Insolvency

Motion made, and Question proposed, That this House do now adjourn.--[Mr. Robert
Ainsworth.]

10.31 pm

Mr. Austin Mitchell (Great Grimsby): It is a pleasure to be able to discuss the subject of
insolvency. The amazing lack of interest in the subject is testimony to the fact that Members of
Parliament are so much better paid these days; this would not have happened if they were paid at
the same levels as when I was a lad.

This is an important subject that should cause us a great deal of concern. The issue of insolvency,
liquidation and bankruptcy is emotive. It is fraught with concern, anxiety and agony for those
involved--it is traumatic for them--and that is exactly why the area should be well regulated by
scrupulous practitioners who can be called to account and owe a duty of care to those involved.
Such practitioners should work to predictable, known rules; they should work openly and be
subject to appeal and control to protect the vulnerable. None of those characteristics applies to
insolvency as it is presently regulated.

The practitioners work in the dark; that darkness is compounded for the victims of insolvency.
There is no effective independent regulation--indeed, there is no effective regulation. There are
2,000 insolvency practitioners in this country and, for that small number, there are eight regulators,
including the Department of Trade and Industry and the Society of Practitioners of Insolvency--a
trade association rather than a regulator. There are far too many regulators. They overlap and
trample on each other's feet; their responsibilities are not clear. It is difficult to secure effective
regulation among such a plethora of regulators.

The framework of regulation consists of the Mafia regulating the Mafia: the practitioners regulate
themselves in their own interests, without effective independent control. There is nothing to cause
the public interest to intrude into that area.

Even the Department of Trade and Industry working party which, as my hon. Friend the Minister
will no doubt remind me, is considering the issue, is the Mafia regulating the Mafia. The people
who make up that working party do not include the victims of insolvency--those who have gone
under, those who have suffered the consequences, or those who have been aggrieved by the
insolvency process. The working party is essentially composed of the practitioners.

I hope that my hon. Friend will be aware of the blandishments of that working party and bear in
mind what it is. It is the industry speaking for itself and almost certainly telling my hon. Friend that
all is for the best in the best of all possible insolvency worlds; in fact, it is not. If it is to be
effective, the inquiry should be independent and presided over by a High Court judge; in fact, it is
chaired by a representative of the Law Society and includes representatives of all the other
regulators--the trade associations. None of those who have suffered, including the employees of
companies that have gone under, have been included. The working party does not hold public
hearings; effectively, it operates in secrecy. It is a sham.

15 Jul 1997 : Column 299

The main legislation in the area, the Insolvency Acts of 1985 and 1986, was meant to provide
ways of rescuing companies. It was meant to protect the investor, the shareholder and the
creditor. In fact, it has become a series of Acts for the protection of the accountants because it
gives them, as corporate undertakers, a licence effectively to print money in the fees they levy for
insolvency work--work in which the banks call the shots and the accountants enrich themselves.

By serving the dominant interest of the banks, the accountants have obtained the statutory
monopoly of audit. When something goes wrong with the audit, they also operate an effective
monopoly of the insolvency work that results from bad audits and bad ways of running
companies. They get the fees for creating the mess and the fees for clearing it up. One cannot
think of a better monopoly for self-enrichment.

The fees are huge. Much of the work is done by unqualified staff, but the fees charged are £100
per hour for some grades and £300 to £500 per hour for partners. When the Social Security
Committee studied the Maxwell liquidation, in 1993, when the bill for that liquidation was only £50
million--it has increased since--it found that Robson Rhodes was charging between £111 and
£174 per hour, Arthur Andersen was charging between £90 and £153 per hour, and Price
Waterhouse was charging between £120 and £190 per hour. That is how some of those
astronomical fees are calculated.

The fees so far in the Bank of Credit and Commerce International insolvency amount to $281
million for Deloitte and Touche. It is wonderful work if you can get it--far more profitable than
designing Eurofighters, building cars or producing other things of value to the consumer. The
insolvency income of the major accountancy firms, which employ 40 per cent. of the insolvency
practitioners, is huge. Even two years ago, Coopers and Lybrand earned £53 million a year,
KPMG earned £43 million a year and Ernst and Young earned £44 million a year--and those are
data that those firms provided to the accountancy press.

Whoever loses in an insolvency, the practitioners win--that is the name of the game. I cite some
instances from my experience. A Mrs. Askew, who had the lease of two pubs in Lincoln--a fairly
wealthy lady, who was ill and, I believe, was inattentive to the financial side of the business--was
sued by a wine merchant for £4,400 in unpaid bills. The liquidator was put in. The costs and fees
of that liquidation, for a bill of £4,400, came to £120,000. When I asked the Institute of Chartered
Accountants why the figure was so huge, I was told that Mrs. Askew was to blame because she
did not co-operate with the trustee. That is a huge bill, given that she was in hospital for much of
the time she was accused of non-co-operation. It is a ludicrous charge.

Practitioners are in a wonderful position and the big accountancy houses win both ways. The
banks, which are notorious for thrusting umbrellas upon us when the weather is dry and snatching
them back as soon as it rains, have most of us in a tight grip--I will make it no more vivid than
that. If a firm of accountants put in by a bank

15 Jul 1997 : Column 300

to report on a business recommends liquidation, the same firm's insolvency arm gets the
liquidation work. That is a monstrous vested interest and places constant pressure to recommend
liquidation.

The classic instance--about which I have had a long correspondence with the DTI and the
regulators--is the case of J. S. Bass in Manchester in 1988. Barclays bank put in Ernst and Young
to report on the business. It did a survey which took all of 48 hours--it is called a quick and dirty
survey in the trade. It looked at the accounts, which effectively can be made to say anything. It did
not look at the order book or the assets--this was an asset-rich company--and overestimated the
losses of the company by a factor of five. It recommended that the firm be put into receivership.

The firm was put into receivership by the insolvency arm of Ernst and Young, which then sold the
factory and the property at less than agreed prices--some of it, apparently, to clients of the
bank--and found a surplus at the end of £1.2 million. But that had all gone in fees by then, so,
effectively, there was no surplus. The insolvency practitioner is guaranteed his share of the
operation.

What is more, the bank tried to take out a bankruptcy order on the managing director, Barry
Chapman, to shut him up because of his objections to the operation. Professor Tony Christie of
Salford university complained about the behaviour of Ernst and Young in a letter to his Member
of Parliament, Sir Fergus Montgomery. Sir Fergus passed it on to Ernst and Young, which then
took out a writ against Christie to shut him up and to stop his accusations against Ernst and
Young. Here is an academic facing the might of one of the big six. It is easy to imagine how the
balance of power will go. None of this had any effect on the inquiry by the DTI or the regulators.
There was no satisfaction, and the business smells curiously.

These are murky waters. Here is a vested interest recommending liquidation to the bank and then
getting the insolvency business. The banks should not do this. If they try to do it, the Government
should prohibit it. The Royal Bank of Scotland, I am pleased to say, has announced that it will not
appoint the same firm to do the financial inquiry and the insolvency work. It has found that it has
been able to reduce the fees for insolvency work by 40 per cent. because it now has competitive
bids from practitioners. It has reduced by 60 per cent. the number of receiverships it deals with,
by the simple expedient of refusing to use the same firm.

The practitioners owe a duty of care only to the interests which put them in--usually the bank.
They have no responsibility to other creditors, whose interests can be ignored because the
practitioners and the interests which put them in effectively control the flow of information to
other creditors and to the courts. The whole business is secretive and goes on behind closed
doors. There is no requirement to publish the bids that the receiver is soliciting for assets or to
ensure that the process is carried out fairly. The process should be open to ensure that it is above
board. It pays receivers not to rescue a company, but to keep the procedure going for
ever--because there are fees whatever happens.

It would be much easier if the auditor's papers were required to be available to the insolvency
practitioner,

15 Jul 1997 : Column 301

because the auditor has done the work and presumably knows where the assets are, where the
problems are and where the creditors are. All that work must be done again for large fees by the
insolvency practitioner.

The fact that that is done behind closed doors leads to doubtful, murky deals. Euroscan is a
Nottingham-based printing company. An offer was made to buy the firm from the receiver for
£320,000. The receiver eventually sold it for half that sum to a company formed by the receiver in
which he was a major shareholder. That practice is not just curious; it is wrong.

In another notorious insolvency case a few years back, Corporate Communications was put into
receivership. The receivership was operated by a firm that had acted as consultant to Corporate
Communications. The receiver sold it back to the directors at half the valuation and got the fees
for the operation. The creditors were left to whistle.

The list goes on. No wonder there are 500 to 600 complaints every year about insolvencies.
Satisfaction of those complaints is rare indeed, because there is no way of securing satisfaction or
of disciplining or controlling the practitioners. The heftiest disciplinary measure that I have heard
of is the penalty imposed by the institute on Jordan and Stone in the Polly Peck liquidation.
Against the guidelines, Coopers and Lybrand took on the insolvency work, even though it was
working for Polly Peck in the Channel islands. When that was discovered, the firm claimed that its
organisational records were not adequate for it to tell that it was working for Polly Peck. Coopers
and Lybrand sells computer systems to other businesses, yet it did not know that. The machinery
trundled into gear and a massive fine of £1,000 was imposed on each firm. The fees on that
insolvency were between £15 million and £20 million. The fine for infringing the guidelines must
have terrified the firms.

Everything is decided by private law, by discussion with the firms in which the shareholders play
little part. They can complain, but they have no right of appeal. There is an ombudsman, but he is
an industry figure paid by the professional body. I am sure that matters will improve under my
hon. Friend the Minister for Competition and Consumer Affairs, but until now it has been no use
protesting to the Department of Trade and Industry, because the Department has simply relayed
the complaints back to the professional bodies.

The fees charade goes on. I can cite examples from the Bankruptcy Association. A plumber was
bankrupted for non-payment of VAT. The bill was £2,100; the liquidation fees were £15,000. In
another case, the accountants admitted doing six hours' work and charged £2,500 for it. In a
further case, assets of £2.1 million were realised and the fees for realising that sum were £850,000.

I hope that my hon. Friend will take a cold, hard look at the area. I know that there will be fewer
bankruptcies under Labour, because a Labour Government will run the economy for growth and
expansion and improve the business climate.

I am not quite so sure about Eddie George as Governor of the Bank of England. His role in the
matter worries me a little. He seems to be a master of creating the conditions for more
bankruptcies by squeezing deflation, which he calls stability. I am sure that there will be economic
problems, but I hope that they will not be as severe as under the previous Government.

15 Jul 1997 : Column 302

Mr. John Burnett (Torridge and West Devon): There was an Adjournment debate on an
analogous matter last Thursday, when the right hon. Member for Maidstone and The Weald (Miss
Widdecombe) raised similar points. I suggested then that there should be a system analogous to
that available to the public against lawyers for taxation of insolvency practitioners' bills and fees.
The Financial Secretary said that she would look into that. Perhaps the hon. Member for Great
Grimsby (Mr. Mitchell) will bear that in mind, and perhaps the Minister would consider a system
whereby the taxation of the fees of insolvency practitioners would be available to the public,
particularly creditors.

Mr. Mitchell: There should be some system of appeal so that people can contest the fees.

I hope that the Labour Government will look afresh at this matter. We are committed by our
manifesto to encouraging a culture of rescue so that firms may keep operating rather than being
looted and pillaged by insolvency practitioners. Why can we not have in this country something
like chapter 11 in the United States, whereby a firm has 90 days in which to reorganise? Why can
we not introduce a requirement that no creditor shall appoint any receiver immediately, and that
companies shall have 28 days in which to secure additional resources?

Why can we not ban the accountancy firms that compile reports on companies from also taking
on the insolvency work? Why cannot all plc receivers be forced to publish meaningful information
about their affairs, such as the number of cases they have handled, and their fees? Why can we
not require banks to publish the number of companies that they have placed in receivership? That
might act as a deterrent and ensure that they think about those issues.

The Government are committed to many of those changes and to a more sympathetic approach. I
hope that they will look at the real solution to the problem of insolvency: an effective independent
regulator to represent the public interest. We are providing independent regulation in the financial
sector, but that will be ineffective unless regulation is extended to accountancy, audit and
insolvency where the need is greater. Only a regulator such as the Securities and Exchange
Commission in the United States can call people to account, establish an appeals process and
ensure that the operation is run in the interests not of the insolvency industry and its practitioners
but of the public and the wider community.

10.51 pm

Mr. Keith Vaz (Leicester, East): I warmly congratulate my hon. Friend the Member for Great
Grimsby (Mr. Mitchell) on securing the debate and on raising this important issue. I re-emphasise
the points that he made about the liquidation of BCCI. BCCI closed six years ago on 5 July, and
my hon. Friend mentioned the huge fees that the liquidators, Deloitte and Touche, accumulated. I
am certain that that liquidation merits a full investigation by the Department of Trade and
Industry--

15 Jul 1997 : Column 303

even the charming Mr. Desmond Flynn cannot equal the massed ranks of a firm such as Deloitte
and Touche. I hope that something can be done.

We recently met the Minister to discuss the issue, and he was very sympathetic to our cause. He
is one of the most dynamic and effective Ministers in the new Government. If anyone can do
something about the actions of Deloitte and Touche in the liquidation of BCCI, he can. I urge the
Minister to hold an inquiry, and I shall write to the Chairman of the Trade and Industry Select
Committee asking him to do the same. I hope that the Minister will have some positive news
tonight about that matter.

10.53 pm

The Minister for Competition and Consumer Affairs (Mr. Nigel Griffiths): I congratulate
my hon. Friend the Member for Great Grimsby (Mr. Mitchell) on securing this debate on a matter
that is of great interest to many within and outside the House. My hon. Friend is well known for
his commitment to effective regulation in the accountancy and insolvency professions. Therefore,
I listened to his speech very carefully

Insolvency is, by its nature, a situation in which there are many losers. Thankfully, relatively few
individuals and companies will experience it. In 1995-96, 18,000 companies went into some form
of insolvency procedure compared with a total of more than 1 million live companies. It is
recognised that most failure is honest: people have tried their best, but the business has not
worked for any number of reasons, such as changes in the market or in economic circumstances
and other misfortunes that befall entrepreneurs across the spectrum. So the losers deserve, and
have, our sympathy. They are the suppliers and other creditors--and the employees, many of
whom have given years of loyal service. We must not forget the entrepreneurs and their families.

Joseph Chamberlain said in 1883 that the job of insolvency procedures is to
 

    "protect the salvage and diminish the risk of wreck."

Those words are as true today as they were when first said. The job of official receivers and of
insolvency practitioners is to do just that, often in the most complex of circumstances such as the
liquidation of BCCI. Insolvency is an area in which the highest standards of competence must be
married to the highest levels of probity.

In the 1980s, before the Insolvency Act 1986, insolvency was an unregulated profession.
Anybody could become a trustee or liquidator. There were abuses by a minority, often people
with no qualifications. In the 1990s, the situation has changed. We have an Act that means that
practitioners may be authorised by recognised professional bodies. Those bodies are recognised
by the Secretary of State, and they include the principal accountancy bodies such as the
Insolvency Practitioners Association and the Law Societies of England, of Wales and of
Scotland.

15 Jul 1997 : Column 304

Recognition is on the basis that those bodies have rules to ensure that practitioners have
appropriate educational qualifications and experience, and also that they remain fit and proper.
The bodies are responsible for the regulation of the practitioners they authorise. The Secretary of
State has a residual licensing function, and about 1,830 practitioners are currently authorised.

The regulatory process has developed considerably since its introduction 10 years ago--the Bass
case resulted in tangible improvements--but there is no room for complacency. The professional
bodies are well aware that the insolvency profession is the subject of continued scrutiny, and my
Department will maintain the pressure for the highest standards both within the professional bodies
and among the practitioners they regulate.

It is my view that, if self-regulation works, can be seen to work and works in the public interest, it
is fine. Clearly, there are other ways of doing things. In the United States of America and in
Canada, for example, the Government play a more direct and greater role in the regulation of
insolvency practice, but such systems have their flaws. At the same time, self-regulation is a
privilege, and if it is to continue it must be earned.

Recent headlines about the Maxwell case have caused widespread concern,--a concern that I
share. I was pleased that the president of the SPI welcomed Mr. Justice Ferris's view that the
remuneration of insolvency practitioners should
 

    "reward value and not indemnify cost".

I hope that all practitioners will heed the judge's words and their president's endorsement of them.

The charging of fees that are out of proportion to the sums recovered is something that we are
watching with considerable care. The taxation of fees on insolvency practitioners, which the hon.
Member for Torridge and West Devon (Mr. Burnett) kindly reminded the House was the subject
of an Adjournment debate last week, has been subject to critical comment by Mr. Justice Ferris.
Fees should never be a licence to print money. A liquidation committee has the job of approving
the liquidator's fees and expenses. I had the pleasure of meeting Mr. Tony Scott and my hon.
Friend the Member for Leicester, East (Mr. Vaz), and I am grateful for the work that was done in
ensuring that I was properly briefed.

As my hon. Friend the Member for Great Grimsby made the House aware, a working party has
been established to review the experience of 10 years of regulation of the insolvency profession.
The working party comprises representatives of the seven RPBs and the insolvency service, and
has terms of reference that clearly place consideration of the public interest at the centre of any
proposals for the future. That must be right. I took a very early opportunity to meet the working
party and to make clear my interest in its work. To call its work a sham is unfair, unworthy and
untrue.

The working party's draft report will be available for public consultation. I urge hon. Members to
make their views clear once they have studied it. I have requested a formal presentation by the
working party of its finding when it produces the report.

I am aware that the working party is giving the matters that have been raised by hon. Members full
and careful consideration. I shall give careful consideration to any

15 Jul 1997 : Column 305

recommendations that the working party may make. Clearly, I have no wish to prejudge the
outcome. However, I shall want the report to address the concerns that have been expressed in
the House tonight. I undertake to ensure that my personal consideration of the working party's
findings is given. I shall alert my hon. Friends to that.

15 Jul 1997 : Column 306

We have in Britain one of the best ways of regulating the insolvency profession, but there are
grounds for improvement. I have listened with care to what hon. Members have said. We shall, of
course, continue to give those matters consideration.

Question put and agreed to.