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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

06 FEB 2013

The Business, Innovation and Skills Committee of the House of Commons has published its report into the Insolvency Service

The Business, Innovation and Skills Committee of the House of Commons has published its report into the Insolvency Service. See here.  There is a lot of interesting material in the report. Highlights include the use of Dr Frisby's work on pre-packs and some interesting discussion on the costs of insolvency. I have extracted the recommendations of the committee below. It will be interesting to see how the Insolvency Service respond in due course.

The report has a number of bold critical/evaluative. These comments include the following:

"16. The Insolvency Service has now been considering a new Delivery Strategy since early 2010, which has created uncertainty for staff and added to the delay in delivering much needed improvements to the Service. We understand that the new Chief Executive will want to put his own stamp on the new strategy, but it is important that the Service moves swiftly to the delivery stage of that strategy. In its response to our Report we will expect to receive a clear timetable for the implementation of the new strategy for the Insolvency Service.

21. We applaud the fact that the staff of the Insolvency Service have maintained their high levels of service throughout the difficult period of staff reductions and budgetcuts. However, there is a risk that further reductions in annual running costs and staff may put undue pressure on its ability to deliver. In particular, the Insolvency Service will have to prove to us that it is sufficiently robust to deal with any potential substantial increase in insolvency casework.

28. We are concerned that the continued uncertainty over the future of the Insolvency Service estate could have a detrimental effect on the performance of the Service. If the estate is to be rationalised, decisions on office closures cannot be continually deferred. Any rationalisation of the estate will need to demonstrate the ability to maintain existing levels of service and delivery.

40. Funding for the Official Receiver Service relies on a fee-generated income model. It is clear from the evidence we received that this model is unreliable in the current economic climate. We recommend that the Insolvency Service work together with the Department for Business, Innovation and Skills to look at alternative funding models that are sustainable and not wholly reliant on unpredictable levels of casework and asset values.

43. At present, individual debtor bankrupts have to pay an upfront fee of £525. Given the level of debt relief they can receive we agree with the Insolvency Service that it would not be unreasonable to increase that fee, possibly on a sliding scale. We also agree that the fee should not be automatically required to be paid up front but could be staggered along similar lines as payments to debt management companies. We will expect the Insolvency Service to set out progress in both of these areas in its response to this Report.

48. The target of 68 per cent for stakeholder confidence in the enforcement regime has clearly proved a challenge for the Insolvency Service. Public perception of resource pressures may dampen stakeholder confidence but we do not accept that this is the prime reason for the Service to miss its targets in this area. Confidence in the enforcement regime is a key factor in the success of the Insolvency Service. In its response to this Report the Service must demonstrate that it has a strategy for promoting the successes of the investigatory and enforcement regime so that confidence in it can be better measured.

61. Both the insolvency industry and the Insolvency Service have recognised that resource constraints, both in terms of funding and staffing, have had an impact on the investigatory and enforcement regime. While we welcome additional funding from the Department for Business, Innovation and Skills, we remain concerned that this area of activity remains under-resourced.

62. We are strongly of the opinion that the levels of disqualification of errant directors should not be determined by an arbitrary level set in what the Insolvency Service describes as the public interest. We believe that any dilution of enforcement activity would send entirely the wrong message to delinquent directors and recommend that the Department provides the Insolvency Service with sufficient, and if necessary, additional funding to disqualify or sanction all directors who have been found guilty of misconduct.

72. Proponents of pre-pack administrations argue that they preserve jobs and provide for the effective economic recycling of assets. However, that is disputed by a range of organisations. An objective assessment of pre-pack administrations is not easy and the only research carried out in this area was in 2007 by Dr Sandra Frisby, a lecturer at the University of Nottingham. For the public and creditors to have confidence in pre-pack administrations there needs to be a reliable body of evidence on how they have worked. We therefore recommend that together, the Department and the Insolvency Service commission research to renew the evidential basis for pre-pack administrations.

80. In May 2009, our predecessor Committee expressed concerns about the lack of transparency, resultant abuse of pre-pack administrations and their link to ‘phoenix companies’. Despite the introduction of Statement of Insolvency Practice Note 16 and additional guidance, pre-pack administrations remain a controversial practice. The Insolvency Service is committed to continue to monitor SIP 16 compliance, but to make this effective, non-compliance needs to be followed through with stronger penalties by way of larger fines and stronger measures of enforcement.

81. We have some sympathy with the concerns of the regulator R3, which argues that noncompliant insolvency practitioners are not made aware of the criteria on which they are being judged by The Insolvency Service, or given any feedback on their reports. We recommend that the Insolvency Service amend its monitoring processes to include feedback to each insolvency practitioner and their regulatory body where SIP 16 reports have been judged to be non-compliant. We further recommend that the criteria by which SIP 16 reports are judged should be published alongside the guidance.

86. We recommend that the Department undertake a consultation as a matter of urgency on the rules relating to the continuation of supply to businesses on insolvency in order to assess whether a greater number of liquidations or further damage to businesses could be avoided if that supply was better protected.

97. We welcome the news that the insolvency industry and the regulators have been working together to create common regulatory standards across the profession. The creation of a single gateway for complaints, common standards and a common appeals process would be an important step in this regard. We agree that the Insolvency Service, in regulating the recognised professional bodies (RPBs), should have a wider range of powers, very much akin to those that the RPBs themselves have in disciplining their members.

98. Many insolvency complaints are about the legal framework or a creditor’s financial loss rather than a failing in the insolvency practitioner’s conduct. Often complainants are simply dissatisfied with an insolvency and the financial loss they have suffered. A simplified complaints system, which included greater publicity about the operation and scope of the current system, signposting of disciplinary outcomes and expectation management of potential complainants, could go some way to providing a clearer picture of the work of insolvency practitioners. We expect the industry, as a matter of good practice, to publish an annual report detailing complaints and progress in this area.

107. Insolvency practitioner fees continue to be a vexatious issue and more needs to be done to educate the public and creditors about the fee-setting regime. We welcome the announcement of the review led by Professor Kempson and expect an update on progress on this issue in the response to this Report.

108. We welcome the Insolvency Service’s continued monitoring of compliance by insolvency practitioners with the Statement of Insolvency Practice Note 9. Whilst we recognise that unsecured creditors will not be comforted by this alone, more needs to be done to advertise the process of creditors committees. We also believe it is important for the Insolvency Service to encourage unsecured creditors such as the HMRC, Government Departments, and the Redundancy Payments Service to actively participate in creditor committees.

109. The Insolvency Service is confident that it has emerged in good shape after a challenging period of budget cuts and staff reductions. The Service believes that further efficiencies will be found through the implementation of its much delayed delivery strategy. However, this is not a foregone conclusion. Concerns remain about the funding arrangements for the Service, in particular the Official Receivers Service. Its funding model, based on a static level of casework and the value of assets, is in need of urgent reform.

110. The Insolvency Service also has to address as a priority, staffing reductions and budgetary constraints in its enforcement and investigations unit. Without an increase in resources it will be unable to increase the number of cases it can prosecute which will further undermine stakeholder confidence.

111. The insolvency profession plays a key role in a difficult and often emotional environment. Overall it does a good job but it faces a number of challenges. The ongoing reform of regulations and standards needs greater impetus, and responsibility for that lies with the profession.

112. There remain a number of concerns about pre-pack administrations which need to be addressed. Greater transparency, higher levels of compliance with SIP 16 and a stricter regime of sanctions are needed. Equally, more attention needs to be given to educating creditors of their rights.

113. If the Insolvency Service and profession is to have a more stable and sustainable future, these are issues which will need to be resolved."

R3 have commented on the report. They note:

 

“R3 welcomes this report as we strongly believe that disqualification rates should increase; 10 years ago 45% of ‘D1 reports’ sent to the Insolvency Service by Insolvency Practitioners (IPs) led to a disqualification of a director, today this has dropped to just 21%. An increase in resource, and efficiencies such as electronic reporting would see more ‘delinquent’ directors prosecuted, thereby protecting well-run UK businesses.

“We are pleased that the Committee has recommended the Government, as matter of urgency, issue a consultation on the continuation of supply to businesses in insolvency. R3 has been campaigning on this issue for over two years and our research reveals that 14% of liquidations – which equates to more than 2,000 businesses a year – could be avoided if suppliers continued to supply at the pre-insolvency terms.

“On pre-packs, R3 strongly supports the suggestion of providing feedback to Insolvency Practitioners where the SIP 16 report (explaining the pre-pack to creditors) has been judged non-compliant to prevent repeated mistakes. IPs should be informed of what precisely the IS expects to be included in the SIP 16 report. We believe these changes will produce better SIP 16 compliance and will go some way to improving confidence. R3 believes there are further measures which should be introduced in order to boost transparency and confidence in the pre-pack process, such as giving creditors the option to appoint an independent liquidator to examine a connected party sale.

 

“Pre-packs are a vital rescue tool which fare considerably better than alternatives in terms of the retention of jobs and returns to secured creditors; this is crucial during the current sluggish recovery.

“The committee recommends increasing the £525 upfront bankruptcy fee however we do not see how this will make it any easier for individuals to enter bankruptcy, with the numbers of individuals entering this formal insolvency procedure decreasing 24% over the last 12 months. R3 supports the recommendation for the fee to be paid in instalments which would remove this financial barrier to bankruptcy.

“R3 supports the creation of common regulatory standards and a single gateway for complaints, providing this is done with further education of the public and creditors on the fee-setting regime for Insolvency Practitioners.” 

Lee Manning, R3 President

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