Directors of collapsed refrigeration-to-M&E giant could be prosecuted for breach of duties
PPB Advisory, the administrator of the global Hastie Group which collapsed last May with debts exceeding £600 million, has revealed a litany of poor management, overstated reporting of results and inadequate understanding of the risks of its business. Its creditors’ report concluded: “The Board appears to have exercised inadequate control over the Hastie Group’s operations.”
The report revealed cash for creditors currently stands at only £3 million towards bank debts of £350 million, while trade creditors, owed £250 million, will not receive a penny. Around 2,000 of the group’s 7,000 employees have received compensation for unpaid wages through the Australian government’s redundancy scheme.
The administrator concluded that creditors have a possible case for compensation against the directors for breach of duties, as well as to the auditor for possible breach of auditing standards and the advisor to the Hastie group over the June 2011 equity raising. The seven breaches of duty by directors identified by PPB include ‘failure to maintain books and records which correctly explain the company’s financial position and performance’, a criminal offence which could result in ‘fine or imprisonment or both’.
PPB noted that there was a culture of tendering ‘based on whatever was necessary to win the work’, resulting in significantly reduced margins and huge cost overruns.
PPB said: “Project forecasting processes and cost-to-complete capabilities in many parts of the business appeared to be ineffective. Management systems either seemed to be absent, inappropriate or ignored. We also note the interim CEO’s observation of a culture of misreporting and withholding ‘bad news’.”
The report concluded that the group’s £180 million acquisition spree over two years were the root of its downfall, with the performance of the acquired businesses not reaching their pre-acquisition level and the synergies of the enlarged group not realised. This was compounded by a number of write downs in goodwill, trade and work in progress not being correctly stated in the accounts, PPB said. “In addition, we consider that the write downs reported by the Hastie Group may have been materially understated, resulting in goodwill, debtors and Work In Progress being overstated.”
The administrator listed six longer term issues leading to the group’s failure, together with nine ‘serious deficiencies with the overall control of the group’.
The longer-term issues emphasised by PPB were:
- the poorly implemented acquisition strategy
- profitable companies subsidising the loss-making Middle East businesses
- inadequate operational management processes and increased competition
- inadequate management reporting systems, including from subsidiary management to the Board
- inadequate Board reporting systems and interrogation of management and financial reports by the Board
- inadequate control exercised by the Board over management
The ‘serious deficiencies’ in group control the administrator identified were:
- internal systems for project management were inadequate and not to industry standard
- financial reporting from subsidiary level up to HST was not uniform and open to manipulation
- the Board did not appear to adequately challenge divisional/subsidiary results or forecasts
- there was possibly a lack of due diligence around acquisitions
- the forecasts contained within the prospectus for the June 2011 capital raising were not adequately reviewed and challenged
- there appears to have been a general culture of ignoring bad news
- the Audit and Risk Committee was largely inactive
- compliance with accounting standards appears to be lacking, particularly with reference to provisioning for asset impairment
- the Board, prior to the appointment of the interim CEO Bill Wild, appeared not to have ‘an enquiring mind’ as to reliability of financial statements and overall reporting.
The administrator singled out the Middle East business as a significant contributor to the downfall. PPB reported: “Based on our preliminary findings, the Middle East appears to have reached a position where it had insufficient funding to complete its projects. Relationships appear to have broken down with customers, indicated by them issuing default and termination notices to the Group. Suppliers also appear to have not received payment for long periods. Despite these issues, Middle East management continued to report profitable on-budget results to the Board, which the Board accepted as an accurate reflection of the position.”
UK and Ireland M&E contractor the Rotary Group was originally part of the Hastie businss, turning over £100 million. The UK contracting assets were sold to Lorne Stewart for a sum believed to be in the region of £10-20 million last July. Hastie paid £95 million for the business in 2008.