| DEBT OWED BY INSOLVENT BUSINESSES
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C&AG's Report, para 5
C&AG's Report, paras 1.7 and 1.9
| 6. At 31 March 1996 debts totalling £762 million in respect of payments by the Department of Trade and Industry's Redundancy Payments Service were owed to the National Insurance Fund by some 31,000 employers whose businesses were insolvent. Some £177 million of these debts were preferential, giving the Department a legal entitlement to receive payments ahead of certain secured and all unsecured creditors.
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| C&AG's Report, para 1.10
| 7. Government departments are the main preferential creditors of insolvent businesses. As preferential creditors these departments rank equally for distributions from the available funds of insolvent businesses, which are made to each preferential creditor in proportion to the size of their claims. In addition to the Department the principal departments who are preferential creditors of insolvent businesses are HM Customs and Excise, the Inland Revenue and the Department of Social Security.
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| Evidence, Appendix 2 pp 13-14
| 8. Our predecessors asked the Treasury how much preferential debt was owed by insolvent businesses to HM Customs and Excise, the Inland Revenue and the Department of Social Security. They said that HM Customs and Excise had written off £198 million of preferential debt in the year ending 31 December 1995. The Inland Revenue had estimated that, in the year ending 31 October 1995, the amount of preferential debt claimed by them probably lay between £100 million and £150 million. The total preferential debt owed by insolvent companies to the Department of Social Security in the five years ending 5 April 1996 amounted to £596 million.
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| C&AG's Report, paras 1.6 and 1.12
| 9. In an insolvency, secured creditors' claims to obtain repayments from the assets rank partly before and partly after those of preferential creditors. The secured creditors of an insolvent business are usually commercial lending institutions. They normally have the right to appoint a private sector insolvency practitioner to manage the business and recover sums owed to them from the proceeds of the sale of the assets on which their security is held.
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Q 33
Q 88
| 10. Our predecessors asked the Department what were the responsibilities of insolvency practitioners in these matters. They said that insolvency practitioners had a duty under the Insolvency Act 1986 to deal with claims on insolvent businesses from creditors and to realise as much as they could from the assets. Insolvency practitioners were also required to distribute the funds available to the various classes of creditors to settle their claims in accordance with a strict pecking order for distributions.
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| C&AG's Report, para 1.6
| 11. There are circumstances in corporate insolvencies, some of which may be very complex, where insolvency practitioners have to use their professional judgement in making distributions to different classes of creditors. Where there are competing claims from different classes of creditors there is a risk that, unless the Department actively pursue their interests as a preferential creditor, they may not maximise their recoveries.
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| Qs 36, 38 and 39
| 12. Our predecessors asked the Department why it was necessary for them to spend taxpayers' money to pursue insolvency practitioners for the amounts owed to them, when it was insolvency practitioners' duty, in accordance with the law, to pay creditors the amounts due to them. They said that in the cases they had pursued they were looking to see whether the insolvency practitioner could have acted in a way which would have been more beneficial to the preferential creditors.
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| Qs 1 and 14
| 13. Our predecessors therefore asked the Department whether they could give an assurance that they would be more active in pursuit of preferential debts in future. The Department accepted that they should do more and said that they would be playing a more active role in future.
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| C&AG's Report, paras 1.19 to 1.24
| 14. The National Audit Office examined 10 test cases in which the Department had a total preferential debt of £775,000. In four of these cases the examination had raised the prospect of additional distributions of up to £361,000 in respect of their preferential claims. As a result of this examination the Department had pursued further enquiries and instructed lawyers on behalf of the Service in all four cases.
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Q 9
Q 117
| 15. Our predecessors asked the Department what progress they were making in these cases. They said that in one of them, following the issue of a writ, a settlement had been reached which had resulted in payments of £90,000 to the Department and £71,000 to other departments who were also preferential creditors. In a second case, they had started proceedings and were hopeful of success. In another case they were currently considering their position. In the fourth case, having taken legal advice and consulted Ministers, they had decided that it would not be cost- effective to pursue matters further. The Department told us that the £161,000 recovered from this exercise had more than covered the costs of £95,000 incurred so far.
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| Qs 2 to 4, 13 and 14
| 16. Our predecessors therefore asked the Department whether they intended to pursue other similar cases of insolvent debts where they had a preferential interest to see if they could secure increased recoveries. The Department said that they had set up a recovery unit in their Insolvency Service Executive Agency to review a further 20 cases using criteria for selection based on those set out in the Comptroller and Auditor General's report. They said that it was important to select cases for further examination carefully to ensure a high success rate. This would send a message to insolvency practitioners that the Department were actively seeking to protect their position as preferential creditors.
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| Q 16
| 17. The Department confirmed that, in carrying out these examinations, they would assess the scope for further recoveries from cases which they had scheduled for write-off or previously written-off as irrecoverable.
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| Q 7
| 18. In response to our predecessors' further questions, the Department said that it would be very hard to say when they would be in a position to estimate how much preferential debt they might be able to recover as a result of being a more active creditor.
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| Qs 15 and 121 Evidence, Appendix 1 p 13
| 19. Our predecessors asked the Department how many of the Redundancy Payments Service's staff were involved in debt recovery. They said that there were 141 people in the Redundancy Payments Service which had running costs of around £9 million a year. Under current arrangements, however, none of these people were involved in recovering insolvent debt in the 9,000 cases arising each year. Their claims for insolvent debt were lodged with insolvency practitioners by the Department for Education and Employment's finance office at Runcorn. When the Redundancy Payments Service's new computer system was introduced later in 1997, they would take over responsibility for monitoring insolvent debt.
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C&AG's Report, para 4
Q 11
| 20. Although the Redundancy Payments Service's payments and recoveries are recorded in the National Insurance Fund Account, amounts receivable are not disclosed in this Account. The Department told our predecessors that a record of the outstanding debt owed to them in respect of redundancy and other related payments was, however, recorded annually in an unpublished annex to the National Insurance Fund Account.
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| C&AG's Report, para 18
| 21. The Comptroller and Auditor General's report had recommended that the Department should consider acquiring specialist insolvency and legal skills to support their identification and pursuit of cases where there is a risk they might be disadvantaged, and noted that it would appear that specialist arrangements costing some £200,000 a year ought to be self- financing if five successful challenges were made each year. Our predecessors asked the Department how they intended to take forward this recommendation.
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| Q 5
| 22. The Department said that in pursuing the initial four cases, they had used the private sector advice which the National Audit Office had used in their study, and their own internal legal advisers. In pursuing the further 20 cases their new recovery unit would be supplementing in- house resources with private sector advice.
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| Q 12
| 23. To establish whether there was scope for joint work between departments to secure increased and more timely debt recovery, our predecessors asked the Department whether they had done anything to co-ordinate their efforts with the other Government departments who are the preferential creditors of insolvent businesses and who rank equally for distributions from the available funds of such businesses. They said that they had discussed this matter with HM Customs and Excise, the Inland Revenue and the Department of Social Security. An inter- departmental working group had been set up to improve co-ordination in the recovery of debts owed by insolvent companies. This was expected to report later in 1997.
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| Evidence, Appendix 3, pp 14-16
| 24. In view of the scale of the debt owed to HM Customs and Excise, our predecessors asked them what active steps they had taken to recover preferential debts from insolvent businesses. They said that they had been very much aware of the work which the National Audit Office had been doing on this subject, which had helped to clarify their own ideas about what they should be doing. In August 1996, they had set up a special compliance unit to pursue cases where insolvency practitioners had failed to submit returns or payments. As a result, between August and December 1996, outstanding returns had been reduced by about 81 per cent and £2.5 million of outstanding tax had been collected.
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| Evidence, Appendix 3, pp 14-16
| 25. HM Customs and Excise said that they had also been attending selected creditors' meetings and closely examining their debt claims in selected insolvencies. As a result, in January 1997 they had identified and recovered an additional £491,000 of debt owed to them. They said that these were the sort of steps that they had taken to ensure that insolvency practitioners carried out their duties properly in respect of the amounts owed to them by insolvent businesses.
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| Evidence, Appendix 3, pp 14-16
| 26. Our predecessors further asked HM Customs and Excise what specialist skills were available to them to monitor actively the recovery of their preferential debt. They said that the nature of their VAT work meant that their officers had a general knowledge of insolvency and related issues to enable them to carry out their duties effectively. In cases where they were taking positive action to recover debts owed by insolvent companies, HM Customs and Excise would take expert advice from accountants and lawyers who were specialists in these areas.
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| 27. Our predecessors asked the Treasury and the Department of Trade and Industry whether it might be sensible if one inter-departmental unit were to be made responsible for recovering debts owed to departments by insolvent companies.
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| Qs 57 and 58
| 28. The Treasury said that they were aware of discussions between the departments concerned and that, in their view, these contacts had been welcome and sensible. On the one hand, they could see the arguments for having one unit. On the other hand, the Department of Trade and Industry, HM Customs and Excise, the Inland Revenue and the Department of Social Security had examined the possibility of co-ordinating their efforts, rather than setting up a single unit, and things seemed to be going reasonably well. The Treasury said they would be interested to know the outcome of the departments' deliberations on whether new arrangements should be introduced and, if so, what form these arrangements might take.
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| Q 93
| 29. The Department of Trade and Industry agreed that it would be useful for the departments concerned to share their knowledge and work together on this matter. They were not sure, however, whether HM Customs and Excise and the Inland Revenue would think it right to pool their efforts.
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Qs 46 to 50
Q 52
| 30. In reply to our predecessors' further questions the Department said that insolvency practitioners had to have a licence to operate under the Insolvency Act 1986. The licences were granted mostly by recognised professional bodies and in some cases by the Secretary of State for Trade and Industry. The Department confirmed that the professional body concerned could withdraw a licence if it found that malpractice by the licence holder had taken place in a particular case.
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| Conclusions |
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| 31. We note that Government departments are owed very large sums by insolvent businesses. As at 31 March 1996 £177 million of preferential debt was owed by insolvent businesses to the Department of Trade and Industry. And the total outstanding preferential debt owed by such businesses to the Department of Social Security in the five years ending 5 April 1996 amounted to £596 million.
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| 32. We note that neither HM Customs and Excise nor the Inland Revenue have separate figures for the amount of preferential debt owed to them by insolvent businesses, but that HM Customs and Excise had written off £198 million of preferential debt in the year ending 31 December 1995 and that the Inland Revenue estimated that in the year ending 31 October 1995 the amount of preferential debt claimed by them probably lay between £100 million and £150 million.
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| 33. We welcome the actions of the Department of Trade and Industry in pursuing their claims as preferential creditor in four cases administered by insolvency practitioners and brought to their attention by the National Audit Office. We are pleased to note that in one of these cases the Department secured a pay- ment of £90,000, and an additional £71,000 to other departments who were also preferential creditors in that case.
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| 34. We are interested to note that the Department are pursuing other such test cases and that they have set up a specialist recovery unit in their Insolvency Service Executive Agency.
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| 35. We look to the Department to bring the results of these cases to the attention of the professional bodies who represent insolvency practitioners, and explore with them what further guidance might be provided for insolvency practitioners as regards their responsibilities in relation to the substantial amounts owing to the Government departments concerned as preferential creditors.
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| 36. We note that in August 1996 HM Customs and Excise set up a special compliance unit to pursue cases where insolvency practitioners had failed to submit returns or payments, and that by December 1996 the Unit had collected £2.5 million of outstanding tax. We note also that HM Customs and Excise have been attending selected creditors' meetings and closely examining their debt claims in selected insolvencies, and that in January 1997 they had recovered an additional £491,000 of debt owed to them.
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| 37. We look to HM Customs and Excise to maintain their efforts as an active creditor to secure increased and more timely recoveries of debts owed to them by insolvent companies. Because of the large sums at stake, we look also to the Inland Revenue and the Department of Social Security to consider the cost-effective pursuit of such preferential debts owed to them.
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| 38. We welcome the fact that the Department of Trade and Industry, HM Customs and Excise, the Inland Revenue and the Department of Social Security, have set up a working group to improve co-ordination in the recovery of debts owed by insolvent companies to these departments.
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| 39. We look to all the principal departments who are preferential creditors to explore the possibility of working together, so as to enable priorities for investigation to have regard to the total amount owed to Government departments, and for the recovery efforts of each department to be applied as efficiently as possible for the benefit of all.
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| 40. We note that the inter-departmental working group expected to report in 1997. We look forward to hearing the outcome of the departments' efforts both individually and, where possible and appropriate, jointly to maximise recoveries. We look to the departments to monitor the amounts recovered and to report annually to Parliament on their performance.
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