Rover report details restructuring changes

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The Rover report runs to more than 830 pages and details restructuring changes within MG Rover Group under the "Phoenix Four" which led to the creation of 33 companies.

An inquiry was set up by the Government after MG Rover went into administration on April 8 2005 owing creditors nearly £1.3 billion.

Gervase MacGregor and Guy Newey were appointed as inspectors under section 432 of the Companies Act 1985 and instructed to investigate the affairs of MG Rover Group, its parent company Phoenix Venture Holdings (PVH) and MGR Capital Limited between the purchase of MG Rover from BMW in May 2000 and the date of it entering administration.

The inspectors investigated the actions of the directors of PVH throughout their five-year ownership - particularly Peter Beale, John Edwards, Nick Stephenson and John Towers, known as the Phoenix Consortium.

As well as looking at the creation of the 33 separate companies throughout that period, the inspectors looked at the scale of financial rewards made to the directors and the events which led to administration itself.

This included the role of Government to secure bridging finance while take-over discussions took place with Chinese car manufacturers Shanghai Automotive (SAIC).

The inquiry studied the role played by professional advisers including auditors and corporate finance advisers Deloitte and lawyers Eversheds; aspects of corporate governance; and financial statements and audit arrangements including the transfer of assets.

The report said the Phoenix Consortium obtained "large, and we say unreasonably large, financial rewards, totalling tens of millions of pounds".

"They also undertook a number of transactions to allocate assets to companies in the group other than MG Rover and in which MG Rover had no interest."

The report added that Phoenix recognised that MG Rover was at risk in the longer term.

The report went on: "Representations made to us on their behalf confirm that they 'knew that they were taking on a very real challenge and that there was a real risk that MG Rover would ultimately fail'."

The report said: "We consider that the financial rewards which the members of the Phoenix Consortium obtained from the (MG Rover) Group (and which they essentially set for themselves) were unreasonably large.

"When BMW was disposing of MG Rover, the members of the Phoenix Consortium enjoyed a 'wave of employee and public support' on the basis, in part at least, that they were perceived to be acting for the public good.

"In the event, as already noted, they were able to acquire MG Rover for a nominal sum and with the benefit of a large BMW 'dowry'. Further, the expenditure and risks that the members of the Phoenix Consortium had to bear in connection with MG Rover's acquisition were relatively insubstantial."

The report went on: "There could nonetheless have been little objection, either legally or morally, to the members of the Phoenix Consortium (who, after all, were Phoenix Venture Holdings's - PVH - controlling shareholders) deriving benefits commensurate with the (MG Rover) group's performance had they succeeded in making it profitable.

"However, the group, from whose acquisition all PVH's receipts were ultimately derived, was in fact very unprofitable and eventually went into administration.

"The members of the Phoenix Consortium still chose to give themselves rewards out of all proportion to the incomes which they had previously commanded, which were also large when compared with remuneration paid in."

The report said: "We think there is much to be said for the view that it should not be possible for shareholders to approve transactions to the financial prejudice of their company if the company's survival, at least in the longer term, is known to depend on the achievement of a particular event (in the case of MG Rover, a partner being found) and there is substantial doubt as to whether the event will happen."

The report lists various projects explored by the Phoenix Four, including Project Platinum, Project Lisa and Project Patto.

On Project Patto, the report said it provided "a further example of the members of the Phoenix Consortium seeking to derive financial benefits for themselves from the (MG Rover) group".

The report said that in 2001 to 2002 the MG Rover group was "restructured in a way that meant that certain properties and subsidiaries of MG Rover were transferred either to Phoenix Venture Holdings (PVH) itself or to subsidiaries of PVH in which the group had no interest".

Also, during the negotiations with Chinese company SAIC "there was an attempt to insist on PVH rather than MG Rover group holding shares in the joint ventures which were envisaged".

The report said that the reason that Phoenix Four members Peter Beale, John Towers and, to a lesser extent, Nick Stephenson wanted Phoenix to be the shareholder "was probably to ensure that the value of the shares would accrue to that company (and, hence, themselves as its directors) regardless of what became of MG Rover group".

The report referred to the transfer of various properties and subsidiaries of MG Rover being "effected at less than full market value".

One deal led to MG Rover incurring a £16 million liability.

The report said that "one of the other purposes for which PVH used its income was to support Edwards cars", owned by Phoenix Four member John Edwards and his wife, which was later acquired by Phoenix for a nominal sum.

The report went on: "Between December 2000 and the end of 2002 Edwards Cars charged PVH sums totalling £3,877,958 (excluding VAT), and between January 2003 (when Edwards Cars became a subsidiary of PVH) and April 2005 PVH paid £1,718,953 to Edwards Cars."

In addition, Phoenix-owned Techtronic paid £308,000 (excluding VAT) to Edwards Cars during 2000.

The report said: "Without the financial support it received, Edwards Cars would have incurred very large losses and been most unlikely to be able to continue trading.

"We can see that there may well have been a commercial justification for giving Edwards Cars some financial support. However, we do not think that support on the very large scale in fact provided can have been commercially justified."

The report said that "inaccurate and misleading explanations" were given about the state of the MG Rover group (MGRG) business.

It said: "For example, MPs and others were led to believe in 2003 to 2004 that the members of the Phoenix Consortium had invested considerable sums and taken substantial financial risks when MGRG was acquired and that the sums which had been reported as paid to them did not come from MGRG but from separate Phoenix sources.

"In reality, the relevant payments to or for the benefit of the members of the Phoenix Consortium can for the most part be traced back to interest paid by MGRG and the exploitation of MGRG's tax losses, and the members of the Phoenix Consortium had invested relatively little in the group and undertaken only limited risks."

Directors of companies within the group were not always invited to board meetings, often being given no notice of "ad hoc" meetings.

A Dr Li provided consultancy services to MGRG during 2004 and 2005 and companies associated with her were paid £1.69 million for her services over a 15-month period.

These sums were "much too high" according to the report, and the man primarily responsible for them was Mr Stephenson "even though he had a personal relationship with Dr Li".

Most of the other directors of the companies paying the relevant fees "were not consulted" and only one director - Mr Beale - was told of Mr Stephenson's relationship with Dr Li, the report said.

The report also said that the day after the inquiry inspectors' appointments were announced, Mr Beale "cleaned" his computer's hard drive and did so despite being aware that the inspectors would want to see relevant documents.

The report said Mr Beale insisted he was only "concealing personal documents from us" but the material cleaned "probably included documents relating to MGRG".