Auditors appoint solicitors to defend SFI neglect claim

by The PMA Team Former SFI Group auditor Horwath Clark Whitehill (HCW) has appointed solicitors Barlow Lyde & Gilbert to represent it over a possible legal action for negligence by the Slug & Lettuce operator. SFI Group is exploring whether it can sue HCW for damages in respect of £58.8m in fundamental accounting errors. The high-street bar operator ­ which is asking shareholders to approve a scheme that will see its six bankers swap their debt for equity in the company ­ told shareholders that HCW had been informed of possible legal action last November. In a letter to shareholders, SFI Group stated: "Matters are at an early stage but, now that the audited accounts are available, the claim against HCW can be vigorously pursued. "To succeed in any claim, the company will need to establish negligence on HCW's behalf and that the negligence caused recoverable loss. "Without having gained access to HCW's audit papers to date, the company has been advised that it would be premature to form a meaningful view of the prospects of establishing negligence. The company and its advisers now intend to gain access to and review HCW's audit papers." SFI Group shareholders will be entitled to 12.5% of any litigation proceeds, assuming they accept the banks' plan to swap their debt to equity at an extraordinary general meeting on 7 May. Finance director Tim Andrews will focus on the potential litigation against HCW. Andrews has told shareholders the company's "rapid growth, and the funding of acquisitions, largely obscured the existence of accounting errors". He added: "The 2002 accounts were based on a brought-forward profit-and-loss reserve of £18.4m. "Following the restatement, the actual profit-and-loss re-serve at that point was a deficit of £11.3m, reflecting a business that, for some time, had been generating insufficient operating profits to support its interest and dividend payments." Accounts show the rot set in way back in 2001 The accounts for the year ending 31 May 2003 ­ published just three weeks ago ­ make it clear that the company was in a dire financial position as far back as 2001, at least 18 months before its shares were suspended. A report to shareholders states: "During the year to 31 May 2002, the company paid an interim dividend of £680,000. "Subsequently, it has been found the company did not have adequate distributable reserves to pay this dividend as required under the Companies Act. "Consequently, as the statutory procedures in respect of the dividend were not complied with, it was unlawful. The directors are considering legal remedies. The final dividend paid in respect of the year to 31 May 2001 was also unlawful on the same basis. Again, the directors are considering legal remedies." Lawson's pay at least £345,000 SFI Group executive chairman Stuart Lawson, who joined the company last June, will be paid a minimum of £345,000 this year ­ and could earn as much as £460,000. Lawson, who has drawn up a recovery plan that began in September last year and runs until May 2006, is paid an annual salary of £230,000. A guaranteed bonus of half his salary will be paid at the end of his first year. A further £115,000 is payable if the proposed restructuring of SFI Group is successful and other performance criteria are met. In addition, Lawson will receive a 3.13% stake (a 25% stake in C Shares reserved for staff) in SFI Holdings, the new company created if existing shareholders vote for the proposed debt-for-equity swap by the banks. Company secretary Edward Lavelle, who will join the board of SFI Holdings with a salary of £120,000 per annum, will hold a 1.25% stake in the new company. Six banks ­ Barclays, Bank of Scotland, HSBC, Fortis, Evansgrove (a subsidiary of Alliance & Leicester) and West Register Investments (a subsidiary of the Royal Bank of Scotland) ­ will write off £83.4m of debt in return for a 75% stake in SFI Holdings.