HC Deb 02 May 1986 vol 96 cc1266-74

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Malone.]

2.38 pm
Mr. Michael Hancock (Portsmouth, South)

I have been trying for some months to draw the attention of the House to the case of one of my constituents. It is a case where a £75,000 loan, guaranteed under the small firms loan guarantee scheme, was spirited away from my constituent's bank account on the very day that it was credited to that account and paid over to another firm that promptly went into liquidation, with the result that £75,000 seemingly vanished into thin air, or possibly crossed the Channel to Jersey, with none of it ever being used for the purpose for which it was intended.

The Secretary of State has told us that, of over 16,000 loans granted under the guarantee scheme, "several thousand" have been lost in one way or another. In my constituent's case it seems likely that the way in which it was lost was by deliberate fraud. If the same applies to most of the other vanished loans, this amounts to a national scandal, of which the House should be made aware and about which the Government should be prepared to take action.

My constituent, who comes from India, had set up a company, registered under the name of Mogul Foods Ltd., to market canned foods intended especially for immigrants to this country from the Indian sub-continent. Broadly speaking, it was a business to market canned curry. The actual canning was done by contract. There was a surplus of canning capacity in Cornwall, where he was operating, so there was no point in acquiring a canning plant. However, he needed capital to enhance his marketing and distribution capabilities. That was the purpose for which he applied for a loan, and "marketing and distribution" was the official purpose for which the loan was granted.

The loan of £75,000 was approved by the Department of Trade and Industry, which authorised the National Westminster bank to make the money available. According to the bank statement, the money was credited to Mogul's account with the National Westminster bank at its Eastcheap branch in the City of London on 5 August 1982. On the same day, two cheques—one for £71,000 and the other for £6,032—payable to a firm called Backchurch Storage Ltd., which subsequently went into liquidation, were debited to Mogul's account. The larger cheque was in part payment for the lease of a canning plant and its equipment, most of which had been previously sold by Backchurch to another firm called Clarwill Leasing Company which, like Backchurch, was apparently a subsidiary of another company called Lusty Group.

The payment to Backchurch was made without the knowledge of my constituent, Mr. Varma, who was at the time—and still is—chairman and majority shareholder of Mogul Foods. The cheques were signed by a Mr. Richard Sale, who was both secretary of Mogul and a director of Backchurch. The bank's authority for making this payment has been questioned. In its own justification, the bank has produced a mandate which purports to bear Mr. Varma's signature authorising the signing of cheques by Mr. Sale and one other of a list of signatories. I say "purports", because Mr. Varma strongly disputes the authenticity of this mandate.

That leads me to the rather curious part played by the National Westminster bank in these transactions. I am not accusing the bank of fraud, but it looks as though it made a mistake in honouring the cheques signed by Mr. Sale, in view of the fact that the money was not being used for the purpose for which the loan was granted. Since then it appears to have been very busy covering up and attempting to justify this mistake. In doing so, it has made a number of self-contradictory statements. All that I need say here is that, before this case was drawn to my attention, it had been looked at by the hon. Member for Surrey, North-West (Mr. Grylls) in his capacity as chairman of the Small Business Bureau. In its letter to the hon. Member for Surrey, North-West, the bank's solicitors made three apparently trivial misstatements of fact that could hardly have been the result of carelessness.

I cannot say what the bank's purpose was. It gave the date on which the loan was credited to Mogul's account as 28 July 1982, and the date when the two cheques totalling £77,032 were debited was the same—28 July 1982. It would only have had to glance at Mogul's bank statement, a copy of which I have here, to see that 5 August was the date of both transactions. The solicitor's letter also stated that the purpose for which the loan had been granted was "manufacture and distribution." The form I have here from the Department of Trade and Industry, dated 7 June 1982, says again, quite unambiguously, that the purpose of the loan facility was

capital injection to new business for marketing and distributing curried products. In the second letter, Lord Boardman stated that he did not consider that the difference between the two purposes materially altered the bank's position. That was not the attitude of the National Westminster bank manager, who, according to correspondence in my possession, was worried that he had allowed the transaction to go through and went to considerable lengths to manufacture documentary justification after the event.

Before he approached me, my constitutent, Mr. Varma, had approached the City of London fraud squad, which reported that the Director of Public Prosecutions was unable to prosecute because of lack of evidence. I have recently written to the fraud squad again, asking whether the evidence that I have now is enough for it to proceed. I have clear documentary evidence to show that the equipment of the canning factory which Backchurch sold to Mogul Foods was not its to sell, as it had sold it the year before to the Clarwill Leasing and Discounting Company Ltd., which, like Backchurch, was a subsidiary of the Lusty Group, and which, also like Backchurch, subsequently went into liquidation.

I have this week had a reply from the police to my letter of 6 March 1986, in which I asked them to examine my evidence, which is not new but which they appear to have overlooked. Officers of the fraud squad have again interviewed Mr. Varma, apparently as a consequence of my letter. Since then he has had a letter from the assistant director of public prosecutions saying that further consideration has been given to the new evidence. The letter ends not by saying that the evidence is insufficient but with the odd statement that the prosecution would not be appropriate". My letter from the Commissioner of Police for the City of London strangely uses the same words. Mr. Varma tells me that the police officers told him that both the bank and its solicitors agreed that there had been a fraud, but both refused to assist the police in uncovering it.

This would not be a matter of national importance and not a matter to deserve the attention of this House if it were an isolated instance of fraud or an isolated instance of a bank's apparent irresponsibility. The fact that so many of these loans have ended by the lending bank having to invoke the guarantee and reclaim the loan from the Department of Trade and Industry strongly suggests that, sadly, the case of my constituent is not unique.

In correspondence with me and in statements to the House, the Secretary of State has taken the view that once a loan has been approved his responsibility is finished. From then on what happens to the money is a matter for the banks. The banks have taken the view that the actual use of the money is not their concern. Their responsibility remains to their shareholders. If the loan cannot be repaid, they can always reclaim most of it from the Department of Trade and Industry.

I have no intention of knocking the idea of the small firms guarantee loan scheme. On the contrary, part of my purpose in raising this matter today is to suggest that the Secretary of State should authorise a new loan to Mogul Foods, which has been left, stranded without working capital by what has happened. There is certainly the possibility that the loans granted under the scheme are regarded by certain crooked financiers as easy game, as funds which, with a little bit of ingenuity, can be milked and diverted and perhaps end up in Jersey. A few subsidiaries can be set up, which sell off non-existent assets and then go into liquidation. The Secretary of State should examine the possibility that this is what is happening with a substantial proportion of other loans. We should ensure, where fraud seems likely, that they are properly investigated and the perpetrators prosecuted.

I draw to the attention of the House that written replies to me show that the sums so far invested in the small loans scheme amount to £150 million. There is a case to be answered. I hope that the House will seriously consider this case so that investigations can be carried out and the problems of Mogul Foods be properly sorted out. I hope that prosecutions will take place and that the way in which the small firms loan guarantee scheme is handled can be properly investigated.

2.50 pm
The Parliamentary Under-Secretary of State for Employment (Mr. David Trippier)

The hon. Member for Portsmouth, South (Mr. Hancock) has raised a matter of great concern to one of his constituents, Mr. Varma. In 1982 Mogul Foods Ltd. obtained a loan of £75,000 for the development of its business from the National Westminster bank. That loan was facilitated by an 80 per cent. guarantee to the bank from the Department of Trade and Industry under the small firms loan guarantee scheme. In 1983 Mogul Foods Ltd. was unable to meet its obligations to the bank under the loan agreement and the bank accordingly called on the Department to honour its guarantee, which it did.

As hon. Members will be aware, my Department, the Department of Employment, is now responsible for the administration of the loan guarantee scheme, and it is therefore appropriate for me to reply to the points raised by the hon. Member. For convenience I shall refer to whichever Department was responsible for the administration of the scheme at the time. That is confusing because the sponsorship has moved from the Department of Trade and Industry to my Department. Whoever has been the Minister responsible for small firms has been the sponsoring Minister for the loan guarantee scheme.

The hon. Gentleman has pursued this matter with vigour and persistence on behalf of his constituent. I recognise that his intentions are commendable. I shall try to give him as detailed a reply as possible. I shall concentrate on those aspects of the case which directly involve the Department. I hope that the House will accept that we have dealt with the case properly and in good faith, within the limits of our powers and the available information.

Anyone who has read the correspondence arising from the case, which goes back over four years, will understand that the affair has caused a great deal of distress to Mr. Varma and his family. His hopes for his business have been dashed, his personal investment has been lost and a great deal of expense, time and anxiety has been incurred in pursuing the matter.

On a personal level, one is bound to feel sympathy for someone in Mr. Varma's position. Mr. Varma has made many serious allegations against various persons, some of which the hon. Gentleman referred to today. I emphasise that none of the allegations has been tested in the courts, in civil or criminal proceedings. As a result of the new information that has been drawn to my attention by the hon. Gentleman, that might now happen. It would certainly be interesting. Those against whom allegations have been made do not have the opportunity to put their side of the story and they are not represented here today. The House must bear that in mind.

Mr. Varma has been repeatedly advised that his grievances can be resolved only in the courts through a prosecution. I understand that Mr. Varma has brought his evidence to the attention of the police. We shall see what transpires as a result of the new evidence. So far, there have been no charges.

Mr. Hancock

On the accuracy or otherwise of the evidence, I should be interested to know whether the Minister could say whether his Department has attempted to contact the other people involved in the supposed fraud and, if so, what his Department's response was to discussions with the personalities involved.

Mr. Trippier

I shall endeavour to illustrate our position. The Department's responsibility is to deal with the bank, which was the lender in the first instance. I have no doubt that the bank has tried to contact the other individuals to whom the hon. Gentleman referred, but that is not a matter for my Department. We are interested in whether the loan was within the parameters—which are fairly broad—of the loan guarantee scheme under the existing rules.

It is not our responsibility to appraise applications when they are first brought to our attention. The hon. Gentleman would not seriously expect it to be. I do not want civil servants or Ministers to do the appraising. We leave that to the banks because they have the discipline and training necessary. That was the understanding when the scheme was introduced and I am content with that.

The hon. Gentleman referred to inaccuracies in letters from the National Westminster bank. It is unfortunate that such errors should confuse an already complicated matter, but I find it difficult to believe that the mistakes were deliberate. It is obvious that such mistakes would serve no purpose for the bank and would be easily detected.

Under the loan guarantee scheme, the Department provided at that time a guarantee of 80 per cent. on loans up to a maximum of £75,000. To ensure that the guaranteed loans were not just a soft option, borrowers were required to pay a premium to the Department of 3 per cent. on the guaranteed proportion of the loan. Guaranteed loans were available for most purposes and for most types of business, with some exceptions. The terms of the scheme have been modified from time to time, but the terms that I have described are those that were particularly relevant at the time.

Before outlining the facts concerning Mogul Foods, I must emphasise certain aspects of the scheme. From their inception, guaranteed loans have been loans by the banks and not by the Government. It is wrong to suggest that Government money is paid to the borrower. Government money is paid to the bank only if a claim is made on the guarantee. Moreover, there is only a partial guarantee. The bank shares the risk in the event of a default.

Decisions on the commercial aspects of lending are taken entirely by the banks. They decide whether a loan proposal is commercially viable, taking into account all the circumstances, including, of course, the availability of the guarantee. While the hon. Gentleman was right to say that the precise use made of the money applied for was changed, I told him in a parliamentary answer that the bank was responsible for notifying the Department of any change.

Mr. Hancock

I draw the Minister's attention to a letter from Lord Boardman, the chairman of National Westminster bank, who wrote: The Bank does not accept that Mr. Varma or Mogul Foods Limited have any grounds for complaint against the Bank. Is the Minister saying that the banks have no obligation for the money and nor do the Government? Where is the responsibility for the way in which this public money is used?

Mr. Trippier

The responsibility is with the individuals who were parties to and signed the original application form. Perhaps that was the cause of Mr. Varma's undoing. When the application was submitted, it was clear that the other people named by the hon. Gentleman were directors of the company.

Any case that Mr. Varma has is against the other directors. He readily concedes that point in correspondence with me and I also have a copy of the letter that Lord Boardman sent to the hon. Gentleman. I believe that Lord Boardman is absolutely right.

In preparation for the debate, I had to check whether the bank had notified the Department that there was a change of use for the money being made available. That notification was sent to us and I have it in my file.

As I said, the Department forms no commercial judgment on the aspects of any project, but merely examines whether the application is eligible under the scheme. There is no doubt that this application was eligible and even the changed purposes fell within the scope.

The bank has to decide whether to seek repayment of the debt by means of liquidation, realisation of security or legal action. After any costs have been met, the proceeds of such action are split between the bank and the Department. The Department does not directly pursue the recovery of debts. That would be impracticable.

I assure the hon. Gentleman that in the three years during which I have been the sponsoring Minister of the scheme, I have never received correspondence such as that I have had with Mr. Varma. The hon. Gentleman said that he thought that such problems might he widespread, but I reject that view. A considerable number of loans have been made under the scheme, totalling £540 million, and claims on the guarantee have been relatively small, at about 20 per cent. That bears a favourable comparison with similar schemes on the continent and in the United States. We have never encountered such an issue previously, but I am satisfied that the bank acted within the rules and regulations of the scheme.

The scheme is extremely economical. A unit of about 10 people operate within the Department. As I have said, they issue guarantees on loans over the £500 million mark and settle claims of more than £100 million. That is an arbitrary figure, because obviously people who have borrowed money would still make a claim at some future stage. Those 10 people deal also with any complaints which arise, including—I am sure the hon. Member for Portsmouth, South will agree—protracted correspondence from Mr. Varma over a long period.

It is evident that the Department needs to consider only two issues in any particular case. First, is there a valid guarantee? Secondly, is there a valid claim? The Department will setlle any bona fide claim on a valid guarantee. The circumstances giving rise to a claim are normally quite irrelevant to the Department and it would be impractical to investigate them. Provided the borrower has defaulted on his obligations to the lender, whatever the reason, the lender will have a valid claim under the guarantee. Fraud or theft by the borrower, or by some third party, would not invalidate the claim. The only circumstances in which the Department would hesitate to honour a guarantee would be where it appeared that a claim might not be made in good faith, where, for instance, the bank had been a party to a fraud. Fortunately, that is a hypothetical case which has never arisen.

I turn again to the case of Mogul Foods Ltd. Fortunately, I can be brief, as the aspects of the case that concern the Department are quite limited. My information is derived from the documents relating to the guaranteed loan and from Mr. Varma's letters to the Department. In March 1982, Mogul Foods Ltd. prepared an application for the guaranteed loan. That was signed by Mr. Varma. The directors of the company were listed as Mr. Varma, Mr. Clive Hollands and Mr. Richard Sale. After processing the application, National Westminster bank forwarded it to the Department on 19 May 1982. The stated purpose of the loan was accurately described by the hon. Gentleman—

Capital injection to new business for marketing and distributing curried products". The Department checked that the application met the criteria for eligibility and issued a guarantee to the bank on 7 June 1982. Around the end of July, the bank credited Mogul Foods Ltd. with a £75,000 loan. It is not disputed that around the same time substantial payments were made by Mogul Foods Ltd to a company in the Lusty group called Backchurch Storage Ltd. However, Mr. Varma disputes several aspects of those payments. He argues, first, that the payments were not properly authorised by Mogul Foods Ltd. and that the bank was negligent in making the payments from Mogul's account. On this point, I must say that, in a letter to the Department in December 1982, Mr. Varma admitted that his fellow directors had full authority to sign cheques. It follows that the cheques for the disputed payments which were signed by Mr. Richard Sale were properly authorised. It is difficult to see how the bank can be fairly accused of negligence.

Secondly, Mr. Varma argues that he was unaware of these payments at the time. If true—I am not judge and jury—that is a criticism of his fellow directors. What seems clear is that at some stage Mr. Varma signed a contract on behalf of Mogul under which Mogul agreed to buy a factory and machinery from Backchurch Storage Ltd. Mr. Varma claims that this contract was signed later in the year, although it bears the date 30 July, and that he did not understand its contents. It is not my responsibility to form a view on that claim.

Thirdly, Mr. Varma argues that the assets acquired by Mogul were of little value and that the money was, in effect, misappropriated by the Lusty group, with which Mr. Sale was connected. Again, I do not sit as judge and jury on this, but I note that Mr. Varma's relationship with the Lusty group went back at least to March 1982 and that he appeared, at that time, to be satisfied with the manufacturing facilities which were part of the disputed contract.

At some stage after these transactions the bank manager became concerned that the loan facility had been used up so quickly. He sought an explanation from Mr. Sale and was told that the company had decided to purchase the manufacturing facilities rather than to hire them. He considered that this involved a change in the use of the loan and in October 1982 notified the Department of this change. The Department confirmed—I have seen a copy of that letter—that the change of use did not affect the validity of the guarantee. Mogul failed to make repayments on the due dates and, in March 1983, the bank claimed a sum of £51,516 under the terms of the guarantee, which the Department duly paid.

From these bare bones of the story, I think one point is reasonably clear. The Department and the bank both complied with all relevant rules and procedures of the scheme. There is on the face of it no reason to doubt that both the guarantee and the subsequent claim were entirely valid. For that reason, the Department has always explained that it has no locus to investigate this affair any further.

So far as I am aware there are no strong grounds for any accusation of negligence against the bank. Mr. Varma does not seem to have raised this suggestion until 1984. That is somewhat interesting in view of the time that had elapsed. Mr. Varma certainly started to make the suggestion in 1984. Certain of his later claims, especially about the authorisation of payments by Mogul, flatly contradict his earlier statements. Although I am not sitting as judge and jury on this matter, I admit that that certainly confused me. If Mr. Varma has any real grounds for that accusation, his means of redress is a civil action for negligence or breach of contract by the bank.

I am interested also in knowing whether Mr. Varma has sought to take legal action by going to a solicitor and being advised by him whether the case can be brought up—not necessarily under criminal proceedings but under civil proceedings. Mr. Varma certainly does not appear to have pursued that course. To be fair to the hon. Member for Portsmouth, South, new evidence may have come to light which throws a slightly different complexion on the matter. I should be grateful to the hon. Gentleman if he would grant me the privilege of seeing copies of the correspondence in his possession. I shall be happy to look again at the matter.

I have said repeatedly that I am not in a position to act as judge and jury on the rights and wrongs in what, as everyone would agree, is a complex dispute. Yet it seems to me that, even if the hon. Member for Portsmouth, South had new information, we would not intervene as a Department. It is not a matter that we could pursue through the administration of the loan guarantee scheme. I regret that Mr. Varma's business has failed and that National Westminster bank and the Department, and ultimately the taxpayer, have lost money. I hope that eventually Mr. Varma will be satisfied that he has been fairly treated by the Department and the bank. I am anxious for that to occur. I hope that the hon. Member for Portsmouth, South accepts that my Department has given the matter considerable attention. I look forward to hearing about the new information. I hope that at some stage—sooner rather than later—Mr. Varma will explore through the usual channels the possibility of legal action if he thinks that the case is justified.

Question put and agreed to.

Adjourned accordingly at eight minutes past Three o'clock.