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Friday, 22 June 2012

Judge in Farepak case rules that directors were right to keep trading

In an interesting opinion regarding the collapse of Farepak the Judge in the case against the former directors brought by the Insolvency Service, he has come down on the side of the directors saying they did everything possible to try and find a solvent solution whilst still trading.

This follows the dropping of the case by the Insolvency Service against the former Farepack Directors.  Of course, the savers in the scheme are rightly upset that no one has been brought to book over the affair but their ire may now be directed at HBOS who came in for some very strong criticism by the Judge.  This is what he said; "The directors efforts failed over the period between March and October 2006 on the flinty ground of HBOS, which had a policy of playing hardball, of which it appeared to be proud, and conceding nothing,"   The full statement of the Judge can be found below.

HBOS refused to extend the overdraft and forced the directors to continue trading and collect deposit even though it looked like it there was to be an insolvent solution such as administration or liquidation. This did not impact upon them (the bank) as HBOS had its overdraft of £40m to the company secured so it would be fully repaid in the event the firm went bust. 

The directors tried to find a solvent solution but ultimately the banks action forced the company into administration.  It goes to show that in hindsight it is easy to say "Oh you should have just shut down to stop the creditors position getting any worse." It is often not as simple as that. 

What can we learn from this episode?

Importantly, it shows that the company directors, and their advisers, should always consider ALL the options and this may be to carrying on trading and do a deal with creditors, renegotiate contracts, cut costs and drive more sales.  Some insolvency practitioners look at administration and liquidation as the only options and ignore other rescue mechanisms such as informal arrangements and company voluntary arrangements.  A CVA may not have been appropriate in this case but administration or liquidation didn't solve the problem. for the unsecured creditors. The bank obviously played hard ball and recovered most of its debts but to the detriment of the savers in the scheme. It will be interesting to see if the bank coughs up the £10m extra contribution that the judge suggested should be paid?!

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