Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 16 SEPTEMBER 2009
MR STEPHEN
OLDFIELD AND
MR KEVIN
ELLIS
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 Advisory 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.[1]
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 clear 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.[2]
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, 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% 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 six 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, 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 lacunae
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.
1 PricewaterhouseCoopers: Receiver's report to
creditors, members and former members, 24 August 2009. Back
2
PricewaterhouseCoopers: Receiver's report to creditors, members
and former members, 24 August 2009. Back
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