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PARLIAMENTARY CONTRIBUTORY PENSIONS FUND AND HOUSE OF COMMONS MEMBERS' FUND
Resolved,
That,
(1) in pursuance of Section 1 of the Parliamentary and other Pensions Act 1987, Mr. A. J. Beith and Mrs. Sylvia Heal be appointed Managing Trustees of the Parliamentary Contributory Pensions Fund in the room of Dr. Vincent Cable and Ms Gisela Stuart; and
(2) in pursuance of Section 2 of the House of Commons Members' Fund Act 1939, Mr. A. J. Beith and Mrs. Sylvia Heal be appointed Managing Trustees of the House of Commons Members' Fund in the room of Dr. Vincent Cable and Ms Gisela Stuart.--[Mr. MacGregor.]
Phoenix Companies
Motion made, and Question proposed, That this House do now adjourn.--[Mr. McAvoy.]
10.38 pm
Mr. Phil Willis (Harrogate and Knaresborough): May I thank you, Mr. Deputy Speaker, for the opportunity to raise what is--[Interruption.]
Mr. Deputy Speaker (Mr. Michael Lord): Order. Would hon. Members leave the Chamber quickly and quietly, so that we can proceed with the Adjournment debate?
Mr. Willis: May I thank you, Mr. Deputy Speaker, for the opportunity to raise an important issue at what I hope is not too late an hour?
Phoenixism is the name popularly given to cases where the assets of an insolvent business are reacquired by its former management or closely connected parties. Many small traders who are owed money by companies that go into liquidation are often quite rightly outraged to find that the directors of those companies suffer little personal loss and are able to start a new business in the same sector almost immediately. Indeed, those small traders often find that assets have been transferred to the other company before the first company has gone into liquidation, so as to put assets beyond the reach of creditors.
To a certain extent, that is a logical consequence of the limited liability laws. For the purpose of the law, a company is a separate legal entity if it trades with limited liability, and its directors or shareholders do not usually retain liability for the company's debts if it becomes insolvent. Legally, there is nothing to prevent a director of a company from running a number of businesses simultaneously. Equally, there is nothing in law to prevent a director of an insolvent company from starting a new business overnight, provided that he has acted properly in managing the first company before and during its insolvency.
If, however, the owner of an insolvent company has deliberately acted to the detriment of the company's creditors, action should be taken against him under current legislation. That action should result in administrators reporting unfit conduct to the Insolvency Service, or in a court, under section 6 of the Company Directors Disqualification Act 1986, ordering a disqualification order of between two and 15 years for unfit conduct as a director.
Clearly, when the Government came into office in 1997, they thought the present system wholly inadequate. The then Minister for Competition and Consumer Affairs, the hon. Member for Edinburgh, South (Mr. Griffiths), launched a blistering attack on rogue companies. In his press notice of 30 July 1997, he said:
If, as I suspect, very few directors were disqualified as a result of the hotline, the Minister's boast that the latest disqualification statistics confirmed
That boast certainly has a hollow ring for my constituent, who has brought a case of flagrant abuse, duplicity and possible fraud to the attention of the Department of Trade and Industry, the hotline, the Insolvency Service, the fraud squad, me, and the Minister, with little if any satisfaction. If his case is typical of the way genuine business men are treated when faced with phoenixism, the Minister has a lot of work still to do.
My constituent entered into a 15-year agreement to lease land and buildings to Pallet Ancillary Management Services Ltd.--PAMS--of South Kirkby in Pontefract. That company had a sole guarantor--William Melvyn Jones. Despite the fact that Mr. Jones had previously gone bankrupt, my constituent was prepared to enter into a lease in good faith. Sadly, Mr. Jones went personally bankrupt once again in 1993, and proceeded to threaten to close the company if he had to pay any further rental payments under duress. For Mr. Jones, duress meant the bailiffs coming in, as they had 17 times in the previous eight years to obtain the rent that he had agreed to pay.
During the next three months, PAMS was systematically stripped of its assets, which were effectively transferred into a phoenix company, of which the directors were the man's son and daughter. Meanwhile, the original company was being run by the same son and daughter, but with Mr. Jones effectively managing the operation, despite the fact that he was a bankrupt. He attended rent review meetings with my constituent's agents. He even wrote letters threatening to close down the business. All that was in clear breach of the company and insolvency law. All the evidence was presented to the relevant authorities.
What action was taken? To stop further transfer of assets, my constituent attempted in vain to persuade the official receiver not to discharge Jones from his bankruptcy and allow him to use the transferred assets. The official receiver failed to act, failed to instigate a public inquiry and discharged Mr. Jones from bankruptcy on 3 October 1996.
At the date of his bankruptcy, Mr. Jones owed £489,073, of which £362,000 consisted of income tax and VAT. How, I ask the Minister, could such large debts be allowed to accumulate on such an allegedly small turnover? Why, when the suspicion of fraud was presented to the official receiver, was no further action taken?
Undeterred, however, my constituent approached the trustee in bankruptcy, who openly conceded that Mr. Jones had failed to co-operate and that the trustee's office had found Mr. Jones's behaviour unnerving, if not frightening. Again, no action was taken.
My constituent then brought the matter to the attention of the Department of Trade and Industry investigations and enforcement directorate in October 1996. That directorate is supposed to adhere strictly to a code of practice outlined in "Investigations: How they Work", but it refused to investigate the claims and instead made an unprecedented attack on my constituent.
The directorate criticised my constituent for not taking better precautions when setting up the lease; it cited someone who had made a similar complaint, whose lone crusade had resulted in his requiring protection from two SAS officers; it mentioned that an action would be expensive and no results would ensue; and it suggested that my constituent should simply forfeit the lease and walk away--all that, rather than instigate a proper investigation of his complaints.
Still undeterred, my constituent sought support from the Insolvency Service prosecution unit. He provided clear evidence that Mr. Jones was operating the company while an undischarged bankrupt--again, no joy, because the DTI had previously considered the case, hence the prosecution unit should not do so.
To leave no stone unturned, my constituent then approached the West Yorkshire fraud squad. There was clear evidence that the company was divesting itself of assets, yet despite the fact that my constituent brought the matter to the police in October 1996, an investigating officer was not appointed until February 1997. The police then informed my constituent that the case was of little interest to them, and that investigating Mr. Jones had to be weighed against the public demand for catching real criminals, such as drug dealers.
A whole year later, the preliminary examination was concluded and the case dropped, on the grounds that there was insufficient evidence to justify further police inquiries.
PAMS, of course, has now ceased trading. My constituent has lost thousands of pounds, which should have been invested in his pension fund. Mr. Jones has taken over the phoenix company run by his daughter and son, carrying on the business as before, so that he can start all over again, leaving misery, frustration and debt in his wake.
Meanwhile, the system has failed my constituent--and many like him, I suspect. It seems that, despite the Minister's proud boast, a clever rogue director can still take the system to the cleaners, because there are too many loopholes.
The official receiver was unable to withhold Mr. Jones' discharge because of a failure by the trustee in bankruptcy to declare him unco-operative. The Department of Trade and Industry has no authority to make inquiries of a discharged bankrupt. The Insolvency Service has no power to investigate live companies. The police investigate according to budget constraints, not the pursuit of justice. How can an honest business man who is systematically defrauded hope to gain justice? What can the Minister say to my constituent that will convince him that the Government care about his plight and are interested in stamping out rogue directors?
I owe the Minister a debt of gratitude for his courtesy in responding to my constituent's complaints promptly and effectively. However, that is frankly not good enough.
I support the Government's broad aim of creating an entrepreneurial culture in which people of all ages and backgrounds start their own businesses. I agree that, as a society, we are afraid of failure, especially in business, where there is a fear that failure will create a lasting stigma. Investors are often not found when they are needed to support marginal businesses; banks are often too anxious to limit possible loss, and a lack of venture capital and of capitalists hampers business development for individuals who have little or no collateral.
Liberal Democrats largely support the Government's proposals in their competitiveness White Paper, which was published in December 1998 and entitled "Our competitive future: building the knowledge driven society". In June 1999, the Minister issued a press release, which stated:
I am particularly infuriated when one of these bad companies goes into liquidation and then starts up again with the same directors and with almost the same name, same staff and equipment and then carries out the same or similar business with a blatant disregard to creditors so that further failure is inevitable--this is the "phoenix" company and the cowboy director.
The hon. Gentleman was very strong in his determination to drive such practices out of our system. Six months later, he launched a 24-hour hotline to allow
members of the public to report disqualified directors who continued to trade. A press release by the present Minister reported that, in the hotline's first year,
Insolvency Service investigators have received 1,200 calls with each one carefully followed up.
How many of those calls resulted in a rogue director being taken to court? What is the percentage increase in the number of directors disqualified in the past three years compared with the previous three years?
the effectiveness of the Government's approach to tackle rogue directors and phoenixism
will have a hollow ring.
For enterprise to flourish and grow in the United Kingdom, entrepreneurs, business and the public must be confident that directors who deliberately set out to disadvantage their creditors or abuse their limited liability status will be disqualified.
I believed that that was the Minister's intention. However, it is not the reality.
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