Barclays Bank has been accused of using a taxpayer-backed scheme – designed to get finance to budding entrepreneurs – to provide a safety net for its risky lending. The Small Firms Loan Guarantee scheme underwrites 75% of loans to young businesses whose founders do not have enough assets to get traditional finance. But Barclays is accused of lending £200,000 under the scheme to an established businessman whose net worth it had reckoned as being “well over £20m”. The bank is said to have hoped the loan would prop up Jeffrey Morris’s business empire after becoming concerned that it might collapse.
Alec Shelbrooke, the Conservative MP for Elmet and Rothwell in Leeds, told parliament: “Evidence has been passed to me suggesting that Barclays used the scheme to underwrite their own bad loans for a company which did not meet the criteria.” Ultimately, Barclays was able to reclaim nearly £70,000 from the taxpayer using the government guarantee on a loan which it is alleged did not qualify for the scheme. Shelbrooke intends to raise the issue with the Treasury select committee.
The Barclays loan will raise questions about how the banks have used the SFLG scheme after they were given freedom in 2005 to administer the loans themselves. In 2007/08 new loans worth £207m were made under the scheme, but in the same financial year the government had to pay out £69m on loans that went bad. In 2006 Barclays lent £200,000 to a company owned by Morris, a Leeds businessman with an extensive range of interests. Barclays had become worried about the financial health of Morris’s empire and conducted a review of his personal and corporate finances. It concluded that he was worth “well over £20m”.
The bank is then said to have sanctioned a loan to one of his companies under the SFLG scheme – but under SFLG rules at the time borrowers were only eligible for the scheme once all the business and personal assets of the owners had been fully pledged on conventional borrowings. A note written early that year by David Brady, who was Barclays’ relationship manager for the Morris businesses, said: “For the first time we have [received] full details of Morris’ net worth … [which] conservatively is well over £20m.” The note continued: “Given the undoubted worth of Morris personally I do feel we could [be] prepared to lend more to him in his own name. “If Morris was to be in agreement to clear ALL the company debts by transfer to his personal name then I feel we could be comfortable enough to go a long way to funding his extra requirements. In summary I propose: J Morris – interest only on demand loan – £1.3m; Clarge NewCO SFLG £200k – term 3 years.”
Barclays denied that the loan criteria had not been met. In a letter to Morris’s lawyers, Barclays’ own lawyers, Matthew Arnold & Baldwin, said: “The bank met the eligibility criteria.” How ever, Mark Hambly, a senior executive at Capital for Enterprise, the government-owned fund management company that designs and manages venture capital and debt guarantee schemes, told Morris’s associates last month that in 2006 SFLG loans could only be made once all available security had been exhausted, including personal guarantees. He also confirmed that the scheme was only available for businesses carrying out a trade that had been established for less than five years. That rule could not be avoided by setting up a new borrowing entity either to take on the trade or to lend the funds on to a sister company. The SFLG loan to Morris’s corporate empire appears to be focused on long-established businesses and was part of a wider lending package provided for Morris by Barclays. Countrylarge (the full name of the company associated with the “CLarge Newco” referred to in Brady’s note, which was the recipient of the SFLG loan) was incorporated in February 1999. It acquired another Jeffrey Morris business in March 1999 and in its first year of trading to 5 March 2000 recorded a turnover of £2.2m.
The NewCo established to receive the SFLG loan on behalf of Countrylarge was called Diamond Shape, which was incorporated in March 2006. A charge over Diamond Shape’s assets in Barclays favour was registered at Companies House in July 2006. In his note about Morris and his businesses, Brady concluded: “The proposed inc[rease] in exposure is £580k. However, at the same time we will remove £310k of what is unsecured debt and £150k will be covered by the DTI G[uaran]tee … Whilst the level of debt is substantial Morris has more than enough personal assets to give us comfort.”
Morris has been embroiled in a legal battle with Barclays in relation to his financial affairs. He made his concerns about the SFLG loan known to Bob Diamond when he was Barclays chief executive and more recently to chairman Marcus Agius, who is stepping down from that role in October.