Oral evidence: Sports Direct: employment practises and the sale of USC, HC 1111Wednesday 25 March 2015

Oral evidence, 25 March 2015.

Witnesses

Dr Keith Hellawell, Chairman, Sports Direct International, gave evidence.

Chair

Let us start this meeting of the Scottish Affairs Committee. As you will be aware, we have been looking at the closure of the warehouse in Dundonald, which has led us into a number of other things. I welcome you to this meeting. Would you start by introducing yourself and telling us where you fit into the grand order of things in Sports Direct?

Dr Hellawell

My name is Dr Keith Hellawell. I am chairman of Sports Direct and have been for five years. My responsibilities are for a FTSE 100 company: responsibility generally for the board, the strategy of the company, and the protection and interests of the shareholders—an interest in developing, improving and expanding the company.

Chair

I wonder whether I can start by asking you about the closure of the warehouse in Dundonald. I went with some staff to meet some of the staff there, some of whom had been working for the company for quite a number of years. They told us that they were sacked with 15 minutes’ notice. Would you tell us the process by which that ended up being the culmination?

Dr Hellawell

If I may, I will start by setting the picture. It is very difficult to—if you think that Sports Direct is this area, Dundonald warehouse is this area. Sports Direct is a multinational company; there are 67 companies within the Sports Direct group; turnover is approaching £3 billion. It has many facets of business and we are divided into a number of parts within the business. USC was one of those parts. We endeavour to sell product to the market as cheap, or cheaper, than anyone else. That creates issues for us right across our business, particularly with the suppliers, who do not like us selling at a cheap price. We sell at a cheap price because we believe that that is the issue—the main thing—for members of the public, which is sometimes forgotten in all of this. As far as USC is concerned, we started that division three or four years ago, with a view to getting into a new area of business. We were in the main line sports business—sports retail and sports footwear—but we were not in what I describe as the fashion side of the business. That is an area where there was competition. We wanted to get into that competition and that is why we formed that side of the business. That is why we bought USC. Forgive me and please bear with me because this is important: one of the principal reasons that we bought was to show the brand suppliers that we don’t own—we own a number of brands—that we were quite serious about getting into the full panoply of the sports market. We have a constant issue with them in that they will refuse to supply us, or restrict the amount or type of goods that they supply to us. One of the reasons that they do that is because, unlike supermarkets, which have the power over the suppliers, in the sports retail market, the suppliers have the power over the retailers. So we have a constant battle. One of the reasons that we started that division was to encourage the retailers to stay with us and to supply goods that they would not supply to Sports Direct into those companies and those companies that previously had that supply of particular goods. What we found, to our sadness really, was that once we went into that market and bought this premium division and started to build it, the suppliers removed their supply. They stopped supplying us with goods that they had supplied to USC and to the other companies we bought within that group. From day one, we were faced with this constant battle of trying to keep suppliers on board, even within that group of companies. Just to make it clear: we had suppliers that had been supplying USC with a particular type of product. As soon as we bought it, even though we labelled it USC and we were not going to supply those goods into Sports Direct—they were going to go through that outlet—the suppliers reduced and took away that product. USC was losing money. In the last financial year, in terms of the generic group, we turned over £240 million; we lost £20 million. We were determined to remain in that area of the market because we believe—forgive me for repeating this—that we sell those products at the cheapest price to customers in the United Kingdom. We firmly believe that one of the reasons our suppliers reduce and take away their goods is that they do not like that, because we are selling cheaper than anyone else. In relation to USC, we lost a number of brands. I could list them if you wish, but we lost a number of well-known brands. As soon as we took it over, they said, “We’re no longer going to supply you.” Over the period—they did not all go at once—a number of them started to leave. The culmination of that for us was Diesel. Diesel is very popular in those stores and is a well-known brand. Diesel said, somewhere in the middle of last year, “At the end of the year, we’re no longer going to supply you.” We were working with Diesel, pleading with Diesel, speaking to Diesel and having a lot of discussions with Diesel to say, “Please continue to supply us. Everything’s fine.” They refused. They were adamant that they were not going to supply us any more. One of the significant things with that is that if Diesel had gone at that stage, the other brands that had remained with us would have gone with it. Running that part of the business, which was difficult, would be made even more difficult if Diesel went. If that domino effect had occurred with Diesel going, the business was worth nothing, and all our efforts to maintain the business, the supply and the product for our customers would have gone. That is where the negotiations were, leading up to Christmas. Diesel were adamant that they were not going to supply us. Word got out that Diesel were not going to supply us. We then got feedback from other brands saying, “We’re going to go.” We also got feedback from their insurance companies, saying, “If you put your goods and your products into USC stores, we won’t insure them,” because the word was out that we had not paid our bill and that was it. That is the background. That is the big picture coming down to the small picture. That was the environment we were in, in terms of our goods, that business and the products supplied into that business. We withheld the bills from Diesel, hoping—it did not work in the end—that we could come up with some resolution that they would continue to supply us. We used it as a bargaining chip. That is the reason we did not pay Diesel. Dundonald warehouse is a separate issue but it becomes combined later on. When we bought USC, we had a contract for the warehousing as well. The warehousing at Dundonald was never adequate. We went, as you will know if you have been, from one warehouse to virtually the whole of the site being Sports Direct or USC. It was still inadequate. Sometime, certainly well before Christmas—I cannot remember exactly when—we made the decision that we had to make a radical change. We were dealing with an issue that was an issue and a problem. Our decision was to take all footwear out of Dundonald and use it for textiles. The footwear was going to go into a number of different warehouses across our estate. We did not do that before Christmas for obvious trading reasons—it was a very high trading period, so to try to do that prior to Christmas, causing a great deal of disruption, was not going to happen. It was planned to take place on 9 January, I think, and the staff were aware that these changes were going to take place. At that time, we had no intention of Dundonald going; what we were doing was changing the way in which we used those facilities. As I read in the newspapers—I am sure you are all aware of this—when our vehicles turned up to remove the footwear, we were blockaded by the landlord. You would have to ask him about his motives; I can suspect what they were, but you can ask him. We were not allowed to take out our goods unless we paid £225,000, which we would describe as a ransom. Because of that problem and the issue with the landlord—the lease was up in 2016—we decided to remove everything from there. The product in there, our stock, was worth about £10 million, and it was owned by Sports Direct Retail Ltd: it was not owned by USC. It was not USC stock, and I think that is important for you to know. It was Sports Direct stock and the value of that stock was, as I say, about £10 million. That is the reason. Running alongside this, we had pressure from Diesel—action was taken against us. We had asked for and scheduled a final meeting with them prior to Christmas. They said they could not meet us until 9 January—the date is a coincidence. We were hoping that we could resolve the issues on 9 January, but we didn’t, so—as you are aware—we appointed administrators on the 12th and went into administration on the 13th. The pre-pack agreement that we made with the administrator did not include Dundonald. By the way, in going into administration and coming out in the way that we did, we saved 800 jobs. As I am sure you are aware, 83 people were employed at Dundonald, 25 of whom were what we call permanent salaried staff. That is basically it. We did the negotiations—if I can call it that—with the administrator, and Dundonald had never been adequate and had caused us particular problems. The relationship with the landlord had diminished or deteriorated, and therefore in doing that deal, from a business point of view, it was sensible not to include that warehouse. I hope that is a full explanation.

Chair

Can you clarify how it came about that some employees got 15 minutes’ notice of dismissal?

Dr Hellawell

I think that’s up to the administrator, isn’t it? When we went into administration, the administrator was responsible for that, not USC or Sports Direct.

Chair

Okay. Can you clarify who owned USC? It was a wholly owned subsidiary of Sports Direct—is that correct?

Dr Hellawell

Yes.

Chair

And were USC’s directors separate, or was USC run from the main board?

Dr Hellawell

It is partially that. It does not have a separate board in terms of a board structure. It will have directors, and I think the chief executive is a director of that company, but we do not have a whole host of separate boards. If we do, they are boards in name, rather than boards in the normal sense of the word.

Chair

So not only is it a wholly owned subsidiary, but it is a wholly controlled subsidiary. It is not semi-autonomous or anything like that. It is being run quite clearly from the centre.

Dr Hellawell

Yes.

Chair

Right. I just wanted to be clear about that. May I just clarify this question of the pre-pack? When was it decided, and by whom, that that process would be begun?

Dr Hellawell

Formally, probably on the 12th. Looking back, there were some notifications on the 9th, but we formally appointed the administrators on the 12th and went into administration on the 13th.

Chair

Sorry, is this January?

Dr Hellawell

Yes, sorry.

Chair

Right. May I clarify something else? Our understanding was that you had begun consulting with Duff & Phelps on 14 November 2014.

Dr Hellawell

“Consulting” is the right word, I suppose. Every good company and every good business, when faced with the threat that we had from Diesel, would take advice, but while we were taking advice, we certainly had no view at that time of going into administration, I can assure you of that. Our emphasis and impetus all the time has been to maintain that company. Of course we would not have bought it out of administration if that was not our intention.

Chair

May I be absolutely clear about this? Certainly the papers that I have read from Duff & Phelps give me the impression that the discussion about a pre-pack began with the consultation starting on 14 November and that it was part of the ongoing dialogue from that date when they were first engaged.

Dr Hellawell

If that is the case, I do not have knowledge of it. I cannot answer that.

Chair

In that case, whose decision was it to bring in Duff & Phelps and the other firm, whose name escapes me at the moment—Gallagher, wasn’t it?

Dr Hellawell

That would have been the chief executive of the company.

Chair

The chief executive?

Dr Hellawell

Yes.

Chair

And would he do that just on his own?

Dr Hellawell

Clearly he would do that, looking at how the business is performing, but yes he has the authority to do that on his own.

Chair

You are the chairman. It just seems sensible to me that a member of staff would not start a pre-pack administration process without at least a nod and a wink to someone else, if for no other reason than to cover themselves.

Dr Hellawell

I do not know that that is really the case. We are operating across more than 60 companies. We have full confidence as a board in the chief executive. He kept us aware of the situation in relation to USC. He had the power to do that, and the authority. When we went into administration, and when we were going into administration, clearly the board was notified, but in terms of discussions and what happened prior to that, it was within the general powers that that individual has.

Chair

So when did you first know about this then?

Dr Hellawell

Specifically about going into administration was the day—

Chair

Sorry, about the dialogue. Without getting technical, when did you first know about the dialogue, the beginning of the involvement of Duff & Phelps and Gallagher?

Dr Hellawell

I cannot say. I cannot answer that. I cannot recall.

Chair

Right, okay.

Simon Reevell

First of all, between 14 November and 31 December how many conversations were you privy to about the possibility of administration?

Dr Hellawell

None.

Simon Reevell

So you did not discuss the possibility of this company going into administration at any time during that period with anyone.

Dr Hellawell

That is a slightly different question. As a board, not just from November but from almost the time that we got involved in and built this division, we have had constant issues—

Simon Reevell

It is only 14 November onwards that I am interested in.

Dr Hellawell

Specifically in relation to those discussions, no.

Simon Reevell

And you didn’t chair any meeting at which this was raised during that period?

Dr Hellawell

Are you talking specifically about the discussions that took place between—

Simon Reevell

I am asking whether you chaired a meeting between 14 November and 31 December at which any arrangements or potential arrangements for administration were raised.

Dr Hellawell

No.

Simon Reevell

When was the first time that you became aware that there had been ongoing discussions between your chief exec and others after 14 November?

Dr Hellawell

When we notified that we were going into administration.

Simon Reevell

What date was that?

Dr Hellawell

That would be 9 January or 10 January.

Simon Reevell

So the first time you were involved in a conversation about the company going into administration was the actual conversation after which it went into administration.

Dr Hellawell

No, the conversation about when we were going into administration, when we notified the court that we were going into administration.

Simon Reevell

It must have been clear to you when you had that conversation that some previous discussion had taken place with administrators and the like—you might not have known from 14 November—during the latter part of 2014.

Dr Hellawell

I was told on that date. I mean, why I set the scene—

Simon Reevell

Just give me the answer. You gave us a very long introduction. I am suggesting that there you are, the chairman of a FTSE 100 company, and you start to talk about part of that company going into administration. What you are telling us is that it then became apparent at that point that there had been some discussions with administrators during that latter part of the previous year.

Dr Hellawell

That is correct.

Simon Reevell

Did you raise with anybody the nature or extent of the arrangements and discussions that had taken place—in other words, did you say, “I am the chairman of this company. Why has no one told me that you have been talking to administrators?”?

Dr Hellawell

The conversations that I had had—and the board had had, not just me—were in relation to the problems that were facing USC and the way in which the executives were trying to resolve those problems. The administration would have been a last resort and until it came to the eleventh hour or the twelfth hour we as a board did not want the company to go into administration. It was the last thing on our minds.

Simon Reevell

I understand.

Dr Hellawell

Therefore my understanding was that the discussions that took place were in terms of good business practice, to say, “Look, this could be a possibility.” As far as the board were concerned, we did not wish that company to go into administration and we trusted the executives to try to maintain that view.

Simon Reevell

So there were discussions during the latter part of 2014 at which the possibility of administration was raised.

Dr Hellawell

No, not specifically. That is what I am trying to say—not specifically, no.

Simon Reevell

Did the subject of administration feature in those discussions? You have already told us it did, as good business practice—that was the context in which you just put it.

Dr Hellawell

Yes—that is good business practice. But the answer to the question is no, the specific issue of administration was not raised with the board.

Simon Reevell

Well, let’s not play semantics, Dr Hellawell. You were chairman of a board at which “problems with this company” were discussed during the latter part of 2014, yes?

Dr Hellawell

Yes.

Simon Reevell

In that context, among other things, the possibility of administration would also have been part of the general discussion, yes?

Dr Hellawell

The answer is no.

Simon Reevell

It was never mentioned?

Dr Hellawell

No, not in terms of that, because our intention was and the action was to make sure that this thing worked and that we didn’t go into administration.

Simon Reevell

So during the time that you and your board were discussing the problems and never mentioning administration, your chief executive was talking to administrators and not mentioning that.

Dr Hellawell

Yes.

Simon Reevell

That sounds not good. Would you agree?

Dr Hellawell

It sounds not good the way you say it.

Simon Reevell

Well, the way I say it is the way it was—yes?

Dr Hellawell

Yes, but I would not expect that of the chief executive. This was one small part of dealing with a multinational business. The responsibility in our view of the chief executive was for that business to continue, however difficult it was, and to resolve the issues with Diesel. That was what. The fact that he clearly spoke to administrators is, as I mentioned, good business practice. I don’t think we needed to be notified of that.

Simon Reevell

You might not have needed to be notified, but can you think of any reason why, while all those discussions were going on about the issues with this business, he would not say, “Just so that you know, in fact I have done the sensible thing and spoken to some administrators,” just so that you got the full picture?

Dr Hellawell

I think, with hindsight, that would have been helpful.

Simon Reevell

But you are quite clear that he kept that to himself and that you and the board meetings you chaired were simply not aware of it.

Dr Hellawell

I was not aware of it, no.

Chair

You suggested that this officer of the company kept it to himself but presumably it would not only have been the chief exec. He would have discussed it with other executives of the company.

Dr Hellawell

I believe he discussed it with some of our advisers, yes.

Chair

Advisers—but other executives?

Dr Hellawell

I suspect he would do, yes.

Chair

Can I just draw your attention to something? I presume you have seen this. The note we had from Duff & Phelps in the administrators’ report says that on 14 November 2014 Robert Palmer of Gallagher’s and Philip Duffy and Geoffrey Bouchier of Duff & Phelps met with the secured creditor—presumably Sports Direct—to discuss the debt due from the company and the available options. That seems a bit stronger than that on that day they had a wee casual chat. That seems pretty formal to me. Is that unreasonable?

Dr Hellawell

I don’t think what you say is unreasonable. I am just telling you what my information and knowledge is.

Simon Reevell

Do you know the size of that debt at that time?

Dr Hellawell

No, I don’t.

Simon Reevell

Was it a substantial amount?

Dr Hellawell

It was a substantial amount.

Simon Reevell

So, discussions about the security of that debt would have involved your board.

Dr Hellawell

Not necessarily, no.

Simon Reevell

So you chair a board that does not know that the chief exec is seeing administrators, does not think it necessary to involve itself in the security of a substantial debt, is having general discussions about the future of the company that in fact within a matter of weeks would be in administration via the process that the chief executive had already started.

Dr Hellawell

The board was confident in the ability of the chief executive to do his best to maintain that relationship with Diesel. The debt that was owed to Diesel was used as a bargaining ploy.

Simon Reevell

You told us a little while ago that one of the issues with your suppliers was that their goods were not insured because you had not paid your insurance policy.

Dr Hellawell

No, no. I am sorry if I have misled you on that. When it was known that we had not paid the bill to Diesel, my understanding is that the insurers of other suppliers that we would have certainly lost if Diesel had gone, were putting pressure on them not to put their goods into our stores, because they said, “Look, if this thing goes into administration, we are not going to pay for those goods.”

Simon Reevell

As far as your dealings with Diesel are concerned, were you in breach of your contract with them by withholding payment?

Dr Hellawell

I haven’t seen that specific contract, so I can’t answer that question.

Simon Reevell

When you, as the chairman of a FTSE 100 company, make a decision to withhold moneys that you owe to a supplier, presumably you say to someone, “Are we legally entitled to do this?”

Dr Hellawell

Yes.

Simon Reevell

And were you?

Dr Hellawell

No.

Simon Reevell

So, you were in breach of your contract?

Dr Hellawell

Yes.

Simon Reevell

Right. Was there any reason why you gave the first answer that you did about not seeing the contract rather than just acknowledging that you were in breach of it?

Dr Hellawell

I haven’t seen the contract.

Simon Reevell

No, but that was not what I asked you, was it?

Dr Hellawell

But as a legal entity, I am sure it would have—

Simon Reevell

So you acted in breach of contract with Diesel in order to try to bring them to the negotiating table.

Dr Hellawell

Correct.

Simon Reevell

Just as an aside, when you went to get your footwear from the warehouse and the landlord asked you for some money, you said that you felt you were being held to ransom.

Dr Hellawell

Yes.

Simon Reevell

How would you describe what you were doing to Diesel? Would you describe that in the same terms?

Dr Hellawell

Yes.

Simon Reevell

Right. So your board—the board of which you are the chairman—has a chief executive who is on a frolic of his own, talking to administrators. The board has made a decision to act in breach of contract by withholding payment owed to suppliers in order to get them to continue supplying. It is not far away from the sort of circumstances you would have investigated in the job you had some years ago, in a not dissimilar context. You have a situation where your board know that they are acting in breach of contract as far as their supply is concerned but do not know that the chief executive is talking to the administrators. Is that right?

Dr Hellawell

My answer to that would be that we asked the chief executive. The chief executive made us aware of the issues in relation to the supply and the withholding of supply, or the threat of withholding supply, by Diesel. The tactic of delaying payment, which I am sure a number of companies do but we tend not to do—it was a tactic—was supported by the board. As far as what he did in terms of good business practice, perhaps in anticipation of everything going wrong, I think he did the right thing.

Simon Reevell

How much notice did you give your employees that the company was going into administration?

Dr Hellawell

We did not know that we were going into administration until the day before we went into administration.

Simon Reevell

So how much notice did you give them?

Dr Hellawell

Well, there was no notice.

Simon Reevell

So if the administrators to whom you passed the buck for 15 minutes only gave 15 minutes’ notice, they gave 15 minutes more than you.

Dr Hellawell

Yes.

Simon Reevell

The impression we have—or the impression I have; I cannot speak for everybody else—is of a FTSE 100 company acting in breach of its contracts with its suppliers to try to force them to continue supplying, while discussing the viability or otherwise of part of its business in a way that appears to be wholly unrealistic in the eyes of its chief executive, who is already talking to administrators. At the end of all this, a group of people who have worked hard for a long time get no notice of administration and 15 minutes’ notice that they have lost their jobs. There does not seem to be much in all of this where it looks very good if you shine a light on it. Can you understand how I get that impression?

Dr Hellawell

I can understand that. But the potential loss—remember that this is a loss-making business that we are trying to maintain. We are trying to maintain it because we believe in selling that product at the best price to the public.

Simon Reevell

You are trying to maintain it to make a profit. You have told us a number of times that you are trying to do your best in terms of pricing for the ordinary member of the public, and that is commendable. But you are only doing it that way because if you stack it high and sell it cheap—if you get the formula right—you can make a lot of money out of it. It is not a charity, and you should not assume that we are daft enough to think that.

Dr Hellawell

I take exception to this, “stack it high, sell it cheap”. That is a newspaper term and is wholly untrue. If you go into our USC stores, you will see that it is not like that at all. Here we have, as a large company, a business that we are trying to run successfully, a business that is losing money and a business that the board, the executive and the chief executives want to maintain for a number of reasons—one being the brands and the other being, whatever you say, to sell that product cheaper than other people within the sector.

Simon Reevell

But for a profit.

Dr Hellawell

We are trying to do it. What we could have done as a board is say “Forget it; we lost £20 million in that group last year—forget it.” We didn’t. We persevered, and we are continuing to persevere with that business. That is what we did. It is unfortunate that 83 people out of all of those numbers lost their job; and I am delighted to say I understand a number of the people at the warehouse—a substantial number—secured a job straight away. I am delighted for that. Our principle was to retain that business to do the best we could for the people within that business, and we retained 800 jobs. We could have lost the whole lot. We could have made the decision to lose the whole lot.

Simon Reevell

What you could also have done is worked more closely as a board with your chief executive, taken a long-term view of what the problems may or may not be and, rather than running two parallel courses, which end up with the business going to administration at short notice and these people losing their jobs, perhaps have allowed yourselves more time to, at the very least, plan what you did more effectively.

Dr Hellawell

Ever since we bought those businesses—acquired those businesses and worked those businesses—there has been a constant dialogue. There are a number of areas where the company is successful and does not need as much focus. That has been one that has needed focus—constant focus—in terms of actually trying to turn it around, and trying to make it work, and trying to make it profitable. We could, quite seriously, have said, “Forget it,” but we were determined to maintain that business and we have come out of it at the end of it with 800 employees still in place, the stores still in place; and we are still working hard to deal with that. We have lost Diesel, but we have retained the other people who were going to go. We have retained them and we have got longer-term contracts with them for supply.

Simon Reevell

The point I am trying to make to you, Dr Hellawell, is simply this: that while you and your board are having all these discussions about the problems, and no one is even mentioning the prospect of administration, your chief exec seems to have seen a problem a long way off and started to plan for it; and if there had been some discussion between the board and the chief executive then you may have been able to help him to help you with the way you were going, or he might have been able to explain to you the problems that he had seen. What might not have had to happen was a decision like that, over the space of a couple of days in January, where suddenly it is all gone. If you want to try and argue that it is better for your chief executive to plan for administration without telling you then by all means do.

Dr Hellawell

No, I am not doing that. The last thing we wanted to do was to go into administration. We did not plan for administration. We did not want administration. What we actually wanted was that company to be maintained, and what we wanted was Diesel to stay on board, and clearly the other people who had left us in the past and were definitely going to leave us in the future would do it. The actual specifics of when the chief executive spoke to the administrators—my understanding was it was a preliminary discussion, and I have not seen that document you refer to.

Simon Reevell

So you have not seen it.

Dr Hellawell

The document you refer to from the administrators: I have not seen that.

Chair

It is in the public domain, and it is published by the administrators. I think when we have witnesses in front of us we normally expect them—it is not unreasonable—to prepare. Even if you did not have time to prepare, I would have thought that somebody somewhere within the organisation would have advised you that this is something that you ought to be aware of.

Simon Reevell

I only want to ask one more question, which is simply this: is your evidence to this Committee that at a time when you and your board were making a decision to act in breach of your legal obligations by withholding money to Diesel, because you were that desperate to keep them on board, that there was no discussion at all in which your chief executive informed you that he was in fact already exploring possibilities for administration?

Dr Hellawell

That is correct.

Chair

Have you subsequently discovered whether or not the chief executive discussed this with any of the other executives?

Dr Hellawell

I have not specifically. I presume that he would have.

Chair

You do not know. Okay, can I just clarify one thing? You constantly refer to USC as a business, but I tend to think of Sports Direct as a business, and it has got different bits. Sports Direct was the empire, so to speak, and USC was part of it. It was a wholly owned subsidiary.

Dr Hellawell

It is part of the premium lifestyle division.

Chair

Fine, it is a bit within a bit within a bit, in a sense. The question of being a separate business isn’t quite germane in these circumstances. That is the point I want you to clarify, and I will come on to that later. Sports Direct’s secured debt, as I understand it from the figures we have been given, was £7,367,556. Do you know how much of that was recovered by Sports Direct?

Dr Hellawell

No.

Chair

Maybe you could let us know in due course, which would be helpful. Will you clarify when the firm went into pre-pack administration? As I understand it, the secret of pre-pack administration lies partly in the name. It is “pre,” so when somebody goes into administration via pre-pack they have actually, by definition, thought about it and planned for it beforehand. It certainly appears to me from the papers that I have read and everything I have heard that the pre-pack process started being an option from 14 November. Is that unreasonable? [Interruption.] You are nodding in agreement, but unfortunately Hansard does not record nodding.

Dr Hellawell

That is not unreasonable.

Chair

Do you understand why staff in Dundonald, when they now discover that pre-pack administration was being considered on a date from 14 November, were a bit aggrieved that they only got 15 minutes’ notice of dismissal?

Dr Hellawell

I can see why they would be aggrieved, but I think those discussions, whatever they were, were safeguards, “Say if all of this goes wrong, maybe there is some way around it.”

Chair

I understand that. Are you aware of the legislation on consultation in the event of possible dismissals, and so on?

Dr Hellawell

Yes.

Chair

Clearly, if from 14 November pre-pack administration was an option, and therefore dismissals were an option, why was there no consultation at all with employees or their representatives?

Dr Hellawell

Because, even where there were discussions, there was no decision by the board to go into administration.

Chair

I understand that.

Dr Hellawell

Therefore, why would you tell staff, “Look, we have these problems, and perhaps we might—might—do this. We might go into administration. We might go out of business, but we might not”? That would create all sorts of problems within the work force and all sorts of problems with the suppliers.

Chair

What is your understanding of consultation? You seem to be suggesting that you would only consult the work force on dismissal after you had actually taken a decision to dismiss because otherwise, by definition, it is hypothetical and it might not happen. That is the whole point, surely.

Dr Hellawell

But there was never any intention in terms of the warehouse. The warehouse formed part of our business. Until we had that issue with the landlord, there was never an intention to get rid of the warehouse. Even if what you say was true, we wouldn’t be saying to the warehouse staff, “Look, we’re thinking of getting rid of you,” because at that time we had no intention of getting rid of them.

Chair

But from 14 November you were considering doing something about USC that included pre-pack. The whole point of the law on consultation—I presume you have advisers—is to consult and make staff aware that there is the possibility of closure or that something might happen so that they can, if they wish, make observations about how the business could survive in order to help and be part of the whole process. I can see why you have difficulty. If you weren’t consulted by the chief executive, I can see why you didn’t feel able to consult the staff because your defence is that you didn’t know. But surely the chief executive should have been making staff aware of this as a possibility. Surely the chief executive and other executives should understand the instruction that if closure is being considered, there should be some degree of discussion and consultation before a decision is made, not only as good practice but because it is actually the law.

Dr Hellawell

I repeat: closure of that warehouse was not considered at that time.

Chair

No, I heard that. I said I would park that. I am asking about what happened to USC. You did not consult with people in USC either, as I understand it. Or did you?

Dr Hellawell

My understanding is no, but the point is that what you are implying is that at the negotiations or the discussions—whatever they were—in November there was a decision or an intention actually to go into administration.

Chair

No, I am not saying that at all. I am most emphatically not saying that. I am saying that when you, or “yous”, so to speak—the company, not you personally—started the discussions that was clearly one of the options. I am sure that if Duff & Phelps and your chief executive, and other executives—and the staff, had you involved them—could have come up with an alternative solution that was going to result in stemming the losses and making money you would not have done what you did.

Dr Hellawell

No.

Chair

Fine. I don’t believe that you had automatically decided to close, because the executive involved would not have taken a decision to shut at that early stage without consulting—well, I hope he would not have, anyway. I want to be clear, then, coming back to the question of the law: do you accept that the law was broken by there not being a period of consultation with staff before dismissal?

Dr Hellawell

Certainly our legal advice is that that is not the case—that we did not break the law.

Chair

Fine. Could you maybe let us have a note of that? Is your defence that it was not you who broke the law? It was the administrators who broke the law?

Dr Hellawell

I did not know I was on trial or that it was my defence, but my understanding is that our advice is that we have not broken the law. Whatever the administrators have done is a question for them.

Chair

Okay, we will ask the administrators.

Simon Reevell

When you were talking about reasons not to start a consultation, the gist of which was that you were saying that you did not want to panic people, you referred to suppliers. What would be the effect in terms of your suppliers of starting a consultation period?

Dr Hellawell

You would have to ask them that.

Simon Reevell

Well, you mentioned suppliers. You obviously had in mind a number of consequences of starting a consultation period. You explained about creating uncertainty for staff and you also referred to suppliers. Could you explain, as far as suppliers are concerned, the impact of starting a consultation period?

Dr Hellawell

No, I can’t.

Simon Reevell

Well, I can think of three. One is that they would not supply you any more, the second is that they would want their stock back, and the third is that they would want all the money they were owed. Are they three things that could arise if you suddenly started a consultation period?

Dr Hellawell

Yes, but—

Simon Reevell

So what did you have in mind when you referred to suppliers?

Dr Hellawell

I think just the impact that that would have on the marketplace.

Simon Reevell

What does that mean?

Dr Hellawell

I want to go back, please—I really need to—

Simon Reevell

I would just like you to answer my question. You referred to suppliers. I think you meant that if you announced that there was a consultation period it would have a financial impact.

Dr Hellawell

But we were not in the phase of a consultation period.

Simon Reevell

Let’s take it in stages.

Dr Hellawell

It’s a hypothetical issue.

Simon Reevell

It was raised by you, and I would like you to explain it.

Dr Hellawell

No, I was answering a question.

Simon Reevell

Yes, and you included suppliers. The potential impact as far as suppliers are concerned is financial, isn’t it? Is there a non-financial impact as far as suppliers are concerned?

Dr Hellawell

The suppliers were made aware—not by us—that Diesel was going to withdraw, so whatever consultation there had been and whatever form it had taken, it would not, I think, have affected the suppliers in any way in that once the information was out the suppliers were already concerned about—

Simon Reevell

If you started a consultation period, the suppliers you were trying to keep hold of while you tried to persuade Diesel to stay might have gone. The problem then is that even if Diesel agree to stay because you are withholding their money, you have lost other suppliers—that’s the sort of thing you are talking about, isn’t it?

Dr Hellawell

You are implying that we kept quiet about a consultation period—

Simon Reevell

No, I’ll tell you what I am implying in a minute.

Dr Hellawell

There wasn’t a consultation period.

Simon Reevell

No, I know there wasn’t, but the consequence of a consultation period, as far as suppliers are concerned—you raised suppliers—is that you may lose suppliers.

Dr Hellawell

Yes.

Simon Reevell

Right. Not a difficult question in the end.

Dr Hellawell

No.

Simon Reevell

The point at which all this became official and would trigger things such as consultation periods was when the board made a decision—yes?

Dr Hellawell

Yes.

Simon Reevell

And the board made a decision very shortly before administration actually took place?

Dr Hellawell

Yes.

Simon Reevell

So a coincidence of your chief executive going on a frolic of his own with administrators and not telling the board until the very last moment, after which administration comes along almost straight away, is that there are no financial problems with suppliers and all your obligations to consult effectively go out of the window. Had your chief executive kept you informed all the way along, you may well have had to make a decision earlier, at which point all those obligations and financial risks would kick in.

Dr Hellawell

You used the words “frolic of his own”—

Simon Reevell

Well, according to you, Dr Hellawell, in terms of the board he was ploughing a lone furrow, wasn’t he?

Dr Hellawell

No, he wasn’t ploughing a lone furrow. He is the chief executive of the company and, in terms of those discussions, he was doing what he believed to be prudent in the circumstances.

Simon Reevell

And the effect of that was that the board was not aware, so it could not make a decision. By the time it was told, the decision had to be made straight away, so financial problems with suppliers and consultation periods were completely bypassed.

Dr Hellawell

There was insufficient time for a consultation period.

Simon Reevell

Yes. Do you think that the lack of time for consultation and the absence of financial problems with suppliers, caused by the way in which your chief executive operated—you say without the knowledge of the board—is just a coincidence? Or do you think that that may have been the purpose, or partly the purpose, of his keeping you in the dark, if that is what he did?

Dr Hellawell

I think we’re into semantics again. I don’t think that he went on a frolic of his own. I don’t think he kept us in the dark with any view to keeping us in the dark. I think he was doing what he felt was in the best interests of the business and acting with due diligence in doing what was his responsibility. His responsibility and his task was to keep that business alive and afloat. With hindsight, you could perhaps say that what he did could have been done differently, but, to answer your question directly, I do not believe that he was misleading the board on purpose or for any ulterior motive.

Simon Reevell

I have not suggested that he misled the board. He didn’t tell you anything, so he couldn’t mislead you. By not involving you, he created a situation in which financial disadvantage and consultation were not part of the process because the time frame was reduced so much that they couldn’t be. Do you agree with that? Whether he meant to or not, that is a consequence of his actions.

Dr Hellawell

No, it isn’t a consequence. Diesel have agreed to deliver the goods that they were—how shall I put it?—contracted to deliver, but they are not going to deliver after that. The other suppliers have signed with us medium and longer-term supply agreements, which is better than we had before.

Simon Reevell

But that’s all later, isn’t it? He was not aware of that at the time?

Dr Hellawell

Yes.

Simon Reevell

So at the time, a consequence of what he did, whether intended or not, was to avoid any difficulty with suppliers and remove sufficient time scale for consultation?

Dr Hellawell

I think he was acting in the best interests of the company.

Simon Reevell

He may have been, but they were consequences of what he did, intentional or otherwise. You and I both know the answer, Dr Hellawell. If you do not want to give it, just say so.

Dr Hellawell

No, they were potential consequences, but it didn’t happen, did it? It didn’t happen.

Simon Reevell

Well, the lack of consultation period did, because your board was informed and made a decision almost straight away to call in administrators, so that was the end of that.

Dr Hellawell

That is correct. There was insufficient time for consultation, because the decision was made very close to administration. Whatever went on before that, at the time the board were unaware of.

Simon Reevell

Right, I think we are in danger of agreeing. Because the board was not informed until the point at which it had to make a decision, there was no consultation. You do not know whether that was deliberate or not, but it was a product of the way—

Dr Hellawell

I do not believe it would be.

Simon Reevell

Fine. Does your chief executive report to anyone else except you and the board?

Dr Hellawell

Not really, no.

Simon Reevell

Not really or no?

Dr Hellawell

No, he doesn’t, no. He reports to the board.

Simon Reevell

Does he report to anyone else?

Dr Hellawell

No.

Simon Reevell

So he doesn’t have any meetings with anyone, in terms of chain of command, who is not you or your board?

Dr Hellawell

Meetings? It is a very small executive team, but they will have meetings every day.

Simon Reevell

In terms of the executive team, who does he report to? Anyone on that team?

Dr Hellawell

Not really, no.

Simon Reevell

This man must report to someone.

Dr Hellawell

He reports to the board.

Simon Reevell

He reports to the board?

Dr Hellawell

Yes.

Simon Reevell

And no one else?

Dr Hellawell

Not in terms of reporting, no. He has discussions. The organisation is very flat, very lean. There are four or five executives who work as a team. That team will be aware of most of the issues involved on a day-to-day basis, but he does not report to them; he reports to the board.

Simon Reevell

Let us assume that you are right and he has not gone off on his own initiative, simply by himself, to do what he did. You could authorise it, but you told us that you didn’t.

Dr Hellawell

No. We authorised him in terms of his responsibilities.

Simon Reevell

I am talking about 14 November, these meetings. You could authorise that, but you didn’t, did you, because you didn’t know about it?

Dr Hellawell

No. But I didn’t think we would need to. Even now I don’t think we needed to.

Simon Reevell

Your board didn’t authorise it—

Dr Hellawell

No.

Simon Reevell

Because they didn’t know. Correct?

Dr Hellawell

Correct.

Simon Reevell

Are there any two or three members of the board who as part of some sort of sub-group would be able to authorise?

Dr Hellawell

No.

Simon Reevell

So who else within the company would be in a position to give authorisation?

Dr Hellawell

I think the authorisation that he would take, I am certain, would be the best advice from accountants, legal consultants—

Simon Reevell

No, in terms of authorisation, who is in that position? You were in the police force. You understand that at the top of the police force in a particular area there is a chief constable, and there is a structure below that.

Dr Hellawell

Correct.

Simon Reevell

So I am trying to work out who is where in that sort of structure. I understand that if we just look at the board, as chairman of the board, you are top of that little pyramid.

Dr Hellawell

Correct.

Simon Reevell

And your chief executive sits below the board, so that tells us that the board can authorise him.

Dr Hellawell

Yes.

Simon Reevell

Right. Who is above the chief executive apart from the board?

Dr Hellawell

No one.

Simon Reevell

No one?

Dr Hellawell

He has, in the terms you used about the police force, the divisional commanders, if I can call them that, who have to operate within the strategy and the budget, but then they have autonomy. The chief executive of this company has that autonomy and authority. He obviously works within the law and within the corporate nature and strategy of the company, but he has the authority to operate. He does not report to anyone; it is not a formal structure like that.

Simon Reevell

One of the reasons I asked the question is because this Committee had correspondence from a firm of solicitors called RPC. RPC explained that, despite this Committee asking Mr Ashley to give evidence, your board felt that you would be better placed to help us.

Dr Hellawell

That is correct.

Simon Reevell

But implicit in that is that there is also a role that Mr Ashley occupies.

Dr Hellawell

Yes.

Simon Reevell

What is that?

Dr Hellawell

He is largely responsible for making deals. He is—

Simon Reevell

In what context? How would he introduce himself? You would say, “I am the chairman of the board,” and your company secretary, if that is what he calls himself, would say, “I am company secretary.” How would he introduce himself?

Dr Hellawell

I think he’d probably introduce himself as a worker. He works 50 or 60 hours a week.

Simon Reevell

So he would say, “I’m a worker,” would he?

Dr Hellawell

Sometimes he will be in the warehouse. Sometimes he will be by the computers. His key area is the strategy of the business. He’s been described in a number of papers as a genius.

Simon Reevell

You know how we describe your chief executive as the chief executive, because that’s what he is—

Dr Hellawell

He’s the deputy chairman of the company. If you want a formal title, he’s executive—

Simon Reevell

I’m sorry if I was opaque.

Dr Hellawell

If you want a formal title, he’s the executive deputy chairman of the company.

Simon Reevell

So where does the executive deputy chairman sit in our pyramid?

Dr Hellawell

It’s flat—it’s a flat line. Below the board, it’s a very flat line. It’s a very, very flat line.

Simon Reevell

I don’t understand your answer. How does he compare to you in terms of making decisions? If he didn’t want to do something, and you did, is there a built-in role that you each have that allows you to understand whose the final decision is?

Dr Hellawell

The final decision would be the board’s in relation to anything. Mr Ashley is a major shareholder. On anything—dividends, for example—I would have his vote. He would not vote on that; he would abstain.

Simon Reevell

But in terms of the things we are talking about—I am sure this is my fault—I still can’t quite understand the structure. You have told us it is flat.

Dr Hellawell

Correct.

Simon Reevell

That makes it sound a bit like anybody could say to the chief executive, “There’s an issue.”

Dr Hellawell

It’s not like that. There are four or five key people, and they work as a team. Three of them work in the same office—not nearly this size. You haven’t got secretaries, PAs and all those distinctions. It is a very entrepreneurial business, with three people working in one room. It would be a discussion. They meet on Tuesday evenings.

Simon Reevell

Does that group of executives include the executive deputy chairman?

Dr Hellawell

Yes, it does.

Simon Reevell

Right. So we’ve got you and the board.

Dr Hellawell

Correct.

Simon Reevell

And we’ve got the chief executive and some other executives, and that includes the executive deputy chairman.

Dr Hellawell

Correct.

Simon Reevell

You know that your board didn’t know anything about talks about administration that were being conducted by your chief executive.

Dr Hellawell

No.

Simon Reevell

But you’ve told us that you think he probably spoke to other executives.

Dr Hellawell

Yes.

Simon Reevell

Which would include your deputy executive chairman.

Dr Hellawell

Yes.

Simon Reevell

So—because it gets really complicated—if we just use names, Dr Hellawell and his board did not know anything about all of that. What’s the chief exec called?

Dr Hellawell

David Forsey

Simon Reevell

Mr Forsey, we know, did know. We think he spoke to some other executives about it—and those other executives would include Mr Ashley?

Dr Hellawell

Yes.

Simon Reevell

Right. It sounds a bit like a parallel structure. There is a board that kind of looks the part, and a group of people who get on and do things, and they do not always tell the board what they are doing.

Dr Hellawell

That’s unfair.

Simon Reevell

Is it?

Dr Hellawell

Yes.

Simon Reevell

I don’t know anything about the company. That is just the impression I’ve got from what you’ve told us today.

Dr Hellawell

Sometimes I get the impression, when you look in the newspapers, that Michael Ashley is Sports Direct and that he runs Sports Direct and controls Sports Direct. That is not the case.

Simon Reevell

I accept that.

Dr Hellawell

If anyone reports to anybody in terms of the running and structure of the company, they would report to the chief executive. In terms of that, the chief executive would, to use your terms, be above Mike Ashley, if you want to put it that way.

Simon Reevell

I see. So put the board to one side and just look at these people in the office that is not as big as this room who are the executives. If there is a real locking of horns about what is going to happen, Mr—what is he called again?

Dr Hellawell

Forsey.