MP rounds on Labour's rotten regulation

2009-12-28

Calls for an investigation into the insolvency industry have been made amid concerns that administrators are cashing in at the expense of creditors. SNP spokesperson on regulatory reform Mike Weir MP is leading demands after parliamentary questions revealed a worrying picture of how the insolvency industry is operating.

Mr Weir’s concerns were sparked over delays and the level of compensation for the Farepak victims - the Christmas hamper firm collapsed in October 2006 owing £37m to more than 119,000 savers. More than three years later, savers are likely to recover just 5p in the pound, while the final bill for the administrators and their legal advisers could reach £3m.

But Farepak families are not alone in losing out. With as many as fifty businesses going bust every day the insolvency gravy train is an opportunity for the administration industry to make vast sums out of the recession. High Street and high profile examples include:

- Zavvi, the music retail chain which went into administration in November 2008, owing unsecured creditors nearly £185m – including 510,000 unredeemed vouchers worth an estimated £4.1m. Creditors are likely to get back between 5p and 10p in the pound. Administrators Ernst & Young have so far collected £3.2m in fees.

- Furniture chain, Land of Leather, went into administration with debts of £37m in January 2009. Creditors received just 9p in the pound, while administrators Deloitte and Touche collected fees of £2.5m.

The staggering scale of the situation is reinforced by parliamentary questions tabled by Mr Weir in the House of Commons which reveal that:

- 15,535 firms went into liquidation in 2007/08, owing an average of £349,501 each or £5.5bn in total.
- Liquidations have no statutory time limit and some, such as the Israel-British Bank, which entered liquidation in 1974 was only finalised in September this year. Also in 1974, holiday firm Apal Travel went into liquidation – finalised only in August this year by which time some of the holidaymakers entitled to receive the 74p in the pound settlement had probably died in the intervening 35 years.
- indeed, more than 19,500 liquidations started five years or more have not yet been finalised.
- 6,629 liquidations started 20 years or more ago have not yet been finalised.
- The level of fees charged by insolvency practitioners is not regulated.

Mr Weir said:

“The UK government must take a serious look at the workings of the insolvency industry which appears to be raking in a fortune at the expense of creditors. It looks like another example of rip-off Britain, and another failure by the Labour government to regulate properly.

“After three years, victims of the Farepak collapse have been left with pennies while the administrators have pocketed millions, and this by no means is an isolated case. I have been utterly astonished by the sheer number of unresolved insolvencies – there are thousands going back more than twenty years.

“There is something seriously wrong when liquidations can take a generation to finalise and people are actually dying before the insolvency gravy train comes to a halt.

“Just like the banks, current UK insolvency regulation has failed. Part of the problem seems to be that the industry is largely self-regulated. Insolvency work is handled by licensed practitioners, most of whom work for accountancy firms. The practitioners are in turn regulated by accountancy and law professional bodies, which have no independence from the firms they regulate. What’s more, there is no independent complaints investigation procedure or ombudsman to adjudicate on malpractices – there are no questions over fees or delays.

“This is clearly a pertinent and pressing issue in the current economic climate and the UK Government must not shy away from investigating the insolvency industry and taking action. We know only too well from Labour’s banking crisis the cost of doing nothing.”

Note:

Further information from Mr Weir’s parliamentary questions can be found here:

1. On the amount of money owed to unsecured creditors by firms in liquidation:
http://www.publications.parliament.uk/pa/cm200910/cmhansrd/cm091203/text/91203w0027.htm#0912042003339