This is the story of some small businessmen who felt caught up in our legal/financial system which makes it in practice impossible to the question the actions of professional accountants and lawyers.   The majority of evidence of this case was found in the incredibly well kept files of an indefatigable creditor of a liquidated company who felt that an extreme injustice was taking place on his door step.   While the story is told from the point of view of this creditor and two of the directors of the liquidated company, the problems they found with dealing with professional organisations and other social institutions are likely to be fairly common.  In their quest for justice they hit two major stumbling blocks,

1 cost. The exorbitantly high cost of legal and accounting fees make access to the law for many people practically impossible.  The people involved in this case were mostly professional builders and really would have liked the lawyers and accountants to give quotations for their work in advance in a similar manner to builders.

2 structural problems with the legal system.  In their attempts to obtain justice, the people involved in this case came across some serious structural impediments.  There may also have been some problems with the lawyers and accountants involved in the case but these were difficult to pin down because some of the professional players in the story would rather concede to problems with the system than inefficiency on behalf of themselves.
 
 

The facts of the case are as follows-

Three men A, B, and C were jointly involved in a business venture in 1993/4, which we will call MAYDAY. Very broadly,  A and B were involved in the sales and operational side of the venture and C the administrative side.  According to a creditor of their venture, C as administrator, had responsibility for setting up the company keeping the accounts and so on.  There was a meeting between the three, at which it was decided that the best way to form the company would be through acquiring an “off the shelf” company from Registration Agents.  Registration Agents typically form companies, issue shares to themselves and on selling the company, hand over resignation and share transfer forms to the people who acquire the company.  It was unclear from the documentation whether this did in fact happen.  But it seems that A and B at least, did not receive any shares from this “off the shelf” company.

There was a dispute with A and B on one side and C on the other.  It seems that there was a misunderstanding between the parties over several matters including which of the three were to be shareholders of the company, the constitution of the company, profit-sharing arrangements and wage payments.  A remained fairly detached from the business.  B contended that he was the main person carrying on the day to day work of the business and believed that he was receiving wages for his work.  He later discovered that the money he received was accounted for by C as “repayment of loans” to the company and that despite working for the company, he actually owed the company money.  A and B seemed to believe that profits MIGHT be shared in the ratio of 40% to A, 40% to B and 20% to C, if all was going well, although there was no guarantee of this.  In any case, A and B didn’t feel as if things were going at all well and several meetings were held.  It seems that at the time of these meetings the company had not been properly constituted and there was some dispute over who should be given shares, whether the company should be a subordinate company of C’s holding company or whether C should take his initial investment and leave the company to A and B.

 It seems that very soon after these deadlocked meetings there was a scramble by the parties to file papers with Companies House to properly constitute the company (and claim ownership of it).  A and B filed their documents (naming only A and B as shareholders), and they claim that after this, C and his wife lodged their documents nominating C and his wife as sole directors and shareholders.   A and B then claim that C’s lawyer tried to convince A and B to give some shares in the company to C.  A and B refused so C’s lawyer had an Interlocutor in the Court of Session passed and a Judicial Factor with the powers of a Scottish Receiver appointed to run the company (March 1994).  The Judicial Factor was also an insolvency practitioner.  The mystery in the case is whether or not the appointment of a judicial factor was safe.   A and B and at least one creditor of the company contend that only shareholders have the right to appoint a Judicial Factor and that since only A and B were shareholders (not C), that the court should never have appointed a Judicial Factor in the first place.  They also believe that this appointment is a misuse of the Judicial factors Act which was intended to protect the interests of a company in the absence of its owners.   If A and B are correct then the appointment of this Judicial Factor could be described as setting off a chain of events which led to the ultimate demise of the company and a significant wealth transfer from a small business (and its creditors) to legal and accounting professionals.  But even if they were wrong in their belief this story serves highlights the problems which small business people (shareholders, directors and creditors) face when caught up in an expensive, slow, and bureaucratic financial and legal system.  In particular this story raises some issues surrounding the work of liquidators.  It is worth noting at this point that all of the parties involved (A, B, and C), in all likelihood considered the venture to be a profitable one.  This would be the most likely explanation for their desire to own and control the company.

A and B were distressed at the appointment of the Judicial Factor.  Aside from the fact that they felt that he was wrongly appointed and so had no right to interfere with their business, they felt that the Factor didn’t cooperate with them, wouldn’t give them control of the company and wouldn’t give them an estimate of his costs.  They felt that the Factor acted in a bullying manner.  A and B believed that the role of the factor should be like a guardian of a company, preserving the company for the benefit of the people concerned.  But A and B felt that the Factor was acting more like a receiver than a Factor.  Indeed they were concerned that every time they asked the factor a question the factor would charge them for his response and that this would then eat into the funds of their company.

If the appointment of the Factor achieved one thing, it was that A and B’s campaign was now directed against the legal system which appointed the Factors, and the actual Factors involved in the case, rather than C.  They believed that C would also lose out if the assets of the company were taken up by expensive factors and other legal costs.  A creditor of MAYDAY wrote to the firm of solicitors who had acted for C in the appointment of a Factor concerning the legal correctness of the appointment given that C was not a shareholder of the company.  The firm’s response was that they were unable to verify whether or not C was a shareholder.  Furthermore, since the Factor was appointed by the Court that it wasn’t for them to question the appropriateness of the court’s decision.  This law firm wrote

Without necessarily disagreeing with many of your views, I do not intend to challenge the interlocutor of the Court of Sessions. (17/11/95)

The creditor found this response to be overwhelmingly bizarre.  He found it difficult to believe that lawyers didn’t have a professional duty to see that the law was carried out fairly and that if the court had made a mistake to ensure that the mistake is rectified.  Moreover, the creditor discovered that only C had a legal right to find fault with this law firm’s actions.  Although the creditor was affected by them, he, it seems, had no line of legal redress.

 After several complaints and action on behalf of A and B and one of MAYDAY’s creditors, the matter ended back in court.  The court appointed yet another Judicial Factor who was also an Insolvency Practitioner.  One of the company’s creditors felt that this second appointment was unsound because B and the creditors were not officially informed.  This creditor believed that the second Factor apart from being unable to run the company also seemed to be incapable of answering simple questions.  In particular MAYDAY owed money to some other companies of which A was a director.  A was concerned that since the Factor’s fees might be expensive and eat into the assets of MAYDAY to the extent that fees owed to his other companies might be threatened.  Two of MAYDAY’s vans, at this time, were being repaired by a garage of which A was a director (with the apparent approval of C and B).  A decided to keep the vans under what he saw as a lien.  The Judicial Factor started court proceedings to get the assets back.  In effect one of A’s companies was paying the Factor to take action against another of A’s companies.    In a meeting between the Factor and A and B the issue of the vans was raised.  A and B contend that they told the Factor that all he had to do was ask for the vans.  The Factor apparently replied that he would not continue talking about them as they were the subject of a court order.  A and B and the creditor felt that the Factor would rather waste MAYDAY’s assets on expensive legal proceedings, and increase his own fee income than adopt a cheaper and fairer pragmatic approach.

This second Factor declared that the company was bankrupt.  A and B and the creditor wrote many letters to the new Judicial Factor.  Specifically they wanted to know at what point their company had become insolvent and under whose stewardship it happened.  The also asked if the Factor could produce time sheets; and could the Factor provide documentary evidence as to his decision making processes.  One of the creditors felt that the first Factor has forced MAYDAY into liquidation by sacking one employee, constructively dismissing another and causing others to resign.  The creditor also felt that MAYDAY should have advertised its services in order to keep running.  He also believed that MAYDAY had received a number of orders but the Factor had disallowed the commencement of any new work.

A and B ascertained that Judicial Factors are answerable to a court official called The Accountant of the Court.  They believed that the Accountant of the Court’s role should be to ensure that Judicial Factors actions are for the real benefit of the estate and that if the Factor’s actions were incompetent that they should not be paid a fee.  Since A and B felt dissatisfied with both of the Factors they wrote to the Accountant of the Court.  They were concerned that the Factors had not addressed their concerns properly.  Because a Lord Ordinary had approved the original Interlocutor, it was requested of the Accountant of the Court that A and B be allowed to correspond with Lord MacKay.  One of the concerns of A and B and the creditor were that many of their letters remained unanswered and when they did receive a reply, the reply didn’t answer their questions.  A and B and one of their creditors felt that the company had been destroyed by the “legal operators themselves”.  They felt that while they were trying to pursue a constructive solution that the Court Officers did not seem to be concerned with Justice.  They believed that the Lawyers and accountants involved in their case were primarily concerned with distributing any funds available from MAYDAY to themselves.  Moreover, they felt that self-regulation did not work, in part, because of the amount of time that they had to wait before they received a reply from any of the self-policing bodies.  But the major source of their distress seems to be that professional bodies seemed to blame “the system” rather than the conduct of their members.  For example, Mary McGowan, from the Client Relations and Complaints Office, of the Law Society, wrote to the creditor

I think that we discussed in our conversation that the difficulty appears to be really in relation to the law as it stands, rather than to the conduct of the individual firms of solicitors concerned. (29/2/96)

 Anthony C Surtees, Reviewer of Complaints of the Institute of Chartered Accountants of England and Wales wrote

I suspect your real complaint is perhaps against the whole process rather than “X” personally.  I do not disagree that the system could be improved.  However, I have seen no evidence of any professional misconduct by “X”. (7/1/98)

The creditor wrote frequent and colourful letters to many people.  He felt that the responses which he received were frequently evasive and tardy.  They may also be described as rather rude-

Thank you for your further letter of 20th January, with the religious clipping.  I do not think there is anything meaningful I can add to what I have said in my previous letters

You say that I am a paid puppet of the profession, my reasoning is spurious and my arguments are fallacious tripe: yet you end by hoping for my positive help.  That's likely to be an ineffective way of going about it.  My function is solely to determine if “X” was guilty of professional misconduct, not to seek to change the procedure under which he was appointed provisional liquidator of your company.(15/1/98).
 

At one point in time when matters seemed to have ground to a halt, A contacted an MP.   The MP advised A that he would take his case on but might have to contact the press.  At this point, A recontacted the Accountant of Court and told him about the communication with the MP.  The Accountant of the Court’s office began to respond; they expressed surprise that A had not been in contact with the Judicial Factor directly.  In fact A had written many letters to the Factor and was able to produce copies for the Accountant of the Court..

A explained that the letters sent to the Judicial Factor containing questions he would like answered were not answered directly.  Some questions were answered obscurely and some were not answered at all.  He felt that this meant that contact with the Judicial Factor was effectively useless.  A further expressed the belief that in Law his only route was through the Accountant of the Court and he also explained that he expected the courts to protect him.  His experience of the Court system was that it was inadequate for dealing with a dispute of this type and that it bordered on the farcical.  He had to treat the Court in this situation like a drunk man with a gun.  Funny but if challenged, questioned or talked to the wrong way had the capacity to hurt by bluster bullying or malice.  Through all this time the costs and the use of outside resources were getting greater and the perpetrators of the situation were effectively at this stage unscathed.  A felt that it was a nonsense that a lawyer could start a ridiculous situation and then remain aloof from proceedings and it was also a nonsense that a Law Lord could appoint someone as a Judicial Factor when that person was in reality an insolvency practitioner and one who proved to be totally incapable of running MAYDAY.  The boundary of stupidity was stretched to the point of laughable when another insolvency practitioner was appointed to administer the Company as a Judicial Factor.

Despite his submissions to the Accountant of the Court, A was unable to receive any satisfactory explanation as to what has occurred.  A felt that if the same effort had been put into sorting out the problem as had been put into skirting round it a conclusion could have been reached much more quickly.

 A’s frustration led him to write to both the Law Society and to the Institute of Chartered Accountants to ask them to look into the case.  He felt that the Judicial Factors had acted in a bullying manner.  He also expressed the view that a lay person or a state employee (not interested in collecting fees) would have been a more appropriate person to sort out such affairs since neither would wish to set of a chain of events for their own benefit.  In short, the profit motive should be kept out of the law.

A specifically asked ICAEW the following-

Is there any statistical analysis over the past 10 years as to how much money has been paid in the case of liquidation to the creditors and how much has been paid to the accounting profession?  As a percentage or as a ratio?

Are there records from the past ten years of the percentage of companies in liquidation that have been unable to pay out to ordinary creditors?

How often in sequestration have all the creditors been paid?

Are there any statistics relating to the percentage of companies in receivership which are helped to recovery?

Is there a typical hourly rate for a Receiver?

To A this information is essential if the accounting profession wish to prove that they act for the benefit of others rather than themselves, or in other words, as a real profession.  Moreover, without this information there can be no true public accountability.  Despite tenacious letter writing, it was not possible for A to receive satisfactory answers to these questions.

At this point one of the creditors decided to begin battle with the legal profession and the accounting profession.  This resulted in many more letters being sent to the Accountant of Court’s office pressing arguments made earlier by A.  Finally the Accountant of Court sent a letter to the creditor advising him that there would be no further correspondence from the Accountant of the Court and that the creditor should address his concerns to the Provisional Liquidator (who was both a qualified lawyer and accountant).  So the creditor wrote to the provisional Liquidator informing him of his concerns regarding the initial appointment of the Judicial Factor.  A Liquidator’s meeting was held on 1st November 1995.  At that meeting many of the issues surrounding the concerns about the appointment of a Judicial Factor were raised.  The creditor felt that the Liquidator’s junior conceded two point during the meeting.  Firstly that the whole case was a mess and secondly that shareholders A and B and the creditor had a point.

 Another meeting was held between the Provisional Liquidator and the creditors and shareholders late in 1995.  Again the creditors put their case that if the appointment of the fist Judicial Factor was unsafe it followed that all the other appointments including the appointment of this Provisional Liquidator were also unsafe.  They argued that the first Factor had no entitlement to be there and in any event his appointment fell because of lack of Caution.  The second Factor had no right to be there because the creditors had never been informed of his appointment and had no chance to object.  The creditors argued that fee levels were prohibitive, and asked why the company and its creditors should finance the mess which the court officers had made of the case?  They asked that the professional bodies involved (both accounting and legal) should pay for an investigation into the case, and that lay people should be involved to sort matters out.  They also argued that the initiating solicitor who sought the appointment of the judicial factor in the first place and the two Factors should be made to pay the creditors their monies due and some form of compensation.  Furthermore, there should be a full written apology to the creditors and shareholders who have been the innocent victims of a disgraceful situation.  The Provisional Liquidator said that he could not see any of these requests being met and asked if he should commence Court Action to recover damages from the Judicial Factor.  The creditors agreed to this but the also stated that they did not agree to company funds being used to do so.  The question as to whether or not the Provisional Liquidator should be appointed fully also arose at this meeting.  The Liquidator (lawyer/accountant) accepted the appointment subject to the creditors pointing out that his appointment in no way prejudiced their position that they did not recognise his right to be there.  A liquidation committee was formed and the liquidator stated that two other people would be on it.  These were a liquidator from another company in liquidation and another creditor.  The liquidator was asked for charge out rates which he agreed to provide.  The creditors said that the liquidator should not use funds for any purpose and that they should remain frozen until the mistakes of the professional involved were recognised and full compensation paid to the parties involved.  The creditors left the Liquidator to write to the Law Society and the Institute of Chartered Accountants.  The creditors asked for copies of the minutes of the meeting and it was agreed that they would receive them.

As in their previous meetings with Factors the creditors felt that the Liquidator was much too slow in providing minutes of the meeting.  Several weeks passed and the creditors sent a fax.  The reply they received stated that the Liquidator’s Office was in the process of moving premises.  In April 1996 the Factor sent the creditor a letter with a copy of ICAS’s response to the request that they should fund an enquiry-

I am afraid that I can discern no obligation incumbent on the Institute to become involved in the manner which you suggest.  The matter is one which falls to be addressed by the courts, and the appropriate action should be at the behest of the creditors of the company.  I can see no reason why the institute should participate (ICAS 13/2/96).

Indeed, none of the professional bodies involved were prepared to become involved in the case.  Thus, the creditor and A and B hit structural brick walls in trying to fight their case.

Current Position

At the time of writing (late 1998) the indefatigable creditor is still trying to solve the problem.  Counsel’s opinion was proffered in October 1998 but on several aspects of the case seems to be unsatisfactory.  The creditor believes that one of the problems is that Counsel’s opinion may well be based on partial documentation and that he was not sure that Counsel had all sides of events accurately in his mind.  The letter writing is sure to go on.

The indefatigable creditor has tried to obtain what he sees as justice and fairness from every conceivable professional body, firm, or person involved in this case.  He has written to an MP, ICAEW, ICAS, the Law Society, legal firms, Factors, Receivers, the Accountant of Court, DTI and others in order to ask them to take on board what he and others see as a serious legal wrong.  For the most part, his letters have met with evasive and at times rather rude replies.  The correspondence catalogues the problems which a layperson is almost bound to encounter when challenging the system.  His belief that the system could be simpler, fairer and cheaper especially to small and newly emerging business is definitely worthy of consideration in a country which prides itself on its entrepreneurial spirit.