The Foskett Panel

Quantifying D & C Losses - Potential Sources of Material to Help Assess D & C Losses

This guidance note is in four parts:

Potential sources of material to help assess D & C losses

  1. We set out in this section many examples of types of information that will be helpful to us if you have access to it. If you don’t have the sort of information described here, that does not necessarily mean we cannot make an assessment, but the more information you can provide the better.
  2. Understanding the history of the Company and the reasons for each of the events that happened in the Actual Scenario will be important to enable us to consider realistic hypothetical alternative events and model these out in detail in one or more plausible Non-Fraudulent Scenarios.

    For example:

    If key parts of a Company’s business had been closed down as a result of the actions of the fraudsters, whereas in the Non-Fraudulent Scenario those key parts of the business would have continued in operation, then the modelling process would need to calculate the impact on cash flows of that differing set of events.

  3. In constructing the Non-Fraudulent Scenario, we have to bear in mind what factors and events may depend on each other, such that one could not logically happen without the other. It follows that the Non-Factual Scenario must be logically consistent. This scenario will be based on what we understand about the business, and how it operated, including its cash requirements, capacity constraints and customer base, as well as us considering the wider market and competitive environment, where known.
  4. We will be able to use hindsight (for example, when looking at the trading and economic environment over the Relevant Period) to consider what realistically could have happened to the Company in the Non-Fraudulent Scenario between the time it was first affected by the IAR Fraud and the end of the Relevant Period.

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Documents and information relevant to the Company’s position

  1. Subject to what we say in paragraphs 8 and 9 below about reliability, contemporaneous documentary materials will be important to obtain if possible, such as any of the following items where available:
    • accounting records showing what the Company achieved prior to, and during, the period of the IAR Fraud, including an analysis of its trading performance against prior periods, budgets or forecasts, cash flows and net debt position;
    • board minutes or other correspondence discussing the reasons for the financial distress (or other trigger for the IAR referral) e.g. whether this was a result of factors particular to the Company or those affecting the whole market, and in either case how long the impact was expected to last and why;
    • business plans and cash flow forecasts prepared by, or on behalf of, the Directors/Managers showing key drivers of the business and dependencies;
    • bank statements and documents evidencing the control of the Bank or QCS or Associates over the bank payments of the Customer;
    • invoices for QCS fees and other consultancy fees;
    • third party assessments such as Independent Business Reviews; or
    • third party offers for acquisition of the business or parts of it or expressions of interest from customers or competitors;
    • commercial due diligence reports or other documents containing competitor intelligence and market data showing how other businesses in the sector were performing and key drivers/ expectations for the relevant market;
    • correspondence with the Bank or QCS or Associates during the period of the IAR Fraud, e.g. demonstrating demands made or conditions imposed that may indicate the reasons for certain decisions and the information based on which certain actions were taken, providing context and motivation.
  2. Other materials or information that may assist us, where available:
    • material from the Criminal Trial or any reviews indicating that certain transactions in the Actual Scenario were fraudulent (e.g. inappropriate entertaining, or transactions with the convicted criminals or their associates that were not carried out at arm’s length or that were based on fraudulent misrepresentations), resulting in the need to make adjustments to arrive at a ‘normalised’ set of hypothetical results for the period;
    • Customers who were or are experienced in their chosen market will be able to provide informed insights into what was realistically achievable in their business in a Non-Fraudulent Scenario, (which can be presented to us either orally at a meeting or in writing in response to specific questions, if the Customer is able to do so);
    • market data, showing the growth or performance of other businesses in a similar sector/market to the Company at around the same time, and that were unaffected by the IAR Fraud;
    • credentials or CVs or other documents demonstrating the track records of key management personnel, setting out experience and prior achievements, which may help to demonstrate management’s ability to achieve the hypothetical business plan in the Non-Fraudulent Scenarios.

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Additional documents and information relevant to Directors/Managers and Shareholders

    • contracts of employment or loan documentation demonstrating amounts paid or payable to/by Directors/Managers or Shareholders.
    • documentation showing the commitments and transactions undertaken personally by Directors/Managers and Shareholders in favour of the Bank and/or the Company and any proceedings such as bankruptcy or repossession.
    • statement of Directors/Managers’ own income over the years affected by the IAR Fraud, compared to previous income or the income of other individuals in comparable positions who were unaffected by the IAR Fraud.

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Availability and reliability of contemporaneous records

  1. We will consider the information available and will aim to build a fair picture of the Company and associated individual Customers’ actual positions and prospects at the time they were affected by the IAR Fraud, and of their realistic prospects without the effects of the fraudulent activity. In doing so we will bear in mind the likely limitations and challenges of obtaining documents given the time that has passed and the events that occurred.
  2. We are also fully aware of the risk that the contemporaneous materials may have been compromised by the IAR Fraud, e.g. through deliberate destruction of material, or creation of misleading documentation by or at the request of the fraudsters, trying to conceal the true picture of events. We will be alive to this risk when we consider the documentary material, or its absence, and will place appropriate weight on Customer explanations. We explain more about our approach to considering the information that may be available in ‘IAR Fraud and Causation of Loss’.

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