Co-op rift risks £363m due to banking arm

The Co-op Group owes the Bank £263m of the £333m promised as part of last year’s £1.5bn fundraising and a further £120m if it takes up its rights as part of a fresh £400m capital raise.

Were the Group to not hand over the money to the Bank, it would force the lender to go cap in hand to shareholders to raise the additional money owed, and see the Group’s current 30pc stake in the bank significantly reduced. The remaining 70pc of the Bank’s shares are owned by a number of debt and hedge funds.

In its 276-page accounts, the bank warns: “The Co-operative Group is currently considering its ongoing governance arrangements. It is possible that the process of consulting on and implementing any changes in its governance arrangements ... may affect the decision making process in the short or longer term and may impact on the actions required to generate the cash necessary to make the 2014 contribution payments.”

The warning strikes at the heart of the relationship between the two bodies. The Group owes far more to the Bank than any other body - some £110m according to the accounts - “balances...[which] would exceed the Bank’s risk appetite in the normal course of business.”

Were the Group to fail to meet its capital contributions, the relationship between the two bodies would reduce significantly. Below a 20pc holding, the right to appoint a board director to the Bank falls away, as does the current relationship agreement between the two bodies, which enshrines the mutual’s ethical code in the lender.

Lord Myners confirmed last Thursday that he is to leave the board of the Co-op Group at the annual meeting in May, when his proposed corporate governance reforms will be voted upon.

Although Group chairman Ursula Lidbetter has said she is hopeful his reforms - which proposes the creation of a two-tier board structure and the recruitment of City-style non-executive directors - will be approved, at last week’s two-day board meeting all regional board representatives are understood to have rejected his ideas.

The rift threatens to derail the restructuring process initiated by Mr Sutherland on his arrival in May 2013. Although he spent much of last year on the bank’s recapitalisation, he also worked on a broader plan, which would see the sale of its farm and pharmacy business to produce capital to revive the business. Those two processes are thought to be in danger if militant members of the board decide to overrule his earlier decisions.

Ms Lidbetter is being supported by Richard Pennycook, the former Wm Morrisons finance director, who is acting chief executive. Although Mr Pennycook has indicated he has no desire to fill the role permanently, a search process will not begin until after the May 17 annual meeting at which the governance reforms will be voted on.

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