June 21, 2012 11:29 pm

Judge faults HBOS in Farepak failure

A High Court judge has attacked the “hardball approach” employed by HBOS that contributed to the collapse of Farepak, the Christmas hamper savings club, and £37m incurred in losses by 120,000 customers.

Mr Justice Peter Smith gave a critical assessment of the role played by HBOS, which was Farepak’s banker. The bank in effect “forced” the Farepak directors to continue to collect money from savers “knowing full well that those depositors would not get their money back in the likely event of an insolvency, he said.

The judge said: “This is not a court of morality, but I would suggest that HBOS really ought to look at the collections that they took in September and October [2006] and seriously consider whether or not they ought to make a further substantial payment to the compensation fund.”

He added that HBOS’s actions, “whilst apparently legally acceptable . . . might not be regarded in the public’s eyes as being acceptable”.

Farepak collapsed in late 2006, leaving hundreds of families facing a bleak Christmas, and HBOS later paid £2m into a distress fund set up for those who lost money.

Mr Justice Smith was speaking after the abandonment of a High Court legal battle brought by Vince Cable, business secretary, who had wanted to ban former executives from Farepak or its parent company from being directors because of the collapse.

However, the judge vindicated the former directors, saying they “did nothing wrong” and “did everything, as far as I can see, possible to save the group”.

The case gives a telling insight into the way HBOS’s commercial lending business, headed by Peter Cummings, was run at the height of the boom. The court was told during the trial that one HBOS email derided deposits paid in by ordinary savers as “Doris” money.

HBOS was one of the most aggressive lenders at the height of the lending boom, building a huge book of toxic loans, but it had to be rescued by Lloyds after the financial crisis hit in 2008.

The judge added that ironically, if HBOS’s reputation for “playing hardball” over Farepak had been repeated by the UK government two years later when HBOS itself was close to collapse, “HBOS would not be here and that is something else that HBOS might like to think about”.

Lloyds said that its employees acted entirely appropriately and “made entirely reasonable decisions based on the information available to it at the time”.

The outcome is embarrassing for Mr Cable’s department given the judge’s criticism of the way the case was put together and the cost to the taxpayer of up to £20m.

Sir Clive Thompson, one of the former directors who was vindicated, earned the nickname “Mr Twenty Per Cent” for his ability to hit earnings growth targets consistently during a stint as chief executive of Rentokil. On Thursday, he said he was “delighted the judge felt the directors acted with honour and integrity”.

The other six are Neil Gillis, Michael Johns and Paul Munn, non-executive directors, as well as Stevan Fowler, former finance director of EHR, the parent company of Farepak; William Rollason, former EHR chief executive; and Nicholas Gilodi-Johnson, an EHR director.

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