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From The Sunday Times

December 13, 2009

Advisers rake in £3bn from Lehman Brothers, Woolworths and other failed firms

(Paul Rogers/The Times)

More than £4 million was paid to Zavvi's administrators

Michael Gillard

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Accountants and lawyers have been accused of ripping off creditors and taxpayers to rake in more than £3 billion from firms such as Woolworths that have collapsed in the recession.

Some senior partners have been charging up to £960 an hour. Other administrators have charged £120 an hour for filing and photocopying.

Millions of pounds in fees have been taken out of collapsed firms, including Zavvi, the music retailer, Waterford Wedgwood, the china and crystalmaker, and Lehman Brothers, before small suppliers and other creditors see even a penny.

The taxman has also lost out on millions.

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A joint investigation by The Sunday Times and More4 News has found that a “magic circle” of 10 accountancy and law firms, including PricewaterhouseCoopers (PwC), Deloitte and Ernst & Young, have made a total of almost £20 billion in fees in the past two years. An estimated £3 billion of this has involved insolvency work, which has covered almost all the recent big company collapses.

Last month the Office of Fair Trading began an investigation after concerns that some insolvency practitioners were inflating their fees and failing to settle debts owed to unsecured trade creditors.

“This is an enormous extortion racket carried on behind a very opaque screen,” said Austin Mitchell, a Labour member of the Commons public accounts committee. “Quietly, [these firms] are making themselves very rich.”

More than 42,000 companies have gone bust in the past three years. The fee bonanza for Britain’s 1,700 insolvency practitioners is likely to continue because more businesses usually collapse during the tail end of a recession.

Less reputable insolvency firms are thought to employ a range of unethical — and sometimes illegal — practices, often in collusion with the directors of a company being wound up and at the expense of creditors.

Stephen Hunt, of Griffins, a firm that investigates fellow insolvency practitioners on behalf of unsecured creditors, said these included fake time sheets and expenses claims and fictitious creditors.

Deloitte has acted as administrator for three of the biggest household name casualties of the recession. In the last financial year it billed more than £10m in fees for winding up Woolworths, Waterford Wedgwood and Land of Leather. Some partners at Deloitte made an average profit of almost £900,000 across the company’s activities during the same period.

Insolvency partners working on Woolworths charged an hourly rate of up to £890.

Since Woolworths collapsed in November 2008, Deloitte has been paid almost £5.8m in fees. Secured creditors, such as the banks, have received £325m, but their unsecured counterparts have been less fortunate.

Martin Lowe, a sock supplier, is still owed £300,000, which has had a “drastic effect” on his cash flow. “It’s almost like theft,” said Lowe. “When administration occurs, you know you’re not going to get that money.”

Deloitte said its fees reflected the complexity of the work and, by law, were paid first along with secured creditors.

The fees are agreed by a creditors’ committee, which in the case of a high-street company is typically made up of banks and private equity firms.

Before Land of Leather went bust last January, the company had agreed to compensate 350 customers who had suffered burns from toxic chemicals used to preserve some of its leather sofas. However, two months after the collapse, insurers refused to pay, claiming they were not liable.

Land of Leather’s unsecured creditors are claiming a total of £37m, but no money has been paid. Meanwhile, Deloitte has pocketed almost half of its £4m fees and paid £500,000 to the legal firm Ashurst for advice on the insolvency and the toxic sofas.

Deloitte said only a small proportion of Ashurst’s fees related to the toxic sofa claim.

PwC has so far earned £154m in fees after dismantling the European arm of Lehman Brothers, the US investment bank that collapsed in September 2008. Partners have charged up to £799 an hour for their advice. PwC justified the fees by citing the “complexity, size and risk” involved.

Ernst & Young has been paid £4.2m for acting as an administrator to Zavvi. One partner charged an hourly rate of £960 for tax advice. Customs & Revenue is still seeking to recoup £783,000 in unpaid taxes.

When Axeon Holdings, a Scottish battery maker, folded earlier this year, administrators Grant Thornton charged £120 an hour for secretaries and filing clerks.

Additional reporting: Matthew Holehouse For further details see More4 News tomorrow at 8pm

High cost of failure

LEHMAN BROTHERS (Europe) 
Collapsed: September 2008 
Job losses: 1,000 
Administrators: PricewaterhouseCoopers 
Fees paid: £154m

WOOLWORTHS 
Collapsed: November 2008 
Job losses: 30,000 
Adminstrator: Deloitte 
Fees paid: £5.77m

ZAVVI 
Collapsed: December 2008 
Job losses: 1,100 
Adminstrator: Ernst & Young 
Fees paid: £4.23m