HC Deb 25 March 2003 vol 402 cc57-63WH 3.30 pm
Mr. Alistair Carmichael (Orkney and Shetland)

I am grateful for the opportunity to raise the issue of phoenix traders. It is by no means a new issue, and has been raised by other hon. Members over the years.

As I prepared for today's debate, it struck me that the reason why everyone always agrees on this issue but nothing ever changes is because the main victims of phoenix traders are usually small and medium-sized enterprises, which do not have the same political clout as big business. Often such businesses are too busy fighting for survival to seek the necessary political change. I hope that today gives us the opportunity to focus on the small and medium-sized enterprises that suffer from this practice.

My interest in phoenix trading was first stimulated by a piece of constituency casework, to which I shall later refer. The debate has proved timely, however, as last Sunday the Sunday Mail carried an article that is a classic of the genre. The headline is "Shameless", and the article tells the story of a tycoon whose bus firm went bust owing £350,000 but who is back on the road again. Being a good tabloid newspaper, it states that he is "guzzling" champagne. I do not know whether the Minister is familiar with the Sunday Mail—it may not be the paper of choice in her constituency—but I commend it to her as an excellent example of responsible tabloid campaigning on an issue that affects a great number of people.

The report states: The firm under investigation is School Bus Scotland, which went to the wall two years ago after running up losses of £500,000 and owing creditors £344,715. The creditors of that firm are typical of such stories. One is the Golden Filling Station in Greenock, which is owed some £26,907. That is an example of what I mean when I speak of small businesses that can ill afford to be so cheated.

The Minister and I both served on the Committee that considered the Enterprise Bill—I hope that her scars have healed as well as mine, as it was something of a marathon. Much of the debate in Committee focused on the tension between encouraging an entrepreneurial spirit and the need to penalise dishonest chancers. The more I see of such stories, the more convinced I become that we have not got the balance right. The law is letting too many chancers get away with economic murder—it is nothing short of a chancers' charter.

The constituency case to which I referred concerns one of my constituents, Dr. Jonathan Wills. He runs an excellent wildlife tourism business, taking visitors to see Shetland's spectacular seabird colonies and seal rookeries. It is an award-winning business. He was looking to develop and expand his business and accordingly he decided that a more comfortable, larger boat that was specially designed to allow wheelchair users and other disabled passengers to take advantage of his service was necessary. He received good support from the local council and Shetland Enterprise.

Dr. Wills then entered into a contract with a company called Steelboat Ltd. in Pwllheli, north Wales, which was run by one Mr. Don Fuller-Love. The business was apparently on the level. Mr. Fuller-Love produced a reference from Natwest bank. A proper marine construction contract, complete with penalty clauses for late delivery, was checked by lawyers and a marine surveyor. In October 2001, Dr. Wills paid a 10 per cent. deposit, and thereafter made stage payments as work proceeded on his new boat.

My constituent did not know at the time that Mr. Fuller-Love had previously liquidated two of his companies. He believes that Mr. Fuller-Love used the practice of taking funds from one company to pay debts due on another. His subsequent investigations led him to believe that more than £90,000 may not have been properly accounted for in the firm's books. Nor did he know that the deposit and stage payments that he made were all that kept Mr. Fuller-Love's company afloat. It began with no capital, and was using deposits from new customers to finish work on the previous contract. A game of financial musical chairs was going on, and when the music stopped it was Dr. Wills's misfortune to be left standing.

It eventually became clear that the boat would not be finished on time. Eventually, Mr. Fuller-Love's company went into voluntary liquidation. A liquidator, BN Jackson Norton, was called in to perform the administration. That was when Dr. Wills's difficulties went from bad to worse. The liquidator insisted that, notwithstanding the terms of the contract as Dr. Wills interpreted them, he would release the boat in its semi-completed state only on payment of £30,000. I do not know how that was assessed. At the same time, another company in my constituency was dealing with the same company and they received a similar offer.

Dr. Wills ultimately had to hire lawyers to negotiate with the liquidator, and I became involved. I was eventually able to broker a deal and as a result Dr. Wills was able to get hold of his property at the beginning of December. If the situation had been left for another couple of weeks, Dr. Wills would have been out of business because he would not have been able to sustain the losses. He tells me that he may be working for nothing for the next couple of years to keep his business afloat.

My constituent is a remarkable individual. He is a former investigative journalist and—the Minister may be interested to learn—a former Labour party activist. In his own time and at his own expense, he traced Steelboat's former employees, and with their help he discovered that £53,000 of company assets had been spirited away just before liquidation. He says that there are gaping holes in the company's financial records, and has established that the liquidator did not have full access to the company's records, which were all removed from the office in Four Crosses by Mr. Fuller-Love and his assistant hours before the liquidator was called in. Dr. Wills properly passed on all that information to the liquidator, and 12 weeks after the firm had gone into liquidation some interviews were held.

I understand that Mr. Fuller-Love is still in business. He is trading under another name and uses assets that my constituent believes are properly the property of Steelboat Ltd. Incidentally, some 16 workmen lost their jobs at Steelboat Ltd., but somehow Mr. Fuller-Love continues to trade. The injustice of that is obvious.

I should like the Minister to consider the role of insolvency practitioners in dealing with such cases. My suspicion is that a lesser man than Dr. Wills would have paid the £30,000, which was over and above all the money that he had paid to Steelboat Ltd., and gone away counting himself lucky. I do not quite understand how the liquidators arrived at the figure of £30,000. It seems arbitrary, but no doubt there is some reason behind it.

It is worrying that the only real investigation into the circumstances surrounding the collapse of the company was carried out by those in my constituency, not by the insolvency practitioners—and BN Jackson Norton, as the Minister will know, is a very reputable firm. If that is how insolvency practitioners conduct themselves, it is time to look again at how the system works. Not every small and medium enterprise is run by someone as intelligent and resourceful as Dr. Wills is, especially when roused. How many others have been in the same situation and simply given up and gone away because it was too difficult?

What use has been made of the new powers to disqualify directors for up to 15 years? Can the Minister give me some assurance that those powers are being used to their full potential, and that it is not just the big boys who are being hammered? If we are serious about cracking down on phoenix traders—I hope that the Government are—those powers are an obvious sanction that will have some effect. It is said sometimes that phoenix traders are an inevitable consequence of limited liability. I understand why that is said, but that does not have to be the case. If we use the sanction, limited liability can regain some of its respectability.

There is also the factor of the different practices of, and resources used in, trading standards departments. The Minister will be surprised to hear me ask for more central control. She will have heard me speak in the past about the importance of subsidiarity. However, on this issue, the Minister's Department should have control, especially in setting minimum standards.

The Federation of Small Businesses in Scotland suggested that there is a need for a special division in courts to handle liquidation applications. I do not know whether that comes under the Minister's remit or that of the Justice Department of the Scottish Executive. Obviously, it is a matter on which there will be considerable overlap. I hope that, if that is a shared responsibility, the Minister can make progress with the Scottish Executive.

The Federation of Small Businesses in Scotland has suggested that stop now orders simply do not work properly, especially in relation to one of the most recent scams, in which companies offer services under the Data Protection Act 1998. The Minister may be aware that many companies receive an official-looking letter telling them that they need to pay £90 to register under the 1998 Act. The actual cost of registration is, I think, £35. As soon as the companies responsible are found out, they go under and re-emerge in another guise, and the scam goes on. That is one of the most obvious and clamant deceitful practices of phoenix traders.

The Government introduced the disqualified directors hotline in 1998, but I am told that it does not operate north of the border. Does the Minister's Department have responsibility for that, and why is there that distinction?

3.44 pm
The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson)

I congratulate the hon. Member for Orkney and Shetland (Mr. Carmichael) on securing the debate, and on raising issues affecting his constituents, which he did with his usual vigour. He did not advise me beforehand of the specific cases that he has mentioned, but even if he had, I could not comment on them. I cannot comment on the detail of the points that he raised. However, I listened with sympathy to his constituent's plight.

The Government's overall aim is to promote an effective framework for corporate activity and to give confidence to investors, business and other stakeholders. I appreciate the point that the hon. Gentleman made about the business-to-business aspects of that. Within that framework, it is essential that we have an insolvency regime that, while encouraging enterprise and reducing the stigma associated with failure, deals fairly and effectively with financial failure and deters fraud and misconduct. I assure the hon. Gentleman that we are fully committed to tackling abuse and misconduct, and that we have in place—and in use—mechanisms that deal with that abuse. I must emphasise that I disagree with the hon. Gentleman's concern that we have got the balance wrong on "chancers", as he called them. That is not right.

The term "phoenix trading" is generally used for those who abuse the privilege of limited liability. It normally refers to cases in which the directors walk away from the debts of a failed company and assume the management of a successor business, often working from the same premises, using the same or a similar name and the assets of the failed company. At its worst, phoenix trading is dishonest exploitation of limited liability by the unscrupulous, who maintain commercially unsustainable operations at the expense of their creditors. Those creditors typically include the small businesses and members of the public who can ill afford such losses. The hon. Gentleman sketched out how losses of that kind have affected his constituent.

Of course, the Government are keen to prevent such abuses. We have brought forward a number of cases recently involving such matters as the reuse of a company name. Last year, at West Bromwich magistrates court, Grenville Higgins was convicted of the offence of using a prohibited company name. At Manchester Metropolitan magistrates court on 12 November, Graham Heap was convicted of the same offence. There have been several other such cases, some quite substantial, involving directors.

In answer to the hon. Gentleman's questions about the use of the powers, I will sketch out what we are doing in a little more detail. There are quite a number of mechanisms to deal with the abuse. There is disqualification, to which the hon. Gentleman referred. Courts can, in the cases that he mentioned, disqualify unfit directors for between two and 15 years. Phoenix companies are particularly targeted, and the courts take such cases very seriously. I mentioned a couple of them earlier, but I could have cited many others. Of course, we need hard evidence in all cases.

Mr. Carmichael

I thank the Minister for what she has said about the use of disqualification. What assessment is her Department making about the length of disqualification, and will she consider introducing a minimum period of disqualification? That would fetter the discretion of the courts and ensure a more uniform application of the law.

Miss Johnson

We have in legislation set a period of between two and 15 years, so once a disqualification is issued, there is, in effect, a minimum ban of two years. In a way, what the hon. Gentleman requests has already been envisaged. Obviously, it is not for me to fetter the discretion of the courts. I am sure that if he were wearing other hats, he would object strongly if I did such a thing.

On the results of the process, it is worth the hon. Gentleman noting that 1,413 disqualification orders were made between April 2002 and February 2003, of which 1,122 were undertakings. Since 1986, some 13,082 directors have been disqualified. Indeed, in some of those cases there was no need for a court hearing, because the director consented to the period of disqualification. There is also the fast track process that was introduced in April 2001. The Insolvency Service has the resources to pursue all identified cases of serious misconduct and it has been doing so.

The hotline that the hon. Gentleman mentioned was established in January 1998. The public may use it to report possible criminal activities by those who manage companies while they are disqualified. More than 3,500 calls have been received and every one is followed up by the appropriate people. Apart from being disqualified, directors can be, and are, prosecuted for offences relating to phoenix operations, including theft of company property, fraud in anticipation of winding up and, in more serious cases, fraudulent trading. There is quite a wide range of responses. It is not just the big guys, as the hon. Gentleman alleged; it is also the smaller companies and those who are affecting other small companies. I sketched out earlier a couple of court cases involving both large and small companies.

The reuse of a company name is another relevant aspect. There are restrictions on the reuse by directors of the failed company name. They can be prosecuted if those are ignored and they can also be made responsible for the company's debts. Between April 2000 and March 2001 the Department prosecuted 46 offences and obtained 35 convictions. Between April 2001 and March 2002 it prosecuted 74 offences and obtained 58 convictions. I am sure that the hon. Gentleman will join me in welcoming that activity and the success rate we have achieved.

The hon. Gentleman may wish to note that it is possible to arrange for clawback provisions to apply if a company's money and assets have been put deliberately beyond the reach of creditors. However, the creditors may need to fund such a court action and they are often unwilling to lose more by funding the liquidator to take action. Of course, unscrupulous directors take care to cover their tracks.

I do not have to hand the figures on activity on stop now orders, but I am happy to supply whatever current figures we have. I have recently answered a number of questions relating to that issue. There has been a good success rate in the use of stop now orders. However, the formal orders brought before the courts as injunctions are orders that have not been successful in preventing, through agreement and discussion between trading standards officers, or the Office of Fair Trading, and those who are committing an offence, the need to go to court. In fact, many stop now orders do not appear in the statistics. However, we know that they are being used widely by trading standards departments throughout the country and by the OFT, under its responsibilities to protect the consumer.

Mr. Carmichael

Can the Minister tell me what measures are taken to record those informal arrangements, that enable us to stop short of going to court? There is a danger of people entering into that kind of arrangement and then quietly going away.

Miss Johnson

It is not possible for me to give any figures on the number of arrangements that have been accepted by anecdotal means, or perhaps through contacting various trading standards departments. The likely numbers would vary between departments, because they are of different sizes and deal with different kinds of areas. It would not be easy to get a representative picture, but we know from what is said to us that the numbers refer to negotiations by trading standards and the OFT that take place in various cases. It is unlikely that, having come to the attention of either of those bodies, the trader would be left entirely to his or her own devices without some continuing oversight, albeit from a distance, to check on whether their trading practices and activities are lawful.

I am sure that the hon. Gentleman will be reassured that people are watching over those who have not gone through the formal injunction processes or to court, but who have, none the less, been prevented from continuing with things that would undoubtedly have led to injunctions for offences. Those powers are being widely used and the hotline is also being well used.

The hon. Gentleman asked about the powers of Westminster and the Scottish Executive. I will write to him on those matters. It is always dangerous to venture an opinion about the exact balance of responsibilities in that regard.

We take the hon. Gentleman's concerns seriously and we take the need to tackle phoenix companies seriously.

Mr. Carmichael

I would not normally intervene on a Minister during her peroration. However, the Minister has dealt fully with the matter and it strikes me, as I listen to the full exposition, that we have a complex system that will be beyond the means of many small businesses. Is the Minister's Department actively looking at ways in which the system might be simplified and made more user-friendly for the small firm that does not have vast resources to spend on big commercial lawyers?

Miss Johnson

The hon. Gentleman is suggesting that in all instances the businesses themselves must bring the case. However, a trading standards department would act if something were brought to its attention. Similarly, disqualification proceedings are brought to the attention of the courts by the department, and those are prosecuted through the courts. Businesses on the receiving end of such problems are not required to bring them to the attention of the courts. There are various routes that do not require the businesses themselves to take further and to prosecute—both literally and metaphorically—the case in question. Many routes are available. Those are well used and are leading to disqualification, fines, winding up and other mechanisms, about which we have spoken.

I am happy to draw the hon. Gentleman's views to the attention of the Under-Secretary of State for Trade and Industry, my hon. Friend the Member for Edinburgh, South (Nigel Griffiths)—the Minister with responsibility for small businesses—who always gives due consideration to how things can be improved for small businesses. I shall ask whether he has additional reflections on the matter, which may assist small businesses in future. That may reassure small businesses throughout the country that the Government, Government agencies and trading standards departments do, and will, regularly take action on their behalf.