Vince Cable’s advisor, Lawrence Tomlinson, has revealed publicly what many practitioners already know; that the Royal Bank of Scotland has failed to support distressed but viable companies and is, in certain circumstances, instead using them for profit.
His report claims that the bank’s Global Restructuring Group (GRG) is forcing viable companies to go bust by purposely charging high rates and fees, and then selling off the business assets cheaply to make a profit in its own West Register company.
Lawrence Tomlinson, who works for the Department of Business, Innovation and Skills as an advisor has compiled the damning report and is calling for an investigation by regulators.
The main criticisms and/or complaints were the following practices;
- Property revaluations without site visits, and mistakes in documentation
- Property taken over by RBS subsequently sold for a price higher than the bank's own valuation.
- In one "very clear example" the reasons a business was put into GRG "changes throughout the conversation"
- One business submitted evidence that in fees alone, their time in GRG had cost them £256,000
- Small loan breaches forcing companies into much more expensive arrangements, leading to the inevitable collapse.
Business secretary, Vince Cable, has passed the information on to the FCA and PRA to investigate further. The report has been published at the same time as a review (commissioned by RBS) by a former Bank of England’s official, Sir Andrew Large. He looks into issues with SME lending and GRG’s role in the organisation.
RBS have said in a statement, ‘GRG successfully turns around most of the businesses it works with’ but ‘not all businesses that encounter serious financial trouble can be saved.’
Tomlinson believes that small companies are being pushed to the edge, even if they were not struggling to begin with but have faced a few financial problems.
On BBC radio today a hotelier was interviewed who had lost his hotel following a crippling interest rate swap that went bad. The hotel was sold at a knockdown price to the property investment subsidiary of RBS, West Register.
It is KSA’s view that turning around viable but distressed companies should be the focus of these bank departments, by giving financial support and to help these businesses stay alive, wherever possible. But if they cannot be kept afloat as is often the case, then any sale of assets forced by administration should not be to the bank’s own companies.
The issue of how finance firms including banks have perhaps exploited struggling but viable businesses has been the topic of much discussion. See this much publicised issue last year about invoice finance firms.
In addition many banks have assumed that any business that is proposing a company voluntary arrangement (CVA) is such a high risk that they call in the loan. An agreed CVA does not bind the secured creditor and in many ways put the bank in a better position than previously. The CVA removes risk of winding up petitions once approved.
The banks still have the ability to enforce their security, but are often don’t give the company the chance to try and trade out of it.
One of our clients asked their MP to question why RBS would not continue to provide a small overdraft to it, once the company had a company voluntary arrangement (CVA) approved by its unsecured creditors.
The RBS Chief Executive of Corporate Banking Chris Sullivan wrote back to Philip Dunne MP, stating that because the company had entered into a CVA it was considered insolvent; “and in line with the Bank’s (sic) policy not to provide banking and debt facilities to insolvent companies, the facilities were withdrawn and proposals for repayment of the debt requested”. Fortunately, we were able to find another funder for the company and it is trading on.
Finally the issue that has yet to be highlighted is the so called “panel system”. Each bank has its own panel of insolvency practitioners to whom it gives all work.
What is often galling for KSA and other smaller turnaround firms, is that we are often the architects of a viable restructuring plan. The debtor company approaches us for help in cost cutting, financial re-engineering, turnaround and recovery, we set up strategies to do this and work closely with our clients. We then take the business’s rescue plan to the bank’s recovery teams and then we are asked to politely get lost. This is because the banks all operate a so called “panel system”.
Ostensibly this is to ensure “value and quality advice is obtained for the bank” and or the company from regulated approved insolvency firms. In reality the panel firms are doing the company no favours, because they are effectively a bank appointee, whom the company’s board do not want to work with but whom they must pay, because the bank insists upon it.
So to add insult to injury, the directors of a distressed but viable company may engage KSA or other effective insolvency and turnaround firms, to build a workable plan, but as soon as the bank passes the case to GRG or its equivalent across the other banks, the company has a panel firm, whom they have never met, foisted upon the company to drive a recovery.
Recovery for whom?
Often it’s the bank putting its own interests before the body of all creditors. And giving the resultant insolvency work to their small group of friendly panel firms, before sometimes selling assets to the bank’s own companies. Clearly secured creditors have fixed charge priorities over other creditors and floating charges to back this up. But the Enterprise Act set out a company rescue culture that is not being supported by West Register and the like.
KSA is not moaning because we want bank work, far from it. Obviously very large insolvency cases such as Lehmans require large insolvency/accountancy practices to cope. But for all other insolvencies we simply want banks to recognise that there are many able recovery and turnaround firms like ours who can work with viable, but struggling companies, to restructure them and their debts. A level playing field is all we ask. We cannot be right or successful in every rescue case, of course, but when we are summarily dismissed and replaced by bank advisors, that is far from a level playing field?
It is our belief that the bank’s insolvency advisory panel system is a closed shop, this is anti-competitive and it is, along with banks recovery teams knocking down viable companies is undermining the UK rescue culture.