Insolvency gravy train to hit buffers?
November 12th, 2009
It’s common knowledge in small business circles that the world of insolvency has become an unregulated free-for-all where it no longer seems to matter in whose hands property or assets end up.
Even supposedly reputable accountancy firms such as Deloitte, Ernst & Young, KPMG and PwC have been known to abuse the system by ’stitching-up’ insolvencies to suit narrow interests — including their own and those of favoured bankers and business partners.
One of the insolvency practitioners’ favourite tricks is to extend the duration of insolvencies so that dividends due to creditors end up lining insolvency practitioners’ pockets instead (through exorbitant, time-based fees). Another is to dump unsecured creditors or illegally to cherry-pick creditors through the abuse of pre-packaged administrations.
The latter seems to have happened in PwC’s recent pre-pack Aviemore Highland Resort. PwC insolvency partner Bruce Cartwright assured me in July that this insolvency was all perfectly legal and above board. However those with knowledge of the matter argue that it doesn’t seem quite right that the state-owned Lloyds Banking Group is having to write off its £46m loan to AHR, while small local creditors (food suppliers etc) got paid off in full.
They’re also wondering why the resort’s former and current owners, Donald Macdonald’s Macdonald Hotels, have been able to wash their hands of their debts and continue to trade as though much nothing has changed.
To me, something stinks about this deal. When challenged on the matter in July, Cartwright cited Statement of Insolvency Practice 16, which became effective in January 2009, and assured me that everything that happened in the AHR pre-pack abided by those rules.
However one wonders if this particularly cosy pre-pack really met with the principle of clause seven, which states: “When considering the manner of disposal of the business or assets … the administrator must perform his functions in the interests of the company’s creditors as a whole.”?
There are countless examples where receiverships and liquidations are imposed by banks or others without the appropriate Court orders and no proper official documentation in place. These include the FSA’s highly dubious December 2003 liquidation of the bent accountancy firm Dobb White & Co and in the infamous 1988 receivership of Barry Chapman’s JS Bass Group of Companies.
There is also documentary evidence to suggest that professional firms tasked with closing down companies destroyed in the notorious Bank of Scotland Reading fraud — which included KPMG, PwC, Vantis, MCR (formerly known as Menzies Corporate Restructuring) and Hurst Morrison Thomson (HMT) — mishandled these insolvencies.
One example? They sold off the companies’ assets at fire sale prices to vehicles owned by David Mills (founder of Quayside and Core Enterprise Management) and HBOS’s Bank of Scotland unit, even though much higher prices could have been obtained on the open market. There was also the small matter of whether Mills and his increasingly notorious band of brothers were board directors of these companies at the time they entered administration.
There’s also the curious case of Ury Estate in Aberdeenshire. This 1,500 acre estate near Stonehaven was acquired by Jonathan Milne’s FM Developments, with loans from Bank of Scotland, in 2001. FM planned to build a Jack Nicklaus-designed golf course, an upmarket hotel and over 200 houses on the site. But FM went bust in February 2009.
Administrator Fraser Gray of Zolfo Cooper then sought to sell the estate, appointing Savills as selling agents. But this turned out to be a bit of a farce / charade, since FM had sneakily granted “an agricultural tenancy” and a “right to buy” to Jonathan Milne’s co-director and first-cousin-once-removed John I Forbes, with the blessing of BoS, in 2003. Zolfo claims it is seeking evidence of the existence of the ‘right to buy’ and ‘agricultural tenancy’, but observers suspect a disposal of the estate at a fire sale price to Mr Forbes may follow.
In such instances the people who lost out were the general public (in that they part-own the banks who remain surprisingly willing to accept less than they should for distressed assets provided the offers are made by businessmen they “favour”), HMRC, other small creditors — and notions of truth and justice.
Finally, it seems that the politicians seem to be wising up to the fact the UK’s insolvency profession has become a favoured stamping ground for Artful Dodger types. In April 2009, the Business & Enterprise Committee of the House of Commons produced a report into the insolvency profession suggesting that unless urgent changes are made, public confidence will evaporate
The report said:
“Public confidence in the insolvency regime is being and will be further damaged … Pre-packs fuel understandable concerns about illegitimate, self-serving alliances between directors and insolvency practitioners … The insolvency system, the Insolvency Service and the insolvency profession all risk real reputational damage if the situation is not addressed.
“The new practice statement, Statement of Insolvency Practice 16* is a responsible first step … but if this does not prove effective then it will be necessary to take more radical action, possibly by giving stronger powers to the creditors or the court.
“In the meantime, we urge anyone who suspects the abuse of pre-packs to contact either the Insolvency Service or the body that licenses the insolvency practitioner concerned. We also encourage large creditors, in particular HMRC, to take an active role in rooting out abuse.
* SIP 16 is always cited by insolvency practitioners when you challenge them on the widespread abuse of pre-pack administrations. They say “yes there were some problems in the past but it’s all fine now — since we introduced SIP16…”
Given this background, today’s announcement that the Office of Fair Trading is launching a “market study” into corporate insolvency is not before time. Cynics may talk of shutting stable-doors after horses have bolted but I say better late than never.
The ‘market study’ will examine the structure of the market, how insolvency practitioners are appointed and aspects of the market that “may result in harm”, such as higher fees or lower recovery rates for certain classes of creditors.
The OFT is launching the review following “concerns raised within government, including the Insolvency Service which is an executive agency of the Department for Business, Innovation and Skills (DBIS), and the industry itself. The study will cover the whole of the UK. Initially, the OFT intends to analyse data from interested parties “including accountancy firms, law practices, government, regulators and trade bodies”.
The OFT said it will be speaking to key parties directly but is inviting anyone who else wishes to make a submission to write to:
Corporate Insolvency Market Study,
Office of Fair Trading,
Level 4C, Fleetbank House,
2-6 Salisbury Square,
London EC4Y 8JX.Email corporateinsolvency@oft.gsi.gov.uk
This ‘market study’ could lead to enforcement action by the OFT; a reference of the market to the Competition Commission; recommendations for changes in laws and regulations; recommendations to regulators, self-regulatory bodies and others to consider changes to their rules; encouraging firms to take voluntary action; campaigns to promote consumer education and awareness; ‘a clean bill of health’ for the industry.
Let’s just hope this does not turn out to be yet another whitewash.
- For Accountancy Age’s take on the OFT inquiry, click here
November 19th, 2009 at 5:16 am
Hear hear. Well said, Ian. You are spot on with this. Sadly, much of what goes on in the guise of “legitimised rights” of trustees is in fact legalised robbery — under the very noses of the creditors and wronged parties!
Trustees invariably hide behind ’shields’ or corporations, using their big name as a distraction such as with the case of BAKER TILLY and their seven separate companies, yet no-one quite knows or even understands the exact workings of the relationship between the Trustee and the corporation he presents through. The wording of Insolvency Law is hideously over-complicated. Here is a description written by a colleague recently to describe his experience of Insolvency Law:
My friend writes:
Any the wiser? Deliberate obfuscation? The Trustee recently admitted there were “defects” in the Insolvency and pulled a rabbit out of the hat as to the “remedy”, namely a non-existent clause that nullified the Insolvency Law that was written in the first instance! Make any sense? Nope. But then that’s exactly how these so-called ‘professionals’ like it.
More billions are laundered through our courts than we could ever imagine. Their time is up. It’s wake-up call time. The MPs expenses scandal will pale into insignificance once the lid is lifted on this scandal.
November 20th, 2009 at 12:03 pm
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January 10th, 2010 at 2:54 am
I certainly believe that legals and trustees handling bankruptcies charge exorbitant rates for little work, i.e they take huge sums for inflated fees leaving very little for the true victim creditors.