HC Deb 22 July 1991 vol 195 cc1005-12

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Nicholas Baker.]

9 am

Mr. Ray Powell (Ogmore)

On a point of order, Madam Deputy Speaker. I am sure that in your customary way you will be able to advise me, since Back Benchers often need to raise matters of great importance to them, on how to deal with a problem created by the shortness of time between now and when the House rises for the summer recess. During the past nine months in the House I have introduced a ten-minute Bill, I have presented a Bill to the House and I have asked questions on the training and enterprise councils and, in particular, Mid-Glamorgan TEC, asking for a public inquiry. I was hoping to be able to ask again today, and I wonder whether you, Madam Deputy Speaker, could advise me on how to put that request again to the House in the short time available between now and when the House rises for the summer recess.

Madam Deputy Speaker (Miss Betty Boothroyd)

The Chair does not usually offer advice on such procedural matters on the Floor of the House. I am sure that the hon. Gentleman is ingenious enough to find a method himself. He does not have to look far down our Order Paper to see that before the House rises there is a debate on economic policies when he might try to catch Mr. Speaker's eye.

9.1 am

Mr. Conal Gregory (York)

I welcome this opportunity to debate the Insolvency Service, the first since the service became an agency of the Department of Trade and Industry.

The service was established more than 100 years ago to protect the public. At that time, when the Bankruptcy Act 1883 was being debated in the House of Commons, Joseph Chamberlain said that it should improve the general tone of commercial morality … protect the salvage and diminish the risk of wreck". The service has a strong and honourable tradition of commitment to those purposes. It provides an essential means of coping with financial failure and, through its investigatory functions, contributes to confidence in the market.

The service is now a vital part of our contemporary economy. It has a clear identity within the Department of Trade and Industry. It enjoys greater freedom to manage its affairs and to respond flexibly to the changing needs of the society it serves.

This year, the Insolvency Service has a budget of some £45 million, of which about 65 per cent. is accounted for in staff costs. Most of our debate today concerns the DTI, but nevertheless I appreciate that the Treasury is involved as it has a number of specific responsibilities as set out in the Insolvency Act 1986 for certain issues of finance, accounting and investment and for certain fees. The Treasury also has some other order-making powers and the Insolvency Service executive agency is subject to Treasury staff inspection.

The Insolvency Service initiates legal action based on reports submitted by official receivers where the reports allege that criminal offences have been committed or where a director's conduct is such that he is unfit to be a director of a company and an application should be made for him to be disqualified. In both cases, official receivers are targeted to submit reports within 10 months of the winding-up orders in at least 80 per cent. of cases identified for investigation.

I shall examine shortly the service's interpretation of when to prosecute or not. It may, though, be appropriate to ask what expertise is held within the service. Currently 632 officials in the Insolvency Service studied for accountancy or allied qualifications. Of these, 84 are fully qualified, 14 will shortly be sitting their final examinations and others are still studying. Additionally, a number of officers are members of the Insolvency Practitioners Association. While some entrants to the service have law degrees, what surprises me is that there is not a single fully qualified lawyer in the service. That is a source of concern. Such legal expertise as is required is provided at arm's length by the solicitors division of the Department of Trade and Industry.

I come now to the approach adopted by the Insolvency Service. The official receivers submit reports to the DTI when investigations have shown that criminal offences appear to have been committed. After vetting by the service they are forwarded to the investigations division of the Department with a view to prosecution. Criminal proceedings are normally instituted by the Secretary of State, although a small number of cases are referred to the Serious Fraud Office or the Crown prosecution service. In considering whether criminal proceedings should be instituted, the principles and criteria laid down in the code for Crown prosecutors are applied, and the prosecutor considers whether he is satisfied that there is admissible, substantial and reliable evidence that a criminal offence known to the law has been committed by an identifiable person; and, if he is so satisfied, whether the public interest requires a prosecution. The objective is to institute criminal proceedings within four weeks of that decision being taken when the case is to be taken summarily. When the case is to be taken on indictment, the period is eight weeks. When these criteria are not met, criminal proceedings will not be instituted.

Last year, official receivers submitted 569 reports, compared with 627 in 1989, alleging that criminal offences had been committed. During the year convictions were obtained in just 290 cases, compared with 352 in 1989, resulting in 309 persons being convicted—388 in 1989—of 769 different offences. The latter figure for 1989 was 671.

The Insolvency Service had, at 30 June 1991, obtained 1,009 disqualification orders against individual directors of failed companies. Additionally, 94 warning letters were issued to individuals last year—107 in 1989—where there was evidence of an offence having been committed but where it was not considered that proceeding with a prosecution would be in the public interest. During 1990, official receivers also assisted the police or other investigatory authorities in 412 criminal investigations. During the year, 166 persons were convicted in such cases.

William Shakespeare frequently made allusions to insolvency. In "Venus and Adonis" he refers to the "blessed bankrupt"; three years later in "Romeo and Juliet" his adjective had changed to the "poor bankrupt"; while the advice given in "Timon of Athens" was:

  • "Bankrupt, hold fast,
  • Rather than render back, out with your knives
  • And cut your trusters' throats."
Against this background, I turn to the case of Mrs. A. My constituent met Mr. A about four years ago. They married in 1988 and divorced the following year. She was not aware that Mr. A had been declared a bankrupt in 1982 and discharged from his bankruptcy in December 1989.

In June 1989 Mrs. A was persuaded to take out a personal loan with Mercantile Credit which was countersigned by Mr. A. She was forced by her husband also to take funds from her account in a building society.

On 11 May 1990, Mrs. A visited the official receiver in Hull, who advised a week later that there was insufficient evidence. Yet she had shown five specific examples of evidence: Mr. A advertising his business, using cars purchased by Mrs. A as taxis; taking credit over £250 while still an undischarged bankrupt; registering his business for VAT; and securing a mortgage by deception. Mrs. A was even advised that she could not have her own property returned.

The official receiver said that the evidence produced, was not sufficiently conclusive of the offences alleged and that the case, taken as a whole on this evidence, was unlikely to be successful". Subsequently, Mrs. A forwarded further documents to the official receiver which provided "clearer and better evidence" in the words of the service's senior official receiver. The Hull office agreed to contact the finance companies involved.

In the year ended 31 March 1991, official receivers covering the Yorkshire area submitted 209 reports, alleging either the commission of possible criminal offences or recommending that applications be made for the disqualification of directors whose conduct appeared to make them unfit to be concerned in the management of limited companies. At the end of June, there were 191 cases under investigation. The service's offices in Yorkshire have 29 officials who have studied for accountancy or allied qualifications. Rather worryingly, only three are fully qualified and no one has a law degree or any legal expertise as is required by the Department of Trade and Industry.

Mrs. A was awarded maintenance on 18 June last year, but no funds were forthcoming. She returned to court on 3 August and the maintenance was actually reduced. Again, no funds were secured. At that stage she estimates that Mr. A owed £62,000 in tax and she warned the authorities that her ex-husband was investing in a property on the Algarve.

Despite receiving an assurance on 5 June that a full investigation would be initiated by the official receiver, I heard nothing Further and therefore wrote to the service on 11 September for a progress report. That was tardiness itself. A guarded response dated 4 October, four months after the last letter, referred to a difficulty in securing documentation from hire purchase companies. At the same time inquiries were made of the Inland Revenue as to whether it was trying to recover funds from Mr. A. For reasons of confidentiality, no information was available, although the Inland Revenue's special branch appreciated being informed. No further information came from the Insolvency Service until 28 March this year, hardly a speedy reaction. This stated that the official receiver's report had been passed to the investigation division solicitors.

I am reminded of the words of Lord Meston, speaking in the other place on 15 January 1985. He said: A cynic has observed that if you go 'bust' for £700 you are probably a fool; if you go 'bust' for £7,000 you are probably in the dock, and if you go 'bust' for £7 million you are probably rescued by the Bank of England.—[Official Report, House of Lords, 15 January 1985; Vol. 458, c. 914.] Sad to say, in an undated letter from the Insolvency Service which was received on 30 May, I was advised that, having regard to the criteria in the Code for Crown Prosecutors, it was not in the public interest that further action should be taken. Clearly, that was an unhelpful reply and one acknowledged as such in the letter. No explanation was given for this amazing decision.

On 30 May I asked for an explanation and on 14 June the official receiver drew my constituent's attention to paragraph 8(i) of the code, which states: When the circumstances of an offence are not particularly serious, and a Court would be likely to impose a purely nominal penalty … Crown Prosecutors should carefully consider whether the public interest would be better served by a prosecution or some other form of disposal such as, where appropriate, a caution. This applies particularly where the offence is triable on indictment when Crown Prosecutors should also weigh the likely penalty with the length and cost of the proceedings". Surely the offences were serious if they involved obtaining credit and carrying on a business without discussing that Mr. A was an undischarged bankrupt. Surely the courts would have awarded an appropriate penalty, and not a "purely nominal" one. Surely bankrupts should be warned that such action will not be tolerated in a civilised society. Fourthly, surely proceedings would be repaid by obtaining the funds illegally acquired.

Meanwhile, Mrs. A had information that her ex-husband was living in Spain, owed £44,000 in tax, and had not had his passport removed. She has since discovered that Mr. A has admitted to earning in excess of £51,000 last year. If someone decides to go abroad leaving debts of tax due, apparently the Inland Revenue has no power either to prevent him from leaving or to have him brought back from his destination. If there are assets in the United Kingdom depending on the size of the debt and the individual circumstances of the case, it can and does take bankruptcy action through the United Kingdom courts involving the service of a writ or statutory demand outside the jurisdiction. This allows the defaulter's United Kingdom assets to be put towards settlement of the debts.

So, in this long saga, Mrs. A still does not have title to the house she owns. She has even had to ask the trustees in Mr. A's bankruptcy for their approval to the building society—which loaned the mortgage—transferring title to her sole name. It would have been helpful if the official receiver had offered to undertake this. I should remind the House that the offices for the receiver in Yorkshire cost £135,200 this year and in Hull £454,000. Earlier this month—on 8 July—after pressure from me, the Hull office confirmed that it had no objection to the property being conveyed into Mrs. A's sole name. Mrs. A has been left with £18,000 worth of unpaid debt.

In my hon. Friend's reply of 8 July, he said it was not possible to calculate an average penalty. The code for Crown prosecutors, which comes under section 10 of the Prosecution of Offences Act 1985, was reviewed as recently as this June.

Therefore, what lessons do we learn from this sad case? Could Mrs. A have supplied any additional information to secure justice? She is rightly owed a full explanation. The public must be alarmed at the complacency of the Insolvency Service, its inordinate delay in investigating a straightforward case, and failure to protect the innocent citizen. Just how large must a fraud be before action is taken? The code needs clarification. Otherwise, the clear message from this case is that fraud still pays.

Gibbon, in "The Decline and Fall of the Roman Empire", referred in 1781 to the cruel treatment of the insolvent debtors of the state. Will our state ensure that it recovers its rightful dues from Mr. A?

9.16 am
The Minister for Corporate Affairs (Mr. John Redwood)

I am grateful to my hon. Friend the Member for York (Mr. Gregory) for drawing the attention of the House to the important work of the Insolvency Service and for his kind opening remarks about the central function that it performs. I shall try to answer in some detail the criticisms that he made in this individual case. Listening to his liberal quotations from Shakespeare, the one that was on my mind was: Neither a borrower, nor a lender be". As the Minister responsible both for financial services, where things sometimes go wrong for investors, and for the Insolvency Service, where things always go wrong for our clients, that is probably the one that should be engraved on my heart.

My hon. Friend asked whether the absence of lawyers in the Insolvency Service is a worry. As he said, official receivers make reports to the Insolvency Service headquarters. If there appears to be evidence of a prosecutable offence, they are passed to my Department's solicitors. They decide whether to prosecute. Official receivers and the police investigate, and solicitors decide whether to prosecute. As my hon. Friend said, departmental solicitors and the Treasury solicitor are available to advise the Insolvency Service on all legal matters and staff in the service are happy with those arrangements and feel that they have access to the right level and degree of legal advice that they need.

As my hon. Friend said, a number of restrictions are imposed on bankrupts. If they obtain credit of more than £250, they must say that they are bankrupt when they are trying to obtain it. They must always use their own name. In this way, potential creditors can be protected. Most post-bankruptcy offences are brought to the attention of the official receiver by creditors who have suffered a loss as a result. If they come to light in some other way any potential prosecution must weigh that while an offence might have been committed no individual creditor may have suffered.

On 25 July 1983 a receiving order in bankruptcy was made against Mr. A in the York county court on a creditor's petition. Mr. A was adjudged bankrupt on 3 August 1983. The case was administered by the official receiver at Hull. On 23 November 1983, Mr. A was publicly examined at York county court. According to Mr. A's amended statement of affairs, submitted in the bankruptcy proceedings, as at 25 July 1983 his only asset was his interest in the then matrimonial home which was fully charged to secured creditors. He had gross liabilities totalling £121,752, of which £38,470 was due to secured creditors. Only £5.15 was realised in the bankruptcy proceedings and so there was no distribution to creditors.

The official receiver obtained his release as trustee on 8 September 1988. On 3 October 1986, Mr. A's bankruptcy was reviewed by the court, which is an automatic procedure. He did not attend and he was not granted a discharge from his bankruptcy. Mr. A obtained his discharge from bankruptcy on 29 December 1989, as a consequence of the Insolvency Act's general amnesty for bankruptcies over three years old.

In May 1990, the official receiver at Hull was given information to suggest that, while undischarged, Mr. A had contravened restrictions placed on him. He was said to have obtained credit in excess of £250, without disclosing his status to the creditor. He was also alleged to be trading in a trading name when he had been adjudged bankrupt in his own name. An allegation was also made that he had obtained a mortgage loan by deception.

Carrying on a business while an undischarged bankrupt and registering for value added tax are not in themselves illegal, as long as the conditions for bankrupts have been met. The official receiver was shown evidence that Mr. A had used a trading style in a press advertisement, but he had also quoted his own name in that advertisement.

The official receiver went on to make inquiries based on the information received and established that Mr. A had received a credit card in November 1989 from one of the clearing banks. By the date of his discharge from bankruptcy, he had incurred a debt of £511.35 to the credit card company—an amount in excess of £250. The debt was later settled in full. The official receiver also established that in July 1989 Mr. A had entered into a conditional sale agreement with a finance company to purchase a motor vehicle at a total cost of £12,530. In May 1990, the account was settled to the satisfaction of the finance company.There has been no reply to the official receiver's inquiries of the building society from which the mortgage was obtained, or from another finance company.

In March 1991, the official receiver submitted a report on Mr. A's actions to the Insolvency Service. It was discussed with a lawyer from my Department's investigations division. Advice was given that the matter should not be proceeded with in the public interest, having regard to paragraph 8(i) of the code for Crown prosecutors, which my hon. Friend has quoted.

The two instances of obtaining credit discovered by the official receiver occurred within six months of Mr. A's automatic discharge as a bankrupt and both debts have been paid in full. The legal advice was based on those facts, on the absence of creditor complaints and on the lawyer's interpretation of the code for Crown prosecutors.

If my hon. Friend has further information to assist the official receiver at Hull in his inquiries into Mr. A's affairs while he was bankrupt, my Department will be pleased to receive it and investigate further. As for the question of tax that may now be owing to the Inland Revenue, I understand from what my hon. Friend said that that occurred after Mr. A's discharge from bankruptcy. It is for the Revenue to pursue the matter in its usual way.

Nevertheless, I appreciate my hon. Friend's concern about the case, from which it appears that Mr. A violated restrictions imposed on bankrupts. During 1990, there were 255 convictions for post-bankruptcy offences, usually where creditors had complained. That demonstrates the Government's commitment to ensuring that creditors are protected and offenders punished. There is no automatic immunity to prosecution for anyone: it depends on the facts of each case.

My hon. Friend has given figures for prosecution reports submitted by official receivers in 1989 and 1990, and for the number of cases in which they assisted the police. Between 1 January and 30 June official receivers submitted 312 reports and also assisted the police and other investigatory authorities in their inquiries in 237 cases.

As my hon. Friend pointed out, a large number of directors have been disqualified under the legislation introduced by the present Government. Before that legislation, there were no such provisions.

In 1986, substantial changes were effected to insolvency legislation by the introduction of the Insolvency Act, which streamlined procedures for handling bank ruptcies and compulsory liquidations. That has enabled official receivers to concentrate more of their resources on investigating the affairs of individuals and failed companies, and on bringing disqualification proceedings against delinquent company directors.

Since 21 March 1990 the Insolvency Service has been an executive agency within the Department of Trade and Industry. I am pleased to say that streamlined case administration procedures have enabled official receivers to cope with a very substantial increase in the number of compulsory insolvencies, while still being able to devote time to investigating possible wrong-doing and unfit conduct on the part of company directors.

It is important that official receivers, in conjunction with my Department's investigations division, concentrate their investigative resources on those cases which are the more serious, involving fraud and systematic dishonesty.

The evidence of the figures for prosecution reports and disqualifications, already given, is that the authorities are putting more effort than ever into the investigation of fraud and commercial misconduct. To accuse the Insolvency Service of complacency is wrong. The service plays a full part in the Government's efforts to ensure that fraud does not pay and is seen not to pay. I give a pledge to my hon. Friend that I shall carry on the task of making sure that all those involved in fraud are fully investigated and, where necessary, prosecuted.

Question put and agreed to.

Adjourned accordingly at twenty-five minutes past Nine o'clock.