Councillors failed to spot £159 million debt

EXCLUSIVE by EWAN LAMB

The members of a 16-strong delegation from Scottish Borders Council who took part in a 'valuable and illuminating' fact finding mission to Bristol in October 2014 returned completely unaware the contractors they had selected for a £21 million public sector project in Galashiels were already £159 million in debt to banks, and the main source of further funding had already been cut off and suspended.

Last month's complete financial collapse of the New Earth Solutions Group (NESG) along with the allied New Earth Recycling & Renewables [Infrastructure] Fund (NERR) has been followed by devastating evidence from the Group's joint administrators in a damning report to creditors.

The company which was to have delivered a waste treatment solution for the Borders is to be dissolved while the linked Isle of Man-based NERR Fund is being liquidated.

It has also emerged that Duff & Phelps, NESG's administrators, are conducting statutory investigations into the role of NES's directors in the three years leading up to the Group's spectacular demise with checks also to be made for money laundering activities.

Borders council taxpayers have had to shell out at least £2.4 million as a direct result of the council's involvement with NES on a four-year venture which was finally abandoned last year. At the same time company shareholders and investors are understood to have lost millions more while at least one payment of £4 million from public funds to NES has also been written off.

The October 2014 trip was, according to SBC, vital to allow the delegation to conduct 'due diligence' and familiarise themselves with the technical detail of the contract. But the 75-page report from Duff & Phelps suggests the mission failed to uncover the catastrophic and near insolvent state of NES. By this time the Borders project was years behind schedule.

A report published by the Border Telegraph on October 13 2014 - after the Bristol trip - included the following contribution from a council spokesman: "A new delivery timetable is being agreed. When the modified operating permit [from SEPA] has been secured, further work on the integrated facility can be progressed and a revised construction date will be communicated to the community and stakeholders."

Council leader David Parker was quoted as saying the trip had been “valuable and illuminating”. He added: “The integrated WTF (waste treatment facility) is a really big deal for our council as it will transform the way we deal with our waste and help us comply with our zero waste obligations.

“It also involves a major investment, in partnership with NES, which requires councillors to carry out due diligence and, in that respect, the trip was necessary. I am satisfied after our visit that we are on the right track and confident that the WTF will be up and running before the 2019 contract deadline, hopefully by mid-2017.”

However, the report to creditors outlines a somewhat different scenario.

It confirms conclusively that In October 2014 NESG was carrying approximately £159 million of debt with £37 million due to the Banking Group (Co-op) and a staggering £102 million to the NERR Fund which was subordinated to the Co-op debt.

A further £20 million was owed to Australia's Macquarie Bank with a request for further funding. The report explains that funding from NERR had been suspended in 2014 and Co-op Bank had been requested to step in to provide financing.

The assets of the Group have been sold by Duff & Phelps in a deal with DM Opco Ltd for just £5.903 million. The sale included New Earth Solutions’ business intellectual property (the New Earth name) for £1, the customer list (£1), information technology (£1), stock (£1) and work in progress (£1).

Other significant bullet points from the report include:

*There are insufficient realisations to repay Co-op Bank in full under its security.

*As NERR’s security is subordinated to the Co-op’s debt there is no prospect of any distribution being made to NERR under its security.

*It is not anticipated that there will be any return to the non-preferential creditors of NES. A total of 266 businesses and individuals owed £9.169 million including: Trade & Expense creditors £4.202 million; inter-company loans £3.954 million; HM Revenue & Customs £1 million.

*The joint administrators recommend New Earth Solutions Group be dissolved.

The report goes on to state: "It is a statutory requirement that the joint administrators provide a report to the Secretary of State on the conduct of the directors in their management of the Group to determine their unfitness to act in such a role. If the Secretary of State then instigates directors’ disqualification proceedings, further time may be expended in providing supporting documents, witness statements etc.

"Full details of the investigations to be conducted cannot be disclosed at this stage in order to avoid prejudicing any potential recovery or action in this regard. Given the size of the Group’s operations, number of bank accounts and number of directors involved in the Group in the three years prior to the joint administrators’ appointment, time costs are estimated at £41,860 in both NESG and New Earth Solutions Facilities Management (NESFM). Activities will also include anti-money laundering and ethical checks costing £96,200 and £95,000."

Publication of the joint administrators' report and its direct reference to October 2014 re-shines the spotlight on SBC's cross-party visit to the New Earth Solutions untried and untested technical and financial arrangements which were supposed to make SBC the leading waste disposal authority in Scotland.

A detailed account of the trip and all paperwork associated with it should be made public immediately to allow council taxpayers to judge the standard of 'due diligence' achieved on a visit which also cost thousands of pounds to carry out. If elected members were unaware of the alarmingly negative facts and figures set out above then they patently failed in their duty.