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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