Insolvency Act 1986 (Amendment) (Hansard, 3 February 1999)

§ Mr. Richard Page (South-West Hertfordshire)

I beg to move, That leave be given to bring in a Bill to amend the Insolvency Act 1986 so as to disqualify from appointment as receiver or liquidator of a company any person or company called in to carry out a financial appraisal of that company. My comments today will be almost identical to the words used by Baroness Dean, when she spoke on a similar subject in the other place last week. I was pleased to learn that the Secretary of State for Trade and Industry, in his Mansion House speech, also touched on my concerns. It is nice to know that all minds are thinking in the same direction.

The Bill aims to remove a long-standing problem in our legislation. Under the present law, firms of accountants that are called in by the banks or other lenders to report on companies in difficulties can be, and often are, appointed as administrative receivers if the findings are sufficiently serious. Those firms of accountants are obliged to safeguard the capital of the lenders: they are not concerned about the continuity and survival of the borrowing company. Indeed, all too often, the accountants have a vested interest in putting the companies on which they report into receivership.

As long ago as 1992, 30 per cent. of insolvency practitioners recognised that the issue was a real and not just an apparent conflict of interests. It is like giving a judge and jury £10 for every prisoner whom they set free, but £100 for every prisoner whom they find guilty. No one would think that that was a fair law and no one would say that justice was being done under such rules. The same logic applies to the situation today, in which insolvency practitioners are so often the reporting accountants.

Serious mistakes have been made under the present arrangements. One accounting firm investigating a company to whom a bank had lent money reported that it was in serious difficulties. The accountants recommended that their related firm of insolvency practitioners should be brought in to act as receivers. It took the intervention of the Postern Executive group, a group specialising in business recovery, and a report from a second firm of accountants to persuade the bank that a mistake had been made. In due course, the loan was repaid, the secured and unsecured creditors were paid and hundreds of jobs were saved.

I could cite numerous examples, but I shall give only one more. The owner of a dairy business in Pembrokeshire sought the advice of his bank on the value of his stock. He was visited by a 24-year-old accountant who worked for one of the big five. After a single day on the farm, that expert valued the cheese held in the dairy at half the figure the owner had calculated. The visit cost the owner £3,000. The accountancy firm—surprise, surprise—was appointed to act by the bank as the receiver for the business. As events turned out, the receiver could not milk 200 cows a day or keep them in good health for sale and, when the original owner obtained another valuation for his stock, the bank granted him overdraft facilities of £1 million and he was able to save much of his operation.

934 All those problems flowed from the visit of a young accountant who was inexperienced in farming, but whose firm could have benefited from the dairy business going into receivership. Legal action was unsuccessful, because receivers have a duty of care only to the party that appoints them: the bank. For individuals and companies who face adverse reports, there is, sadly, usually no effective remedy short of legal action. Directors of companies being investigated are all too often presented with winding-up petitions without any opportunity to make representation or any avenue of appeal. That is neither fair nor right. No wonder accountants are often said to exist to kill the wounded and count the dead.

Reputable bodies working in the industry recognise the need for action. For example, the Royal Bank of Scotland has altered its entire approach to companies in difficulties. For it, receivership is the last resort. The results have been dramatic. In 1992, it had an 11 per cent. receivership rate. Four years later, that figure had dropped to only 5 per cent. In 1996, it put only 48 companies into receivership, a fall of 82 per cent. over four years. The more positive approach meant that some 79 companies and almost 5,600 jobs were saved. Even with the companies put into liquidation, the new approach meant that it was possible to sell off many parts as viable concerns.

The key element in the strategy is the bank's decision not to appoint investigating accountants as receivers. It has recognised the conflict of interest that investigating accountants may face and acted to remove it. It prefers to diagnose the problems that borrowing companies face and strengthen their management capability to deal with them. If only all banks would adopt such an approach.

There are wider lessons to be learned for the eight bodies engaged in licensing insolvency practitioners. They should have acted long ago to resolve this issue. My major contention about the potential conflicts of interest that arise when investigating accountants act as administrative receivers was conceded by Lord McIntosh of Haringey speaking for the Government in another place last week. However, I do not accept his repetition of the old argument about the advantages in terms of knowledge that a firm of investigative accountants has about a business when appointed as the administrative receiver. That only perpetuates the existing problem over the conflict of interest.

The promise of legislation to provide for a moratorium on creditors' actions while a company is in difficulties and proposals are formulated is all very well but neither that nor the joint Treasury and Department of Trade and Industry review of the law on company rescue mechanisms promised in last December's competitiveness White Paper offers the remedies that are needed right now, especially as the economy may move into recession.

There have been too many delays in tackling the matter. Those professionally involved, such as the banks, lending institutions and, above all, the companies that have experienced scrutiny by investigating accountants, understand the conflict of interest. The case for independent regulation of those who play both roles, perhaps through an insolvency commissioner, is strong. I prefer effective self-regulation to Government action, but if the eight bodies engaged in insolvency licensing cannot take the necessary steps to end this obvious conflict of interest, the duty to act falls upon Parliament and the Government.

935 I know that the Government are studying changing the Insolvency Act 1986 and that this issue, as we know from the Mansion House speech, is attracting Ministers' attention. That is all to the good and I welcome it, but action is needed now, not in two, three or four years. The Bill reflects important changes of attitude towards that problem outside Whitehall and Westminster. It provides a solution to that long-standing conflict of interest and I commend it to the House.