20 January 2012

Debt Management Companies wound up after Insolvency Service investigates

Following an investigation by the Insolvency Service, two debt management review companies have been wound up in the public interest by Edinburgh’s Court of Session.

Cost Reduction Services (2010) Ltd and Cost Reduction Services (UK& NI), both based in Glasgow, were judged to be misleading for clients.

According to the investigation, Cost Reduction Services (2010) Ltd ran two types of businesses:

-    A debt and expenditure review for businesses and individuals, which claimed to save clients between £500 and £1,500 per month and for which they were charged £3,585

And  

-    The “Easyearn Franchise” where clients bought debt and expenditure review franchises for £15,000 per territory with the promise of a return of £46,000 a year, generated by the fees from the reviews, without requiring any effort on their part.

The Insolvency Service determined that some of the franchisees who were guaranteed their money back in 50 or 100 days if the scheme didn’t work were misled by the company’s online information. The website displayed false testimonials and unrealistic earnings forecasts of up to £100,000 a year.

Furthermore, they discovered that only 13 clients had actually signed up for the review service from July 2010 to January 2011.  This generated revenue of only £38,780.

Only five of 20 franchisees earned anything from the investment, and none of the money-back guarantees were honoured.

The Supervisor of Company Investigations (North) – which is part of the Insolvency Service and carries out confidential enquiries on behalf of the Secretary of State for Business – Scott Crighton said of the Court’s judgment: “This should send a clear and simple message that The Insolvency Service will take action against unscrupulous companies and ensure that those who run companies in this way do not get away with these sorts of practices.”

The company took £357,500 in franchise fees, and at least £71,000 was expended for the personal benefit of its sole director, who was also paid £34,000 in salary, expenses and commission, which included £14,000 paid one week before he caused the company to cease trading.

An additional £158,000 was taken from the fees in unexplained cash withdrawals and unreceipted debit card expenditure.

Cost Reduction Services (UK & NI) was incorporated with the intention of carrying on the same business and displayed the same misleading client testimonials on its website. According to investigators, however, it had only been involved in limited activity.