HC Deb 24 May 2000 vol 350 cc247-55WH 12.30 pm

On resuming

Mr. Bill Tynan (Hamilton, South)

I am grateful to have secured time for this important debate and to have the opportunity to speak on behalf of many colleagues who, like me, have been inundated with pleas for help and requests for assistance from many angry and confused constituents. Numbers affected in my constituency are relatively small, but the overall effect on individuals is considerable. The administrators have confirmed that approximately 21,000 people have been affected throughout the United Kingdom. With so many people involved, justification for this debate is self-evident.

As I go through events, I hope that the Minister for Trade, my right hon. Friend the Member for Sheffield, Central (Mr. Caborn), will agree that there is a case for a thorough investigation of the relevant issues which, if mismanagement is established, may lead to the introduction of legislation to protect consumers who find themselves in similar circumstances. Two of the furniture stores traded in Lanarkshire, and, like me, my colleagues in neighbouring constituencies, my hon. Friends the Members for Clydesdale (Mr. Hood) and for Motherwell and Wishaw (Mr. Roy), have constituents who ordered and paid for furniture in part or in full. Those people now find themselves with little chance of receiving either their furniture or a refund of their hard-earned cash, leaving them with substantially reduced bank balances. The vast majority have been told that they will not receive a penny of compensation as they have little or no protection under current consumer laws.

However, the problem is not confined to Lanarkshire. As hon. Members can confirm, approximately 21,000 consumers throughout Scotland, England and Wales are affected by the closures of Uno plc and World of Leather plc. World of Leather was acquired by Uno in April 1997, and, between them, the two companies traded in 58 stores throughout the UK, 19 under the name of Uno and 39 under the name of World of Leather. In November, both companies issued a profit warning and announced a £6.06 million loss for the previous 26 weeks in, I understand, the London Gazette, a well-read journal in my constituency.

It is safe to say that the customers who continued to shop at both stores were totally unaware of the companies' perilous financial position. Had they known, I believe that they would never have parted with their money. Unsuspecting customers continued to order furniture between November and 14 March, the date on which the decision was made to close all Uno and World of Leather stores. In fact, they were encouraged to pay in full to qualify for substantial discounts or early deliveries. On the advice of a colleague, I visited a Uno store, but, fortunately, did not place an order. I was totally unaware of the company's financial difficulties, and I sincerely hope that my colleague was, too.

It has come to light that both companies sold off all their freehold properties prior to the appointment of the administrator in an attempt to address their liquidity problems. It is possible that about £11 million was raised, but I have no idea what it was used for, where it went or, indeed, how long it was between the sell-off and the appointment of the administrator. I am sure that the Minister could use his good offices to inquire into that.

During that period, I believe that purchasers for the companies were being actively sought. It is thought that detailed negotiations began with interested parties in December 1999: one set of negotiations involved the companies' main supplier and the other a proposed management buy-out. Unfortunately, negotiations broke down in early March and subsequent efforts to find another buyer were unsuccessful.

I do not know why the negotiations failed. It appears that the directors considered their options carefully and discussed the way forward with their professional advisers. On 8 March 2000, a separate bank account, known as the trust account, was established for consumers' cash and cheque deposits. However, cash and cheque deposits paid prior to that date were paid into the companies' overdrawn bank account and were not held in trust for the benefit of customers. If, at the time of the announced profit warning, the companies had set up a trust account, consumers would have been protected. Unfortunately, however, for the 21,000 customers, that is not the case.

Following the closure of all the stores on 14 March 2000, on 15 March, the High Court appointed Simon Allport, Alan Lewis and Richard Dixon Fleming of Arthur Andersen as joint administrators to the companies, and they became responsible for the management of the companies' affairs. I should like to place on record my thanks to Simon Allport, who has been extremely helpful. At my request, yesterday, with his colleagues, he attended a meeting in the House of Commons to brief Members. Those who attended agreed that the meeting was informative and worth while.

The administrators concluded that formal trading of the business was not viable for several reasons. The two companies owed a total of £3.2 million in rental payments on 24 March 2000, and salary payments of approximately £600,000 were due on 31 March 2000. Many customer deposits had been taken and there were related outstanding orders. Finally, substantial losses were being incurred by Uno.

Despite those and other difficulties, the sale of World of Leather as a going concern took place on 24 March. Thirty-two of its stores were transferred to the purchaser, a consortium of private individuals who, for whatever reason, decided to trade as New World of Leather. I think that that choice of name was unfortunate, as customers who were left high and dry by the closure of Uno and World of Leather could not understand why stock once owned and displayed by those companies was now being sold in the same stores under the name of New World of Leather. That was confusing for the many customers who ordered and paid for purchases from stock that is now back on sale. They cannot come to terms with losing their money and furniture while the stores are back in business and even employ the same employees as before. That is quite unacceptable.

As I said, the two companies had approximately 21,000 customer orders outstanding on the date of administration. Following representation on behalf of my constituents, the administrator told me that he was attempting to establish the position of individual customers' orders by reviewing the companies' records and identifying individual orders. He said that considerable work was involved, as the particulars of every outstanding order had to be analysed and the furniture held at the companies' storage locations had to be sorted, counted and allocated. It was necessary to ensure that all furniture stored in all sites could be identified and relocated to central storage units.

There was also a need to sort, count and trace from source documents all furniture that appeared to have been appropriated by individual customers, thus identifying all customer stock. All competing title claims to furniture, including customer stock, had to be resolved, which involved negotiation and resolution of legal issues with suppliers who had not been paid for furniture manufactured by them. I understand that that may end up in test court cases. Finally, negotiations with customer finance providers and credit card companies had to take place to permit the release of furniture.

After that exercise, approximately 2,400 items of customer stock were identified—compared with a possible total of 21,000 outstanding customer orders—and stored in distribution depots throughout the country, one of which was in Baillieston in Glasgow. My hon. Friend the Member for Clydesdale and I gained access to that depot, checked our constituents' order numbers and identified their furniture. To his credit, the administrator had authorised the release of any furniture with a customer's name, address and order number, and three of my constituents were fortunate enough to obtain orders held in that depot.

The current position is that customers are likely to fall into three broad categories. Some are likely to receive their furniture because their order has been identified as customer stock. Others are likely to receive their order as the result of the administrator reaching an agreement with a third party on completing their order. Finally, some customers are unlikely to receive their order or have their money refunded, resulting in a claim against the companies for the amount paid. Unfortunately, however, those customers would be classed as unsecured creditors and are unlikely to receive any substantial return. Alternatively, depending on circumstances, they may have a claim against the credit card or finance company under the Consumer Credit Act 1974.

Is it any wonder that customers are extremely angry and are asking how companies can get away with what they believe is tantamount to fraud? They do not accept that there is nothing to be done in such circumstances and have asked that the Government take whatever action is necessary to prevent innocent people being ripped off in such a way in future. My constituents find it totally unacceptable and immoral that, on the same site where World of Leather and Uno previously traded, a new company trading under the name of New World of Leather is selling stock previously owned by World of Leather and Uno as bankrupt stock.

To return to the profit warning, it is clear that the announcement was known to those who knew where to look for such information. Was it just a coincidence that a private company of investors set up an organisation in November? I am sure that the Minister could explore that and confirm whether it is true. I am not suggesting any impropriety, but the Department of Trade and Industry must undertake a thorough investigation into the events surrounding the closure. There are many questions to be asked and answered.

According to a customer notice issued by the consumer and trading standards advice service in Hamilton to my hon. Friend the Member for Motherwell and Wishaw and myself, the new company, MM&S, confirmed that the organisation acquired the display stock of Uno plc from the administrators on 24 March. The administrators have confirmed that part of the assets of World of Leather were sold to an independent consortium of private investors trading under such a title. The administrators further confirmed that no customer stock was sold as part of the sale agreement.

MM&S said in the customer notice that it had taken on some of the staff previously employed by the two companies, and went on to reassure customers who had lost their hard-earned savings that it had no connection with the previous owners. MM&S, now trading as New World of Leather, said that it would like further to reassure all customers that the staff were totally unaware of the financial state of Uno plc and World of Leather, whose collapse came as a complete and very nasty surprise, and resulted in significant loss of earnings for each and every one of them.

On that basis, the profit warning in November was unknown not only to consumers but to staff. Indeed, one of the employees—a manager—confirmed that. It is therefore essential that we revise how profit warnings are given, where they are published and how we maximise consumer awareness of the financial difficulties that companies may face.

This Government have a proud record of introducing legislation to ensure that consumers are protected—for example, the recent Utilities Bill. I do not accept that we should or can continue to allow consumers who buy goods in good faith to use their hard-earned savings only to find themselves in a similar situation to my constituents: simply being informed "It's just your bad luck" and given sympathy. They need and desire protection against sharp practices. That must be delivered by creating a fund or bond to compensate consumers in such circumstances. It is unacceptable simply to advise consumers that the Office of Fair Trading suggests avoiding paying in full for goods before receipt of them or, if paying a deposit in excess of £100, to consider using a credit card. Many of the consumers in my constituency do not have credit cards.

Since I was elected, I have constantly heard complaints from the Opposition about the amount of regulation that the Government are introducing. I make no apology in this instance for seeking more protection for my constituents and the 21,000 customers who feel that they have been ripped off. I seek a commitment from the Minister to investigate thoroughly all the issues and to introduce additional regulation if required in order to ensure proper consumer protection. On that basis, I ask the Minister to consider three changes to legislation.

First, a scheme similar to the bond scheme that operates for travel agents, which compensates consumers when a travel agent goes out of business, should be introduced. Secondly, a profit-warning notice should be given maximum coverage, especially in local publications. Thirdly, the DTI should agree to an extensive investigation of the facts and act on its findings. If the Minister examines events leading up to the closure of those companies, I believe that he will reach the same conclusion as my constituents and I and many hon. Members.

12.44 pm
Mr. Keith Darvill (Upminster)

I congratulate my hon. Friend the Member for Hamilton, South (Mr. Tynan) on securing this debate. I should like to emphasise concerns across the country. Although he represents a Scottish constituency, while I represent an east London constituency, many of my constituents have raised similar problems. Some of them have lost—or are looking like they will lose—more than £3,000 in deposits. Others may have to rely on chance to receive their suites of furniture on the retention of titled clauses.

I emphasise the need for stronger consumer protection in this area, similar to that in the travel industry, where consumers pay such large deposits. We need a thorough investigation into the matter because the companies to which my hon. Friend referred clearly encountered financial difficulties some time ago, and because consumers were clearly unaware of that and unable to protect themselves.

12.45 pm
The Minister for Trade (Mr. Richard Caborn)

First, I apologise to you, Mr. Jones, and to the House for being half a minute late. I was trying to get some information from the stock exchange, which I was not able to get but will pass on when I eventually do so. If I do not complete my speech, I will write to my hon. Friend the Member for Hamilton, South (Mr. Tynan), probably depositing that letter in the Library. Some 21,000 people have been affected by the matter and it is therefore important that we provide as much information as possible, although some of it will be an interim response.

I congratulate my hon. Friend the Member for Hamilton, South on securing this debate. I am very sorry to learn of the difficulties faced by customers who may lose money that they have paid for furniture ordered from the 58 furniture stores throughout the country. I assure him that some of my constituents have been hit, too; there are complaints in my postbag just as there have been in his. Many of those affected can ill afford to lose the sums that they paid, which in some cases was in excess of £2,000.

Before addressing the issues, let me confirm the facts as we know them. Administration orders were made against Uno plc and its wholly owned subsidiary, World of Leather plc, on 15 March 2000 on the petition of their directors. As my hon. Friend the Member for Hamilton, South said, three partners in Arthur Andersen were appointed as administrators. The objective of the administration was to secure the survival of the companies as an on-going concern or, if that was not possible, to sell the assets at an enhanced value.

As my hon. Friend knows, achieving the former objective was not possible, so the assets, comprising premises, showroom stock and the order book for potentially profitable contracts, were sold to New World of Leather. The administrators have a duty to sell assets at the best value. I understand that the assets were sold to the New World of Leather Ltd. partnership, which was formed after the date of the administration's appointment. A separate company, New World of Leather Ltd., which is part of the group, was formed in November 1999 under the name MM&S (2599) Ltd. It is quite possible that that company was acquired off the shelf from company formation agents.

The potentially profitable orders to which I referred represented a small proportion of the total. Generally, they are orders on which only a small deposit was paid, and most were placed with World of Leather, not Uno. None of the directors of Uno or World of Leather is a director of the new company.

I understand that the administrators will be calling a meeting of creditors in mid-June to vote on the administrators' proposals on the companies' affairs. Generally speaking, an administrator is not permitted to distribute funds among creditors. That will occur by placing the companies in liquidation in due course.

Officials have obtained information from the administrators about the prospects of customers obtaining goods that they have ordered and paid for in whole or in part. As I said, about 21,000 customers are in that position. Broadly speaking, customers fall into one of three categories. First, there are customers whose furniture has been manufactured and delivered to Uno or World of Leather. Secondly, there are customers, mainly of World of Leather, who have paid a small deposit and consequently whose orders may still be fulfilled profitably. New World of Leather has acquired such orders. Thirdly, there are customers who fall into neither of those categories. They are unsecured creditors.

The position is complicated by the fact that most suppliers to Uno and World of Leather sold goods to them under terms whereby they retain the title of the goods until they are paid for in full and by the fact that some of the furniture appropriated to customer orders is in commercial warehouses, which may exercise liens on goods stored with them for unpaid costs. That means that it is unsafe to make definitive statements about any customer order until all the relevant circumstances have been investigated.

When companies are placed in liquidation, the order of distribution of assets will be determined by insolvency law. The Crown has certain preferential rights, but only for taxes that the company will have collected and should have paid, such as PAYE and VAT, and then only to certain limits. Employees also enjoy preferential rights for sums due to them, but, again, they are limited. I shall return to preferential rights later.

A question that I am sure is running through the minds of customers and hon. Members is what action might be taken if misconduct by Uno's directors is discovered. Although the Insolvency Service has no power under the Insolvency Act 1986 to investigate the affairs of a company in administration or any regulatory role in relation to one, the administrators have a duty under the Company Directors Disqualification Act 1986 to report to the Secretary of State if they form the view that the conduct of any of Uno's directors makes them unfit to be involved in the management of a company. I am sure that, in preparing their report, the administrators will be at pains to establish the causes of the failure of both companies.

Mr. Jimmy Hood (Clydesdale)

I am listening carefully to my right hon. Friend's response and, if he does not mind my saying so, the legal rhetoric. Let us be clear that, from our constituents' point of view, and ours, we are talking about corporate robbery, and I want him to tell us what will be done about it. There may be an inquiry further down the line, but we and the 21,000 creditors who have been robbed by the company want some answers. Where are the directors now and what are they doing? What influence did they have? If they are not still directors of the company, are members of their family or their friends involved in it? We would like him to tell us that there will be an inquiry.

Mr. Barry Jones (in the Chair)

Order. Interventions must be brief.

Mr. Caborn

Thank you, Mr. Jones. I hope to cover some of those matters. If I had had notice of those questions, I might have been able to answer them, but I cannot at the moment.

I cannot anticipate whether the administrators will make such a report, but, if they do, the Secretary of State has the power to apply to the court for a disqualification order against the director concerned if he believes that it would be in the public interest to do so. That partly answers my hon. Friend's questions. The court may take into account the extent of a director's responsibility for any failure by the company to supply goods or services that have been paid for in whole or in part—in other words, deposits and pre-payments.

On 4 November 1999, more than four months before the administrators were appointed, Uno made a trading statement warning that results for the year to April 2000 were likely to fall materially short of market expectations. I understand that publicity given to such a statement is covered by chapter 9.2 of the listing rules: a listed company is required to notify the company announcements officer of the London stock exchange, which makes the information publicly available. In addition, it must notify shareholders, either by sending them a copy of the statement or by placing a copy in the national newspapers.

My Department also has investigatory powers under the Companies Act 1985. They are exercised if there is good reason to do so, but they are not used to duplicate investigation efforts elsewhere. We considered Uno plc for investigation, but took the view that administrators were already in place and were alert to their duty to report misconduct, so we do not plan to investigate at present. That stance will be reviewed if circumstances change.

An administrator has powers under insolvency law to apply to the court to reverse any payments made by the company that amount to preferences to certain creditors or transactions that are undervalued. The wrongful trading provision in the Insolvency Act 1986—which enables a court, on application, to make a director personally liable if he permits a company to continue trading while insolvent—applies only to a company in liquidation, as does the provision whereby a director may be made liable to contribute to a company's assets if fraudulent trading is proved to the court's satisfaction.

Hon. Members will want me to address the question of whether, if nothing can be done to help the customers of World of Leather, the law could be changed to avoid a repetition of the position in which customers of World of Leather find themselves. The Government's view is that any attempt to protect consumers by removing existing preferential rights or, indeed, extending preferential rights to consumers in an insolvency case would not achieve adequate protection of customer deposits and pre-payments because it would not overcome the fundamental problem that, in many insolvencies, there are simply insufficient assets to go round, even for preferential creditors.

Mr. Desmond Browne (Kilmarnock and Loudoun)

On possible changes to the law, what is my right hon. Friend's response to the not unreasonable suggestion of my hon. Friend the Member for Hamilton, South (Mr. Tynan) that, in the particular circumstances of the credit retail business, information about the insolvency or the trading circumstances of a business should be advertised in publications that circulate in the area where that business trades so that potential customers might know what the stock exchange and the limited number of readers of the London Gazette know?

Mr. Caborn

That is a very valid point. I was late arriving at the House today because I was trying to find out exactly what had gone on with the stock exchange. It could be argued that rights are given to shareholders, but not to customers, which needs to be investigated. I was trying to find out for hon. Members whether the public had been informed and, if so, exactly how. I cannot answer that question now, but, as soon as I receive that information from the stock exchange, I will write to my hon. Friend the Member for Kilmarnock and Loudoun (Mr. Browne) and put it on the public record. We might have to look at such matters when we discuss the consumer affairs White Paper.

Changing such rights would constitute an attempt to close the stable door after the horse has bolted. If protection were to be afforded to advance payments by consumers, it would have to operate when the payment was made. There are good policy reasons for not extending the ranks of preferential creditors. To do so would lead to demands from other categories of creditor who could advance an equally strong claim. For example, subcontractors could argue that moneys due to them by main contractors should be granted preferential status. To accede to any such requests would open the floodgates and lead to a general extension of preferential rights. That would be contrary to policy under the Insolvency Act 1986, which is to reduce preferential claims as far as possible. Time is running out, but I assure hon. Members that I will put in writing the information that I would have given them had I been able to do so.

It has been suggested that the Government should provide some means of compensation for consumers when firms fail. For example, there could be a statutory requirement on retailers to protect consumers' deposits and pre-payments generally by placing them in a bond—which was referred to by my hon. Friend the Member for Hamilton, South—or a trust account until the contract is fulfilled, or we could make retailers take out insurance. However, while that might well be effective, it would all have to be enforced, and that would be costly. Inevitably, the additional costs on business would be passed on to consumers generally in the form of higher prices. All consumers would pay, but relatively few would benefit. A small business might find it increasingly difficult to trade, especially because of the loss to its cash flow. On balance, therefore, that approach would not be a viable solution to the problem.