Failed broker Ward Evans' directors and its auditor could face legal action after a damning report from administrator Ernst & Young.
The report identifies a net shortfall of £3.97m in Ward Evans' accounts. But more worrying for creditors is the news that the company's directors had no directors' and officers' (D&O) cover and its professional indemnity (PI) cover lapsed on 25 November 2002.
The report said: "This [PI] policy operated on a claims-made basis. As a result any claims made following the date of this policy lapsing will not be covered."
The Leeds-based broker went into administration on 18 December 2002 and, at the time, estimates were that it owed insurers, including Zurich, Norwich Union, St Paul, Groupama and Allianz Cornhill, around £3.5m.
Ernst & Young has confirmed that "improper withdrawals of funds" from the company's IBA accounts had occurred "to keep its overdraft facility within its limits".
Creditors face a long and protracted battle to recoup their funds. According to the report: "Insurers and policyholders with a claim to funds received into the IBA accounts in October 2002 or earlier are unlikely to recover any payment."
But creditors after that date would more than likely receive payment in full, said Ernst & Young.
Based on pay-roll records for the year ended 30 November 2002, the broker's 20 directors were paid £2.1m in salaries. The top earner was chief executive Mike Kenney, who was paid a total of £634,140 per annum. Neither Kenney nor colleague Martin Ward could provide the administrator with details of their renumeration over the past three years.
In breach of recent corporate governance guidelines, Kenney was implicated by fellow directors as the one person who "approved all their salaries".
When Ernst & Young asked the directors why the company failed, a litany of excuses was given. These included:
The report points a finger at both the directors and the company's auditor, Clive Owen & Co, which is based in York.
The report said: "A detailed investigation was warranted to ascertain if there are any potential causes of action...to seek recoveries from the directors (past and present) and auditors."
A meeting of creditors took place on 5 March in Leeds to discuss what action to take against the broker.
The lifestyle of a regional broker
The lifestyles of Ward Evans directors was "excessive and not commensurate with a business of this scale", according to the administrator's report. They also administered "no clear demarcation between business and personal purchases." To give some examples, Ward Evans directors:
- purchased a yacht for £240,000, which was moored in Majorca at a cost of £40,000 per annum. It was used for both corporate entertaining and personal use, including a stag event
- had use of a London flat with a monthly rental of £2,383 plus cleaning costs of £1,000, which included a requirement for it to be stocked with champagne
- had access to ten season tickets to Leeds United and catering costs of £40,000 per year as well as chauffeur services to the games
- took numerous helicopter trips to functions such as Grand Prix meetings and had access to a pool of company cars at a cost of £72,000 per year. Family members of directors also had access to lease cars at a monthly cost of £830
-- paid home TV licences and telephone calls through company ledgers.
