Dairy Farmers of Britain - Environment, Food and Rural Affairs Committee Contents


Examination of Witnesses (Questions 20 - 39)

WEDNESDAY 16 SEPTEMBER 2009

MR STEPHEN OLDFIELD AND MR KEVIN ELLIS

  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.[3]


  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 where it would have come out of. 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% 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".[4] Those are three things that are, shall we say, out of the ordinary that occurred. In May of the previous year Mr Norman Coward, the adviser, left and two non-executive members of the Board went in June 2008. 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 (DFB) 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 10% 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 10 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.


3   Note from witness: Certain IPS are exempt from audit, but not DFB. Back

4   PricewaterhouseCoopers: Receiver's report to creditors, members and former members, 24 August 2009. Back


 
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