The decision to waive a proper assessment of the company was taken even though RJB was to owe the Government £125m in deferred payments under the terms of last year's controversial privatisation.
A letter written by David Childs, of the law firm Clifford Chance, in February reveals that there was "great reluctance" on the part of the Government to carry out a full financial assessment of RJB Mining. The letter does not explain why this was so. Mr Childs was advising the Government on the sale of the coalfields to RJB.
The sale of most of England's coal assets to RJB has aroused controversy both in Whitehall and in the City.
Labour politicians are up in arms because RJB is run by Richard Budge, a man deemed by Coopers & Lybrand, the leading accountants, to be "unfit to be concerned in the management of a company".
Coopers wrote a highly critical receiver's report concerning Mr Budge's conduct as a director of AF Budge, the family firm that collapsed in 1992 owing creditors around £100m.
In the City the coalfields sale attracted criticism because many analysts felt that RJB, bidding around £300m more than its nearest rival, had bid too high to make the business viable. Against this background, the Government's decision to accept deferred payments from RJB without any apparent security and without first undertaking a full financial assessment is bound to attract controversy.
One analyst, who declined to be named, said: "There is unquestionably a risk that this company could struggle once the contracts to supply coal to the power stations end in March 1998." When RJB won the contest to take over the coalfields, it raised around £1bn in the City of London, including a £494m loan from a group of banks.
The banks have most of their loans secured against the cash-flow that is promised, at least for the next three years, from the contracts already signed with the power generators. The Government, it appears, has no security for its loan.
The Government's advisers declined to comment this weekend about why they had decided not to carry out a full financial assessment of RJB, which would have allowed it to secure a guarantee for its money.
But one source close to the negotiations said that the subject of RJB's financial suitability consumed many hours of discussion before Christmas.
The source explained that one of the problems in carrying out a financial assessment of RJB would be that the Government, if it then approved the finances, would effectively be giving a stamp of financial stability to a private company. The Government might then be called upon to provide compensation to creditors or shareholders if RJB went into receivership. The source also said that the Government's advisers took into account the fact that Barclays' investment bank, BZW, would have done a due diligence test when it helped RJB to raise around £1bn in the City.
The Department of Trade and Industry said only that it had undertaken sufficient checks to satisfy itself of RJB's viability.
Many critics of RJB's bid said that they could not understand how Mr Budge would make the figures stack up.
Last week BBC's Panorama programme questioned other aspects of Mr Budge's suitability for owning the coalfields. It disclosed that Mr Budge was being interviewed by the DTI's Insolvency Service for possible disqualification as a director at the same time as a separate section of the DTI was considering him as a coalfields buyer.
Martin O'Neill, Shadow Minister for Energy, wrote last week to Michael Heseltine, President of the Board of Trade, asking whether the Government knew at the time of awarding the contract that Mr Budge had an unreliable record.
RJB's shares finished the week 22p lower at 404p. Charles Kernot, mining analyst at Paribas Capital Markets, reckons the shares are worth 256p given deteriorating conditions for coal.Reuse content