Department of Enterprise, Trade and Investment: De Lorean: The Recovery of Public Funds
A report published today by John Dowdall, the Comptroller and Auditor General for Northern Ireland, examines the actions taken by the Department of Enterprise, Trade and Investment (formerly the Department of Economic Development) to recover public funds lost as a result of the failure, in 1982, of the De Lorean sports car project. Over the 20-year period to 2002, a wide range of actions, including a number of litigation proceedings, were undertaken in the bid to recover public funds lost as a result of the failure of the project. The Audit Office reviewed the overall outcome of the recovery process, including the Department’s 12-year litigation against Arthur Andersen, the De Lorean company’s auditors.
Background
Between July 1978 and February 1982, Government provided assistance totalling some £77 million to establish the De Lorean manufacturing project in Northern Ireland. The company aimed to produce up to 30,000 cars a year, with a workforce rising to 2,000 over five years.
In February 1982, some 12 months after starting full-scale production, the Northern Ireland company, went into receivership. Production ceased in May 1982 and the plant closed six months later. The Belfast High Court ordered the company to be wound up, and appointed Joint Liquidators from a Belfast-based firm of accountants. In December 1983, the ‘De Lorean Motor Company’ - the US parent - also went into liquidation, with the US Court appointing a ‘Trustee’ (the equivalent of a liquidator in the UK).
In July 1984, the Committee of Public Accounts at Westminster reported that, "the De Lorean project represents one of the gravest cases of the misuse of public resources to come before us in many years". The Committee noted that there were still a number of matters relating to the project which had not been fully resolved, including enquiries by the police and Receivers into the affairs of the Northern Ireland company and investigations in the United States into the affairs of the parent company. A key issue was an alleged fraud of some £8.8 million. The Comptroller and Auditor General for Northern Ireland undertook to monitor progress and report on the outcome.
Main Findings
The Overall Outcome (Part 2 of the Report)
- Following the collapse of the project, the Department registered a claim for £61 million with the Receivers. Claims were also lodged with the Trustee of the United States parent company. Subsequently, the Department lodged a claim for damages of £73 million, in both Belfast and London, against Arthur Andersen, auditors of the De Lorean group of companies in the UK and the United States. These claims were based largely on Andersen’s failure to disclose the £8.8 million fraud in its reports on the De Lorean accounts, as a result of which the Department had continued to invest in the project. The Department also lodged a claim against Arthur Andersen in New York. Overall, the Department’s approach was to ‘cast the net’ as widely as possible, in order to maximise the possibility of recovery (paragraphs 2.11 and 2.12).
- By January 2003 (when the recovery process effectively came to an end), the Department had recovered a gross total of £40.45 million, primarily from litigation settlements and distributions from the Receivers. Against this sum, the Department incurred direct costs of £20.72 million, largely legal fees and expenses, giving a net recovery of £19.73 million. The figure for direct costs does not include the Department’s administrative costs of recovery. Given the longevity of the process - some 20 years - and the significant staff time involved, it is likely that these costs amounted to a substantial sum (2.13 to 2.17).
Actions of the Receiver, Joint Liquidators and US Trustee (Part 3)
- Overall, the Receivers realised some £20.7 million (net). After fees and expenses of £3 million, a sum of £17.7 million was available for distribution. Of this, £13.8 million went to the Department and some £3.6 million to other Government creditors (3.2 to 3.6).
- The Joint Liquidators represented some 600 unsecured creditors of the Northern Ireland company, owed £14 million, excluding the Department’s claim. However, as sums realised by the Joint Liquidators were limited, they paid a first and final dividend at the rate of 4.1 pence in the ‘£’. The total dividend to unsecured creditors amounted to £150,000 (3.7 to 3.11).
- When the United States Trustee’s action against Arthur Andersen went to trial in February 1998, a New York State Court found that Arthur Andersen had been negligent in failing to detect and report the fraud. The jury ‘awarded’ the Trustee US $46 million, plus accrued interest, in damages - that is, around US $109 million. However, prior to an appeal, the parties agreed a figure of US $27.75 million in full and final settlement. Under the terms of the Department’s earlier settlement with Arthur Andersen in November 1997, the Department did not qualify for a distribution from the Trustee (3.12 to 3.15).
The Action against Arthur Andersen - Negotiations and Settlement (Part 4)
- The Department’s action against Arthur Andersen reflected Government’s determination to recover as much as possible of the public money invested in the De Lorean project and to take action against those who it considered may have been responsible for such losses. It also wished to hold (and to be seen to hold) professionals to proper standards of honesty and propriety in their conduct. Between 1985 and 1997, the action was largely conducted in the United States, where there was the potential for a considerably higher level of damages to be won. Also, most of the alleged misconduct had taken place in the United States (4.3 to 4.8).
- In 1989, the Department commissioned a review by the Treasury Solicitors Department to provide assurance that, in the face of mounting legal costs, the case against Andersen was worth pursuing. Thereafter, what became known as the ‘running note’ was periodically updated. While the running note was the work of the Treasury Solicitors, it was informed by the ongoing advice of the Department’s US lawyers. On each occasion, between March 1990 and February 1997, the running note indicated a strong prospect of the Department recovering very substantial damages, possibly far outweighing the costs associated with the action (4.9 and 4.10).
- In March 1997, at the Department’s instigation, a review of the fundamental strengths and weaknesses of the Department’s case was undertaken by a Treasury Solicitors official not previously involved in the case. While confirming that there was a well-based case against Andersen, the reviewer noted a number of matters which gave cause for concern. He considered that a good outcome was by no means certain and that there were a number of ways in which the case "could go badly wrong". His view was that, in weighing the likely damages against costs to date and likely future costs, "the balance of advantage has swung firmly in favour of making efforts to bring this case to an honourable conclusion by way of settlement". Noting that the Department’s direct legal costs were "huge" - some £18.5 million to March 1997 - the reviewer considered that it would be "irresponsible" not to seek some compromise position (4.11 to 4.13).
- In November 1997, the Department agreed a settlement of US $35 million with Andersen, some £20.72 million. Against this, it incurred substantial costs - £20.32 million - over the period 1985 to 1997. However, this figure does not include the Department’s administrative costs over the period, Treasury Solicitor’s Department costs between 1985 to 1991 (when it did not charge for services), or the administrative costs of other Departments involved at various times in the action. The Department was unable to calculate these costs (4.24 and 4.25).
- The Department told the Audit Office that, in addition to recovering damages from Andersen, it was also seeking to uphold a principle - as Andersen’s negligence had contributed to the loss of public money, it was important that they be held to account. This was not simply a commercial issue - Government has a responsibility to hold professionals to proper standards and this may sometimes make it necessary to litigate even where there is no direct financial benefit (4.26).
- The Department also said that the action against Andersen was a very complex process and necessarily very time-consuming and costly. Andersen had sought to prolong the action, with the Department having little or no control over the speed of the proceedings - as one of the largest global accountancy firms, Andersen had substantial resources, significant indemnity cover and, most important, substantial experience of defending actions brought against it (4.38 to 4.40).
- The Department said that lessons had been learned. Since this case began, Government had developed a greater recognition of the need for continual review of the costs and objectives of litigation and the relationship between the two. In particular, a department engaged in litigation should seek formal independent reviews as and when major milestones are reached. Reviews should be undertaken by a lawyer not directly involved in the case, as was the Treasury Solicitor’s Department review of March 1997. With hindsight, this review should have been undertaken earlier in the process (4.41).
Notes for editors
In July 1984, the Committee of Public Accounts at Westminster reported the results of its enquiry into the investment of public funds in the De Lorean project (‘Financial Assistance to De Lorean Motor Cars Ltd’, Twenty-fifth Report of Session 1983-84, HC 127 Volumes I and II).