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MG Rover - what is going on

This story is quite interesting. The quotation therein: " But car industry insiders said it would be almost impossible to find anyone else willing to take on the undisclosed debts of MG Rover which ultimately made the Chinese walk away from the deal." shows a total misunderstanding of insolvency law.

What happened in the last 2 weeks really demonstrates the odd way in which government works.

MG Rover had for some time been working on a Joint Venture (JV) with the Shanghai Automotive Industry Corporation (SAIC). This looked quite close to completion on numerous occasions and had generated some half finished new models of car.

In essence a loan from the government to the holding company of MG Rover (Phoenix Venture Holdings - PVH) of £100 Million had been needed to complete the deal.

SIAC would not complete the deal unless that loan was paid. On the other hand the government would not pay the loan unless SAIC signed up to the deal. We, therefore, had a bit of an impasse. (Good Old Catch 22) The government should have paid the loan because it had the assurance of £10 Million from the directors, but it clearly did not think like that and probably a bit of back protecting was going on.

On Friday 1st April 2005 at about 10pm there was a conference call between me, Mike Whitby (Conservative Leader Birmingham), Steven O Brien (Conservative DTI shadow), Malcolm Bruce (Lib Dem DTI Shadow) and Jacqui Smith (DTI Minister). This discussed the proposed loan as it was likely to have to be handled during the election period. All parties agreed that this would be a good idea on the condition that the Directors of PVH put up £10 Million of their own money as well.

Mike and I spoke after this and concluded that we should make no comment (although we had not been asked to do this which was a bit odd) given the sensitivity of the issue and not wanting to undermine the company. The next day, however, we read in the newspapers that the Government had briefed the papers about this.

This was quite surprising. For any company to trade requires confidence. If people do not have confidence in the company they will not give it credit. Revealing the existance of this loan confirms formally the financial instability of the company. It spends around £25 Million a week so £100 Million is not that much.

During the week the story grew and grew. The DTI were briefing newspapers about the problems with the negotiations with SAIC. Again this is an odd thing to do. Such negotiations need really to operate in confidence as press stories, which tend to vary in their accuracy, can rebound on the negotiations themselves in a form of negative feedback.

On the Tuesday Wagon a listed supplier issued a Stock Exchange statement that they were stopping supplying MG Rover. This is seen by some as being designed to bring MG Rover down. It is possible, however, that because they were listed they needed to do this. However, there are those that see this as very unusual.

The next day 27 other suppliers stopped supplying MG Rover. On the Thursday almost all production stopped. Most supply is on the basis of "JIT" Just In Time where no large stocks of components are held to minimise the working capital requirements.

In essence at this stage the company had no credit. That meant that it had to pay in cash (that it did not have) for supplies and it needed another £50 Million that it did not have. On the Thursday night, therefore, it was clear that the company was insolvent and to continue trading may be "wrongful trading" and that insolvency practitioners would need to be brought in to advise. This was reported by the DTI as the company bringing in the receivers. Personally I think this was more like a misunderstanding of law than any particular attempt to bring the company down. However, there are others who see this as a further attempt to bring the company down.

On the Friday there was an emergency board meeting and at 1.04pm the company was put into "administration".

"Administration" does not mean that a business is closed down. It means that the owning companies (in this instance MG Rover and Powertrain) are insolvent and no longer trading. All trading goes through a trust account run by an administrator. Only cash that has come in can be paid out.

Administration is particularly bad news for the staff. It is normal practise for redundancies to occur during administration. Those redundancies are only paid at statutory minmums by funds from the DTI rather than the normal terms. TUPE does apply, but as far as I know the pension liabilities do not come through TUPE. This means that whatever liabilities existed for the pension fund and any deficit rest with the insolvent company. The government's actions in pushing the company into administration by briefing about its problems will, therefore, have caused considerable numbers of redundancies, a cut in redundancy pay and a loss of pension rights.

I visited Longbridge to talk to people on Friday. It was clear that there was an obvious solution which is to get the company bought out of administration (which is where all the assets are bought by a completely new legal entity) and the deal with the Chinese was completed. It was also clear quite early in the day that there was some effort from the DTI to get this to happen or alternatively to get the Chinese to buy the assets.

I also spoke to Digby Jones who not only is Director General of the Confederation of British Industry, but was also born over Longbridge Post Office. He agreed with me that one or more transaction out of administration would be a sensible way forwards. He suggested that the "hostage had been shot", by the damage to the companies reputation in the last week so administration was less damaging to the company's reputation than would normally be the case.

There is a question, however, as to how competent the "Department of Timidity and Inaction" is. To do a deal whilst a company is in Administration it is crucial that it happens very quickly. Administration is normally something to be avoided as it really damages a company's reputation. However, the damage had already been done by the briefing of the DTI in the last week in any event.

I personally have little confidence in the ability of the DTI to deliver a new deal. I have, therefore, been discussing with people in the workforce and others in the community preparing an alternative "backstop" deal. This would be in place in the event that the Government and the DTI fail to deliver. If they fail there will not be time to produce an alternative bid so the work needs to be done simultaneously. Clearly we must not have competing bids, but having a backstop is sensible. If the Government then fail to come up trumps we can do something. The sum of money needed is in excess of the original DTI loan of £100 Million. It sounds, however, entirely reasonable that the DTI should still stump up the loan - something they are empowered to do by EU law. The DTI and in particular government ministers have pushed the company out of business through their briefings. This has resulted in a loss of pension rights and a loss of redundancy payments as well as resulting in a number (unknown as yet) of redundancies. They need to accept their responsibility and create some recompense for the local people.

Any deal should involve the community, the workforce and the management.

Comments

Anonymous said…
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Groetjes Albert

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