Ferry fiasco shipyard at centre of £5m legal fight

Insurance firm says it is owed cash after deal paved way to nationalisation

MINISTERS are facing a

£5 million legal claim in a dispute over a secret deal that paved the way to the nationalisation of the shipyard at the centre of Scotland’s ferry-building fiasco.

Details of the claim have come as it emerged that the Scottish Government “gave up” £21m in insurance payments in relation to the collapse of Ferguson Marine Engineering Ltd (FMEL) as part of the confidential agreement.

Ministers had ploughed in bailout loans totalling £45m to ailing Ferguson Marine before it fell into administration nearly two years ago.

The Government has said it believes it was acting in the public interest in taking control of FMEL, as it saved the yard from closure, rescued more than 300 jobs and ensured that the two vessels under construction would be completed.

But the delivery of the vital island ferries at the centre of the row, MV Glen Sannox and Hull 802, is between four and five years late with the cost of construction now double the original £97m contract agreed in 2015.

Ministers are now fighting a debt claim from Texas-based insurance

firm Tokio Marine HCC, which says it is owed £5m in relation to the deal that came as FMEL fell into administration two years ago.

Tokio Marine’s subsidiary HCC International Insurance (HCCI) provided the surety bonds, which acted as insurance to ensure the delivery of lifeline Scottish ferries.

It claims that a “deed of indemnity” had created an issue for the deal and means it is owed money.

Surety bonds are common business pledges to pay a sum if one party fails to meet certain obligations to another, such as failing to fulfil the terms of a contract, and usually provides

payment protection to subcontractors and suppliers.

The HCCI performance bonds acted as an “insurance” against the company going under and would allow for the completion of two lifeline ferries. HCCI said the deed of indemnity gave it the right to cash if there was likely to be a claim

or demand under its bonds.

Joe Reade, chairman of the Mull & Iona Ferry Committee, said: “Shenanigans like this just add to the frustration and the feeling that the services as a whole are not focused on the users. These

vessels are horrendously late, but not only that there are concerns whether they are the right vessels at all.

“What frustrates people on the islands is that our needs seem to be the least important thing. We hear the manoeuvrings of nationalising and protecting jobs, but the upshot is that the people that rely on the ferries are at the bottom of the heap in terms of consideration.”

The Scottish Government’s secret deal meant that HCCI would not have to pay £25m in default payments in connection with the construction of the ferries as a result of the collapse of FMEL.

Court papers show that an agreement ensuring HCCI was not liable came after a period of discussions was initially reached in August 16 – six days after the shipyard firm fell into insolvency.

They show that their settlement meant HCCI had to hand over £4.85m and that it would mean it would have no hold over the firm that owned the last shipyard on the lower Clyde – paving the way for the Scottish Government to step in.

The confidential agreement was made with Caledonian Maritime Assets Ltd – the taxpayer-funded company which buys and leases publicly owned Calmac’s ships on behalf of the Scottish Government.

The document also divulged it had to hand over £4.5m plus interest of FMEL money held by HCCI. Official documents seen by The Herald show that before ministers approved a £30m bailout loan in June, 2018, earlier in the year an agreement was reached for HCCI to release £10.7m of over £15m in FMEL money, held as collateral against the ferry construction bonds as the Scottish Government’s directorate for economic development was told the company’s cash position was “beyond critical”.

In return HCCI wanted a tighter hold on FMEL’S assets, which included the shipyard and all equipment. One memo from the directorate for economic development warned that a delay in releasing the £10.7m was

“damaging the business” and that an intercreditor agreement involving ministers, HCCI, and major shareholder Clyde Blowers, owned by Scots tycoon Jim Mccoll was urgently needed.

But the official analysis showed that ministers knew that the £10.7m would only allow the business to remain “cash positive” till April, 2018 – and would not address funding required over a rise in costs over the construction of Scotland’s two lifeline ferries.

That paved the way for ministers to provide the £30m loan. But discussions noted that if FMEL fell into administration, the American firm’s “security” would stand in the way of any state takeover.

While then finance secretary Derek Mackay told the public the £30m loan was “to further diversify their business”, internal documents state the real reason was that

Ferguson was in financial trouble and at risk of falling into administration. Ministers had been told as early as August, 2017, that HCCI’S legal hold over the assets of FMEL could be an issue.

But ministers sought to ensure there was a “right to buy” of FMEL when it provided the £30m loan knowing it was creating a path to a controversial state ownership.

In January, opposition parties were united in condemnation over ministers’ rejection of the “catastrophic failure” conclusion of an inquiry into the ferries’ procurement.

Islands minister Paul Wheelhouse said: “I am satisfied that procurements in relation to [the ferries] were undertaken fastidiously, in good faith and following appropriate due diligence.”

Confidential documents revealed by The Herald showed that the Scottish Government knew FMEL was in danger of financial collapse two years before it undertook the state takeover. The secret takeover deal was hatched with HCCI by the Scottish Government as FMEL executives lodged complaints just before the firm went under, saying ministers were not serious about keeping it afloat and were keeping them out of vital discussions.

Documents showed that, two weeks before FMEL went into administration, directors thought ministers were still trying to pursue what they called “the solvent solution” involving keeping it intact as a private business while behind the scenes ministers had created a pathway to nationalisation.

Former FMEL managers subsequently accused the Scottish Government of forcing it into insolvency by rejecting a plan that would have avoided any state aid claim, save the taxpayer at least £120m, and prevent the costs of building two key lifeline ferries soaring to over £230m.

Neither HCCI or the Scottish Government would comment due to ongoing legal proceedings.