Insolvency industry operates like ‘the Wild West’by
Carol Baker reviews the APPG Fair Business Banking report ‘Resolving Insolvency: Restoring confidence in the system’ and asks, does it present a balance view of the industry?
The press has been quick to home in on the co-chair of the APPG, Kevin Hollinrake, MP, soundbite “Sections of the UK insolvency industry are operating in a manner that is more akin to the Wild West,” when referring to the APPG’s review into the Insolvency industry.
Without doubt, this Report makes difficult reading for the industry – then again, the truth is seldom pretty. But it is important to remember that the APPG Fair Banking Group is primarily looking at the ‘relationships’ banks have. If a report was undertaken on the legal profession’s involvement with the banking world, it is likely to have similar findings.
Many in the Insolvency industry are concerned that the slant of this report could sway the outcome of the government’s own review at the end of the year, particularly as the Report’s authors say they were “presented with evidence of intimidation, deception, dishonesty and even mis-appropriation of assets, all involving IPs supposedly performing their court appointed functions.”
Are IPs above the law?
In the last 10 years, the Report found that just five IPs have had their licences removed. This is not surprising given the ‘masonic like’ protection around IPs that hides wrongdoing. Whilst the same could be said of the legal profession, the difference is the legal profession is more transparent, it is easier to spot when lawyers get things wrong, and the route to holding a lawyer accountable is easier. But if you find an IP doing something wrong, it is near impossible (if not impossible) to get the matter examined.
IPs appear above the law – and in many ways, they are. They are assumed to be scrupulous officers of the court. “The legal bar for a challenge is set high … raising the necessary litigation finance and insurance needed to start a claim against an IP is all but out of the question,” says the Report.
Over the last seven years, around 30 IPs have been sanctioned by way of a fine. But with typical fines in the range of £500 to £2,000 these are disproportion given the impact that when IPs go bad it has the power to destroy people’s lives.
Every industry has its ‘good guys’ and ‘bad guys’ and insolvency is no exception. Insolvency desperately craves to be seen as an honest industry, but until it identifies and eradicates its own rotten apples, they will unfortunately, continue to contaminate the whole sector overshadowing the good work that the industry does.
IPs are often working against very tight deadlines to recognise and balance the interests of an array of stakeholders. Their role is heavily regulated and dissatisfaction with the performance of an IP often stems from the unpalatable situation they are managing: that stakeholders and creditors face a loss from the insolvency of the company. Wherever possible the IP tries to mitigate this loss by selling a business in whole or part as a going concern with the resultant preservation of jobs.
Rescuing a company usually involves both a financial restructuring (either within an insolvency process or outside it) and a restructuring of the business model (turnaround). Whilst IPs are set up to do insolvency advisory and processing work – turnaround work which involves considerable hands-on medium to long-term intervention using a senior skill set – is a completely different business model.
This hands-on approach suggests the need for IPs to recognise other professionals such as those qualified by the European Association of Certified Turnaround Professionals and the Institute of Turnaround as many IPs do not have the sufficient experience to do ‘hands on’ turnaround work, nor can licensed IPs do the work due to the regulated nature of their role as an appointment taking IP.
R3 says it is “disappointed by elements of the report, which shows a lack of understanding of the framework, the difficult circumstances in which the insolvency profession works, and the critical role it plays in rescuing businesses, preserving jobs and creating the confidence to trade and lend by returning money fairly to creditors.”
One of the biggest bugbears of the credit management industry centres around the IPs inability to actively pursue and collect on sales ledgers. On an IP’s appointment, a bank will simply call in a director’s personal guarantee (so will cover much of the bank’s losses). Monies having been returned to the secured creditor, and insolvency fees recouped, the enthusiasm of IPs seems to wane, and many in the credit management sector believe that if the insolvency industry adopted a more proactive approach to collections, a greater amount of realisations would be available for the benefit of unsecured creditors.
Panel agreements and cultivating relationships
The secretive nature of panel agreements was a matter of concern in the report. Potential conflicts created by panel agreements were said to be “an abuse of the close relationship between secured creditors and professional advisors,” and it was “too easy for professionals recommended by a bank to forget that their obligations are to their distressed clients and not to the secured lender who will be their next referral source,” says the European Association of Certified Turnaround Professionals (EACTP) in its submission to the APPG.
The business world operates on relationships, and it is important for every business to cultivate relationships with all customers, suppliers, stakeholders, and often with the public at large as well. But as the Report explains, sometimes relationship building can go a little too far.
The Report discussion of the HBOS Reading scandal makes colourful reading, but it’s not surprising. After all, ‘boys will be boys’ and it’s not uncommon to find this sort of thing happening in banking. Nor is it unusual for IPs, bankers, accountants and solicitors to find themselves being entertained in ‘clubs’ with the sole purpose of cultivating relationships.
However, as one solicitor explained to me, these relationships can come with a sting: when his client was accused of acting outside the rules of an administration (despite having evidence to the contrary) – which resulted in three of the company’s directors being jailed for seven years based on an IP’s evidence – he had been urged by the IP in question to drop any case against him for wrongdoing simply because prior to the trial the solicitor had accompanied the IP to a club where he had been filmed.
The solicitor was given a clear choice: drop the matter, or the film would be sent to his wife. The solicitor opted to leave his practice, on the basis that his employer would be likely to forgive him, but his wife most certainly would not!
In the world of insolvency there is still much to do. The Report proposes five recommendations:
- A conflict of interests ban. This would ban IPs taking an appointment where the IP has personally been involved in pre-appointment work for any interested party in the two years before the appointment. It is hoped that this would create ‘true independence’ ensuring that ‘outcomes are not skewed by conflicts of interest’ and prevent ‘administrators and creditors discussing pre-administration strategies’ which could force the collapse of the company.
- A single regulator with an ombudsman. But this is unlikely to be the silver bullet solution that addresses the concern about insolvency regulation. As we have seen with other sectors such as the FCA, any regulator funded by the sector it is set to regulate will always be mindful not to upset its paymasters too much.
- Placing the Code of Ethics on a statutory footing. It is hoped that this recommendation would increase the enforcement of ethical behaviour in the profession.
- A centralised database to record the outcomes of administrations to encourage a rescue culture. This would increase transparency in the appointment of IPs, allowing the monitoring of links and potential conflicts of interests between creditors and IPs. But for any real transparency to occur this database will need to be in the public domain.
- Further rule changes to provide more clarity on procedures. This will include legislative amendments that: prohibit administrators from discussing pre-agreed administration strategies with appointing creditors; remove lenders’ right of veto in appointing IPs; employ a safety check to ensure that directors do not appoint IPs with whom they themselves might have a close relationship; and encourage IPs to document and demonstrate that all practical avenues to rescue have been explored.
It will be interesting to see what the future holds for the industry given the government’s review at the end of the year, and the impact that the insolvency services’ five-year strategy plan will have on the sector.
This Report has turned the key and pushed ajar the door to the world of insolvency – now government needs to have the courage to push the door all the way open. But it needs to be prepared: what it finds may be more horrific than it could ever imagine because until the industry starts publicising all that it does right, it will never make up for what it does wrong.