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Insolvency consultation sees industry in the spotlight

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12th Apr 2011
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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 takes a look at the government consultation process due to close 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.

“We would welcome the introduction of criteria that analyses moves by companies to mitigate their original exposure to the risk of a business or trading partner going insolvent. We would then see pay outs based on a risk matrix, whereby firms that proactively took steps to protect themselves from the liabilities of a firm entering insolvency were rewarded for risk mitigation.”

“How can it be fair that a company that takes no steps to protect itself from the risk of trading with a company that becomes insolvent is paid ahead of one that is committed to due diligence, taking every available measure to reduce its exposure to this risk?” continued Knowles.

“The impact of this proposed change would be two fold. It would encourage companies to make appropriate checks at Companies House or via reputable credit ratings agencies, to limit their exposure to trading with an enterprise that has a high risk of insolvency. This would establish a beneficial paradigm of business practice for the wider economy. 

“Secondly, when a company does find itself seeking to secure monies from an IP after a business has entered insolvency they would find themselves rewarded for a ‘best practice’ risk mitigation strategy. They would prove themselves more deserving of receiving payment than an alternate enterprise that did not bother to make such credit checks.”

Pre-packs

The merits of pre-pack sales have continued to be the subject of much debate. In response to the concerns raised, the previous government launched a consultation exercise in March 2010.

The responses make it clear that the greatest cause for concern is where the business and assets are sold back to the current management or a connected party – something that is often referred to as “phoenixism”.

In order to inject greater transparency into the process administrators are now required to give notice to creditors where they propose to sell a significant proportion of the assets of a company or its business to a connected party.

This will enable creditors to express concerns, which the administrator would need to consider, or to make a higher offer for the assets, and in cases where the circumstances justify it, apply to the court for injunctive relief. These options can be exercised before the sale has taken place, and therefore reflect concerns raised by stakeholders in their responses to the consultation.

Previously, administrators were required to provide a detailed explanation of why a prepack sale was undertaken to creditors in compliance with professional standard Statement of Insolvency Practice 16.

Now, administrators will also need to confirm that the sale price represents, in their view, best value for the creditors.

However, the insolvency trade body R3 is calling for a change in legislation after estimating that the number of pre-packs will fall by more than a fifth. In a recent R3 survey more than 22% of administrations were cited as being pre-packed because insolvency practitioners fear that suppliers will take unreasonable actions during insolvency, making it impossible to trade the business.

“When a supplier demands a ransom payment it puts a further strain on a business’ already stretched resources. This prevents an insolvency practitioner from trading a business out of insolvency and reduces the amount that can be returned to the body of creditors as a whole” said R3 president, Steven Law.

“In these cases a supplier is not recouping money lost; the supplier is ‘taking advantage’ to the detriment of other creditors. It is unnecessary for suppliers to take this action as those who continue to supply during insolvency have the security of being paid as an administration expense – ahead of all other payments.”

For some this latest consultation may be viewed as “too little too late”, but we do have to start somewhere. Insolvency practitioners who are traditionally viewed by the public and creditors alike as a pack of hyenas picking off the weak and feeble, often adopting the “I’m all right Jack, pull the ladder up” attitude have finally caught the attention of senior MPs in the government’s coalition who have been quietly taking notice of the behaviour of the insolvency industry, and behind scenes continue to be involved with academics researching the industry.

Carol Baker is the editor of Credit Control Journal (incorporating Asset & Risk Review) and RedAlert, and trustee of the Sherbet Foundation.

Replies (2)

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By ksagroup
13th Apr 2011 13:19

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

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By lawmaniz
15th Apr 2011 18:25

The noose is tightening.
Firstly, businesses which deal with claims for members of the public who have suffered negligence from others were required to register with what is called the Claims Management Regulation Unit and, in being required by law to do that, are now required to pay a registration fee and heavy yearly fees to that bureaucracy.

Secondly, businesses which deal with health and safety matters are now required to register under a similar bureaucratic scheme.

Thirdly, it looks like businesses which deal with insolvency will, similarly, be required by law to be subject to a similar bureaucratic regulatory regime. Is there no end to the Coalition Government's love affair and endorsement of the previous New Labour's pursue of regulatory control of businesses and enterprise?

Who will be next? Accountancy businesses? Is it time to emigrate while you have the opportunity? Or perhaps stay put and stage a Lybia-style rebellion against the Coalition Government's dictatorial police-state edicts?

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