The Sudeley Bankruptcy and its Contemporary Significance (continued)

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VII

The City speculations in which Sudeley became involved contributed in some degree to his debt but were insufficient to account for most of it.  Here he became involved with two great sharks of the period, the well known company promoter Earnest Terah Hooley and Jabex Balfour.  Hooley gave a set of gold Communion Plate to St. Paul’s Cathedral to celebrate Queen Victoria’s Diamond Jubilee.  When Hooley became bankrupt, the Church of England insisted  on returning it to help satisfy Hooley’s creditors.  The celebrated reactionary priest Monsignor Gilbey once remarked to me the Church of Rome would have made no such gesture.  Balfour was a vivid illustration of the abuse of the privilege of limited liability.  He founded a series of companies for the development of suburban housing over which he had supreme control and all supported by a bank.  He window dressed the balance sheet of one company borrowing from the next. When through this over extension his bank crashed, all the companies fell like a set of dominoes.  It must be noted there still appears to be no sufficient regulation to prevent the abuse of limited liability in this way.

The petition for bankruptcy filed against 4th Lord Sudeley by Lloyds Bank was parked off by Sudeley’s attempt to rescue the great financial house of Murietta. Just before they became insolvent in 1890, Dr. Chapman tells us Barings sold large quantities of Argentinian railway stock, in which they had an interest, to the gullible public, including  the South American and Mexican Investment Company which was incorporated  just as the bubble was about to burst.  The Baring crisis plunged Murietta into an immediate liquidity crisis.  To plug this, Sudeley negotiated with the Governor of the Bank of England to extend the Bank of England’s loan of half a million pounds to Murietta on the condition Murietta could amalgamate with the South American and Mexican Investment Company of which Sudeley was a director. This plan collapsed when that company’s debenture holders rebelled against their Directors.

Sudeley insisted the South American and Mexican investment Company never intended to take over any large liability from the Bank of England unless its amalgamation with Murietta was successfully carried through.  The Bank of England did not agree. It successfully petitioned the court to wind the Company up and picked on Sudeley as a surety for £40,000 owed to it by the Company.  Dr. Chapman comments that Sudeley should have guarded his position against the Bank of England as the most powerful financial institution in the country.  When I examined some of the court papers of this case, I had to ask myself how solid was the evidence on which the Bank of England took up its position.  The Bank of England was in the position to pay the best lawyers to do what it wanted.  Sometimes one notices that a case of law bears little relationship to the facts and personalities involved; (See UK Banking Litigation Report) it is like a drama in which the best lawyer - like the best actor - wins.  On first seeing this, one experiences a sense of nausea and then gets used to it. 

It was Sudeley’s intention to sell the Gregynog estate and keep Toddington with its great orchards there.  The extent to which his assets exceeded his liabilities was very similar to that of Barings.  Because  Barings represented credit the world over, it suited the banking industry to support them , and we know that after a passage of time they survived.  By contrast, it was in no one’s interest to support Sudeley in his need so that he could sell only some of his assets at a comfortable pace to fetch their proper value.  At the same time the Bank of England and other major creditors had no wish to press Sudeley into bankruptcy.  When Lloyds Bank, low down on the list of creditors, filed for bankruptcy it made no difference that they withdrew their petition.  The mere fact the petition ever was filed meant confidence was undermined, and Sudeley could only borrow on the most onerous terms.

If Sudeley had been allowed an accommodation with his creditors whose claims were reasonable they could have been paid in full and he could have kept the rest of what he had.  But because Lloyds Bank acted as it did the creditors themselves got next to nothing.  So Dr. Chapman agrees there must be an unknown reason for Lloyds Bank filing for bankruptcy and we can only speculate.  Dr Chapman suggests that in the aftermath of the Baring Crisis, which shook credit to its foundations, scapegoats had to be found, and it was Sudeley’s misfortune ever to have been associated with the South American and Mexican Investment Company which had to pay for its misdeeds with its life.

What other explanations have been offered?  The late Sir John Prideaux, Chairman of the Nat West Bank, suggested that Lloyds Bank was idle.  Or with banks being sensitive to political pressure, is 4^th. Lord Sudeley’s case the spin-off of the feud within the Liberal Party between middle class radicals and old Whig aristocracy like ourselves, already there owing to class animosity and exacerbated by the Irish situation when the law so heavily weighted in favour of the creditor allows him to punish the debtor for reasons divorced from economics.  We know how Joseph Chamberlain was the deadly enemy of 4^th. Lord Sudeley’s principle creditor Lord Stalbridge, Treasurer of the Liberal Party, who, owing to 4^th. Lord Sudeley’s bankruptcy - or so his grand-daughter Elspeth Huxley tells us in her book “Nellie - Letters from Africa” - had to move out of politics to make money in railways.

But perhaps the most convincing explanation is the offered by Arkell, that under 4th. Lord Sudeley’s Deed of Arrangement with his creditors shortly afterwards overturned by Lloyds Bank filing for bankruptcy, a Deed which though formed may not have taken effect, the creditors may have fraudulently enlarged their audited claims because they were in collusion with outside parties. They were thus enabled to acquire our assets at undervalue.  On this abuse Arkell writes:

“Cases of fraudulent enlargement are, by their very nature, almost impossible to prove, since the proof would place any creditors so discovered in danger of appearing in the criminal courts. Nevertheless, most accountants are aware of cases, some arising from their own casework (where debtor clients have alleged collusion between creditors and a liquidator or receiver), and some heard about ‘on the grape-vine’.

From my own files I give you the tale of a couple who ran a working men’s café. It was the husband’s task to complete the VAT and business tax returns, since he had sacked the business’s accountant for over-charging and delay in submitting returns.

The VAT returns were dealt with sufficiently well so that there were few questions raised on the infrequent inspections, and VAT was accounted for and paid over timeously. The income tax returns, however, baffled the husband so much that he put them in a drawer, thinking that he would deal with them later. ‘Later’ never came: instead, a series of increasingly peremptory demands which also found their way into the drawer with the tax returns.

The end result was a court judgement in the sum of more than £40,000 (around 4 times the tax actually due as determinable from the VAT returns which had been accepted by HM Customs and Excise as perfectly in order). Interest and penalties were added to this figure.

The husband and wife now tried to defend themselves. They provided the Revenue with all their accounting records. The Revenue accepted that the assessment for tax was far too high and agreed to reduce it, and moreover, to stay any bankruptcy proceedings while a negotiated settlement was discussed.

Despite these assurances, the Revenue still proceeded to exact judgment. This led to a visit by the bailiff on behalf of the Revenue and a bankruptcy order, and the appointment of a registered insolvency practitioner to administer the couple’s estate. The Revenue put in their maximum claim, based on the erroneous assessments, and though the couple pleaded with the insolvency practitioner to ‘make the Revenue see sense’, the Revenue’s claim was accepted by the practitioner as good. ‘You don’t rock the boat with the Revenue’ was the practitioner’s response. There were only a handful of other creditors (given the cash basis of the café’s suppliers) amounting to a trivial sum in total.

The couple had to hand over their business to the practitioner as part of the settlement with their creditors. The practitioner ran it for three years during their bankruptcy with the couple as  his ‘agents’ actually working in the café each day, and paying over to the practitioner all the café’s takings.

Eventually the couple came out of bankruptcy, and retrieved their café. They discovered that the Revenue were paid only a fraction of the inflated debt claimed, and the practitioner’s fees for the administration were very substantial indeed. Unfortunately, the couple have no wish to draw attention to themselves, since they must still deal with the local tax authorities, and the practitioner is well known in their area.

A clearer case where the auditing of creditors’ claims prior to acceptance by an insolvency practitioner cannot, in my opinion, be found. Sadly, it is all too common.”

 VIII