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Lord Razzall: My Lords, before the Minister rises to his feet, perhaps I may make it clear in response to the noble Baroness, Lady Denton, that I was not in any way being negative. I was trying to get across that this is a very big issue, and I am worried that the narrow solution proposed here does not crack the nut of the major problem. I think the Minister accepts that.

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8.13 p.m.

Lord McIntosh of Haringey: My Lords, I share the gratitude that all noble Lords have expressed to my noble friend Lady Dean for raising this important issue. She will have the satisfaction--even before I say anything in response--that every single speaker in the debate has supported her. I agree with the noble Lord, Lord Razzall; I thought he also supported her, although perhaps not in the detail of the solution to the problem.

My noble friend also attracted a number of people who have personal experience of these issues, notably my noble friends Lord Montague and Lord Evans. Although my experience is not quite as direct as that of my noble friend Lord Montague, I did run my own small business for 30 years. I had some difficult conversations with the bank manager but never quite got to the stage reached by my noble friend. On the other hand, I did not get the result that he did. I did not end up with a business worth £400 million, with 10,000 employees. I think he came out on top in the end.

This is an issue which goes to the heart of the relationship between businesses and their bankers and to the professional conduct and obligations of those who practise insolvency.

One of the most common forms of security granted by a company to a lender, usually its bank, is a floating charge. This will cover the whole, or substantially the whole, of the company's assets and undertaking and, most importantly, it will contain within it the power to appoint an administrative receiver. My noble friend Lady Dean was right to point out that before the time of the insolvency Acts there was a free-for-all and no regulation at all, so the Acts were an advance. Under the provisions of the Insolvency Act 1986, a person acting as an administrative receiver must be an authorised insolvency practitioner. An administrative receiver will have the power to seize all the company's assets and to continue or close down its business.

Effective control of the company's affairs passes from its owners and managers into the hands of the administrative receiver, whose appointment is therefore a major step for all concerned. It is certainly not one to be taken lightly or precipitately. Banks make money from lending it to customers and, of course, recovering their loans and any interest. They have no "interest", in the wider sense, in putting their customers in a position where they can no longer borrow and pay interest on that borrowing.

Incidentally, I very much agree with the noble Baroness, Lady Denton, about entrepreneurs losing their houses. I do not think that there were more than five or six years out of the 30 years that I was running a company when I did not have to give a personal guarantee on my own assets, which were, and are, largely my house. If I had ever got to that stage, not only would my business have been closed down, but I would have been homeless.

Where lending institutions--again mostly banks--have substantial exposure on particular lending, they generally take steps to ensure that their borrower provides them with an up-to-date flow of information from which they can assess the security of their advance.

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Where that information is not available or is defective and a bank has concerns about the viability of a borrowing company, it may appoint accountants, often insolvency practitioners, to investigate and report on the company's financial situation and prospects.

In the recessions of the 1980s and early 1990s there were frequent claims that when investigating accountants were appointed the directors of borrowing companies were not told what conclusions they had reached--or indeed the basis on which they had reached them--even though the company was footing the bill. If the investigating accountants were also insolvency practitioners, a recommendation by them that administrative receivers be appointed to the company carried an obvious potential for conflict of interest--which is the theme of this debate--since they were the likely appointee. This was particularly so in the eyes of those concerned in the ownership or management of the company who could feel entirely excluded from a process which had the most serious of consequences for them.

The recessions of the early 1980s and 1990s also gave rise to frequently voiced complaints that banks were too ready to withdraw financial support from troubled companies--or, indeed, to pull the rug from under them at the first hint of trouble.

It is fair to say that when the economy emerged from the recession of the early 1990s, there was a recognition that the relationship between banks, their business customers and, where they were involved, accountants and insolvency practitioners was under considerable strain. That was certainly something recognised by the insolvency profession. In 1994 the Society of Practitioners of Insolvency conducted a survey of their membership which found that in some 65 per cent. of cases investigating accountants recommended steps other than insolvency proceedings, including receivership. That finding, while welcome, shows that there remained a large number of cases--the other 35 per cent.--in which investigating accountants were appointed administrative receivers and it is these cases which continue to cause understandable concern to all noble Lords.

There is a conflict between what I am saying and the figure that my noble friend Lady Dean quoted from the Warwick University research in 1992. I would like to look at that conflict and write to her about that, and, if I may, I will copy it to other noble Lords who have taken part in the debate.

Before I leave that point, we do not have firm evidence of the number of cases where investigating accountants do not charge for their services in anticipation of becoming the receivers. If we can get any evidence, and if the noble Baroness can provide any evidence, we will be happy to take that into account.

The banks, too, recognised that their relationships with their business customers needed to be improved. In March 1997 the British Bankers' Association launched its statement of principles entitled Banks and Businesses: Working Together. The statement of principles seeks to show how banks intend to work together with small and medium-sized businesses to get their relationships right from the outset.

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There are some specific principles addressed as to what should happen when things start to go wrong. Principle five states that banks will alert their business customers, in writing, when they have concerns about a customer's business or their relationship. Principle six explains that banks may ask for additional financial information or seek an independent review of the business where underlying problems are not resolved. Principle seven confirms that if a bank asks for an independent review the requirements of that review will be explained to the customer, as will its terms of reference, who should conduct it and the nature of costs likely to be incurred. Principle eight states that where the bank has requested an independent review, it will seek to discuss the information provided with the customer and, should the customer wish it, with the customer's advisers. No action would be taken before such discussions took place. Principle nine confirms that banks will support rescue propositions they see as viable and, most importantly in the context of this debate, principle 10 states as follows:

    "If you [the customer] act in good faith; keep us informed about developments; keep to your agreements with us; heed what your own and any independent adviser say; and are prepared to make the changes needed early enough to preserve the underlying business, we will not normally seek the immediate appointment of a receiver or start other recovery proceedings".

The then government welcomed the publication of these principles in March 1997 and their coming into force on 1st July 1997 was welcomed by this Government. In the Government's view the statement of principles provides a clear recognition of the sort of problems which have been the subject of this debate and a clear statement of intent as to how relationships between banks and business customers finding themselves in difficulty should proceed. The operation of the statement of principles is due to be reviewed in July of this year.

The framework for the relationship between a bank and its business customers, set out in the statement of principles, certainly seeks to provide reassurance first, that banks will not engage in the precipitate appointment of receivers to a company in financial difficulties and, secondly, that the appointment of investigating accountants is not inevitably a first step to the appointment of that firm (or any other firm) as administrative receivers.

The insolvency profession has in place ethical guidance which includes a reference to the situation where investigating accountants might subsequently be appointed as an insolvency office-holder (whether as administrative receiver, administrator or liquidator) of a company. That guidance states that if the circumstances of an initial appointment are such as to prevent open discussion of the financial affairs of the company with its directors, an investigating member or other principal in the practice might be called upon to justify the propriety of their acceptance of that subsequent appointment. The profession may need to consider whether that guidance adequately reflects the degree to which this subject is a matter of real concern in the business community, as expressed in today's debate. In the light of the statement of principles, it is to be

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expected that banks appointing investigating accountants as, say, administrative receivers would give this issue very serious consideration.

When the question of a prohibition has been raised in the past insolvency practitioners and banks have argued that the appointment of a new insolvency practitioner to be, say, administrative receiver of the company would mean that that practitioner would have to devote a great deal of expensive time and resource in "getting up to speed" in relation to the company's affairs. Where the insolvency practitioner appointed is the person who has conducted an investigation on behalf of a bank, such expenditure would be unnecessary. If the company's assets were insufficient to discharge its borrowing the additional costs would be a further burden on the secured lender. Otherwise the costs would almost certainly fall on the unsecured creditors of the company.

In other words, while there is a general recognition that there is a clear potential for a conflict of interest, it has been argued that the balance of advantage--for the company, its creditors and its shareholders--lies with not imposing a prohibition in the terms set out in this Question but rather relying on the professional obligation of the interested party--the insolvency practitioner--to report fairly and impartially, and without regard to his own financial interest, in relation to the affairs of the company which he has investigated.

I admit that we have to qualify that, if I may respond to my noble friend Lord Montague, by admitting that there are eight sources of an insolvency licence--the various bodies of chartered accountants, the Insolvency Practitioners Association itself, the Law Society, the Association of Certified Accountants and, finally, the Secretary of State. These licences are given to individuals, as my noble friend said, and not to firms.

The argument about getting up to speed is, in the Government's judgment, a plausible one to put forward but its acceptance depends on two things: first, a demonstration of the increased cost and disruption that would attend a prohibition on investigating accountants accepting a subsequent appointment; and, secondly, on the insolvency profession demonstrating that it demands and enforces the highest standards of professional conduct from its members in this, and indeed in every other, area. So it is right that I should respond to my noble friend by acknowledging her point about the Royal Bank of Scotland. She was kind enough to point me to the article in the Insolvency Bulletin last year to which she referred.

In 1992 the Royal Bank of Scotland took a unilateral decision that, as a matter of policy, it would not, other than in exceptional circumstances, appoint an insolvency practitioner to be the administrative receiver of a company if that insolvency practitioner had undertaken investigation into that company's affairs. The Royal Bank of Scotland had considered the cost of disruption and decided that they would not be important. There is no evidence that it has passed on any additional costs to its customers. It has argued--and it says that its recent experience supports the argument--that the certain knowledge that they will not be appointed as administrative receivers has caused investigating

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accountants to develop innovative and creative solutions for companies in financial difficulties. It is clear that "the Royal Bank of Scotland experience" must be given due weight in any assessment of where the balance of advantage lies.

In conclusion, there are three approaches that need to be taken to attack this problem. First, when the banks review their experience of two years' operation of their statement of principles--the review is due to take place in July 1999--they will need to examine the subject matter of this debate very carefully. On that point I agree with the noble Lord, Lord Razzall. Secondly, Peter Mandelson, when Secretary of State last year, announced that, parliamentary time permitting, it was the Government's intention to introduce legislation to provide for a moratorium on creditors' actions where a company in financial difficulty requires time to formulate proposals to put to its creditors, proposals which would enable its survival and continued training. I do not think he specifically said that he meant to go as far as Section 11 protection. But that is certainly one element which should be considered.

Thirdly, and perhaps most importantly, in December 1998 the DTI published a competitiveness White Paper which announced a review of the law relating to company rescue mechanisms--the noble Lord, Lord Lucas, and others referred to that--to be conducted jointly by the DTI and the Treasury, because the Government would wish to see as many companies as possible being given the opportunity and encouragement to overcome short-term difficulties.

We have heard this evening that decisions about the appointment of receivers to companies are crucial in determining the future of all those involved in the company's business: owners, managers, employees and suppliers. This is clearly an issue which deserves to undergo a thorough re-examination. I am pleased therefore to be able to confirm to your Lordships--indeed, I just have--that it will be considered as part of that joint review of the law on company mechanisms which was announced in the competitiveness White Paper. I hope my noble friend will feel that we have taken the arguments used this evening seriously and that we propose to advance our consideration of them.

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