HOW should we rate the insolvency industry?
Corporate vultures picking over the flesh of ailing and defunct companies or knights in shining armour putting worthwhile enterprises back on their feet?
The last few years have witnessed the unsavoury sight of corporate insolvency practitioners – led by the big four, Pricewaterhouse Coopers, KPMG, Deloitte and Ernst & Young – cashing in on juicy corporate corpses. PwC is said to have received more than £150m as administrators of the European arm of Lehman Brothers. Deloitte reportedly notched up a £3.8m bill from Woolworths, despite leaving next to nothing for unsecured creditors.
In February The Herald reported that KPMG was forced to cut its bill by £77,000 for handling the administration of Glasgow jeweller Martin Groundland. Noting that a ten-minute phone call was charged as a half-hour unit, Lord Glennie criticised the firm for “uncertainties” and “lack of proper vouching”.
Today, The Herald highlights the case of Malcolm and Barbara Ritchie, owners of Aikmans, a popular music venue in St Andrews. Fife Council petitioned for Mrs Ritchie’s sequestration over an unpaid council tax bill. A series of unfortunate events led to debts of £120,000 and the closure of the venue. However, although their major supplier quickly cleared the debts, it took 18 months before proceedings were concluded and the venue re-opened. Meanwhile administrators PwC had racked up more than £100,000 of charges, including their own fees and expenses, which totalled £67,000. Mr Ritchie compared the experience to “walking through treacle”.
This case raises several questions. Why was it necessary to appoint one of the big four accountants, with fees of up to £480 an hour, for a straightforward sequestration procedure? When time is money and the debt was paid very quickly, why did it take so long to resolve the case? How can PwC justify expenses that appear exorbitant to the casual observer, such as £775 for “attendance at pub to meet meter reading”? To add insult to injury, Mr Ritchie was only told that the level of fees could be appealed to the Accountant in Bankruptcy (AiB) when it was too late. The fact that the AiB apparently approved these fees suggests that they were typical in such cases. Indeed nobody is suggesting malpractice.
This only goes to show that the whole insolvency industry is overdue for major reform. When he was business secretary, Lord Mandelson complained of “rip-off” fees. The Office of Fair Trading produced a report last year after a seven-month investigation calling for a radical reform of the industry’s regulatory regime. It revealed that UK administrators earned £1bn in fees from every £5bn of assets realised and concluded that the process was skewed in favour of the banks and insolvency practitioners and against unsecured creditors. The report called for a beefed-up independent complaints body to scrutinise practitioners’ fees and actions.
In opposition Vince Cable called the insolvency process “cumbersome and costly” for those like the Ritchies trapped in a trustee arrangement and said it offered “easy money” for accountants.
The main burden falls on small companies because, as suppliers, they are normally unsecured creditors and because it is frequently small basically sound businesses that are being forced to the wall. Now Mr Cable is Business Secretary. If he were brave enough to take on the insolvency industry, he might go some way to restoring his battered credibility.
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