Insolvency consultation sees industry in the spotlight
The insolvency industry is finding itself increasingly in the spotlight, most recently on how insolvency practitioners can deliver the best possible outcome to all creditors.
As the UK economy continues its somewhat bumpy ride from the recession, Carol Baker reports on the government’s latest consultation process that closes on 6 May.
Launching a 12-week consultation period, the Insolvency Service is seeking views on the proposals put forward by the Office of Fair Trading (OFT) in its report The Market for Insolvency Practitioners in Corporate Insolvencies.
The consultation considers three main issues to address the problems associated with the weak position of unsecured creditors:
- Establishing an Independent Complaints Body, including dealing with fees
- Reforming the regulatory framework
- Detailed amendments to legislation relating to administration and liquidation.
Currently, each of the seven Recognised Professional Bodies (RPBs) is responsible for investigating complaints against their own insolvency practitioners, but the processes each of the RPBs employ are slightly different, and none consider complaints about fees charged by an insolvency practitioner (IP) as this is seen as a court function.
The need for an entirely independent complaints body became clear many years ago when Desmond Flynn (head of the Insolvency Service at the time) famously said, “Insolvency Practitioners pay us to fund parts of the Insolvency Service, it is not in our interest to chastise them for their malpractice, frauds, thefts and trespasses.”
Major weaknesses stem from the lack of regulatory objectives, the oversight body’s lack of power, the conflict of roles in the Insolvency Service, and the way standards are currently set, have now all been suggested in the OFT report.
Although many industry bodies have welcome the consultation, Steven Law, president of R3 pointed out that “Under the current system, unsecured creditors already have the ability to influence the insolvency actions and fees of the IP but rarely engage in the process.”
Speakers at the recent ICM Essex Insolvency Conference confirmed that the level of creditor apathy is not helping the creditor’s position, citing cases where when insolvency documents/accounts had been placed online for creditors’ input, only 2% of creditors took the time to log on to the IP’s system to comment. Despite this, insolvency practitioner fees remain a sore point with creditors.
“The current system for insolvency resolution undoubtedly sees small enterprises, often the unsecured creditors, disproportionately exposed to diminished pay outs” said David Knowles, business development director at Creditsafe.
Carol Baker is the editor of Credit Control Journal (incorporating Asset & Risk Review) and RedAlert, and trustee of the Sherbet Foundation.
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It is a fine balancing act
A prepack needs to be appropriate for the circumstances. It has been abused in the past but in our view the regulations brought in by SIP 16 have reduced the risk of abuse.
The problem is that if creditors have 3 days ( as currently suggested ) to object to any sale this will leave the company in limbo and customers and staff may walk. A prepacks main advantage is business continuity and low cost which will ultimately allow a better return to creditors. It should be noted that most banks will not approve a prepack sale to existing directors. Where speed is essential to save a business then we do not see the need to change the process itself. Insolvency practitioners should make proper use of the tools available and many do not consider the use of a CVA as an alternative