Reaping profit from insolvency
Updated on 14 December 2009
42,000 British firms have gone bust in the last three years. It has meant redundancy for thousands - but a bonanza for insolvency practitioners. More4 News reports.
A joint investigation by More4 News and the Sunday Times has revealed the billions being made by Britain's top accountants from the business of bankruptcy.
Last year Woolworths was the most high profile of the wave of bankruptcies that followed the banking crisis. What has been bad news for the high street has been good news for some in the City.
It is the job of insolvency practitioners to sell off the assets of bankrupt companies in order to repay the company's creditors.
You would think that picking over the bones of bankrupt firms would yield little in the way of profits. Far from it. More4 News has discovered that Britain's top 10 accountancy firms have made nearly £20bn in the last two years - £8bn of it pure profit. A growing proportion comes from insolvencies.
Critics say that insolvency practitioners earn their huge fees at the expense of others. If insolvency was a Woolworths pick n' mix, it would work like this.
The first to get their money are the insolvency practitioners themselves. Then come the secured creditors, which generally means the banks, who get the lion's share. Last of all come the smaller, unsecured creditors who get the scraps or, more usually, nothing at all.
The closure of Woolworths in November last year was a classic example. When the chain shut down, sock supplier Martin Lowe found himself with large amounts of unwanted stock on his hands.
But, worse, he had just made substantial deliveries to Woolworths ahead of the busy Christmas period. This sock supplier from Nottinghamshire is typical of Woolworths' small, unsecured creditors.
Martin Lowe said: "It's just disastrous when something like that happens. When administration occurs you know you're not going to get that money.
"And you are sat there with a debt that, in good faith, you've supplied goods, and they've pulled it at an ideal time because they've got maximum stock in their business and maximum debt that they don't have to finance any more."
Martin and dozens of other suppliers had to sit and watch while the administrators sold off his stock to pay themselves and larger, secured creditors.
He believes the relationship between the accountants and the banks is all too cosy - to the exclusion of small businessmen like himself.
Martin Lowe said: "All in all, as a business, it's probably cost us over £300,000. Secured finance and banks are all in the same pot and all, as far as we can see, looking after themselves.
"They're making sure that they're money's fine. They are not looking after our money that we need to do."
In the case of Woolworths, the losses are all the more painful because many believe the business could have been saved.
Former Woolworths boss Sir Geoff Mulcahy was one of a number of businessmen who put together rescue packages for the stores last autumn. Sir Geoff Mulcahy thinks Woolworths could have been saved.
He said: "There was a core group of stores, probably 600, that were profitable. In spite of being poorly managed, very few stores were actually losing money.
"So at the end of the day there would be a very high chance of success in saving a substantial part of the business and Woolworths would still be on our high street."
"If you have a situation like Woolworths where the administrator is both the financial adviser and then turns out to be the administrator, the fact is he would earn a few hundred thousand pounds for advising on backing the management and restructuring the business.
Yet he and his agents would earn many millions of pounds by liquidating the business. Therefore there must be a perceived conflict of business."
Woolworths' administrator was multi-national accountancy firm, Deloitte. Some reports estimate that Deloitte could have made up to £40m from the Woolworths closure.
Deloitte declined to give us an interview, but in a statement they said: ''Deloitte wholly rejects any suggestion that there was any conflict of interest.
"Woolworths collapsed because it was making substantial losses. Despite meeting with many parties, there were no credible offers for the business. In short, nobody could make the business model work.''
Peter Sargent is president of R3, which represents insolvency practitioners.
He said: "I think that insolvency practitioners do pick up a company and see if they can try and save the company, they see if they can try and save the business.
"And if they can't they wind it up the World Bank has released some data on insolvency. And the UK is in the top ten when it comes to realising assets, speed of distribution and fees.
"I've been dealing with this job for something like 30 years. In some cases I'll make 100 per cent recovery on the time I spent on a job.
"In many cases, quite frankly, it's substantially less. And in some cases I might not get paid at all."
But even within the industry, criticism is growing. Last week at a lecture in central London, Steve Hunt, insolvency practitioner for Griffins, called for change.
And he told More4 News, that regulators need far greater powers. A regulator has the power to fine and the regulator has the power to take away a license. But having done that they could do really no more.
There is no power of intervention so if you found fraud or wholesale negligence within a practice, unlike with lawyers where there is an intervention power, there is no such intervention power with insolvency practitioners.
So that is a key area where the regulator would need to be greatly strengthened. The Office of Fair Trading has now launched an inquiry into the sector. And critics say- it's time to act.
Austin Mitchell MP said: "I think the whole business has really got absolutely monstrous. And given the fact that, with recession, it's going to get worse, and it's going to be prolonged as well, there is a case for immediate and prompt regulation.
"The government has ignored it. But the government has to pay attention now. Because the situation is reaching such critical proportion."
In the meantime, the profits of insolvency practitioners fuel the belief, that those in finance inhabit a different universe to the rest of us. Companies across the UK are shutting down, thousands are out of work.
But it seems no matter how bad things get, the big city firms are still making money.
