REPORT ON THE AFFAIRS OF PHOENIX VENTURE HOLDINGS LIMITED, MG ROVER GROUP LIMITED AND 33 OTHER COMPANIES VOLUME II Gervase MacGregor FCA Guy Newey QC (Inspectors appointed by the Secretary of State for Trade and Industry under section 432(2) of the Companies Act 1985) Report on the affairs of Phoenix Venture Holdings Limited, MG Rover Group Limited and 33 other companies by Gervase MacGregor FCA and Guy Newey QC (Inspectors appointed by the Secretary of State for Trade and Industry under section 432(2) of the Companies Act 1985) Volume II Published by TSO (The Stationery Office) and available from: Online www.tsoshop.co.uk Mail, Telephone, Fax & E-mail TSO PO Box 29, Norwich, NR3 1GN Telephone orders/General enquiries: 0870 600 5522 Fax orders: 0870 600 5533 E-mail: [email protected] Textphone 0870 240 3701 TSO@Blackwell and other Accredited Agents Customers can also order publications from: TSO Ireland 16 Arthur Street, Belfast BT1 4GD Tel 028 9023 8451 Fax 028 9023 5401 Published with the permission of the Department for Business Innovation and Skills on behalf of the Controller of Her Majesty’s Stationery Office. © Crown Copyright 2009 All rights reserved. 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First published 2009 ISBN 9780 115155239 Printed in the United Kingdom by the Stationery Office N6187351 C3 07/09 Contents Chapter Page VOLUME I I Introduction 1 Background 3 Our appointment 3 The scope of the inquiry 3 Conduct of the inquiry 4 Support from BDO staff 4 Documentary evidence 4 Other evidence 5 Potential criticisms 6 Support from CIB 6 II Rover at the beginning of 2000 7 Ownership 9 Products 9 BMW group structure chart 10 Plants 11 Other premises 11 Subsidiaries 11 Financial performance 12 III The sale of Rover 13 The proposed sale to Alchemy 15 Origins 15 The memorandum of understanding 16 The sale of Land Rover 17 Subsequent events 17 The Phoenix bid 20 Formation of the Phoenix Consortium 20 The initial offer to BMW 24 Support for the Phoenix Consortium bid from other stakeholders 25 Professional advice 27 Negotiations with the Phoenix Consortium 28 The BMW “dowry” 29 The parts business 31 The proposed £75 million loan notes 31 Contents Chapter Page Appointment of Mr Stephenson and Mr Parker as directors 35 Capital injection by the Phoenix Consortium 36 Alternatives to the Phoenix bid 36 The limited scope of the due diligence work 36 The contingent nature of the advisors’ fees 37 Other financial consequences 39 VAT deferral 41 Completion 42 Summary 46 The Phoenix Consortium’s prospects 46 IV The members of the Phoenix Consortium 49 Mr Towers 51 Mr Stephenson 51 Mr Edwards 52 Mr Beale 52 V Rover under new ownership: events between May 2000 and June 2001 55 Establishing MGRG as an independent company 57 Management of the main companies 58 MGRG 58 The composition of the board 58 Ms Jane Ruston 61 Meetings 62 Techtronic 62 The composition of the board 62 Roles and remuneration 63 PVH 65 Reports in the press and Mr Parker’s departure 65 The establishment of PVH 72 Events leading to the establishment of PVH 72 Decision to pay interest 80 Implementation 81 The effect of the restructuring 85 The Phoenix Consortium’s knowledge of and responsibility for the restructuring plans 86 Project Slag 89 Background 89 Transaction overview 90 Contents Chapter Page Discussions with the Inland Revenue 91 Failure of the transaction 92 The completion accounts dispute 92 SPA provisions 92 Draft Completion Accounts 93 Objections 94 Letter of intent 96 Settlement and acquisition of Powertrain 96 Use of BMW’s £25 million contribution to the escrow account 97 VI Development agreement with St. Modwen 101 The Development Agreement 103 The payment to Landcrest Developments 107 Explanations of the payment to Landcrest Developments 109 Mr Parker’s evidence 109 St. Modwen evidence 109 MG Rover evidence 113 Conclusions 115 VII Project Platinum 121 Basic facts 123 Financial arrangements between MGRG and Rover Financial Services (GB) Limited 123 Implications of the sale of MGRG by BMW 125 BMW’s decision to dispose of RFS and the early stages of the auction process 126 Interest in a bid by MGRG and withdrawal of other bidders 128 Formulation of the Phoenix Partnership’s bid 129 Negotiations on price 131 Completion of the transaction 132 Individuals involved with the Phoenix Partnership’s bid 136 The composition of the Phoenix Partnership 136 The Deloitte team 137 Mr Ian Whyte 138 The identity of the purchaser 156 Advice from Mr Robin Potts QC 165 Anticipated returns 175 Possibility for finance to be provided by First National/Abbey 180 The 21 September 2001 PVH board meeting 189 Contents Chapter Page The 10 October 2001 PVH board meeting 196 The 12 October 2001 MGRG board meeting 198 Completion 207 The 16 November 2001 MGRG board meeting 219 Implications for MGRG 219 The Phoenix Partnership’s benefits from Project Platinum 221 Explanations to MPs 224 Concerns of Ms Ruston and Mr Millett 226 VIII Group structure after 2000 227 Plans for the Group 229 Changes in the structure of the Group 231 Group structure in January 2001 232 Group structure in 2004 233 Stated justification 234 PVH’s subsidiaries 237 Techtronic’s subsidiaries 246 MGRG’s subsidiaries 246 MGR Capital 250 MG Rover Group Trustees Limited 250 MG Rover Group Senior Trustees Limited 250 MG Rover Group Contract Trustees Limited 250 IX Property and share transfers at the end of 2001 253 Introduction 255 The Longbridge land and buildings 255 The sale 255 Aerial view of the Longbridge site 256 The value of the Longbridge land 259 The board meetings approving the sale 263 Disposal of the Longbridge land by Property Holdings 264 Use of the proceeds of sale 265 Management 267 Dealer properties 268 Background 268 The sale 269 The value of the dealer properties 272 The MGRG board meeting approving the sale 276 Contents Chapter Page MGRDP’s indebtedness to MGRG 276 Management 277 Events since administration 278 Heritage companies 279 Background 279 The sales 280 The involvement of advisors 281 Attendance at the board meetings 282 Management 282 The “Duomatic” principle 283 X Project Lisa 285 Conclusion 294 XI Aircraft: exploiting tax losses 295 Tax losses 297 Project Aircraft 297 Basic facts 297 Application of the returns 301 MGTF tooling 303 The surrender of tax losses for no consideration 305 Approving the surrender of tax losses 307 Cessation of trading 314 Advice from Ashurst Morris Crisp 315 Project Trinity 315 Concluding comments 318 XII Project Patto 321 Introduction 323 Basic facts 323 The basis of the proposed provision for the “D” shareholders 335 Knowledge and approval of the proposed benefits 337 Concluding comments 338 XIII Xpart: the transfer, management and sale of the parts business 339 Introduction 341 Background 341 The transfer of Xpart to PVH 344 Contents Chapter Page Events leading to the transfer 344 The transfer 348 The value of Xpart 348 Reliance on professional advice 351 The reasons for the transfer 352 Management 352 The sale of the parts business to CAT 353 Events leading to the sale 353 Completion 361 Application of the proceeds of sale 362 Profit on the transaction 363 Amount received and paid by PVH 364 Amount received and paid by MGRG 365 The dividend 366 The benefits to MGRG 367 Concluding comments 370 XIV Edwards Cars Limited: financial support and acquisition 371 Background 373 Financial support from the Group 373 The acquisition of Edwards Cars by PVH 381 Insolvency 387 XV The reasons for the group structure 389 Background 391 Unlikelihood of achieving management focus and financial transparency 391 Use of indirect subsidiaries 392 Ring-fencing 392 Involvement with the restructuring of the Group 397 Concluding comments 398 XVI Financial and trading performance of MGRG between 1999 and 2004 401 Introduction 403 Volume of sales 403 1999 404 2000 405 2001 407 2002 409 Contents Chapter Page 2003 412 2004 415 VOLUME II XVII Changes in the boards of the main companies between 2000 and 2005 421 Techtronic 423 MGRG 423 Mr Sanders 423 Mr Ramsay 424 Mr Petrie 424 PVH 425 XVIII Powertrain 427 Introduction 429 Acquisition by Techtronic 429 The composition of the board 430 Mr Millett 430 Mr Howe 430 Mr Poynter 431 Mr Welford Winton 431 Powertrain’s directors’ relationship with PVH and MGRG 431 Business strategy 432 External customers 432 Transfer pricing 432 Financial performance 433 2000 433 2001 434 2002 436 2003 437 2004 438 XIX Joint ventures 441 Introduction 443 Malaysia 445 Proton 445 Contents Chapter Page Petronas 446 Iran 447 Dastaan 447 Iran Khodro 448 SAIPA 448 Mega Motors 450 Poland 451 DFM 451 India 454 Tata 454 Sonalika 457 China 458 China Brilliance: Project Sunrise 458 The collapse of Project Sunrise 460 Further discussions with China Brilliance 465 Project Battens 465 C&F 470 HAGC 470 Geely 471 Torch 472 Chery 473 FAW 474 Changan 475 LIFAN 476 BAIC 476 NAC 477 Guangzhou 478 XX The events leading to administration 481 Project 528 483 Background to the negotiations 483 Letter of intent of 16 June 2004 484 Insolvency advice from Halliwells 486 Memorandum of understanding and letter of intent of 2 July 2004 487 The Group’s negotiating team 488 Progress of the negotiations 494 Initial due diligence and valuations 495 Further insolvency advice from Halliwells 496 Impact of disclosures in the Group’s 2003 financial statements 497 Contact with Government in late 2004