Lilley wanted to stop Matrix trial: Peter Lilley yesterday became the first minister to criticise the 'arms for Iraq' prosecution. David Connett reports from the Scott inquiry

PETER LILLEY, Secretary of State for Social Services, was convinced that the prosecution of three Matrix Churchill businessmen was 'destined to failure' but still signed a 'gagging order' to try to withhold government papers essential to prove their innocence, the Scott inquiry heard yesterday.

The former trade secretary even offered to write requesting that the case be dropped until he was advised it would be 'grossly improper' to attempt to influence an independent Customs prosecution. His inability to stop the case left him frustrated, he said. In spite of this he still signed a Public Interest Immunity (PII) certificate to withhold documents from committal proceedings.

It was his duty to sign because of a long-standing precedent to protect the confidentiality of government documents, he said. He was also advised that the papers being withheld were not relevant to charges of breaching export regulations faced by the three men from the Coventry-based machine tool company.

He believed the prosecution in 1992 would fail because businessmen who met the former trade minister Alan Clark to discuss exports to Iraq could legitimately believe the Government was giving them a 'nod and a wink' to carry on, even though it was known the ultimate destination was Iraqi munition factories.

Failure was also assured because one defendant, Paul Henderson, had supplied information to MI6.

Lawyers for the Department of Trade and Industry advised Mr Lilley he had a duty to sign the PII certificate to protect confidential papers relating to discussions between ministers and advice they received from their civil servants. His 'limited role' was to decide whether the papers fell within a particular category or class requiring protection. It was for the trial judge to decide whether they should be disclosed in the interests of justice.

Mr Lilley assumed that the judge would see the documents before coming to a decision, but shortly after signing the original PII, he was asked to sign an amended version which made clear that the judge would not see the documents unless he specially requested them.

Mr Lilley was advised that Alan Moses QC, for the prosecution, believed that the second PII would reduce the risk of disclosure. The advice 'puzzled and concerned' him, but when he questioned it, he was told he should accept counsel's advice. 'I was told it wasn't normal to append the documents and there was nothing wrong with this,' he said.

He defended the practice of applying protection to classes of documents rather than specifically to sensitive contents. Confidentiality ensured 'frank and candid' advice from civil servants, he said.

Attempts to change the practice would require Cabinet agreement. He said: 'You can't unilaterally blow a hole in it and then expect to remain aboard the ship.'

The inquiry continues today.