunity for the Board's proposals in relation to trying to find a solution for Dairy Farmers of Britain to have a further, in effect, nearly three months of time.

Q59 Lynne Jones: At that time as well they knew that the Co-op contract was going to be ended and you knew that Tesco's had changed on the Local Choice, so what realistic prospect was there that DFB could be brought into a situation where it was a going concern?

Mr Oldfield: There were a number of interested parties around in March. Remember we kicked off that M&A activity in February, so it was not as if it was without hope. There were interested parties, albeit the interest, and it is in the report, in the liquids part of the business was not strong. The second thing, and it goes back to your question, is you also said how did the co-operative continue to take in milk after March. It took in milk after March but remember ---

Q60 Lynne Jones: I did not say "how did it", I said why did it not go into receivership in March rather than continue trading?

Mr Oldfield: It continued trading. It had bank facilities to 11 June and it met the £24 million April milk cheque and a further milk cheque in May before it failed in June. There were two further milk cheque payments made to farmers between 27 March and my appointment on 3 June.

Mr Ellis: I think it is worth noting in any insolvency that with the power of hindsight you can look back in time to a kind of perfect moment, but you criticise directors sometimes for throwing the towel in too early when there is a prospect of making a sale, preserving jobs and preserving stability in the market. It is a very difficult call with any director looking at that point in time. With hindsight you can look back, as Stephen said.

Q61 Chairman: Would I be right in assuming, looking at the sale of the Lubborn business and Llandyrnog business, that if those two businesses had been got away during your period of analysis then the business could have traded through the receivership situation or were we just putting off the evil moment when it was going to go into receivership?

Mr Oldfield: I think those two businesses being sold was good news but, as I alluded to in my report and I have alluded to in a number of answers to the questions, the real problem business here was the liquids business.

Q62 Chairman: In other words, they had not realised sufficient of the benefits from Project 523 and it was burning through cash at a rate that was unsustainable and even if they had sold these two assets that would not have stopped the cash haemorrhaging. When the decision was made, was it that the bank said, "Enough's enough, stop" or did the Board of Directors say, "We know we can't go on"? Who actually triggered the decision of receivership?

Mr Oldfield: The answer to that is on 2 June the Board came up with a new proposal for continuance but required more money. The Board brought the chairmen of the Member Council with them to that meeting. The bank consulted with the chairmen of the Member Council and the feeling was that it should stop. I remind you that, of course, the facilities were to 11 June but it was not allowed to continue that long. The funding request by the Board to the bank was therefore not supported. The Board then went back to its legal advisers, took advice and invited the appointment of receivers and managers.

Mr Ellis: Also, I am right in saying by then we knew that for four months they had tried to sell the problem liquids division and it had not been sold, so that was a key factor.

Q63 Lynne Jones: I take your point about hindsight, but in this particular case it was known early on that the Co-operative contract was lost and that the Local Choice bonanza was not going to take place, so that was known in March, was it not?

Mr Ellis: A successful sale of the business outside of insolvency would have been better for everyone and that was what was being pursued at the time. Things are lost, but often we would criticise directors for throwing the towel in early and causing more of a loss to creditors, employees, and in this case the industry.

Mr Oldfield: Because of the spring flush.

David Taylor: In August 2008 the Board Minutes reflected the fact that the contract with the Co-operative Group, which was 30 per cent of their turnover, was in close jeopardy. It was not something that had sprung out of the blue sky, was it?

Q64 Mr Williams: At one time you were advising the bank and advising them to put more money into the business and the next minute you were acting as a Receiver whose responsibility was to the creditors, who was the bank. I am not quite sure how you go from the one role to the other in a seamless way.

Mr Oldfield: You ask an interesting question insofar as the receiver and manager is appointed by the bank in relation to their debenture, so the receiver and manager's prime duty is to the bank. That contrasts with what my colleague here has been discussing in relation to corporate insolvency where the process is administration where there is a much wider responsibility, Chairman, to the creditors than just the bank. I think we, and in talking to the bank as well, would feel that being able to deal with something as complex and as difficult as Dairy Farmers of Britain through a Company Act, Enterprise Act type of appointment with administration would have made this a whole lot easier to deal with than dealing with it through a receiver and managership which had to be appointed by the bank otherwise it would have been liquidation. For the avoidance of doubt, if it had been liquidation the doors would have had to close because that is what liquidation is, it is the ceasing of the business.

Mr Ellis: You would not have been able to move the 1,800 farmers across.

Mr Oldfield: You certainly would not have moved the 1,800 farmers across. I had to actually borrow £10 million from the bank personally to continue to trade Dairy Farmers of Britain. I was personally liable for that money. The receiver and managership allowed the business to be able to continue to trade, but the receiver and managership is appointed by a bank, because that is the only way it can be done under an Industrial and Provident Society, as opposed to being able to be appointed administrator under corporate law and deal with the wider body of creditors in that way. PwC took the opportunity to try and engage with both the FSA and the Insolvency Service to say, "Look, receiver and managership restricts our ability to talk to the stakeholders in this business, please can we have your support in engaging in a much wider level of communication including the creditors meeting and report". It was open for us to try and drive that because there was very little statutory guidance at all.

Q65 Mr Williams: Apart from the members of the co-operative who supplied the milk and the bank, what other creditors were involved at the time of the Receivership? Substantial creditors?

Mr Oldfield: At the time of the receivership there was approximately £10 million of money owed broadly split into two camps. There was £5 million owed to HMRC and then there was £5 million broadly owing to other creditors, which included people like packaging companies and hauliers.

Q66 Mr Williams: What options are available either to members or those other creditors now in any attempt to recover any money? Is there any option available to them at all?

Mr Oldfield: In the report we make it clear that the outcome of the receivership is likely to result in a shortfall to the bank of around £4 million, so the likelihood of a further process in relation to Dairy Farmers of Britain in order to distribute money to other classes of creditors, there is no further money to distribute because the bank are going to suffer a shortfall. Technically the co-operative can go into liquidation but there is no money to distribute to those creditors to seek their recovery of further monies.

Q67 Mr Williams: In your report you say that the creditors could petition for liquidation, but you are saying there is no point in doing that at this point because it would mean throwing good money after bad?

Mr Ellis: Yes.

Q68 Mr Williams: Is the process of liquidation different for a co-operative than for another company or organisation?

Mr Oldfield: I do not believe so. I have looked at the receiver and managership versus administration. I have not looked at the liquidation IPS versus company but I do not believe there is a difference.

Mr Ellis: The key difference, as Stephen said, would have been if you went into liquidation immediately the doors would have closed, that was what was desperate to be avoided.

Mr Oldfield: Absolutely.

Q69 Dr Strang: These people are milk producers, it is not like a co-op growing lambs or barley, they have to get their milk lifted regularly and it is a perishable product. That is really the difference.

Mr Oldfield: Absolutely right. The key objective of the receivership was to keep the wheels turning and milk flowing and the industry rallied round the receivership and we managed not to spill any milk and for me, as a farmer, that was the most important thing because that really would have produced a crisis of confidence much wider than just Dairy Farmers of Britain.

Mr Ellis: The stability enabled the 1,800 farmers who were supplying to find new sources of outlets for their milk. As I say, liquidation on day one with doors shutting would have meant that those farmers probably would not have survived at all. They would not have survived a week really, would they?

Mr Oldfield: There would have been milk spilt with nowhere to go.

Q70 Lynne Jones: How was it decided how to pay back the different creditors? I understand that with an Industrial and Provident Society there is no priority order, so how is that being done?

Mr Oldfield: Although it is a co-operative and there are no preferential creditors, which was a question on my left earlier, there is the ability to create what I call mortgage creditors, so secured creditors. Co-operatives can borrow money from banks against which they give a debenture charge, and that is exactly the same as in the corporate world, and that was what happened here, they borrowed money from the bank against a debenture.

Q71 Lynne Jones: So the bank has priority over any of the other creditors?

Mr Oldfield: Yes.

Q72 David Taylor: I am still not convinced on the conflict of interest issue but I think we will have to abandon that for the time being for want of time, Chairman. I am far from satisfied with the answers we have received. Let us move on to the issue of milk price during receivership. During April 2009 the average price that DFB members had been receiving was 20.1 pence per litre, but then in the first two weeks of receivership the total amount they received was 16 pence per litre and then in the final month 17 pence per litre and at 16 July just under that at 15.7. The NFU point out that the average cost of milk production was in the range of 24-27 pence per litre, therefore the fact was the price that you calculated was three or four pence below what they had been receiving and even when they were receiving 20 pence a litre they were losing five, six or seven pence per litre and that put farmers into a very, very difficult position. Why were prices so low? Why did you pitch it at that figure?

Mr Oldfield: We did not pitch it at any figure.

Q73 David Taylor: Did you not?

Mr Oldfield: No, we did not. We said we would go fully transparent in relation to the milk price on a margin managed basis which meant we would take the proceeds of the milk that were received from customers, we would deduct the costs that were incurred excluding the costs of receivership, excluding the costs of bank borrowing, excluding the costs of closure of any of the assets further down the line, and in that case it was the liquids business, and we would just return to the farmers what we got for the milk less the cost of collecting it and sending it on. Those were the numbers. It was explained very clearly to the Member Council on 3 June before we commenced that strategy and we have been fully transparent with the members in relation to how that number was calculated. If I just might pick up on something you said. The spot price for milk at the time that we were trading was considerably less than 24 pence per litre, I believe the spot price was more like 17.5 pence. That is just so you know.

Q74 David Taylor: Your calculated price was below the spot price?

Mr Oldfield: Correct. It was the performance of the business. We could not afford to make trading losses. I was borrowing £10 million already, I did not want to run further risks of trading losses.

Q75 David Taylor: The NFU were critical of the way in which you undertook that pricing, were they not?

Mr Oldfield: Not to me they were not, no.

Q76 David Taylor: Were they not?

Mr Oldfield: No. I consulted with the NFU, with Defra, with the Welsh Assembly, as many stakeholders as I could, in order to explain my strategy and how I was going to deal with it. In particular, I was acutely aware that I could not afford to put a guaranteed price in the first two weeks of my trading because by definition in order to avoid losses I would have had to set a very low price and the feeling was that if I set a low price in that what I call two week hiatus period I would have dragged the whole market down. So I actually did not set a price, even a guaranteed minimum price, until my milk field had settled after two weeks and then I put in a guaranteed minimum price of ten pence, which I ultimately paid 15.7 on.

Q77 David Taylor: You have explained that the decision to carry on trading from April to 3 June allowed two further milk cheques to be paid. Nevertheless, is it not the case that the main beneficiary of the delayed receivership was the bank?

Mr Oldfield: There were two benefits. The first was that the farmers were taken through the spring flush, which I have said, and the size of the milk cheque was less. The second thing was remember if there had been a solution to Dairy Farmers of Britain between March and June then that would have clearly been in the members' interests, but in the event there was not. It goes back to what my colleague said in relation to directors can be criticised for throwing in the towel too early and not exploring the options available.

Q78 Chairman: You said in your report that you had not held members to their guarantee arrangements. Obviously when you are not getting money into the farm it is very difficult to pay stuff out. Members prior to receivership had to give 12 months' notice to end their contracts but, given the instantaneous uncertainty when receivership occurs, do you think there ought to be a different arrangement where members can just say, "Right, thank you very much" and walk without giving a period of notice?

Mr Oldfield: It inevitably caused me great difficulty. I had a very robust discussion with my lawyers about this and, again, as an agri-businessman I said, "I do not believe that practically we will be able to trade if I try and hold the farmers to these contracts because they'll vote with their feet or they'll employ a good lawyer and all I'll get is spilt milk and a lot of legal suits". That decision has been upheld by everybody I have spoken to, including some fairly prominent members of the industry, who said, "You have no choice". In terms of the answer to the question about whether or not the contracts should give some sort of "out", if I interpret it right, for farmers on insolvency, in most industries you have got an insolvency clause. Kevin, I do not know if you want to comment?

Mr Ellis: They exist in most industries therefore, as you say, in this situation immediately you go into insolvency you have the option to opt out. If you have got the option to opt out it does not exist and there is no contract at all and you have got all the instability of running the business, the volatility of milk, the instability of feed prices and you are not sure what your supply levels are like, so it works both ways. I think if you took the handcuffs off, as we did, post-insolvency and had the opportunity to opt out of those contracts post-insolvency, if you did that pre-insolvency it would make this an even more volatile and difficult business to run.

Mr Oldfield: Having the option in a contract to decide whether you stay in or go makes it available to you as a supplier who has lost money and is concerned as to the future to decide whether you are going to opt in or you going to opt out based on your circumstances, not the circumstances of the co-operative in this case. I took the handcuffs off and I did not have to. If the contract had been worded so that at the option of the farmer they could decide whether the handcuffs stayed on or off, that would have made it much easier for individual farmers to make their own decisions based on their business circumstances.

Q79 Lynne Jones: In March the Member Council voted to support converting £55 million of member investment into shares. What implication did this decision have for the members once DFB had gone into receivership, and in particular the tax implications?

Mr Oldfield: The answer to the first part of the question under analysis is going to make no difference because whether that money was invested as debt or as equity, there is no return for either a debt holder or an equity holder in receivership. In relation to the second question, which is the difference in relation to the tax treatment, yes there is a difference. My team are currently liaising with the Inland Revenue with a view to trying to get an answer to this to try to ensure that farmers who were affected by the debt to equity switch back in March are not adversely affected through their tax affairs. I am active on that and Defra have also been supportive of that to try and get that guidance through. We have got 1,833 farmers who were supplying this business and 5,000 farmers who were members in one capacity or another, as either debt holders or equity holders, so clearly there are an awful lot of enquiries that can go to the Inland Revenue from that body of people and it would be much easier to try and deal with it as one complete solution. We are absolutely onto that because that is the right thing to do in these circumstances.

Q80 Lynne Jones: What response have you got so far from HMRC?

Mr Oldfield: One of the policy officers is onto it. We are pushing hard for an answer. I was trying to get it for my creditors meeting on 7 September and, indeed, I was trying to get it for today but I still have not got my answer.

Q81 Lynne Jones: When that decision was taken were members aware of the implications should the investment not be successful? Who was giving the advice in terms that this would be a good thing to convert from debt into shares?

Mr Oldfield: My understanding is that the Board asked the Council to approve the rule change in order to allow that to happen. This is my understanding of it. As a consequence of that the Board were given the ability to make that switch from debt to equity at their discretion, but the Member Council had to agree to a change in order to allow that to happen. As I explained, the Member Council is a representative body of the members elected. That was what happened as I understand it.

Q82 Lynne Jones: Were these implications spelt out to them?

Mr Oldfield: I do not know because I was not party to that discussion specifically.

Q83 Mr Williams: Shortly after the co-operative went into receivership Defra co-ordinated a meeting of interested parties to see how the milk supply chain could be maintained within the constraints of the receivership. I think there other meetings between Defra and your organisation after that. Is that the total amount of discussions that have gone on with Defra or have they been ongoing?

Mr Oldfield: I have had very considerable discussions with Defra. I first met Defra after my appointment on 8 June, so five days after. I saw the farmers first to make sure they were clear on the trading position and then I went and saw Defra. I also saw the Welsh Assembly. On 8 June I met with them and informed them of the position. I explained that there was a two-week hiatus period and I was very concerned that of the 1,833 farmers there would be a tail, a rump of farmers left who did not have the option to find alternate homes for their milk and would therefore be stuck with me as a Receiver collecting their milk. I was very clear that I would not stop collecting their milk. I made sure that was agreed as part of my Receiver and Manager strategy. I did not want to call an end, to call time on the Dairy Farmers' industry, their business, but what I clearly had to do was to margin manage. The strategy was to continue to collect the milk but to put Defra on notice that if I continued to collect the milk as the number of farmers were falling in my milk field so the price we were talking about earlier would go down and down because clearly the costs of collecting the milk, particularly the further out, would increase. I talked to them about that on the 8th and by the 17th, which was two weeks after my appointment which was the end of the hiatus period when the farmers had to decide whether they were in for a monthly contract or go, I then went back to Defra and that was the meeting when all of the stakeholders came round the table. By that time we were down to 300, which was much lower, Chairman, than I was expecting - much lower. At that meeting we discussed what we were going to do for the 300 farmers who were in the rump. I could not continue to collect the milk forever but I certainly was not going to call time on those 300 farmers, so what was the solution for these 300 farmers. Dairy UK were there, a gentleman called Jim Begg who is the Chief Executive was there and he clearly understood the importance of trying to sort this out and finding an industry solution. We talked about an industry solution and then we talked about Defra intervention. The Regional Development Agencies were also there. The way I viewed it was Plan A was an industry solution and Plan B was intervention in order to try and solve the problem of people with no homes to go to. In the event, following 17 June, within 43 days, so by mid-July, 16 July, I collected my last milk because 144 of the farmers - gradually they were going - ultimately went to Milk Link. That was the end of my milk collections from 16 July. Just to be clear, Defra was all about the Plan B, it was all about what do we do about this rump of farmers if we got left with them if the industry could not take care of it. Does that answer the question?

Q84 Mr Williams: Just about. In the forensic analysis that you have demonstrated this afternoon, what is your assessment of Defra's role in this sorry event?

Mr Oldfield: They were clearly instrumental in putting the stakeholders together. On the 8th I said, "We might need this" and on the 17th the room was full of people, heads of the UK banks were there as well, the UK agricultural divisions of the banks, so they had clearly done their job of putting the stakeholders together. Everybody knew what the challenge was but Plan B fortunately was not brought to test, so as a result I was pleased with what they did on stakeholder engagement.

Q85 Chairman: Just a couple of little points of detail wrapping my mind around some of the complexities of this issue. Was the bank finance to the business subject to any covenanting arrangements?

Mr Oldfield: Yes.

Q86 Chairman: What were they?

Mr Oldfield: I do not know the specifics on the covenants but I know that there were covenants set in relation to the banking facilities, as would be normal.

Q87 Chairman: Could you drop us a note on that if that information is available?

Mr Oldfield: Yes.

Q88 Chairman: Just to be clear about the reaction of members to the December 2008 events when there was a 2 pence a litre price drop and at that time, if I have understood it correctly, 322 members gave notice that they wanted to leave the co-operative, I am assuming that was one of the factors that would have influenced customers of the co-op to say, "We can't be certain of supply in the future, therefore we're going to examine or review our trading relationship". Was that chicken and egg situation one of the triggers for the loss of the contract with the Co-op in March 2009?

Mr Ellis: I do not know obviously because I am not the Co-op but I would observe that you had got losses in the liquids business, the milk price not being terribly attractive against the Milk League, which I think you are all aware of, and as a consequence of that farmers saying, "I can't afford to take that price, I need to move to a new home for my milk. I'm giving notice" and that in turn, the farmer making a reaction to his economic circumstances, means he resigns and that gets into the domain of the customers who say, "Where's the milk going to come from?" and then they review. It is part of my spiral. It is a consequence of the circumstances facing the co-operative.

Chairman: Thank you very much indeed for your forbearance and patience in answering our questions. Obviously this is the first public outing, if you like, and trying to understand the order of events and the relationship of one event to another in what is a complex situation is quite challenging. There are two things I would say in conclusion. If there are any other things upon review that you want to draw the Committee's attention to we would be delighted to hear from you. Obviously what you have now said is down on the record and cannot be undone but, nonetheless, can I put on record my appreciation for your assistance to the Committee both before this hearing and in supplying us with the report and your answers. Thank you very much indeed.