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Scottish Agenda: The revolving door that shuts out taxpayers

By Ian Fraser

Published: The Sunday Times

Date: July 19th, 2009

Is the taxpayer losing out in pre-packaged administrations that leave state-owned banks swallowing debts?

Can we call pre-packaged administrations — which allow professional advisers quickly to put a company into administration, wipe out its debts then immediately sell it on — a fair means of rescuing troubled companies at a time when many of the banks that lose out from these “revolving door” processes are state-owned? It’s a question that has been bothering me in recent weeks, especially in the light of the recent pre-pack of Aviemore Highland Resort (AHR).

Macdonald Hotels, David Sutherland of the Tulloch group and Bank of Scotland (BoS) Corporate, had intended to develop the former Aviemore Centre into a world-class tourist attraction. However, partly due to planning delays, the dream turned sour and AHR went into a pre-pack administration in June.

This pre-pack has enabled the resort’s new owner — who bears a striking resemblance to one of its old owners — to offload the busted company’s debts and other liabilities and reinvent the resort.

Last week, a report issued by the failed company’s former directors revealed it owed a total of £59m — including £46m to BoS Corporate and £2m to HM Revenue & Customs. There was also an £8m investment from Highlands & Islands Enterprise that is unlikely ever to generate a return.

Donald Macdonald, the founder of Macdonald Hotels, who is also a non-executive director of Lloyds TSB Scotland, was presumably permitted by Lloyds Banking Group, which took over the main creditor in January, to go down the pre-pack route. Having owned one-third of the resort business, Macdonald Hotels now controls 100% of the firm, whose assets include several hotels and leisure facilities off Aviemore’s high street.

What grates with some observers is that, having been absolved of his debts, Macdonald was subsequently able to “cherry-pick” which creditors to repay — paying nearly £1m to favoured local suppliers but nothing to larger creditors.

It could be said that Macdonald displayed “unfair preference” by favouring a creditor class whose goodwill his business needs.

However, last week Bruce Cartwright, the PriceWaterhouseCoopers (PwC) partner who handled the pre-pack, told me everything was perfectly legal and that the decision to favour local creditors was “within Macdonald Hotels’ gift”.

Even so, isn’t it morally questionable that Macdonald Hotels has avoided obligations to the resorts’ big creditors, including the state-owned bank, while paying off smaller ones as a gesture of goodwill?

Given that Bank of Scotland owes its continued survival to the generosity of taxpayers, shouldn’t Lloyds and PwC at least have sought a higher return from the AHR assets by putting them into a conventional administration and marketing them to third parties? Isn’t there a chance this would have created better value for the taxpayer?

As the Inverness-based economist Tony Mackay said last week: “It all appears very messy and a straightforward explanation of what has happened would be very welcome.”

Double trouble

Economists are increasingly worrying that Scotland and the developed world are in for a “double dip” or W-shaped recession rather than the “trampoline bounce” forecast by Alistair Darling, our Panglossian chancellor.

Last week there were a few positive signs, including stronger business surveys. In America, markets rebounded on positive earnings guidance from the chip- maker Intel, which predicts stronger demand in Asia.

However, Graham Turner of GFC Economics, warns that there is little hard evidence of a recovery. He said: “Across the industrialised bloc, output is either drifting lower (US and UK), failing to recover (eurozone) or simply rebounding from very depressed levels (Japan).”

Nouriel Roubini, a leading American economist, said: “Yes there is light at the end of the tunnel for the US and global economy, but the recession will continue through the end of the year, and the recovery will be weak and at risk of a double-dip. The policy challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.”

Barack Obama, we’re in your hands.

Payback time

Among the recommendations of Sir David Walker, the former investment bank boss, for avoiding further bank blowouts like that of Royal Bank of Scotland was closer scrutiny of pay and better board oversight.

These are definitely necessary. However, I fear his recommendation that banks reveal the pay of all their high earners, not just board directors, might be counter-productive.

For example, were Barclays to reveal that its Edinburgh-born tax expert Roger Jenkins earns up to £60m in a single year, wouldn’t this just push up the pay of tax experts in rival banks?

When a similar requirement was brought in for chief executives, it turned out to be inflationary. Given the highly competitive nature of traders and investment bankers, the danger is this proposal will make pay levels escalate even further.

This article was published in The Sunday Times on July 19th 2009. To read it on Times Online click here

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1 Comment for “Scottish Agenda: The revolving door that shuts out taxpayers”

  1. […] Gladedale Holdings and Cala Homes, handy pre-packs in the case of Donald Macdonald’s Aviemore Highland Resort, and debt-for-equity swaps that appear to offer astonishingly poor value for the bank in the case […]

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