An insolvency watchdog with bite is needed

London Evening Standard Chris Blackhurst

Published: 20 May 2015

Updated: 13:41, 20 May 2015

If all had gone to plan at university, by now I would be a rich City lawyer or a silk.

As my tutor put it on my first day, after I’d asked to switch to archaeology and anthropology: “You got in here to do law, and law is what you’re going to do. You can do archaeology in your spare time. You’re going to do law and go to a City law firm.”

Or, he might have added, become a QC (seeing as many of my contemporaries did).

He actually said it laced with several expletives. So, thoughts of being the next Indiana Jones were suppressed and I returned to the law library. The first year was not too bad — criminal and tort were interesting — but, oh dear, once we turned to contract and trusts, my mind could not engage.

It was not so much the density of the subject matter, although trying to get your head around probate after a hard night was tricky, but the language lawyers use. We were studying English law, they were English, but what they were speaking and writing was not English.

Theirs was a detached, dispassionate code all of its own. It had to be, of course, otherwise they would be blubbing sentimentalists, but it still brought me up short.

Since then, now and again, I’ve come across examples of legalese that make me realise why there had to be a parting of the ways, even if it meant a life of poverty relative to senior partners at City firms or QCs.

The latest was this week, with the assertion by Stephen Davies QC (a pal from university days) that Lloyds Banking Group “artificially distressed” small business customers after they were transferred to a support unit. It’s wonderful: “artificially distressed”.

What he means is the bank made the firm out to be in a far worse state than it was. The object, he says, was to bolster the bank’s balance sheet in the wake of being bailed out by the taxpayer, to get the client off its books.

Lloyds-HBOS was being rescued by the Government and earmarked the debts of some of its customers for liquidation.

Davies is acting for Julie Davey, a businesswoman, whose property development firm Angel Group ran into difficulty. According to Davies, Lloyds “cynically” transferred Angel to its business turnaround division.

Once there, its affairs were handled by insolvency practitioners employed by the bank who prepared the firm for administration. Angel duly went into administration, with KPMG appointed as administrators.

Davey is seeking, with Davies’s help, to replace KPMG with independent insolvency experts who could then look into why Lloyds put the business into its turnaround unit.

KPMG maintain they acted appropriately and say the allegations are unfounded. Likewise, Lloyds, which is not a party to the action, argues the turnaround unit exists to restore customers to financial health. A judge is preparing a ruling in the first place.

If all this sounds familiar, that’s because it is. Two weeks ago, I argued for the appointment of an Insolvency Ombudsman. There are too many Davey-type cases, too many similar allegations, for them to be ignored.

What usually happens is the bank appoints one of its club or “panel” insolvency practitioners and “panel” valuers. The insolvency practitioner produces an “Independent Business Review” on the bank’s client.

If insolvency is the recommended route, they will almost certainly get the job and, of course, the fees. The valuer will not do badly either. It’s all far too cosy and unquestioning for comfort.

In 1999, Richard Page MP told Parliament: “It is like giving a judge and jury £10 for every prisoner whom they set free but £100 for every prisoner whom they find guilty.” But Page was not listened to. More recently, in November 2013, Lawrence Tomlinson produced his report about Royal Bank of Scotland’s turnaround division, Global Restructuring Group.

Tomlinson concluded: “It is also important that the wider potential conflicts of interest between the banks, IBRs, valuers, administrators, insolvency practitioners and receivers are given careful consideration. Where these conflicts occur, it does so at the expense of the business. If collusion did not happen between these parties, and their relationships were more transparent, then better fairness between the parties could be ensured.

“This requires further investigation and consideration by the Government to ensure that the law is being upheld and these conflicts do not impact on the businesses’ ability to operate.”

The new Commons Business, Innovation and Skills select committee must grapple with the art of “artificially distressing” a business, and inquire into the world of turnaround units and insolvencies. But it’s clear to me we require an impartial expert: we need an Insolvency Ombudsman.

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