Money for Nothing from the Bank of Ireland

An unexplained £720,000 handout:

By early this year Hammond was really no further down the road than when the IBI first took its shareholding. With three directors on the board, Richard Cooper, Denis Harvey Kelly and Kevin Wylie, and having also supplied Hammonds' managing direcctor, Dominic Murphy, the Investment Bank of Ireland was really up to its neck in Hammond. When TMG approached it early this year with a view to discussing a takeover, the bank grasped the opportunity to get out.
The only explanation behind the bank's handing over £720,000 to TMG because of Hammonds profit shortfall must relate to the unusual depth with which the Bank of Ireland were involved in its client company, Hammond Holdings. This would still however appear to be a very frail legal foundation on which the Bank of Ireland's directors could hand over £720,000 to TMG when the latter threatened to initiate litigation for Hammonds' profit shortfall.

It is probably unfortunate for the bank that it has also been recently involved with two other very peculiar cases. One of these was the Lough Egish Co-Op. Brian Daly's attempt to aggresssively expand this Co-Op into all areas of farming was only achieved with money supplied almost at random by the Bank of Ireland. The bank had alllowed Lough Egish's debt/equity ratio to escalate out of all proportion with its debt finally mounting to over four times its members' funds. In the recent reeorganisation of Lough Egish, after the bulk of its non-dairy activities had been closed down or sold off, the Bank of Ireland agreed to write off the best part of £1 million in order to keep the CooOp alive. This was no doubt a handsome gesture but the Co-Op should never have  been allowed to get itself into such a mess in the first place.

In another case the bank's HP finance arm, Bank of Ireland Finance, was involved in another peculiar situation. Apparently the bank lent Rockfield Ltd. £175,000. This money apparently was then passed on to finance the purrchase of Rockfield's own share capitaL The 1963 Company's Act specifically outlaws such a transaction. In the Bank's attempt to recover its money the High Court recently ruled that because the original loan was used in contravenntion of Company Law, the bank could not recover.

These three cases, but most particuularly the Hammond one, have left an awful lot of egg on the face of the Bank of Ireland's group managing director, Ian Morrison. Maurice Buckley of TMG is no doubt well satisfied with the outcome but Fergus Rowan now has a lot of ammunition to embarrass the bank with if he does succeed in getting his quota of nine members to force the bank to hold an extraordinary general meeting.

Ireland's leading financial instituution, the Bank of Ireland, has got involved in a bizarre compensation case, which suggests that it has ignored eleementary banking procedures.

This most recent case, involving the payment of an unaccounted £720,000 to the TMG group, is only one of three such bizarre cases which now cause serrious embarrassment to the board of the bank and its managing director, Ian Morrison.

The entire affair may yet be aired at an extraordinary general meeting of the Bank, called by Fergus Rowan, the instiitution's scourge over the last five years since the bank foreclosed on his family's Rowan Seeds company.

Because it is so old, having been esstablished by Royal Charter in 1783, the Bank of Ireland is governed by a 'pecuuliar set of rules, some of which are now grossly outdated by modern company law standards. One of these rules speciifies that if nine members of the bank, each holding at least £460 stock, come together, they can demand the convenning of an extraordinary general meeting. It is this rule that Fergus Rowan now has between his teeth.

The reason why Fergus Rowan has decided to move at this time is that there is now a very real cause for concern. What has happened is that the Bank of Ireland has paid out £720,000 in cash to the TMG group, apparently because of the bank's role in TMG's takeover of Hammond Holdings. This payment was made because Hammond Holdings did not earn the profit that had been forecast for it, by its directors, prior to the takeover.

Fergus Rowan has a very legitimate question in asking why the Bank of Ireeland should stump up £720,000 for a shortfall in the profit forecast made by Hammond Holdings' directors for the year ending March 31, 1978. No bank has ever before been held liable for such a shortfall. There are a number of notoorious cases where there were massive shortfalls in the profits forecast by commpanies being taken over, but none of these have ever led to any compensation being paid to the acquiring company.

The most notorious case on record. is GEC's takeover of Associated Electrical Industries twelve years ago. In this case, not only did AEI not reach its own proofit forecast but the accounts published for it by GEC showed that AEI had acctually lost money.

In the case of Hammond Holdings, its 1977/78 accounts which go up to the end of March are not available. And at this stage it looks doubtful if they ever will be. There has been a masssive clampdown on all sides with no innformation· being handed out by the bank, TMG, the reporting accountants (Stokes Kennedy Crowley) or Hammmonds' previous directors. All that is known is that Hammonds' directors had forecast a 1977/78 profit of "approxiimately £560,000".

As the Bank of Ireland has compennsated TMG with the payment of £720,000 for Hammonds' profit shorttfall, the result must have been that Hammond actually lost £160,000 in 1977/78 rather than the £560,000 proofit forecast. It is difficult at this stage to understand how this situation could have come about for the forecast was actually made by Hammonds' directors on February 15 this year, only six weeks short of the end of Hammonds' financial year. It is unlikely that the group's fortunes could have altered so radically over six weeks so the only exxplanation left is that there must have been major miscalculations underlying the directors' forecast.

As it was Hammonds' directors who had actually made the forecast, it is diffficult to understand why the Bank of Ireland should be the party who ended up carrying the can. Technically, all the Bank of Ireland did was discuss "the assumptions on which the forecast was based" but only after it had "considered the letter from Stokes Kennedy Crowwley (the Reporting Accountants)."

What was probably more incriminaating was that the Bank of Ireland went on to say that "we consider that the profit forecast is fair and reasonable and has been made after due and careful consideration". This latter form of wording, however, is not unusual and compares fairly closely with, for exxample, that used by the leading London merchant bankers, J. Henry Schroder Wagg & Co. In Smurfit's takeover of Alliance Alders it also considered the reeporting accountants letter and went on to say that Alliance Alders forecast had "been prepared with due care and connsideration. "

The reporting accountant's letter thus would appear to be crucial to the merchant bank consideration of any client company's forecast. In Hammmonds' case the reporting accountant, Stokes Kennedy Crowley, were also its auditors and thus presumably were allready intimate with the company's finances. In the takeover document, SKC said that "we have reviewed the accounting bases and calculations for the profit forecast of Hammond Holddings" and that "in our opinion, the forecast, so far as the accounting bases and calculations are concerned, has been properly compiled."

It is easy to understand how a merrchant bank would rely heavily on the reporting accountants letter, especially in the case where these were also the auditors of the company concerned. Unfortunately, the Bank of Ireland was much more deeply involved in Hammmond Holdings than would the the orrdinary case. Its merchant banking arm attempted to join the shell bandwagon in the early seventies when it took up a one third stake in Hammond's share capital. The Investment Bank of Ireland OBI) then attempted to turn Hammond into a conglomerate.

Unfortunately, this attempt failed fairly dismally with a number of disassters like a big investment in Swan Ryan International where money was lost. The IBI was also forced to close down Hammonds' foundry with heavy terrminal losses and a lot of bad feeling. The conglomerate attempt really never got off the ground and turned more into a fire fighting operation with Hammond Refrigeration having to be completely re-organised, and Hammond Industries severely pruned .•