Capital Bank received £1m fee for winding down Daewoo

Capital Bank, the asset finance arm of HBOS, received a £1m fee for supporting the controversial winding-down of the UK arm of the Korean car maker Daewoo.

Capital Bank, the asset finance arm of HBOS, received a £1m fee for supporting the controversial winding-down of the UK arm of the Korean car maker Daewoo.

The Institute of Chartered Accountants is investigating the role of a senior Ernst & Young accountant in the Daewoo collapse. Thousands of cars were sold to unsuspecting customers in the five months before Daewoo Cars went into administration in October 2002, despite E&Y declaring to Daewoo directors that the group was insolvent in April of that year.

E&Y and the Daewoo management agreed to wind down the business, attempting to sell 11,968 cars that were on its books. By the time it went into administration, just 2,003 cars were left.

As revealed in this paper last week, buyers were not told of the financial problems and were offered three years' warranty, servicing and AA roadside assistance. When Daewoo went into administration, buyers received none of these, getting just £250 in compensation. Many did not even get that.

A subsidiary of Capital Bank was owed £30.5m by Daewoo as of 31 May 2002. It agreed to support the winding-down and received 62.5 per cent of all the receipts from selling the cars.

In addition, it agreed with Daewoo that it would be paid a fee of £600,000 immediately and another £400,000 in the event that its debt was not paid off in full by 30 September 2002. In the event, it received the full £1m and then claimed another £500,000 after Daewoo collapsed. This payment was refused by the liquidators, Baker Tilly.

A spokesman for Capital Bank said that the payment reflected the extra risks that the bank had taken on in supporting the winding-down plan.

It has also emerged that Capital had consulted E&Y about the problems at Daewoo prior to E&Y being brought in by the car group. When Daewoo's parent company in Korea ran into difficulty in 2000, Capital asked E&Y's Manchester office to advise it.

E&Y was later replaced by PricewaterhouseCoopers but angry creditors of Daewoo claim that the Capital relationship proved it had a conflict of interest and so should not have been made administrator.

E&Y has said that all the issues would be looked at when its partner, Maggie Mills, appears before the ICA's investigations committee next month, and so will not comment.

Meanwhile in Korea, the founder of Daewoo Group returned after six years as a fugitive from justice to face fraud charges. Kim Woo-choong has been charged with falsifying Daewoo's accounts to persuade bankers to lend to the ailing company. He was arrested and placed in custody while he awaits trial.