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HBOS Criticized by U.K. Judge Over Gift-Basket Firm Collapse

A U.K. judge criticized HBOS Plc today for its handling of the 2006 collapse of a gift-basket company Farepak Foods and Gifts Ltd. following a month-long trial.

A London court case to disqualify the directors of the defunct firm was abandoned yesterday by the British government, “based on consideration of evidence.” Judge Peter Smith, in a statement made today in court, said it was impossible for the Insolvency Service to continue a case against the Farepak directors, a group that included a former president of the Confederation of British Industry.

“It is ironic that if the bank’s reputation for playing hardball had been repeated by the government two years later, HBOS would not be here and that is something else that HBOS might like to think about,” Smith said.

HBOS is a unit of Lloyds Banking Group Plc (LLOY), Britain’s second biggest publicly owned lender.

In excess of 100,000 customers lost 40 million pounds ($62.5 million) when Farepak, a subsidiary of European Home Retail Plc (EHR), collapsed in October 2006. Most were low-income families who made weekly contributions that were to be exchanged for vouchers for Christmas presents. While an investment of as little as 3 million pounds would have been enough to save the company, HBOS “was not prepared to do it,” Smith said.

“The bank and its employees acted entirely appropriately throughout its relationship with European Home Retail,” HBOS said in an e-mailed statement today. “It made entirely reasonable decisions based on the information available.”

HBOS said it contributed 2 million pounds to a compensation fund after Farepak collapsed.

Smith said it was a tragedy customers had lost their money.

“This is not a court of morality, but I would suggest that HBOS really ought to look at the collections that they took in September and October and seriously consider whether or not they ought to make a further substantial payment to the compensation fund,” he said.

To contact the reporter on this story: Jeremy Hodges in London at jhodges17@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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