Accountancy Practice and Receivership

Baroness Dean of Thornton-le-Fylde rose to ask Her Majesty's Government whether they have any plans to end the practice whereby an investigating accountant appointed to a company subsequently becomes the receiver of the company.

The noble Baroness said: My Lords, first, I thank those noble Lords who are to take part in this short debate. I welcome the noble Baroness opposite--who is also a friend--who will reply on behalf of the Opposition.
 
 
 
 

As a junior trades union officer in Manchester in the 1970s, I well recall my sense of shock and anger when, during a period of recession, companies would close down, often overnight and without notice to their employees. The first they knew was when they turned up for the early shift at 6 a.m. the next morning to find the doors barred and no access to work. Invariably, the companies were small or medium-sized, with little financial clout, and which had gone under.

My anger arose not from receiving a call at 6 a.m. from the people I was pleased to represent, but from knowing that the receiver was, all too often, not qualified or recognised and had no duty of care to anyone but those who had appointed him. To rub salt into the wounds of the employees who were left without jobs and the creditors--usually small companies which could ill-afford not to be paid--I often witnessed the scandal of the company's directors setting up new companies, sometimes the next day, quite close by and usually with equipment they had bought from the company they had allowed to go under. That practice is not unknown today. It still happens.

Such was the concern at that time that Sir Kenneth Cork was asked to chair a review on insolvency issues. From that came the Insolvency Act 1986 and the Insolvency Service, which is an executive agency of the DTI. The Act now needs urgent review. I am absolutely convinced of that. I have seen a consultative document issued at the end of 1997 by practitioners in insolvency, but I do not believe that it shows the way forward on the many issues which need addressing.

However, I welcome the recent press reports on the Government's proposals to review the whole area of insolvency. I also note that insolvency was referred to yesterday in the statement of the terms of reference of the Treasury-appointed review of banks to be chaired by Don Cruickshank. However, that reference does not cover the general remit of insolvency; it deals with the competitiveness element within banks. Where are the Government in bringing forward specific proposals in this area?

I do not say that receivership should never be an option. Companies do fail, and they will continue to fail. That is the reality of the business world. I fully recognise that fact and nothing in this debate is intended to escape from it. My debate targets only one aspect of my concerns about the present practice of insolvency. I refer to the conflict of interest when an investigating accountant is appointed, usually by a company's bankers, to look at a company, or part of a company, and then becomes the receiver of that company. In my view, that is a direct conflict of interest.

Some accountancy firms do not even charge for an initial investigation into a company in the belief that they will become the receiver of the company--a judgement they reach before even considering the facts and figures of the potential victim--or victims, as
 
 

I prefer to refer to them, given all the stakeholders in a company. That sort of unpaid offer to be the investigating accountant would, in everyday terms, be called a "loss leader". However, we are not speaking tonight of loss leaders on the sale of milk or bread in a supermarket, but of people's jobs and, in small companies, the lives of directors who have often put up their homes and worldly goods as a guarantee for the company.

Work carried out by Warwick University in 1992 demonstrated that some 97 1/2 per cent. of investigating accountants were subsequently appointed receivers to the company they investigated initially. I have been a non-executive director of a plc which agreed with the company's bank to have an investigating accountant look at part of the business. Time does not allow me to go into details but within a very short time the investigating accountants became the receivers.

I have been, therefore, on both ends of this issue--both representing employees and as a non-executive company director. In that company, the board, strongly supported by a professional company of "company doctors", tried to get the banks to see the sense of the company continuing, albeit against a severe restructuring programme that was put forward. The receivership ensued and the fees in that case were £3.5 million to recover just £1 million. Who were the gainers? The receivers. That was a disaster for the company. The bank did not recover all it sought; some creditors were put in jeopardy, and many employees lost their jobs.

Many in the profession recognise this conflict of interest. In 1992 the ethics committee of the Institute of Chartered Accountants revealed that some 30 per cent. of accountants believed there to be an "actual, not just perceived conflict of interest" in the profession. So what I am seeking is for the Government to call on the Institute of Chartered Accountants and other professional bodies to change their rules to preclude the appointment of investigating accountants in a company from becoming the company's receivers. The banks, too, will need to be involved in that process.

In my view, that would be a positive move and have positive effects. It is not a new move. Tom Kennedy, a senior manager at the Royal Bank of Scotland, writing in Insolvency Bulletin in 1997, referred to that bank's decision to change its policy in 1993. His article looked back over the previous four years to the bank's experience as a result of that change. First, the bank put receivership services out to tender. In so doing, it saved as much as 60 per cent. of its costs.

More importantly for my Unstarred Question, the bank recognised the conflict of interest and stopped the practice of a company's investigating accountants becoming its receivers. It also adopted a policy of "rescue" rather than "burial" as a first approach to a company's problems. I gather from a statement today on the subject of this debate that this approach of rescue rather than burial is now more common. Well, they would say that, wouldn't they? We do not see any figures issued of work that has been done, nor are details given to the public. Therefore, I do not have the facts and figures to say whether that statement is correct.

Mr. Kennedy revealed that, as a result of its change in policy over the four-year period, the share of receiverships experienced by the Royal Bank of Scotland fell from 11 per cent. to 5 per cent. of all receiverships. In 1996 the bank's receivership totalled just 48--an overwhelming 82 per cent. drop compared with 1992. Further, using the statistics of the Department for Education and Employment, the bank calculated that if it had not changed its policy, 279 more companies would have gone out of business and some 5,600 more jobs would have been lost. Using that same policy, and the same criteria across all businesses in the UK, some 2,200 companies and 44,700 jobs could have been saved.

Parliamentary time for legislation is limited. I prefer to see statutory legislation, but this change can take place without using parliamentary time; namely, by the professional bodies changing their rules. After all, there are only 1,800 insolvency practitioners in the UK--although it takes seven regulatory bodies to govern them.

I hope that my noble friend the Minister can respond positively and with a commitment from the Government to intervene to bring about this change. It would remove a clear conflict of interest and a practice which does not have a place in today's business world. If the experience of the Royal Bank of Scotland is to be followed, then it would be a positive move, particularly for small and medium-sized businesses in the United Kingdom.

Lord Lucas  My Lords, I am very grateful to the noble Baroness, Lady Dean, for giving us the opportunity to debate this long-standing abuse. Justice has not only to be done, but it has to be seen to be done. We have re-emphasised that in this House recently. If judges received £100 for each person they freed and £1,000 for each person found guilty by them, we would not believe that justice was being done and in many cases we may be right that that was the case. Planning inspectors belong to a professional and well-respected body. If they received £100 for each planning application that was refused and £1,000 for each planning application that was accepted, we would not believe that they were fair. Often they may be doing the right thing, but under those circumstances no reasonable man would believe that the planning inspection system was fair.

Accountants are noble and conscientious. They are always truthful and implacably fair, perhaps with the exception of this accountant. It is a profession which is held in high regard. It is a long-running disgrace that as a profession we should find ourselves in a position where it is quite clearly seen that we are not fair; that it is open and irrefutable that if we act as an investigating accountant and go on to be a receiver, and if we recommend that a company should die, we would do a great deal better than if we recommend that the company should live. That is an abuse and it should be changed.

It is very difficult to produce specific evidence of corruption. Who is to complain? Is it to be the people who allowed the company to go down in the first place?

Who will believe them? Is it to be the bank who appointed the relevant people? They rarely have the opportunity to admit that they have made a mistake because they do not have the information. As the noble Baroness said, almost all receivers have been investigating accountants before. If, in the course of the receivership, it was seen that the investigating accountants had been wrong, they are very unlikely to say so. The creditors, the unsecured creditors, employees, other people interested in the business, including the shareholders, do not have the information to prove or to show that the company would have been viable.

But what does show the extent of this abuse is the statistic produced by the noble Baroness, Lady Dean, about the experience of the Royal Bank of Scotland. Under the method it used before, it had an 11 per cent. share of receiverships. When it started to examine whether it could work on rescuing companies rather than using the current system, the Royal Bank of Scotland had a 5 per cent. share. That says pretty directly that half of the investigating reports of accountants recommending that a company should be extinguished are wrong. That represents enormous damage to the companies and shareholders concerned and to the United Kingdom economy. If they are viable jobs and businesses they will be replaced. Often that will be by foreign companies taking the business rather than their United Kingdom competitors. As a country we lose and we also lose, individually through that practice.

As the noble Baroness, Lady Dean, said, it does not take a lot to end this practice. Many accountants recognise that what they are doing is wrong. Most of them recognise that the old argument about the necessity of appointing the investigating accountant as the receiver is an empty one. What happens in practice is that different people carry it out. They rarely pass the files from one to the other. If there is information flowing between the investigating accountant and the receiver, it can pass as a file from one firm to another in exactly the same way as it would pass between different individuals in the same firm. There is no need for that and no benefit flows from it. As can be seen from the figures of the Royal Bank of Scotland, there has been immense damage and abuse in this country. All it would take is for the noble Lord, Lord McIntosh, to say this evening, "Yes, I agree with my noble friend that this is an abuse. When we are looking at the mechanisms for receivership and bankruptcy under the White Paper Our Competitive Future we shall seek to deal with this abuse". Faced with that, the Institute of Chartered Accountants at least would back down and change its procedures.

Lord Montague of Oxford: My Lords, I congratulate the noble Baroness, Lady Dean, on raising this very important matter about which I would initially like to talk from the point of view of my personal experience. When I was a younger man I became chairman of a company that was passing through a difficult period. The bank was worried about its security. It asked whether it could request a firm of merchant bankers to have a look at the company which I was chairing with a view to seeing whether all was comfortable. The merchant bank advised that it could not take that role and appointed what amounted to an investigating accountant.

That accountant reported to the bank that in its opinion a receiver should be appointed. I decided to play it long, first, day by day, then week by week and month by month, until finally we got to the year end, when I was able to prove to everybody that the company was on a decent track. That company very nearly closed. It was later sold, when I was still the chairman, for £400 million, with 10,000 employees. That is a practical example which I invite everyone to look at if they so choose. Most certainly I support the view that an investigating accountant should be forbidden from being appointed as the receiver.

However, I do not know that this matter has to be the subject of legislation. We seem to have legislation for everything. I have been reflecting on this and wondering what might be done. Receivers are licensed. I understand that there are five separate sources for obtaining a licence. It seems to me that we need an arbitrator to whom a board of directors, an individual director, an aggrieved party, creditor or employee, can go when there is an imminent prospect of receivership and say, "Look, this is the situation. Your consideration is only financial and it is short term. It is not viewing the future commercial prospects of the company. You have to see the situation in the round".

I believe that there should be a body to which one can turn. I believe that the five organisations which issue the licences should come together with the professions and create a code of conduct. The arbitrator could decide whether that code of conduct has or has not been met. If it has not been met, in the first instance he can decide against the appointment of the receiver. If there is more than a first instance with a particular receiver, the licence of that receiver should be revoked, and also that of the firm of receivers. I presume that these licences are given to individuals and not just to the firms.

There is also the question of Chinese walls. Once a person is allowed into a business the directors and everyone else worry as to whether what that person is told is just for their ears or whether it becomes widespread to the bank and all other kinds of people. I do not believe in Chinese walls. I have read a great deal of nonsense about Chinese walls since time immemorial. As a practical person carrying on business a Chinese wall is like a Chinese takeaway. One takes it home and puts it in the microwave. I suggest to noble Lords that many of the receivers should be dealt with in a somewhat similar way. I do not trust Chinese walls. If one has any doubts about them, one should simply read the Sunday newspapers. In last Sunday's newspapers we were told which companies were to be taken over that week and who was going to take them over. There was no announcement to the shareholders, but simply authoritative leaks. I do not want to hear of anything that involves Chinese walls.

What I believe we need is to have a rounded inquiry and not just as regards the practitioners. What is needed is a rounded inquiry in which people will sit down, consider the matter and bring forward recommendations which the professions could implement. As my noble friend Lady Dean said, parliamentary time is precious and it takes a good deal of time to get these things accomplished. Indeed, for people who get harmed, it is too long. All this could be identified and put to bed. An effective code of conduct could be devised with business people. Those parties involved could sit down and make recommendations; it could all be done within a year.

In view of my experience, all I can say to my noble friend Lady Dean is that she is performing a great service. I hope that she will not just give up here. Indeed, things do not happen very much as a result of what is said in the House of Lords. We need a great campaign and I shall be glad to do anything that I can to help.

Lord Sudeley: My Lords, the proper way to tackle the question of this debate would be the eradication of usury in its old sense of lending money without taking a share of the risk. However, instead of that, we really need to go back to the Moslem system of banks entering into business partnerships. The case against usury has been well represented by the Christian Council of Monetary Justice, meetings of which in the other place are chaired by the honourable Member for Great Grimsby and also by the Federation of Small Businesses. I am very conscious about how many parliamentarians shy away from opposition to usury because it is so embedded in our system. So this evening I shall ask for less.

The parties which are exceptionally informative on the subject of this debate would, I believe, be the Independent Banking Advisory Service, the Bankruptcy Association, the Federation of Small Businesses and two academics, Prem Sikka and Professor Christer of the University of Salford. In considering the problem posed by the debate we need to be mindful of the view of the Independent Banking Advisory Service that 30 per cent. of business failures would not have occurred during the last recession if banks had not been in a hurry to get their money back. The Bank of England's quarterly report on small business statistics dated December 1998 reflects the fact that business failures rose by more than 6.2 per cent. last year. We also need to have regard to the lack of sufficient bank regulation. The ombudsman is concerned only with small cases and the Financial Services Authority will not comment on individual cases.

The report in the Daily Mail on 20th January headed, "Beware On Demand Bank Loans" was largely concerned with the case of Lloyd's Bank versus Heritage Plc--distributing household wares to major superstores--in which the courts upheld that "on demand" means immediate repayment. Here lies the problem. The British Bankers Association is not collecting information about on demand loans in the belief that they are rare. On the contrary, the Independent Banking Advisory Service finds that the number of such loans is growing.

In repaying a loan it is crucial that a debtor should have sufficient time so that his assets can be sold at a comfortable pace to fetch their proper value. Otherwise, the assets go for a decimated value. The proper role of the investigatory accountant, therefore, is to ensure that that should not happen. He should be acting as a debtor's physician and not as his mortician.

Why is that not happening? It is because of the conflict of interest with which this debate is concerned where the investigatory accountant is appointed a receiver and so has a vested interest from the initial investigation, thereby knowing the lucrative fee income available. There is also the problem and foul practice of collusion with outside parties waiting in the wings to acquire the debtor's assets at under-value. Hard though it may be to prove collusion, the opportunity is there. I hope, therefore, that Parliament will be sufficiently sagacious to judge that it is.

In conclusion, this debate is concerned with the questionable methods by which banks pursue many small debtors who would otherwise survive. But which party is chiefly in debt? Obviously the banks themselves, with a fraction in reserve, lending fraudulently way beyond their resources. I thought that the proportion was 10:1 but, when repeating the Statement on international finance on 2nd November, I was delighted to hear the noble Lord, Lord McIntosh, inform the House that, with hedge funding, that proportion is much higher.

Lord Evans of Watford: My Lords, I am delighted to speak in support of my noble friend Lady Dean, as I have some personal knowledge of current insolvency practices in the United Kingdom. Luckily, I have never personally been involved with investigating accountants and insolvency practitioners. But, as I have been in business for over 30 years, I have inevitably seen friends struggle in a quagmire created by nervous bankers and overzealous insolvency practitioners.

Under today's insolvency laws, insolvency practitioners do not break any laws or regulations when they force viable businesses to close, sell assets at a fraction of their real worth and charge fees which are more related to the amount of cash available than the work which has been undertaken. The core problem is that when a bank becomes worried that its loans are at risk, it sends a firm of accountants into the company to "investigate" the situation. With few exceptions, these "investigation units" are part of insolvency practices. If the investigators report that it is possible for the company to be saved and present an action plan for the bank and the company's directors to follow, they will receive only their fees for that investigation and these will have to be fully justified.

If, on the other hand, the investigation team reports that the best way for the bank to ensure the safe return of its loans is to force the company to call in the receivers, the receivers who are then called in will be the insolvency practice which supplied the investigating accountants. The reason is simple. The accountants already have all of the company's books and knowledge  of its assets and liabilities and, as the largest preferred creditor, it is usually the bank which has the ability to insist on the appointment of the particular receiver.

In return for privileged access to the assets, the receivers make sure that the bank (which is often the real client, however the situation is dressed up) receives all or as much of the money as possible and, after dealing with the debts which cannot be avoided--such as VAT and the Inland Revenue--certain insolvency practitioners, in their guise as receivers, gorge themselves on the cash and assets at the expense of the main body of ordinary unsecured creditors and shareholders. As has been mentioned, the receivers' fees are, of course, preferred and secured over all others.

The situation was most prominently displayed following the collapse of the Robert Maxwell empire. As has been reported elsewhere, the fees charged by the insolvency practitioners concerned were so large that they represented a scandal which came close to rivalling the fraudulent activities of Robert Maxwell himself. This intolerable situation has to change. Companies which could have a viable future are being forced into liquidation. Jobs are lost, wealth is squandered, inappropriate fees are extracted and, not to put too fine a point on it, lives are wrecked unnecessarily.

I believe that we need a regulator, a commission or an effective ombudsperson to whom complaints can be made. There is no effective route for a creditor, shareholder, employee or director to complain about the activities of insolvency practitioners today. For those reasons, I would welcome changes to insolvency law to provide British companies which find themselves in difficulties with a "cooling off period" similar to the American Chapter 11 concept. The concept of "voluntary administrations" as an alternative to receivership, which was introduced a few years ago, has not proved as helpful as was hoped.

I believe that companies in difficulties should have a right to creditor protection for a period long enough to allow them to reorganise and present terms which will be acceptable to a majority of their creditors. We see many such successful corporate resuscitations in the United States. They appear to be almost non-existent in this country. Although it should go without saying, I add that we must also ensure that we provide no opportunity for corrupt company directors to defraud creditors, shareholders and others by using the concept of limited liability to set up serial enterprises which fail. We should strengthen laws with regard to such crooks and we must increase our surveillance of directors who knowingly trade while insolvent and behave in other improper ways which can cause losses to others.

In short, we must provide better opportunities for directors to take risks and create the wealth our economy must have while at the same time requiring them to take more personal responsibility for their actions. Sadly such improvements are long overdue. I very much look forward to hearing that the needs that have been identified this evening will be met in the near future.

Lord Razzall: My Lords, like other speakers I welcome the initiative of the noble Baroness, Lady Dean, in bringing this debate before us tonight. I am sure that we all agree with the fundamental point she makes; namely, that anything the Government can do, or that the banks can do with the Government's help, to ensure that viable businesses are not allowed to go under must be welcomed.

I have some concerns about the specific proposal that the noble Baroness has brought before us tonight. It seems to me that we are in danger of reversing the cliche and cracking a nut when what we need is a sledgehammer. I was particularly concerned by the comment of the noble Lord, Lord Lucas, when he said that all that it takes to solve the problem that the noble Baroness has identified is for the Government to pass the relevant legislation. I believe that more complex issues are involved in solving the fundamental problem that the noble Baroness has identified.

I shall illustrate why I believe the issue is not as simple as the noble Baroness has indicated. About 10 years ago a company called British and Commonwealth Holdings was in the FTSE 100 companies index. The company got into trouble over an investment it made in a company called Atlantic Computers. The banks that were involved called in Ernst and Young, a well-known firm of auditors, as the investigating accountants to produce a report to assess whether after the debacle with Atlantic Computers, British and Commonwealth Holdings was still a viable operation. Ernst and Young advised the board of the company and the consortium of banks that were involved that the company was a viable operation and that the banks should not foreclose the company. The banks chose to ignore that advice, foreclosed the company and appointed Ernst and Young as the administrators of this large company which employed hundreds of people in the United Kingdom.

As many of your Lordships will have read in the press, 10 years later the creditors have just about been paid the money that they had lost following the settlement of litigation involving various financial institutions. Had the advice of the investigating accountants been followed by the banks--I take into account the massive fees paid to the professional advisers--the company could have been kept alive. It was the banks who chose to foreclose that company rather than the investigating accountants.

I have related that anecdote to illustrate that the solution is more complicated than merely adopting the recommendations of the noble Baroness. A number of noble Lords have made the point that this matter is not just about receivership. We have in our legislative process a panoply of remedies that a creditor can choose. A creditor can choose receivership. Assuming that he has the appropriate charge over a company's assets, a creditor can choose liquidation. He can also choose administration or a voluntary arrangement if the company concerned can organise it.

I entirely agree with the noble Baroness that the system is not working adequately to keep companies alive which ought to be kept alive. They are being sent under in whatever form that may take when they are still viable businesses. There is a number of reasons for that. I believe the noble Lord, Lord Evans of Watford, mentioned administration. That was designed to be the equivalent of Chapter 11 bankruptcy legislation in the United States. I think everyone in your Lordships' House would agree that administration has not worked in this country in the way that Chapter 11 legislation has worked in the United States. Large numbers of household-name companies that are still trading and still have viable businesses have been subjected to Chapter 11 procedure in the United States and creditors have been kept at bay to buy time to enable those businesses to continue. That has rarely happened in the United Kingdom. In the United Kingdom most administrations terminate in liquidation. In my view the purpose behind the legislation is not being fulfilled.

I entirely agree with the noble Baroness's implicit attack on the accountancy profession in the following area; namely, that administration has been put in the liquidation-receivership departments of the major firms of accountants. Therefore the kind of people who are appointed as administrators are exactly the same kind of people who otherwise would have been appointed as liquidators and receivers. Therefore instead of "company doctor types" trying to save a company, one ends up with the same accountant who would otherwise have been the liquidator and the receiver.

I entirely agree with what the noble Baroness said about the attitude of banks. She mentioned the Royal Bank of Scotland which has been a pioneer in this respect. It has tried not to put companies into liquidation by appointing receivers but has tried to find ways of saving companies. I hope the Minister will say what action the Government can take to help banks adopt a proactive approach rather than simply closing businesses. I entirely accept that this is a major problem which the Government need to address. However, I am worried that the specific proposal of the noble Baroness will not be adequate.

Baroness Denton of Wakefield:  My Lords, first I thank the noble Baroness for the kind remarks that she made at the beginning of her speech. It is customary to thank the initiator of such a worthwhile debate for introducing the debate. That is a courtesy. In this instance it is a genuine expression of gratitude as great changes could be made in this area. I disagree with the approach of the previous speaker. I do not believe one should approach this matter negatively by saying, "It is not that simple". One should approach it positively and say, "Let us make it simple. Let us find something which will change the situation".

The noble Baroness has seen at first hand the effect on individuals' and families' lives of the subject we are discussing. The noble Lord, Lord Montague, has experienced this matter from another point of view. This is a situation of David versus Goliath in many instances; namely, the weak versus the strong. We must ask who runs small businesses. Not everyone is fortunate enough to have the noble Lord, Lord Montague, to fight accountants. I am talking about people who may have been made redundant and who know how to produce a product or a service which is first rate but who do not know how they should act in other areas. In the old days those people would probably have lived in a street which contained accountants and solicitors whom they could consult for friendly advice before turning to official advice. In many cases their parents may have run small businesses. However, those sources of information are no longer available and therefore these people are exposed to bullying to a greater extent. We need to act urgently on this matter.

People may be bullied when they are at their lowest ebb. Someone who has a failed business which has gone into liquidation may begin to fear that his judgment is wrong. He may begin to become frightened of taking a decision because previous decisions did not work out. We must now protect these people. It is interesting that the insolvency official body is concerned to protect the interest of its members--but who is protecting the interest of its customers? The suggestions made tonight that someone should be doing that are important.

I am also worried about who is protecting small business overall. In this country we need a strong lobby for small business. This debate has been on the papers for some time, and I have not heard a word from the small business lobby about the size of the problem. I know from my previous experience in the DTI as Minister for small firms that it is a question of, "I am getting rid of my risk on to you, so you are out". I was at the DTI at the time when the owners of small businesses were being made to sell their homes at the bottom of the market to remove the risk from the banks. This took away their pride as well as their businesses. It is interesting that when I left the DTI to go to the Department of the Environment, my government driver asked, "Did the banks get you to move?" I was obviously fighting the battle well.

It is important that we look at the issue overall and consider the cases where assets are transferred to other members of the family overnight. Small business also has to play it straight.

The Government must look at the problem and keep their house in order--especially in regard to Customs and Excise and the Inland Revenue. If the banks have done their bit, will the Government seek to ensure that they do not put the final spade of soil on these companies? Will there be an arrangement whereby businesses can talk to and lean on the Government?

If the DTI is to follow the policy of a previous Secretary of State to emulate the US spirit of enterprise and entrepreneurship and to see failure as an experience, it must protect and nurture small business and deal with this issue. I repeat my gratitude to the noble Baroness for raising this subject.

Lord Razzall: My Lords, before the Minister rises to his feet, perhaps I may make it clear in response to the noble Baroness, Lady Denton, that I was not in any way being negative. I was trying to get across that this is a very big issue, and I am worried that the narrow solution proposed here does not crack the nut of the major problem. I think the Minister accepts that.

Lord McIntosh of Haringey: My Lords, I share the gratitude that all noble Lords have expressed to my noble friend Lady Dean for raising this important issue. She will have the satisfaction--even before I say anything in response--that every single speaker in the debate has supported her. I agree with the noble Lord, Lord Razzall; I thought he also supported her, although perhaps not in the detail of the solution to the problem.

My noble friend also attracted a number of people who have personal experience of these issues, notably my noble friends Lord Montague and Lord Evans. Although my experience is not quite as direct as that of my noble friend Lord Montague, I did run my own small business for 30 years. I had some difficult conversations with the bank manager but never quite got to the stage reached by my noble friend. On the other hand, I did not get the result that he did. I did not end up with a business worth £400 million, with 10,000 employees. I think he came out on top in the end.

This is an issue which goes to the heart of the relationship between businesses and their bankers and to the professional conduct and obligations of those who practise insolvency.

One of the most common forms of security granted by a company to a lender, usually its bank, is a floating charge. This will cover the whole, or substantially the whole, of the company's assets and undertaking and, most importantly, it will contain within it the power to appoint an administrative receiver. My noble friend Lady Dean was right to point out that before the time of the insolvency Acts there was a free-for-all and no regulation at all, so the Acts were an advance. Under the provisions of the Insolvency Act 1986, a person acting as an administrative receiver must be an authorised insolvency practitioner. An administrative receiver will have the power to seize all the company's assets and to continue or close down its business.

Effective control of the company's affairs passes from its owners and managers into the hands of the administrative receiver, whose appointment is therefore a major step for all concerned. It is certainly not one to be taken lightly or precipitately. Banks make money from lending it to customers and, of course, recovering their loans and any interest. They have no "interest", in the wider sense, in putting their customers in a position where they can no longer borrow and pay interest on that borrowing.

Incidentally, I very much agree with the noble Baroness, Lady Denton, about entrepreneurs losing their houses. I do not think that there were more than five or six years out of the 30 years that I was running a company when I did not have to give a personal guarantee on my own assets, which were, and are, largely my house. If I had ever got to that stage, not only would my business have been closed down, but I would have been homeless.

Where lending institutions--again mostly banks--have substantial exposure on particular lending, they generally take steps to ensure that their borrower provides them with an up-to-date flow of information from which they can assess the security of their advance.

Where that information is not available or is defective and a bank has concerns about the viability of a borrowing company, it may appoint accountants, often insolvency practitioners, to investigate and report on the company's financial situation and prospects.

In the recessions of the 1980s and early 1990s there were frequent claims that when investigating accountants were appointed the directors of borrowing companies were not told what conclusions they had reached--or indeed the basis on which they had reached them--even though the company was footing the bill. If the investigating accountants were also insolvency practitioners, a recommendation by them that administrative receivers be appointed to the company carried an obvious potential for conflict of interest--which is the theme of this debate--since they were the likely appointee. This was particularly so in the eyes of those concerned in the ownership or management of the company who could feel entirely excluded from a process which had the most serious of consequences for them.

The recessions of the early 1980s and 1990s also gave rise to frequently voiced complaints that banks were too ready to withdraw financial support from troubled companies--or, indeed, to pull the rug from under them at the first hint of trouble.

It is fair to say that when the economy emerged from the recession of the early 1990s, there was a recognition that the relationship between banks, their business customers and, where they were involved, accountants and insolvency practitioners was under considerable strain. That was certainly something recognised by the insolvency profession. In 1994 the Society of Practitioners of Insolvency conducted a survey of their membership which found that in some 65 per cent. of cases investigating accountants recommended steps other than insolvency proceedings, including receivership. That finding, while welcome, shows that there remained a large number of cases--the other 35 per cent.--in which investigating accountants were appointed administrative receivers and it is these cases which continue to cause understandable concern to all noble Lords.

There is a conflict between what I am saying and the figure that my noble friend Lady Dean quoted from the Warwick University research in 1992. I would like to look at that conflict and write to her about that, and, if I may, I will copy it to other noble Lords who have taken part in the debate.

Before I leave that point, we do not have firm evidence of the number of cases where investigating accountants do not charge for their services in anticipation of becoming the receivers. If we can get any evidence, and if the noble Baroness can provide any evidence, we will be happy to take that into account.

The banks, too, recognised that their relationships with their business customers needed to be improved. In March 1997 the British Bankers' Association launched its statement of principles entitled Banks and Businesses: Working Together. The statement of principles seeks to show how banks intend to work together with small and medium-sized businesses to get their relationships right from the outset.

There are some specific principles addressed as to what should happen when things start to go wrong. Principle five states that banks will alert their business customers, in writing, when they have concerns about a customer's business or their relationship. Principle six explains that banks may ask for additional financial information or seek an independent review of the business where underlying problems are not resolved. Principle seven confirms that if a bank asks for an independent review the requirements of that review will be explained to the customer, as will its terms of reference, who should conduct it and the nature of costs likely to be incurred. Principle eight states that where the bank has requested an independent review, it will seek to discuss the information provided with the customer and, should the customer wish it, with the customer's advisers. No action would be taken before such discussions took place. Principle nine confirms that banks will support rescue propositions they see as viable and, most importantly in the context of this debate, principle 10 states as follows:

"If you [the customer] act in good faith; keep us informed about developments; keep to your agreements with us; heed what your own and any independent adviser say; and are prepared to make the changes needed early enough to preserve the underlying business, we will not normally seek the immediate appointment of a receiver or start other recovery proceedings".

The then government welcomed the publication of these principles in March 1997 and their coming into force on 1st July 1997 was welcomed by this Government. In the Government's view the statement of principles provides a clear recognition of the sort of problems which have been the subject of this debate and a clear statement of intent as to how relationships between banks and business customers finding themselves in difficulty should proceed. The operation of the statement of principles is due to be reviewed in July of this year.

The framework for the relationship between a bank and its business customers, set out in the statement of principles, certainly seeks to provide reassurance first, that banks will not engage in the precipitate appointment of receivers to a company in financial difficulties and, secondly, that the appointment of investigating accountants is not inevitably a first step to the appointment of that firm (or any other firm) as administrative receivers.

The insolvency profession has in place ethical guidance which includes a reference to the situation where investigating accountants might subsequently be appointed as an insolvency office-holder (whether as administrative receiver, administrator or liquidator) of a company. That guidance states that if the circumstances of an initial appointment are such as to prevent open discussion of the financial affairs of the company with its directors, an investigating member or other principal in the practice might be called upon to justify the propriety of their acceptance of that subsequent appointment. The profession may need to consider whether that guidance adequately reflects the degree to which this subject is a matter of real concern in the business community, as expressed in today's debate. In the light of the statement of principles, it is to be  expected that banks appointing investigating accountants as, say, administrative receivers would give this issue very serious consideration.

When the question of a prohibition has been raised in the past insolvency practitioners and banks have argued that the appointment of a new insolvency practitioner to be, say, administrative receiver of the company would mean that that practitioner would have to devote a great deal of expensive time and resource in "getting up to speed" in relation to the company's affairs. Where the insolvency practitioner appointed is the person who has conducted an investigation on behalf of a bank, such expenditure would be unnecessary. If the company's assets were insufficient to discharge its borrowing the additional costs would be a further burden on the secured lender. Otherwise the costs would almost certainly fall on the unsecured creditors of the company.

In other words, while there is a general recognition that there is a clear potential for a conflict of interest, it has been argued that the balance of advantage--for the company, its creditors and its shareholders--lies with not imposing a prohibition in the terms set out in this Question but rather relying on the professional obligation of the interested party--the insolvency practitioner--to report fairly and impartially, and without regard to his own financial interest, in relation to the affairs of the company which he has investigated.

I admit that we have to qualify that, if I may respond to my noble friend Lord Montague, by admitting that there are eight sources of an insolvency licence--the various bodies of chartered accountants, the Insolvency Practitioners Association itself, the Law Society, the Association of Certified Accountants and, finally, the Secretary of State. These licences are given to individuals, as my noble friend said, and not to firms.

The argument about getting up to speed is, in the Government's judgment, a plausible one to put forward but its acceptance depends on two things: first, a demonstration of the increased cost and disruption that would attend a prohibition on investigating accountants accepting a subsequent appointment; and, secondly, on the insolvency profession demonstrating that it demands and enforces the highest standards of professional conduct from its members in this, and indeed in every other, area. So it is right that I should respond to my noble friend by acknowledging her point about the Royal Bank of Scotland. She was kind enough to point me to the article in the Insolvency Bulletin last year to which she referred.

In 1992 the Royal Bank of Scotland took a unilateral decision that, as a matter of policy, it would not, other than in exceptional circumstances, appoint an insolvency practitioner to be the administrative receiver of a company if that insolvency practitioner had undertaken investigation into that company's affairs. The Royal Bank of Scotland had considered the cost of disruption and decided that they would not be important. There is no evidence that it has passed on any additional costs to its customers. It has argued--and it says that its recent experience supports the argument--that the certain knowledge that they will not be appointed as administrative receivers has caused investigating accountants to develop innovative and creative solutions for companies in financial difficulties. It is clear that "the Royal Bank of Scotland experience" must be given due weight in any assessment of where the balance of advantage lies.

In conclusion, there are three approaches that need to be taken to attack this problem. First, when the banks review their experience of two years' operation of their statement of principles--the review is due to take place in July 1999--they will need to examine the subject matter of this debate very carefully. On that point I agree with the noble Lord, Lord Razzall. Secondly, Peter Mandelson, when Secretary of State last year, announced that, parliamentary time permitting, it was the Government's intention to introduce legislation to provide for a moratorium on creditors' actions where a company in financial difficulty requires time to formulate proposals to put to its creditors, proposals which would enable its survival and continued training. I do not think he specifically said that he meant to go as far as Section 11 protection. But that is certainly one element which should be considered.

Thirdly, and perhaps most importantly, in December 1998 the DTI published a competitiveness White Paper which announced a review of the law relating to company rescue mechanisms--the noble Lord, Lord Lucas, and others referred to that--to be conducted jointly by the DTI and the Treasury, because the Government would wish to see as many companies as possible being given the opportunity and encouragement to overcome short-term difficulties.

We have heard this evening that decisions about the appointment of receivers to companies are crucial in determining the future of all those involved in the company's business: owners, managers, employees and suppliers. This is clearly an issue which deserves to undergo a thorough re-examination. I am pleased therefore to be able to confirm to your Lordships--indeed, I just have--that it will be considered as part of that joint review of the law on company mechanisms which was announced in the competitiveness White Paper. I hope my noble friend will feel that we have taken the arguments used this evening seriously and that we propose to advance our consideration of them.