Pallet Ancillary Management Services Ltd

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                           Phoenix Companies

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:

 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

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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?

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     the effectiveness of the Government's approach to tackle rogue directors and phoenixism  will have a hollow ring.

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.

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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.

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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:

    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.  Some so-called business men and women are extremely entrepreneurial. They milk the system for all it is worth, leaving a trail of debt, desperation and frustration behind them.
Those people are little more than criminals, and they must be fought with the determination with which we fight criminals. Indeed, many people believe that the Insolvency Bill, which is currently in another place, will simply create another rogues' charter.

Do the Government seriously believe that rogues such as Mr. Jones, who currently operate at the margins if not beyond them, will submit themselves to voluntary undertakings that would have the same legal effect as a disqualification order made by a court? It should not be up to "The Cook Report" to expose such people; the Government should protect honest business men who simply want to make a living.

10.53 pm

The Minister for Competition and Consumer Affairs (Dr. Kim Howells): I congratulate
the hon. Member for Harrogate and Knaresborough (Mr. Willis) on securing the debate. I listened to his speech carefully. It was well delivered and constructed, and he presented a compelling case. I am sure that his constituent, Mr. Whitaker, will be pleased with that.

The case is especially difficult for technical reasons, which I shall try to tackle. William
Melvyn Jones was made bankrupt on 4 October 1993. He was involved, as the hon. Member for Harrogate and Knaresborough said, in a company called Pallet Ancillary Management Services Ltd. or PAMS. The hon. Gentleman's constituent, Mr. M. J. Whitaker, alleged that Mr. Jones was active in the management of PAMS while he was an undischarged bankrupt. That is at the heart of the case.

Mr. Jones received automatic discharge from bankruptcy on 3 October 1996. Mr. Whitaker is the trustee of a pension fund, which manages a property at Lidgate crescent in South Kirkby. PAMS is a tenant of the property and Mr. Jones is a personal guarantor.

It was alleged that property belonging to PAMS was transferred to two other companies, as the hon. Gentleman said, and that its directors included Susan Wood, Mr. Jones' daughter. Mr. Whitaker made several

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complaints between August 1996 and September 1998. The first was to the official receiver in Sheffield, who reported an allegation under section 11 of the Company Directors Disqualification Act 1986. As PAMS was a live company, the complaint was forwarded to the companies investigation branch with a view to making an inquiry under section 447 of the Companies Act 1985. The case was vetted by the CIB in February 1997 and turned down.

Mr. Whitaker provided additional information in May 1997. The matter was reconsidered by legal services prosecutions and referred to the CIB, which vetted the case in June 1997 and sent for a section 447 inquiry. However, the decision was reversed in October. Mr. Whitaker used the telephone hotline in August 1998 to repeat his allegations. The case was reviewed again by the Insolvency Service, legal services prosecutions and the CIB, but it was decided that no further action would be taken.

The hon. Member for Harrogate and Knaresborough, Mr. Whitaker's Member of Parliament, requested the Secretary of State to use his statutory powers to investigate the company. Perhaps I should explain them. The Secretary of State has a range of investigatory powers under the Companies Acts 1985 and 1989 and the Financial Services Act 1986. Most often used are those that enable confidential inquiries. The start of those inquiries is not announced and they do not lead to a publishable report. Section 447 of the 1985 Act enables the Secretary of State to direct a company to produce specified documents and to authorise an officer of his or any other competent person to require a company or a person who appears to be in possession of specified documents to produce and explain them.

Those statutory powers are discretionary. They are invoked when, as the statute says, there is "good reason" to do so, which is taken to mean primarily grounds to suspect fraud or misconduct. Investigations are not undertaken on the basis of unsubstantiated rumours--not that these matters are unsubstantiated rumours. I want to make that very clear. The then Government's response to the Trade and Industry Committee report on company investigations published in 1990 included the following statement:

The Government are always ready to act in suitable cases. But it needs to be recognised that the powers conferred   on the Department by Parliament are exceptionally strong and should not be abused. Each of the Department's  powers of investigation require certain statutory conditions to be met before they can be used. It is important that these strong powers should only be used where statutory conditions are met and where their use is the appropriate means of getting the further information which will allow action to be taken should that prove to be required.

Section 447 enables the Secretary of State, in pursuance of his regulatory functions, to
investigate and ascertain what has happened with a view to deciding whether further
regulatory action--including, where appropriate, the prosecution of crime--should be taken by the Secretary of State or whether information should be disclosed to other regulators for action. Although the use of section 447 powers can be triggered by suspicion of dishonesty and although such an investigation ultimately may lead to a criminal investigation and prosecution, the investigation is not a criminal one that itself leads to a decision whether to prosecute. Nor is it an alternative to private litigation. Those considerable powers are for use in the public interest and Parliament has prescribed the

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other bodies that may receive the confidential information that may emerge from such
inquiries. They do not include creditors, who have their usual remedies.  Unless there is evidence of non-co-operation by a bankrupt during his bankruptcy, the court will not suspend his discharge from bankruptcy. As the hon. Gentleman has told us, following the report of non-co-operation--perhaps owing to an administrative error--William Melvyn Jones was automatically discharged on the third anniversary of his bankruptcy order, as the court was not convinced of the non-co-operation.

Let me now deal with the methodology behind criminal investigations and prosecutions
undertaken by my Department in relation to companies in insolvent liquidation and in
relation to bankrupts, which have a particular bearing on the case that concerned the hon. Gentleman's constituent.

The Secretary of State is also a prosecuting authority, and the majority of offences
prosecuted by the Department arise under the Companies Act 1985, the Insolvency Act 1986 or the Company Directors Disqualification Act 1986. When the Department receives allegations of criminal offences--in the majority of cases, they come from the Insolvency Service--a lawyer will consider whether a criminal investigation should take place. Any criminal investigation will be carried out by one of the Department's own investigation officers, who are experienced fraud investigators, mainly with a police background. No statutory powers are available to such officers when they are carrying out criminal investigations. At the conclusion of the investigation, the case will again be considered by a lawyer who will decide whether criminal proceedings should be instituted.

The code for Crown prosecutors is issued under section 10 of the Prosecution of Offences Act 1985, and applies directly to all prosecutors in the Crown Prosecution Service. In common with other public prosecutors, the Department applies the code so that it can make fair and consistent decisions about prosecutions. The code explains that there are two stages in the decision to prosecute, and that the first stage is the evidential test. Crown prosecutors must be satisfied that there is enough evidence to provide a "realistic prospect of conviction" against each defendant on each charge. They must consider what the defence case may be, and how that is likely to affect the prosecution case. A realistic prospect of conviction is an objective test. It means that a jury or bench of magistrates, properly directed in accordance with the law, is more likely than not to convict the defendant of the charge alleged.

When deciding whether there is enough evidence to prosecute, Crown prosecutors must
consider whether the evidence can be used and is reliable. There will be many cases in
which the evidence does not give them cause for concern, but there will also be cases in
which it may not be as strong as it appeared at first. The Crown prosecutors must ask
themselves whether the evidence can be used in court, and whether it is reliable.

The decision on the sufficiency of the evidence must be made by a lawyer, with the benefit of advice from an independent practitioner such as counsel where appropriate. As the code makes clear, the "realistic prospect of conviction" test is an objective one. That does not mean that there is not room for differing views on whether the test has been passed, but it does mean that the margin of appreciation is relatively small.

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When the decision on whether to start a criminal investigation is under consideration, regard will be had to the two tests laid down in the code for Crown prosecutors. For example, if it appears unlikely that an investigation will be able to obtain sufficient evidence to meet the evidential sufficiency test, an investigation will not be started.

The Department takes its enforcement responsibilities seriously, and is aware of the need to strike a proper balance between protecting the rights of creditors and protecting those of insolvent companies and persons. Prosecution is an important weapon in enforcement, and the Department will prosecute whenever it is satisfied that the evidential sufficiency test has been met, and that the public interest requires a prosecution.

Mr. Whitaker, the hon. Gentleman's constituent, complained to the Insolvency Service in 1996 that an undischarged bankrupt had, from December 1993 until October 1996, acted as a director of Pallet Ancillary Management Services Ltd. without leave of the court, in contravention of section 11 of the Company Directors Disqualification Act 1986. There were also allegations about the improper transfer of assets to successor companies. Those allegations were repeated in a complaint by Mr. Whitaker to the hotline in August 1998.

Because those allegations touched on the affairs of a live company, they were referred to the companies investigation branch of the Department to consider whether the use of statutory investigation powers was appropriate. Officials concluded that it would not be

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appropriate. The question of whether to start a criminal investigation was considered on
both occasions. On each occasion, the view was taken that there was insufficient evidence for a criminal investigation to be launched.

Courts can disqualify directors for between two and 15 years if they are unfit. Phoenix
companies are particularly targeted. The courts take such cases very seriously. The
Insolvency Service has sufficient resources to pursue all identified cases of serious
misconduct. In the past two years, more than 2,800 directors have been disqualified.

The business sector that is most affected, although it will not concern the hon. Gentleman, is the clothing industry, or the rag trade. The Government have been concerned at possible delays in all disqualification proceedings and will introduce a fast-track system of disqualifying directors, which will cut out the courts and dramatically reduce the time that it takes to conclude disqualification.

The hon. Gentleman said that there was a danger that the legislation would become a rogue's charter. I do not think that it will be a rogue's charter. It will help us to disqualify more of those people and to do so more easily. I am sorry that the evidential test does not seem to have applied in that case and that the good case that the hon. Gentleman made on behalf of his constituent could not be pursued any further. If there is fresh evidence, I will look at it. If I can take the case forward, I certainly will.

Question put and agreed to.