Examining the wreckage of the Rover crash

Two months after the collapse of MG Rover, the UK’s last home-grown car manufacturer, and there is still no clear picture of its road to ruin. The news of a formal DTI inquiry may have satisfied some, but with more than 150 sets of financial statements to analyse and a number of complex issues to solve, those who are demanding quick answers could be disappointed.

A formal inquiry was widely expected after the Financial Reporting Council raised ‘questions’ in its confidential report into Rover’s accounts two weeks ago. The fact that trade and industry secretary Alan Johnson took the unusual step of appointing an external QC and forensic accountant to lead the inquiry, indicates the depth of these questions and the level of concerns surrounding Rover’s demise.

External inquiries are, after all, normally reserved for high-profile investigations, most notably the Robert Maxwell and Mirror Group saga in the 1990s.

The inspectors, QC Guy Newey and forensic accountant Gervase MacGregor from BDO Stoy Hayward, will investigate the affairs of the MG Rover Group, Phoenix Venture Holdings and MGR Capital ltd, the companies owned by the infamous ‘Phoenix four’ directors.

A spokesman for the DTI said it was not clear whether the inspectors would investigate all of PVH’s varied concerns, with other companies such as conference centre Studley Castle still trading profitably.

But with the group’s complex structure thought to be one of the issues raised by the FRC, the inspectors could use their significant powers to demand documents to trace assets and cashflow. Significantly, the report from the FRC’s Financial Reporting Review Panel will remain confidential, as will the remit of the inquiry. Johnson has, however, promised that the final report will be made public.

The FRC maintains that it stuck to a strict remit; that of reviewing whether Rover’s accounts complied with the accounting regulations of the Companies Act 1985. Paul Boyle, FRC chief executive, said: ‘We are only concerned about whether they got the accounting right.’

Significantly, he refused to confirm that Rover’s accounts were compliant and the fact that the FRC chose not to take any action, such as forcing Rover to restate, should not be taken as a sign that all was well with the group’s books.

Boyle said they chose not to investigate further as the company was already in administration. ‘Once it’s dead what’s the point of giving it a thorough flogging? We didn’t let it go to another stage in the interest of creditors. It would take a lot of time and money and involve lawyers and that would eat into assets. Getting the accounts restated would not have raised a penny to pay creditors,’ he told Accountancy Age.

But the FRC did find a number of ‘key questions’ and passed these to Johnson. Boyle would not be drawn on the detail but they are believed to include elements of Rover’s accounts, PVH’s use of loans, why Rover was separated from other profitable companies and whether it was trading while insolvent in its final few months.

And there is a lot riding on the answers to these questions.

Unions, former workers, politicians and creditors are anxious to know how a company that was famously bought for just £10 from BMW by the Phoenix four in 2000 could fold five years later, owing creditors £1.37bn and with the loss of over 5,000 jobs.

The sale of Rover had a promising start with BMW granting PVH £427m in an interest-free loan as part of the deal, plus cars worth £300m.

The four Phoenix businessmen apparently set up a complex web of subsidiary companies and there are questions as to whether they parked the BMW loan in one company separately from Rover.

There are also concerns that the directors may have paid interest on the BMW loan into another company, even though it was interest free, effectively passing cash around a complex web of companies.

The fact that the four have paid themselves £40m in salaries and contributions to their pension funds over the past five years has also raised concerns.

Rover’s administrators at PricewaterhouseCoopers have released a report for creditors, with a meeting due to be held on 10 June to decide a way forward, although creditors are expected to get just 5p for every £1 owed. The report gives a clear indication of Rover’s last dealings. And a note in its 2003 accounts makes it clear just how important the venture with Chinese company SAIC was to its future.

SAIC made an initial payment of £37m for intellectual property rights in September 2004 and a further £30m in January 2005 to stem Rover’s continuing financial losses. It was due to pay a further £201.5m from March just as Rover was also negotiating a bridging loan from the DTI. Losses by this point had hit £25m a month and with suppliers refusing to supply on credit, negotiations collapsed and Rover was placed in administration.

All eyes are now on the outcome of the external inquiry. The T&G union, which represents the majority of former Longbridge workers, is demanding a ‘robust statement’.

A spokesman said; ‘Our members deserve some answers.’ These could now be forthcoming, and for many they might make for unpleasant reading.