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Insolvency gravy train to hit buffers?

November 12th, 2009

Train wreck

It’s becoming increasingly apparent 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 ‘stitch-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 (through exorbitant, time-based fees). Another is to dump unsecured creditors or illegally cherry-pick creditors through abuse of pre-packaged administrations.

The latter seems to have happened in PwC’s recent pre-packaged administration of 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 right that the state-owned Lloyds Banking Group is having to write off the bulk of its £46m loan to AHR, while small local creditors (food suppliers etc) get paid off in full.

They’re also wondering why the Highland resort’s former part-owners, who became its sole owners following the prepack — Donald Macdonald’s Macdonald Hotels — were able to wash their hands of AHR’s massive debts and continue to trade as though  nothing had changed.

To me, something stinks about this deal. When challenged on the matter in July, Cartwright cited Statement of Insolvency Practice 16, which took effect in January 2009, and assured me that everything that happened in the AHR pre-pack abided by those rules.

However one does wonder if this cosy prepack 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 administrations, receiverships and liquidations are imposed by banks or others without the appropriate Court orders in place. These include the FSA’s dubious December 2003 liquidation of the accountancy firm Dobb White & Co and the 1988 receivership of Barry Chapman’s JS Bass Group of companies.

The professional services firms that were tasked with closing down the 50 or so companies destroyed in the notorious Bank of Scotland Reading scandal (an alleged fraud that cost the bank an estimated £1bn) also seem to have much to answer for. The firms concerned, which include KPMG, PwC, Vantis, MCR (formerly known as Menzies Corporate Restructuring) and Hurst Morrison Thomson (HMT), would appear to have mishandled these insolvencies.

The administrations in question took place between May and October 2007 as part of an attempt by the bank to cover up the whole Reading scandal. The companies’ assets were sold off at firesale prices to vehicles which, in many cases, were owned, controlled by or linked to David Mills (founder both of the now dissolved Quayside Corporate Services and Core Enterprise Management and a director of off-balance-sheet vehicle The Sandstone Organisation) and his associates — even though higher prices could have been obtained on the open market

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 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 firesale price to Mr Forbes will follow.

In instances such as these, the people who are getting shafted include the general public (in that they part-own the banks concerned, which readily accept low-ball bids for distressed assets, as long as these come from businessmen they “favour”), HM Revenue and Customs, other small  creditors — as well as notions of truth and justice.

However it seems the politicians are wising up to the fact the UK’s insolvency profession may have become the 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 that suggested public confidence will evaporate unless urgent changes are made.

The report stated that:

“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.

Given this background, today’s announcement that the Office of Fair Trading is launching a “market study” into corporate insolvency is to be welcmed. Cynics may talk of shutting the stable-door 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.

I sincerely it doesn’t become yet another whitewash.

  • To read Insolvent Abuse by Professor Prem Sikka, Jim Cousins MP, Austin Mitchell MP, Christine Cooper and Patricia Arnold, click here
  • For Accountancy Age’s take on the OFT inquiry, click here
  • * SIP 16 is always cited by insolvency practitioners when you challenge them on 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…”

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4 Comments for “Insolvency gravy train to hit buffers?”

  1. 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:

    “I am currently doing a direction for someone to apply for voluntary bankruptcy, one might think this is relatively easy. I have two volumes of Muir Hunter on Personal Insolvency, cost £750+. You have a table of statutory instruments that means very little, then you get into the meat which starts at part lll of the Insolvency Act 1986 (as amended), but the index starts at part Vlll?

    “Then you have two and a half pages headed part lll, then it jumps to part Vlll but the paragraph numbers are shown as 3-23.1 as an example, with the added confusion of section numbers like 252 which have subsections (1)……and (a) etc in that subsection you get a reference to another section like 273 below which is another 60 pages on.

    “You then look at the header on the page that 273 is on and what do you see? “Part lll – Insolvency Act 1986”, but when we in section 252 it said it was Part Vlll, so why does part Vlll come before part lll? To make it even more confusing section 273 makes reference to section 258 in Part Vlll. And yet the paragraph that starts off section 273 is “3-458” and the paragraph that starts off section 252 is “3-22”.

    “Don’t even bother trying to understand the “Amendments” e.g. Section 55 (now where did section 55 suddenly spring from when the first section is 252?), it reads: In subsection (5), for “subsection (3) of section 540 of the Companies Act (so now we have to go find another tome) substitute section 168(2) of the Insolvency Act 1986.”

    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.

  2. […] Ian Fraser – Business and Financial Journalist Ian Fraser » Blog … […]

  3. 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.

  4. […] For an earlier piece I wrote on what’s wrong with the UK’s insolvency system, and its practitioners, click here […]

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