HL Deb 15 February 1989 vol 504 cc271-81

9.19 p.m.

Earl Russell rose to ask Her Majesty's Government whether they will consider a further investigation into the affairs of MBP Russell & Co. Ltd.

The noble Earl said: My Lords, the Roskill Committee on fraud trials expressed doubt whether the legal system was now capable of bringing the perpetrators of serious frauds expeditiously and effectively to book. It is argued that fundamental change is therefore required in certain areas of the law. The case I am raising tonight tends, I believe, to suggest that the Roskill Committee was right. I believe strongly that it is the individual case which gives life and meaning to this sort of general phrase. Also, I believe this case tentatively identifies some of the certain areas of the law in which change may be required. These, I hope, are points of legitimate public interest.

In raising this matter, I must of course declare my interest. The MBP Russell mentioned in my Question happens to be my cousin. It is inevitable, because of this connection, that my remarks may have a certain quality of advocacy. I have heard too much distinguished advocacy in your Lordships' House to believe that advocacy in this House is necessarily improper. What I do think is that it is essential, when advocacy is served, that your Lordships should be able to recognise it for what it is in order that you may sit down to it fully equipped with pinches of salt, to be applied according to taste. It is in that spirit that I declare my interest.

Your Lordships may not appreciate perhaps that I am taking up the torch rather late in the history of this matter. My kinsman turned first to his representative in another place who very properly began by writing to the Minister. Having done so several times and having received no satisfaction, he tabled Questions for Written Answer on 24th July and 10th December 1986. He then decided, having received no satisfaction, to raise the matter on the Adjournment. This was delayed by the general election. He finally came out of the ballot with a debate for 7th July 1987. However, a few days before that he was appointed PPS to the noble Lord, Lord Young of Graffham. and was therefore estopped from proceeding.

It was only at this point that my kinsman turned to me and so I come into this story as the understudy. I think it is the duty of the understudy very often to take up the part at the point where his leading man had to drop it. I also decided after prolonged thought that the judgment of my kinsman's representative in another place had been entirely correct and that a general debate was now the only way in which the issues in this matter could be ventilated. Since this Question was tabled, his representative in another place has ceased to be PPS to the noble Lord, Lord Young of Graffham, and I am delighted to hear that he is now taking up the matter again. I look forward to receiving his advice on this with a relief that your Lordships may perhaps imagine.

I am aware of the responsibilities imposed on those who attempt to use parliamentary privilege. I have attempted, whether successfully or not I cannot say, to say nothing tonight which I could not say outside these walls. I have also received advice to the effect that it is not clear that letters to Ministers enjoy unqualified privilege. That, I will confess, influenced me in deciding to come to the Floor of the House.

The story I have to tell concerns the failure of a bank in circumstances which appear to demand rather more investigation than they have yet received. It is not my wish to make any specific charge, nor to prejudge what the findings of any further investigation might be. I am aware of the force of the point made by the noble Lord, Lord Williams of Elvel, in this House yesterday—that in investigations it is essential to avoid casting suspicion on those who may be innocent. I have tried to be mindful of that point in drafting what I wish to say, but I think it is a point which must go to how and not to whether investigations are conducted.

I make no charge tonight against Her Majesty's Government or any of their servants. In my opinion, the worst that can be said of the DTI's handling of this matter is that they have left undone those things which they ought to have done. That is a conclusion that I suspect may be far too familiar to your Lordships to approach the realms of the scandalous.

In fact the DTI appears to believe that this case is a matter of de minimis non curat lex. In a case involving the suspicion of fraud for between a quarter and half a million, depending on the method of calculation, this seems a somewhat complacent definition of de minimis, almost on a level with the famous defence of a young person called Rex to a charge that I may leave to your Lordships' imagination.

I do not suggest that the DTI's handling of this case is in any way out of the ordinary, and it is for that reason that I think it raises issues of general public importance. I would also stress that, for the protection of the innocent, it is as important that those wrongly suspected should be cleared as that those rightly suspected should be brought to book. I am not trying to prejudge to which category this case may belong.

MBP Russell and Co., the bank concerned, had on 31st March 1975 declared assets of £279,175. The shares of this bank were divided between two holding companies. The first, the minority, MBPR (Holdings) Ltd., was the one in which my kinsman was the key figure and had some 22 shareholders. The other, the majority, was Allied City Share Trust Ltd. with over 100 shareholders but with 25 per cent. of its shares held by a single director. By agreement between these two holding companies, MBPR (Holdings) nominated three directors and Allied City Share Trust nominated five.

During the period from 1973 to 1977, and mostly in the later part of that period, the senior director from Allied City Share Trust, whom I see no present need to name, approved advances, mostly in the form of unsecured overdrafts, totalling £644,147. A very high proportion of these was either to himself and his immediate relatives or to companies in which he is known to have had a material interest, including £114,659 to Allied City Share Trust, £24,615 to his and his wife's joint account, £38,485 to his private account and £30,976 to his second mortgage account. Your Lordships may perhaps feel that the circumstances in which these overdrafts were approved bear investigation. The bank ceased to accept deposits in February 1978. During the period from 1978 to 1981 my kinsman was unable to finance a minority action and would in any case have found it difficult to pursue one since he had no access to the bank's records until 26th August 1981.

We are now told that during this period the DTI conducted an investigation under Section 109, now Section 447, of the Companies Act. Such investigations are of course confidential, and I know nothing of any conclusion that it may have reached. However, it is relevant that the Roskill Committee was particularly critical of the lack of power to investigate fraud in banks. It made three points, which I think are relevant tonight. There is no power to make an order for access to hank records at the investigation stage; the correspondence between a bank and its client cannot be made the subject of an order; and there is no power to make an order covering more than one bank. That can make trails difficult to follow. It is perhaps one of the areas of the law in which some change might be considered.

In March 1981 my kinsman purchased the shares, formerly belonging to Allied City Share Trust. He got control of the records and is now willing to show them to anyone qualified to conduct a proper investigation. There is thus the possibility of fresh evidence which may justify a fresh investigation.

The Roskill Committee also made another point relevant to this case. It said there is a potential conflict in fraud cases between civil and criminal proceedings, and that institutions in particular may be reluctant to make a criminal report because they may want to recoup losses by civil proceedings. That was the course my kinsman followed, relying on the civil law rather than on the criminal law, because he believed he had a banker's duty to recover money for creditors and shareholders. He accordingly commenced a series of civil actions, which he proved unable to pursue for want of funds.

In 1985 he began proceedings for voluntary liquidation. For reasons which are not clear to me, this attempt was blocked by the official receiver. But in December 1986 there was a further petition for liquidation from one of the defendants in one of the civil actions which after some dispute was successful. I shall not go into the technicalities of that now. There is dispute as to whether the company is in liquidation, but the DTI believes that it is.

It is a basic principle of English law that there should be no wrong without a remedy. We have here a prima facie appearance of a wrong. We have the failure of a business, consequent losses to a number of creditors and shareholders, the loss of an occupation and a substantial financial loss as well. All that happened by means of which no adequate public account has yet been given. There should be a remedy. If we were to be told that no remedy was available, I believe that would indicate a very significant defect in the law.

A company which has suffered a civil wrong may normally seek a remedy through civil action. But if the effect of that wrong is to make the company insolvent, it is thereby deprived of its natural remedy. That is why the official receiver has a statutory duty, reiterated by the Insolvency Act 1986, to investigate possible offences in every compulsory winding up or bankruptcy. We are now told by the DTI that the official receiver has no funds to enable him to discharge this duty. If that is the case, we may agree with the Roskill Committee that: the overall shortage of resources which clearly exists must be remedied as a matter of priority". Under the Insolvency Act it is perfectly proper for a liquidator's report to give rise to an investigation under Sections 431 and 432 of the Companies Act. Under Section 132 of the Insolvency Act 1986, it is perfectly proper for such a report by the official receiver to provide the foundation for an action by shareholders or creditors. I do not know whether that is the proper way to seek a remedy. I only argue that there should be a remedy and that it is in the public interest that one should be found.

In the end the key question is that of the public interest. Mr. Francis Maude in a letter to Mr. Kenneth Warren, MP, on 14th September 1988 stated the issues in this case I think very fairly. He said: there is in my view no substantiable public interes. in the provision of public funds for … these civil actions. This is because the beneficiaries would be the creditors or (perhaps) the shareholders". In normal circumstances that might be an impeccable principle. I would argue only for one exception to it. That is when the inability of those who believe themselves to be wronged to pursue a civil action is due to their having been rendered insolvent by the action which they claim wronged them. To say otherwise would be to say that a fraudster may be immune from any liability to repay his ill-gotten gains provided only that he takes sufficient care to render his victim helpless by making him insolvent.

That seems to come dangerously near the incentive to rapists to avoid prosecution by leaving their victims dead. It is to argue that a fraudster may acquire immunity by rendering his victim financially dead. That is a doctrine which I hold not to be in the public interest because I believe it encourages crime.

I think there is a great deal of truth in the view expressed by the Inland Revenue that it is essential to prosecute some of all classes of tax fraud because it is the possibility of prosecution that prevents the spread of tax fraud to unacceptable levels. Similarly, I believe that to tell fraudsters that if only they are successful they can be immune from an action in damages is to encourage the belief that crime pays. That belief is not in the public interest.

9.36 p.m.

Lord Grimond

My Lords, the reason why I support the admirable speech of my noble friend Lord Russell is that Mr. Martin Russell, who is a friend of mine, approached me some years ago about this matter. It seemed to me that a question of public interest is involved and that further inquiries ought to be made into the unhappy history of his bank.

I do not intend to go over that history again. It has been very clearly explained by my noble friend. However, I reiterate that Parliament has decreed that the public interest is involved when individuals are harmed by illegal practices in the financial markets.

Parliament might not have done that. There is a case for saying that those who enter the somewhat tricky waters of the City should abide by the principle of caveat emptor and must take the consequences of their efforts to make money. After all, a lot of people hope that they will be supplied with inside information so that they may invest their money wisely on the Stock Exchange. It was not made public by the Rothschilds that they knew of the victory at Waterloo, which was the foundation of their fortunes.

Parliament, rightly, has taken a different view. It says that there is a public interest and that there are matters concerning finance in which it is extremely important that the public should be assured that honest dealing is the order of the day.

I also maintain that it is not the case that because the injured parties in such dishonest dealings, if they are dishonest, may benefit from investigation by the public authorities, that is any bar to such investigations. The public interest is pursued regardless of its effects, harmful or beneficial, upon individuals or individual companies.

I think that it is worth mentioning that individuals, for their own reasons and their own purposes, are perfectly entitled to bring such matters to the attention of Parliament, and constantly do. As a Member of another place, one's mailbag is entirely filled with applications from people who think that they have been wronged by Ministers, the law, their neighbours or whoever it may be. No one doubts that it is a parliamentary duty to look into those matters.

The fact that some individuals or companies may gain is neither here nor there. If the public interest demands an investigation, it would seem right that an investigation should take place. I think that that is the answer to the paragraph of the letter of 14th September 1988 already quoted by my noble friend. The Minister, writing to Mr. Warren, MP, says that he agrees that, there is a public interest in the pursuit of crime, but the way in which to satisfy that interest is by criminal prosecution rather than by civil action". That is certainly the case, but it is not the only way in which it can be and has been pursued. As we all know, there are many recent cases in which the Department of Trade and Industry has intervened either to assist or in addition to prosecutions.

The matters raised in this case have been outlined by my noble friend. There are allegations of excessive overdrafts to friends of the directors. There appear to have been efforts to prevent interested parties from taking action to protect their interests. There are allegations of dilatoriness against public authorities. I emphasise that those are allegations. They may be wrong, but they are borne out by a considerable amount of evidence in this lengthy correspondence and the interviews that took place and they seem to me worthy of investigation.

There is then the curious behaviour of the official receiver, who apparently vetoed a voluntary liquidation and then accepted what is admitted to have been a misconceived application for liquidation from a private individual. As I understand it, there has been no explanation of why the official receiver behaved in that way.

Further, the official receiver has apparently admitted that the Department of Trade and Industry has power to use public funds to continue proceedings after a company has been put into liquidation. One of the points at issue that has been made clear is that Mr. Russell has been prevented from pursuing his rights because of the lack of funds and the inability of the company to take action since it has been put into liquidation. However, if the official receiver is right, it is open to the Department of Trade and Industry to use public funds to continue actions already instituted.

Those are only some of the allegations and I emphasise that they may not be wholly justified, but there is evidence regarding these matters and it seems to me that they should be pursued. It is not only I who felt this to be the case; at least two Members of Parliament have taken up the matter and, as my noble friend said, if a Conservative Member of Parliament had not been given an appointment, he would have raised the matter in the Commons in an Adjournment Debate.

In another passage in the correspondence it appears to be suggested that the small size of the amount at stake might mean that it is not worth while for the Department of Trade and Industry to become further involved. That cannot be supported. The stake may be small to the City but to most people the sums involved are considerable enough. If there is a serious matter of public importance and if it is essential to show that the City deals honestly and that dishonest dealing is exposed, the degree of the dishonest dealing cannot be a reason for dropping the case. If there is anything approaching fraud in this matter, the fact that the sums are small will do nothing to restore faith in the City.

To some extent, that faith must be restored. It seems that the whole of our financial legislation is based on the premise that there is a public interest and that the public at large should be encouraged to entrust their funds to the City and to bankers on the understanding that they will be protected from fraud and that fair dealing will be enforced. Therefore, quite apart from the justifiable wish of Mr. Russell to have his claim examined, to my mind there is a public duty that this should be done. I fully accept that there has been some examination by the Government. No doubt the Government have studied the papers extremely carefully. But I think they would agree that there is certainly room for further investigation and that further investigation, whether it turns out that Mr. Russell was right or wrong, will clear the air and prevent any feeling that there has been a cover up or that fraud or wrongful dealing in the City has in any way been condoned.

9.45 p.m.

Lord Strathclyde

My Lords, I should say at the outset how much I and the Department of Trade and Industry appreciate the way in which the noble Earl has approached his task today by giving me an advance copy of his address. I am grateful too that he has not sought to question the integrity of officials. I may say that they—including those who wrestled with the events in 1978 and thereafter—have considerable personal sympathy, as I have myself, for the noble Earl's kinsman and the position in which he finds himself. I can fully understand why the noble Lord, Lord Grimond, should support him too.

The noble Earl has set out the background facts, and I shall not repeat them except in amplification where necessary and to correct any misunderstandings, of which there are a few. This is a very complex affair and I apologise if it is difficult to follow in a short time. It is important to distinguish between events before and after the liquidation in 1986 and the policies which apply. I shall deal with them separately. We must also be careful to distinguish between civil and criminal matters. Like the noble Earl, I see no need to name names.

I must emphasise that I cannot discuss the affairs of particular companies nor can I disclose any of the information obtained by DTI investigators under the Companies Act.

The noble Earl set his story in the context of the report of the Fraud Trials Committee chaired by the noble and learned Lord, Lord Roskill, and perhaps I should deal with that aspect first. He suggested that the committee report was critical of the limits on the powers to investigate fraud in banks. The noble Earl may have been referring to paragraphs 2.53 to 2.56 of the report, dealing with the Bankers' Books Evidence Act 1879. These referred to criticisms of the limitations on the powers to inspect bank records under that Act. The report went on, however, to summarise provisions in the Police and Criminal Evidence Act 1984 which could be used by fraud investigators to overcome the limitations of the Bankers' Books Evidence Act.

However, DTI officers, in carrying out their inquiries, do not operate under the Police and Criminal Evidence Act. Access to the records of a bank can be obtained by DTI officers under the powers contained in Section 447 of the Companies Act 1985 when a bank is itself under investigation. These powers enable the officers to obtain copies of banking records, including correspondence between a bank and its customer, where this is necessary for the investigation into the bank. The Secretary of State may thereafter pursue those inquiries, if there is a good reason to do so, into other companies and their banking records.

The noble Earl also referred to the possible conflict of interest, noted by the noble and learned Lord, Lord Roskill, on the part of victims of fraud between civil and criminal proceedings. I regret, as do we all, the fact that in some cases some large institutional losers may be inclined to keep quiet when they are injured by fraud.

There may be valid, if not good, reasons for that. I can understand them. But, as the report said: The early discovery and reporting of fraud to the appropriate authorities is crucial to the chances of successful prosecution". The committee was not referring to any conflict affecting the authorities—only the victims themselves.

Although the noble Earl drew attention to that possibility I am glad to observe that his kinsman took the correct steps, because he reported the matter to the department when it was discovered. The fact that he later started civil proceedings did not prevent the authorities investigating the case, nor was it relevant to the decision not to prosecute, as I shall attempt to demonstrate.

I turn now to the facts of this particular case. In March 1979 inquiries under Section 109 of the Companies Act 1967 (now Section 447 of the Companies Act 1985) as described by the noble Earl, were made by the department not only into MBP Russell & Co. Ltd. (which I shall refer to as "the bank") but also into two related companies. As a result of those inquiries, further inquiries under Section 109 were made into yet a fourth company between October 1979 and February 1981. As he rightly says, all those inquiries were confidential. They were made as the result of complaints from shareholders in Allied City Share Trust Ltd. that they had not received adequate information after the suspension of its Stock Exchange quotation and a complaint from Mr. Russell himself.

The Department of Trade had to consider what to do with the results of the Companies Act inquiries. Officials considered whether the facts found by the investigators indicated that a criminal investigation would be justified or if any other action should be taken. As to criminal proceedings, the department's solicitor advised that they would not be justified or would not be likely to succeed. A possible summary offence which then carried a maximum fine of £100 was not pursued. In addition, regulatory action was taken which had the effect of reducing the risk of further mischief.

In the meantime, in 1980 MBPR (Holdings) Ltd., the holding company, had gone into compulsory liquidation on a creditor's petition. For the record, I want to clear up a small but important point made by the noble Earl. This was that the official receiver, who was also the liquidator of the holding company, prevented the bank going into voluntary liquidation. This is not so. What the official receiver did was to vote against a motion, supported by Mr. Russell, for the bank to petition the court under Section 517(1)(a) of the Companies Act 1985 for a compulsory winding up order against it.

Mr. Russell's objective was to get the official receiver appointed liquidator of the bank with a view to the official receiver initiating or continuing civil proceedings for the recovery of money due to the bank. The official receiver explained to Mr. Russell and his legal advisers that, in the absence of company funds, if the motion was carried, the duly appointed liquidator of the bank would have to be indemnified for costs—and possible adverse costs (that is, the costs of the other side, if the case were to be lost)—before he would take on such actions.

The position was that the bank had started four legal actions for the recovery of money in 1983 in respect of claims which had arisen prior to 1978 but had run out of funds to continue them. Two of the defendants were no longer defendants as they had obtained an order for costs with which the bank had been unable to comply. In February 1986, Mr. Russell approached the Department of Trade and Industry. He wished to have the Secretary of State's support for the actions brought by the bank. You will note that these actions were by now three years old and the events on which they were based over eight. He had already tried, without success, to obtain the support of the Attorney-General, the Bank of England and, as I have explained, the official receiver.

The department considered the matter again in great detail. Officials interviewed Mr Russell on 14th February 1986 and, after correspondence between the then Parliamentary Under-Secretary of State and his representative in another place, Mr. Russell was seen again with his legal adviser on 3rd September 1986. Following that meeting, he provided further information, all of which was studied by officials but found to contain little to add to what was already known.

As a result of Mr. Russell's approach, the department was faced with three possible options. The first was that the Secretary of State should provide funds to support and continue the actions instituted by the bank. This was not possible. The Secretary of State has no general power to use public funds to finance actions brought by private individuals or bodies.

The second option was for the Secretary of State to take over and continue the actions under the provisions of Section 438 of the Companies Act 1985. This section enables the Secretary of State to bring civil actions in the name and on behalf of any body corporate if it appears to him to be in the public interest for such proceedings to be brought. This power can only be exercised following an investigation or inquiry under the Companies Act. The Section 109 inquiries in 1979 provided a possible trigger to the Section 438 power. The department sought advice from Treasury counsel on the issue. Counsel advised firmly that Section 438 does not empower the department to take over the conduct of an action which has already been started. Accordingly, this option was not available.

The third option was to institute a fresh investigation to put the Secretary of State in the position where he could use his Section 438 power if appropriate. This was carefully considered but was rejected because the events which might justify an investigation occurred prior to 1979 when the previous inquiries began, and at that late stage the object of the investigation would have been little more than a device to give rise to the Secretary of State's powers under Section 438—not to establish the facts which were already known to Mr. Russell. I do not think that your Lordships would consider this a proper use of the powers, however much they may sympathise with Mr. Russell.

I hope the noble Earl will accept that this represented a careful assessment by the department of the various options available and that it was understandable that Mr. Russell was told that nothing could be done to help him.

The next development was that the banking company went into compulsory liquidation in December 1986. Mr. Russell disputed, and continues to dispute, the validity of the winding-up order. I understand that although, strictly speaking, Mr. Russell had no locus in the matter, the companies court judge nevertheless allowed him to address the court on the issue. His point was, and is, that the petition was not properly served and that the company was wrongly described in the winding-up order.

The court nevertheless made the order. This is a matter for the court. It is not for the DTI to question. For my part, I can see no injustice in the result. I should add only that Mr. Russell has been told this on several occasions. Indeed, I find it odd that, having wished to see the bank in liquidation in 1985, he should oppose liquidation in 1986, when, so far as I am aware, the circumstances had not changed in the interim.

And so I come to the matter of the official receiver's role in the affair. The winding-up order was made against the bank on 8th December 1986. The official receiver became the liquidator. In these circumstances, the official receiver had two distinct and separate functions. As the official receiver, he had to investigate and report to the court on the company's promotion, formation, business, dealings and affairs; under the provisions of what is now the Company Directors Disqualification Act 1986, report any misconduct by the directors of the company to the Secretary of State. As liquidator he had to realise the company's assets and to distribute the proceeds of those realisations to creditors and the shareholders, should the proceeds stretch that far.

The official receiver is not constrained financially in his investigatory and reporting duties which are laid down by statute and funded by the state. He is often constrained by lack of funds in carrying out his role as liquidator, as in this case. The noble Earl is therefore wrong in suggesting that an investigation by an official receiver is hampered by a lack of funds. Moreover, contrary to what the noble Earl said, Section 218(5) of the Insolvency Act 1986 does not apply in cases where it is for the official receiver to investigate. The subsection gives the Director of Public Prosecutions (as it would be in this case) a discretion to refer a report by a voluntary liquidator to the Secretary of State for investigation. This is because a voluntary liquidator does not have the investigatory powers of an official receiver.

I should add that, once the official receiver is appointed, the question of any further investigation by the Department of Trade under the Companies Act does not arise because the official receiver is equipped with all the necessary powers of investigation. I am sorry to say that Mr. Russell has not co-operated with the official receiver. He has not submitted a statement of affairs as required by law; nor has he provided the official receiver with any information about the affairs of the bank. So far as the official receiver is aware, there are no assets available for realisation other than the possible proceeds of the various legal actions to which I have referred.

Earl Russell

My Lords, I am sorry to intervene but I should like to point out that the failure to supply information was, in large measure, due to the lack of access to the records and subsequently to the auditor's inability to sign the accounts for perfectly proper reasons.

Lord Strathclyde

My Lords, perhaps I may finish my remarks. It is a complex issue and I am sure that there are details which I or my officials have missed. It appears that Mr. Russell has been unable to cooperate with the official receiver. The official receiver understands that Mr. Russell is the principal creditor and shareholder of the company and any civil proceedings would be largely for his benefit.

There is certainly a public interest in the pursuit of crime. In this case, that was considered at the conclusion of the Section 109 inquiries back in 1981, some eight years ago. What is proposed now on behalf of Mr. Russell is that public funds should be provided to support civil actions for the recovery of money for the benefit of creditors and possibly shareholders; in other words, largely for the benefit of Mr. Russell.

It is well-established practice that such recovery proceedings should be funded from the assets of the company or, if there are none, from funds provided by the potential beneficiaries of a successful recovery. The Department of Trade and Industry may authorise an official receiver to incur uncovered costs, but the Secretary of State is of the opinion that such an authority should be given only where the proposed proceedings would be primarily in the public interest. This is not the case here.

The noble Earl asked about access to records. I understand that Mr. Russell was willing to make the records available to anyone interested in seeing them. Therefore I am unsure about how the noble Earl's interjection fits in.

The noble Earl's concern in this case is that there is a wrong without a remedy. In fact what this case shows is that there is a remedy for the alleged wrong but that the funds are not available to ensure that it is used—a not unusual state of affairs, however sad and regrettable that may be in particular cases.

I have spoken at considerable length because this is a complicated and sensitive issue. At the outset I said that I had great personal sympathy for the noble Earl's kinsman. I hope that he and the noble Earl will read carefully what I have said and that many points will have been clarified for them.

House adjourned at three minutes past ten o'clock.