The decision by Lloyds will affect up to 120,000 victims – 25,000 from Scotland – whose Christmases were ruined in 2006 when the business collapsed owing £37 million.
Lloyds was taken to court over the failure to compensate the families who lost out when it took over Halifax Bank of Scotland (HBOS), which underpinned Farepak, in 2009.
Yesterday, Lloyds agreed to increase its original payout by £2m to £8m after pressure from a High Court judge in London.
Mr Justice Peter Smith pointed the finger at Farepak’s bankers during a hearing at the High Court in London.
HBOS defended its actions last month after the judge accused it of taking a “hardball approach” and suggested the bank should “consider” adding to the £2m it put into a distress fund in 2006 for Farepak’s customers.
HBOS is now part of Lloyds Banking Group, which said in a statement that it has chosen to make an ex-gratia payment of £8m “in the light of recent comments from Mr Justice Smith”.
It said it emphasised that HBOS acted legally, but said the group had “wider responsibilities” to the community as well as legal and financial obligations.
The Lloyds Banking Group statement said: “We are now working to ensure that this money goes directly to those customers.
Last night, some victims of the payout expressed disappointment at the amount of compensation. Deborah Harvey, co-founder of the Farepak Victims Committee said: “This may sound ungrateful, but if you take into account the fact that £38.2m was taken by HBOS to pay off European Home Retail [Farepak’s holding company], including Farepak’s overdraught back in 2006, making an ex-gratia payment of £8m is neither here nor there.”
Lawyers representing the Insolvency Service – part of the department headed by Business Secretary Vince Cable – halted litigation after “consideration of evidence” was given.
The court heard that following the collapse, claims by customers and “agents” against Farepak amounted to about £37m.
Mr Justice Smith suggested in court that HBOS sat like “stookies” by “doing nothing which involves any reduction of their recoveries”. Richard Highley, who represents former bosses at Farepak, said last month that the judge’s analysis of the firm’s downfall six years ago was a “total vindication” of directors’ conduct.
Last night Lib Dem Business Secretary Vince Cable said: “This increased compensation will go some way in helping those who were left considerably out of pocket by Farepak’s collapse.”