Industrial Grants (Hansard, 3 July 1984)

§ Mr. Derek Foster (Bishop Auckland)

In March, Manders and Co. of Newton Aycliffe went out of business, leaving 80 employees, mostly low-paid women workers, without jobs, and owing hundreds of pounds of wages and holiday pay. In nine short months the company notched up debts of about £250,000 despite a full order book and about £60,000-worth of help from the Aycliffe development corporation.

That was the latest crash in an astonishing three-year trail involving a network of companies and tens of thousands of pounds of public money. The two business men concerned were David Alderman and his son-in-law, Ivan Collins. They were active in three separate companies in the north-east and all of them are now in liquidation. Their debts total more than £2 million. Indeed, David Alderman is associated with at least 36 different companies.

The facts of the case have been made public by Tyne Tees Television in a very good exposé just over a week ago, and also by Roger Cook of "Checkpoint" two weeks earlier, so I do not want to delay the House by going into too many details. Suffice it to say that, having gone out of business as Fashion Industries in Hartlepool, starting up again within a week as Joanne Clare, going out of business as Joanne Clare, starting up again within two days as Manders, with help this time from British Steel Industries, they again flitted at short notice to Newton Aycliffe to enjoy approximately £60,000 worth of help from the development corporation. They were prevented from moving again to Peterborough only because the development corporation there heeded the warning from Aycliffe on this occasion.

There are several specific questions that I want to ask the Minister arising from those facts, and I want to make one or two general points.

Can the Minister tell me whether it is true that the network of companies with which Mr. Alderman and Mr. Collins are associated owe the VAT authorities about £1¼ million? If that is true, I think that he and the whole House would agree that that is a scandal which certainly needs to be investigated.

Is it also true that during the whole period of activities in Hartlepool and in Newton Aycliffe no national insurance contributions and no PAYE were paid? If that is the case, perhaps the Minister will tell me—or cause to have investigated—exactly how much that amounts to.

How true is it that Mr. Alderman and/or Mr. Collins are negotiating to start up business again in the south, perhaps in Basildon or Stevenage? Certainly the Aycliffe Development Corporation has warned all its colleagues in new towns about the activities of those companies, and it would be very disturbing if others were not heeding the warnings which Peterborough heeded.

Has the Minister's Department done any research into the size of the problem caused by these so-called "phoenix" operations? The Manders case suggests to me that there is a great rip-off of public sector job hunting agencies which may have escalated over the past four 288 years as areas such as mine have become desperate to retain any job in the teeth of the avalanche of job destruction.

Will the Minister set up an urgent inquiry into the size of the problem? When he has the results, will he tell the House frankly of its dimensions?

Now may I urge the Minister to draw the insolvency law much tighter? We cannot possibly allow directors involved in a series of voluntary liquidations or compulsory liquidations to start up again in this way with impunity. Will the Minister tell the House whether he has any plans to deal with that problem?

Is is not time that the Department compiled a national register of bad risk individuals? It could be very easily compiled and very easily made available to all the job-hunting agencies so that the sharks are at least identified and the job-hunting agencies made alert as to their activities.

Will the Department devise an agreed set of criteria which all job-hunting agencies could apply in cases such as this? At least we would then know that a model set of criteria applied thuoughout the country. There is a cast-iron case for monitoring companies enjoying grants. It was stated, with a great deal of credit, in the "Checkpoint" programme that many workers had not been aware of any monitoring taking place in the companies with which they were concerned.

Perhaps the Department should operate a ceiling net cost per job so that job-hunting agencies avoid a dutch auction. It is clear that, in the case of Manders, real jobs were not created or retained, merely shuffled from one area to another. Will the Minister institute a full departmental inquiry into the activities of Mr. Alderman and Mr. Collins to prevent further suffering by employees and further rip-offs of job-hunting agencies?

§ The Parliamentary Under-Secretary of State for Trade and Industry (Mr. David Trippier)

There are two aspects to the subject which the hon. Member for Bishop Auckland (Mr. Foster) has raised.

First, the hon. Gentleman asks whether there should not be stronger measures to deal with the so-called Phoenix companies, where directors successively close down companies and open up new ones. The issues surrounding this and the regime for disqualification of directors were addressed in the report of Sir Kenneth Cork's Review Committee on Insolvency Law and Practice.

Secondly, the hon. Gentleman asks about situations in which such companies apply for public funds and whether the monitoring arrangements applied by those responsible for disbursing public funds are sufficiently stringent.

I do not propose to discuss the specific case which the hon. Gentleman raised. My Department was not involved in being asked for or giving grants to the company. I understand that the grants which were given were made by the Ayclyffe development corporation and that, before doing so, it took references from the company's bank and principal customer.

Instead, I will deal with the broader issues of principle, and in particular the widespread concern that has been expressed about the activities of delinquent directors. The problem of abuse of limited liability has featured prominently in the Government's review of the insolvency legislation. The White Paper—"A Revised Framework 289 for Insolvency Law"—published earlier this year, set out our proposals for tackling this abuse, and two major reforms are now proposed.

First, a new civil liability for wrongful trading will be introduced. Wrongful trading will expose directors to a civil liability which may be imposed if, on winding-up, it appears that a company was allowed to trade beyond the point where a director knew, or ought to have known, that there was no reasonable prospect of the company meeting its liabilities.

Secondly, a more rigorous regime of disqualification designed to deter the dishonest and irresponsible director will be introduced. This will be to increase the power which the courts already have to disqualify directors for a specified period. This prevents them from taking on a directorship in any Companies Acts company, and a register of disqualified directors is held by the companies registration office which is available for public inspection. This is already close to the hon. Member's idea of a national register of bad risk companies. Our proposals for extending the court's powers are to provide, first, for automatic disqualification in the case of compulsory liquidations, secondly for possible disqualification in the event of wrongful trading, thirdly for liquidators to be able to apply for disqualification where a director is considered unfit to act, and fourthly for the Secretary of State to apply for disqualification in the light of an inspector's report.

These proposals will be a powerful counter to abuse of limited liability and will inhibit directors from continuing to trade when they know that their companies are insolvent. There will, of course, be flexibility to avoid unnecessary and unjust interference in the work of responsible directors. But the Government have concluded that tough new measures are now appropriate. Limited liability is a privilege which we can no longer allow to be abused.

Subject to other pressures on the parliamentary timetable, it is hoped, therefore, to introduce a Bill including the necessary reforms in the next Session of Parliament.

This range of measures will provide a powerful counter to the abuse of limited liability and will be of benefit to companies' employees and to creditors. The question of getting value for money out of grants offered to companies from taxpayers' or ratepayers' money is just one aspect of this.

The specific topic that the hon. Member raised is about grants to industrialists and how they are monitored. I have already explained that in the particular case grants from my Department and from central Government were not involved. Let me describe, however, the monitoring procedures that we operate in the Department of Trade and Industry for the assistance that we offer.

There are two stages — the appraisal stage when applications are submitted and the monitoring stage for successful applications when an offer has been made and payment is due. The appraisal stage is probably the crucial one in the context of the problem that we are discussing. Appraisal procedures differ slightly between the various schemes of assistance offered by the Department, but the same basic principles underly them all. Applicant companies are required to demonstrate that they have the managerial competence, and where appropriate the technical capability, to carry their project through and that they have the necessary resources to finance it. Applicants are required to provide details of any other applications for 290 Government assistance. Indeed, it is more usual for the Department to be criticised for requiring too much information than to be accused of handing over cash too readily.

A sensible judgment has to be made about the degree of investigation that an application requires. The appraisal officer will draw on his experience of the industrial sector and of similar cases, on feedback from the press and other organisations in the field and on his personal assessment of the individuals involved.

The larger the project, the more intensive the investigation. In regional offices it is common practice to ask for an applicant's curriculum vitae and most cases are seen by the Department's accountancy service which will subject the case to scrutiny, often including correspondence with the applicant's bank.

In larger cases more rigorous procedures are applied and cases will be closely scrutinised by the sponsoring divisions — the industry experts — the Department's accountants or the industrial development unit, which is made up of financial experts from the private sector seconded into the Department.

All applications under the support for innovation facility, in whatever part of the country they are made, and from whatever sector of industry they come, are logged and held in a central computer database. Amongst other things this holds details of the assistance sought, the grant offered and payments made.

The system is being extended to cover all selective assistance by the Department. For applications that have come through this scrutiny and are judged worthy of assistance, an offer is made and payments of grant are then subject to the monitoring procedures. The principal objectives of monitoring are to ensure that public funds are used for the purpose for which they have been made available—meeting the terms and conditions imposed—that the objectives for which assistance is granted are attained and to enable the Government to take appropriate steps, where necessary, to safeguard their position. The depth of monitoring varies according to the type of assistance given and the degree and scale of risk attached to the project concerned. Cases are classified as "low" or "high" risk and assessment is a matter of judgment based on the viability of the project, its sensitivity to market and economic change, the amount of assistance provided and the nature of the security against which assistance is given.

In all cases, however, the applicant will normally receive at least one visit from the official nominated to monitor the project. Claims for payment must be certified by an independent auditor and accompanied by a progress report and the latest audited account.

If monitoring indicates that a project is not proceeding satisfactorily or that the conditions under which assistance was offered have materially changed, there are powers to withhold payment of grant or to reclaim grant already paid.

No system is foolproof, of course, and it is probable that some spurious applications slip through the net. But it would be wrong to treat applicants for assistance as if they were potential criminals, and a balance has to be struck between caution in the use of public money and ensuring that schemes of assistance are operated efficiently and effectively. Overall I am satisfied that we have got the balance right.

The hon. Gentleman asked what lessons the story has for the effectiveness of regional policy. He may have seen 291 from the White Paper on regional industrial policy last November that when decisions have been taken on its coverage, the new regional incentives will involve more selectivity and evaluation. The proportion of discretionary regional selective assistance will rise relative to the more automatic regional development grants. That will involve more evaluation of applications. The question of displacement, which the hon. Gentleman mentioned, is one factor that will be taken into account. Where grant is paid in relation to fixed assets, arrangements will continue to apply, as at present, for clawing back grant if those 292 assets are no longer used and in future when it is linked to a cost per job ceiling so that it can be clawed back if that ceiling is breached.

Those evaluation and monitoring criteria apply to gants offered by my Department. The hon. Gentleman asked whether the various local development corporations and new towns might operate under unified guidelines. He will appreciate that this is a matter for my right hon. Friend the Secretary of State for the Environment.

I am grateful to the hon. Member for drawing this matter to the attention of the House.