Insolvency Commission (Hansard, 28 March 1995)

I beg to move,

That leave be given to bring in a Bill to improve the regulation of insolvency practitioners. The Bill sets up an insolvency commission. It is supported by hon. Members on both sides of the House. It has two purposes. First, it aims to ensure that the insolvency system protects not only creditors but jobs, and, where possible, that insolvent companies are able to continue trading. Secondly, it restores confidence in the insolvency practitioners industry and outlaws people who, sadly, are found to be either inefficient or unprofessional.

The first I heard of the problems in some parts of the insolvency industry was from a Mr. Carpenter in my constituency. Although he put his company into voluntary liquidation, he found that, on assets realised of £180,000, the insolvency practitioners charged him no less than £50,000 to wind it up. He is still making a complaint through the machinery of the insolvency practitioner industry. That case has been delayed some three years.

I am not saying that that case is necessarily typical, but such anecdotal evidence shows that, in a minority of cases, the constructive approach that Kenneth Cork wanted for our insolvency legislation in 1986 is not necessarily being followed through. He said: The purpose of bankruptcy is not to punish the debtor, but on the contrary, to protect him from his creditors". Administrative receivership was introduced to do that and to save jobs and companies. The reason is that legislation is heavily weighted towards the practitioner and away from the company and people who are made insolvent. For instance, insolvency practitioners have a duty of care not to stakeholders but to the creditors for whom they are asked to bring in a petition. They have a statutory monopoly.

In the main, all but 150 of the 1,961 insolvency practitioners have no obligation to be audited in public, as is the case with most companies. When a company goes into liquidation, directors lose the right to have information on what is happening, and thereby the opportunity to comment on the efficiency or otherwise of insolvency practitioners. A recent survey showed that no fewer than 62 per cent. of company directors did not even know that a petition had been brought to wind up the company until the petition had reached the court.

Under section 27 of the Insolvency Act 1986, the powers of creditor committees are more formal than real. The 1990 Charnley-Davies case said that there is no jurisdiction over insolvency practitioners' negligence. The Bankruptcy Association has told me that, when one is made bankrupt during insolvency, one is in a highly emotional state. One often loses one's home. As a result, one is not in a position to ask insolvency practitioners the questions that one might wish to ask.

In the main, the vast majority of companies involved in the insolvency profession do a sensible and proper job, but the actions of a small minority are unacceptable. In 1993, the Select Committee on Social Security commented in relation to the winding up of the Maxwell company that £50 million was paid in fees to insolvency practitioners. As a result, the Committee called for a review of procedures for monitoring the progress of insolvencies.

838 Various studies have been made of the failings of the present system. In particular, there is criticism of the practice of banks appointing reporting accountants who subsequently re-emerge as administrators of the company. The dual role means that those accountants' original reports may not have been as objective as they should have been. In other words, people go by the rule but not by the spirit of the code of professional ethics. It is significant that, when the Royal Bank of Scotland decided that nobody would be allowed to act in two capacities, the number of administrations for which it was responsible fell by 60 per cent.

The level of fees, too, is often rightly criticised. In one case, £2.5 million-worth of assets cost £850,000 in fees. Another insolvency practitioner apparently charged £2,500 for six hours' work. In 1992, the Financial Times carried a report about the insolvency service showing that half of all insolvency practitioners failed fairly seriously to meet the statutory requirements. Yet, sadly, that failure has not been met with any great disciplinary action within the industry, which is self-regulating. In the eight years between 1986 and 1994, only five insolvency practitioners were struck off.

In my view, one of the reasons for all that is the inadequacy of the system of self-regulation within the industry. The system is diffuse—there are seven associations responsible for the monitoring and validation of qualifications in the industry—and there is a complicated complaints procedure, which is unwieldy and takes far too long. Although, last year, the joint industry monitoring unit was set up, only the chartered accountants and the Law Society belong to it. The certified accountants refused to join.

The Institute of Insolvency Practitioners has said that the unit has no power whatsoever for independent action on any problems it may find during inspection". So everything goes back to the self-regulating individual bodies that have proved too reluctant to take action against inadequate practice in the past. That is plainly unsatisfactory, and it is disappointing that, in their response to the Social Security Select Committee, the Government said:

We do not consider it necessary or appropriate to undertake a wider-ranging review of this particular area". I do consider it necessary to undertake such a review, which would achieve two aims. First, it would improve and promote good practice within the profession. Secondly—to be fair, this is equally important—a review would diminish the credibility gap that too often affects the proper, hard-working, efficient and skilled practitioners who make up the vast majority of those in the profession today.

I suggest setting up an independent insolvency commission. It would be paid for by the profession, so it would not be a charge on the taxpayer, and it would have lay members and a lay chairman. The commission would take over the handling of complaints and set up an insolvency ombudsman, as was suggested by the Cork and the Justice committees. It would also carry out inspections, take over the powers of the joint industry monitoring unit and ensure that inspections were consistent, and validate qualifications within the profession—although much progress has been made already in that regard.

839 The commission could also carry out disciplinary action, removing that task from the individual associations that now, where necessary, validate insolvency practitioners. That, I hope, would mean a far more rigorous disciplinary regime than exists at present.

Whatever the fate of my Bill, those proposals should be seriously considered when the Government next review company law—as, indeed, was suggested to me by hon. Friend the Under-Secretary of State for Corporate Affairs. I commend the Bill to the House.