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Railtrack goes bankrupt with debts of £3.3bn

Barrie Clement,Marie Woolf,Michael Harrison
Monday 08 October 2001 00:00 BST

Railtrack finally went bankrupt yesterday when the High Court agreed to place it into administration with debts of more than £3.3bn. Ministers will replace the profit-making business with a "not-for-profit" company ­ an option they had repeatedly refused to consider.

The decision brings to an end the most unpopular privatisation yet attempted, and follows the refusal of Stephen Byers, the Secretary of State for Transport, Local Government and the Regions, to bail the company out with even more taxpayers' money. Trains will continue to operate, with the City accountancy firm Ernst & Young running the network in place of the company's board.

About 300,000 shareholders are expected to lose out, but there will be no job losses and Railtrack's creditors will be paid. Granting the administration order yesterday, Mr Justice Lightman, at a special sitting of the High Court in London, said he believed that his ruling was "not only appropriate but absolutely essential".

The court was told by lawyers representing Mr Byers that Railtrack had needed funding of £700m by December, rising to £1.7bn by next March.

Mr Byers said: "For Railtrack, there will be no bail-out, no last-minute rescue deal paid for by the taxpayer. Our action today will see the end of Railtrack. In my judgement, the time had come to take back the track and put the interests of the travelling public first."

He said that it was only one part of a "fundamental restructuring" of the industry. "I intend to rationalise the present system of regulation to provide a more united approach, with stronger strategic direction, while stopping the day-to-day interference in the industry." The Strategic Rail Authority (SRA), which attempts to deliver government policy, is expected to be merged with the Rail Regulator, which polices Railtrack's performance.

Mr Byers will appoint the present company chairman, John Robinson, to the new organisation.

Officials said ministers had been in secret talks since July with Ernst & Young, the accountancy firm which, for the next three to six months, will be in charge of running the railway while the company is wound up.

The Health and Safety Executive has been consulted in confidence about whether Railtrack should continue. The Government will insist that the new company goes ahead with rail improvement projects, including the upgrading of the west coast main line.

The as-yet unnamed replacement company will be run by "stakeholders", to be appointed by the SRA. They are likely to include passenger groups, representatives of train-operating and freight companies, and unions. The new company will raise funds from track access charges, government subsidies promised to Railtrack, and by raising money on the capital markets. Surplus funds will be ploughed back into the railways.

Mr Robinson promised to fight for the interests of shareholders, who stand to lose virtually all their investment. His message to the group's 12,000 staff was that it is "business as usual".

Mr Robinson first heard about the decision to place Railtrack in receivership at 4.45pm on Friday.

Railtrack and its financial advisers, Credit Suisse Boston, had put an alternative plan to the Transport Secretary whereby the Government would provide Railtrack with up to £4bn in additional finance over the next four years in addition to the £13bn already agreed by the Rail Regulator, Tom Winsor, in return for which the taxpayer would receive a stake of up to 49 per cent in Railtrack.

The proposal was put to the Government after Railtrack realised it would not be able to proceed with a £2bn bond issue this autumn to avert an impending financial crisis.

Unbeknown to Railtrack, ministers had secretly asked their own financial advisers, Schroder Salomon Smith Barney, to come up with the alternative plan for a not-for-profit trust company limited by liability to take over from Railtrack.

Railtrack and CSFB were pressing for a decision on their scheme from Mr Byers when he dropped his bombshell on Friday and informed Mr Robinson that the Government would also be withholding an advance £700m payment.

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