Examination of Witnesses (Questions 60-79)
THE INSOLVENCY
SERVICE
27 JANUARY 2009
Q60 Chairman: If you have the resources
to do it.
Mr Horne: We are going to prioritise
this. With the resources we have got we will certainly be putting
this as one of our priority activities.
Q61 Chairman: My political experience
is that when issues climb up the agenda they usually do so for
a reason, not by accident. There is never smoke without some fire.
I was going to ask you what steps you will take to monitor the
new guidance. I think you have answered that question.
Mr Speed: I just wonder for the
transcript whether we should say that SIP 16 stands for Statement
of Insolvency Practice 16.
Q62 Chairman: Can I ask as a matter
of fact in pre-pack administration what role the court has, what
role you have, what happens?
Mr Horne: There is no role for
the court in the sense that what the administrator does is that
he or she decides that that is the best thing to do for the creditors.
The sale is effected on the same day as the appointment or shortly
thereafter. The administrator then has to put a proposal to the
creditors which explains to the creditors what he or she has done
in their interests, and the creditors can vote, if they are going
to receive some money, on whether or not they agree with the administrator's
proposals. It depends whether the creditors are going to be getting
a dividend but there is a proposal that he has to put to creditors.
He has already sold the business and you might say, "What
are the creditors voting on?", but they will be given the
information as to why that has already happened, and if they do
not like what the administrator has done they will be able to
go back to the administrator and ultimately back to the court
if they really think that the actions of the administrator have
not been in the best interests of the creditors.
Q63 Chairman: You see, we are dealing
with some quite disadvantaged people, are we not? My constituent
on the programme lost £54,000 in a pre-pack and then lost
more money with the following company. That is his pension fund
gone, effectively. He had no redress at all, did he?
Mr Horne: It is difficult for
small creditors to take court action but they can raise it with
the administrator, they can raise it with the administrator's
professional body, they can raise it with us. Government is often
a creditor in these cases as well. HMRC are often a creditor and
I think they can have a proactive role to play in this.
Q64 Chairman: I suspect we will see
more and more of these unsecured small business creditors coming
to us and saying, "We have had our fingers burned".
What advice should we give them? What should we tell them to do?
Mr Speed: I am not one to give
business advice. It does seem to me though, just as a matter of
common sense, and I saw this in one of the press articles recently—I
think it was in the Financial Times—that this is
a time in the economic cycle when all businesses have to be looking
very hard at whether they have priced their own risk properly,
and that sounds a slightly sophisticated term, but whether they
have covered their base properly.
Q65 Chairman: The trouble is here
that the bigger problem is getting credit insurance. In fact,
it has been put to me that credit insurers are not treated properly
as stakeholders in insolvency, and that is one of the reasons
why they are having problems with credit insurance now. Do not
answer that point now but it is an observation. Absent credit
insurance there is a huge problem out there.
Mr Speed: I will not answer the
question substantively but we have had a very useful discussion
with the Association of British Insurers a mere matter of months
ago, so we are engaged with them.
Q66 Chairman: Yes, but it has got
worse recently. The Government, to be fair, is looking at what
it can do here with some urgency.
Mr Speed: We have got anecdotal
stories out there, we have all heard them. The difficulty is getting
some systematic evidence that there is—
Q67 Chairman: The whole business
class cannot get access to credit insurance where they used to.
Mr Horne: But if creditors wish
to raise concerns they have about how the administration has been
handled we have a hotline, we have an enforcement email address.
We would certainly want them to email us.
Q68 Chairman: We should put aggrieved
creditors in touch with you. That is the answer to my question.
Mr Horne: Indeed.
Mr Speed: It is a very helpful
hook for me to say that we would like our hotlines—we have
hotlines for all the different types of misconduct that we investigate—to
be used more. As I said earlier, we would like to get some more
publicity out of all these avenues, yes.
Q69 Chairman: I just want to test
a few other things before I move on. One of the claims made for
pre-pack administrations is that they preserve jobs but it has
been put to me that it is TUPE that does that, the Transfer of
Undertakings Regulations. It is not actually the pre-pack; it
is the legal requirements. Actually, with pre-pack administrations
quite often the jobs are shed subsequently over a period of time
and the protection is the protection of TUPE.
Mr Speed: That is difficult to
comment on. Again I go back to Dr Frisby, who is the expert in
this area, and her research seems to prove reasonably conclusively
that pre-packs do preserve jobs. I cannot comment on what happens
afterwards because I do not know.
Q70 Chairman: I have not seen Dr
Frisby's research. My suspicion is that it deals with the whole
range of pre-pack administrations, and statistically in the bigger
administrations it is done often consensually with creditors,
so her conclusions could be valid, but for smaller administrations
which are not done consensually, they are imposed on trade creditors,
they would not be valid. That is my amateur hunch on this, and
in a recession we must protect the smaller businesses too. Let
us go on to Chapter 11. It has been put to me that a lot of Chapter
11 administrations are actually the American version of pre-pack.
Mr Horne: The first thing to say
about Chapter 11 is that I do not think the experts agree amongst
themselves as to whether or not it would be good or bad for this
country. One thing that Chapter 11 does is that, because it has
got an indefinite moratorium and leaves the directors in charge,
it means that the company carries on almost ad infinitum,
sometimes even when that was not the best thing to do. You said
earlier on that you believe in failure and I think one point about
Chapter 11 is that it almost tries to get rid of failure. At one
point I think 50% of the airline seats of American airlines were
from airlines in Chapter 11, and I think there is a point there
about competition in the market place and whether Chapter 11 is
anti-competitive. Chapter 11 is just an insolvency process. It
does not stop companies going into insolvency. The question I
have asked myself is, is it better for returning value to creditors
and for preserving jobs than what we already have? One observation
I would make is that it is very debtor-friendly whereas we have
had historically quite a creditor-friendly system.
Q71 Chairman: All that you are dealing
with is issues of balance; it is a balance of interests, the balance
of the ongoing business against the creditors, and here I think
you have a different question of balance. I put to you earlier
on that at present the balance of pressures on the administrator
is to have a fire sale to get rid of the business, to move it
on very quickly, not necessarily in the best interests of the
wider economy, the company or the creditors; it is a process that
has to be gone through, whereas in Chapter 11 with safe havens
and debtor-in-possession arrangements it is possible for the company
to take some time to think about what is the best model in the
interests of the company. With the best will in the world, an
accountant coming in knows nothing about how to run a business.
He only knows how to get the value of assets.
Mr Speed: An administrator has
12 months, and indeed, if he or she should find 12 months is not
sufficient, he or she can go to the court to have that administration
extended, so I am not sure that the time itself is a barrier to
similar achievements in administration. I would also go back to
the point I think I made earlier, which is that the principal
objective of administration is rescue. We must not lose sight
of that. That is really what an insolvency administrator is bound
by law to try to achieve in the interests of all of the creditors.
Q72 Chairman: Have you looked at
the new French "safeguard measures", I think they are
called? I will not use the French. Have you looked at what their
implications are, because that is something closer to the debtor-in-possession
arrangements in the US, is it not?
Mr Horne: Yes. We have spent some
time looking at other systems round the world. We have taken a
lot from New Zealand and Australia. The French have recently done
some interesting work which we are looking at and seeing whether
there are things we can import, because we are always keen to
see if there are things we can, quite frankly, steal from other
regimes that would work in the UK economy. Going back to Chapter
11, one of the issues we raised earlier was TUPE. One of the advantages
of the American Chapter 11 system is that you can break contracts,
which is very good to keep the company going but perhaps not so
good for employees whose contracts are broken or creditors who
get their contracts broken, so again there is a balance in all
these systems.
Mr Speed: And, of course, TUPE
derives from European law which the Americans are not yet bound
by.
Q73 Chairman: I am just wondering
if some of the benefits claimed for pre-pack are over-claimed;
that is all I am putting forward. I have a concern about whether
the Enterprise Act was good for the good times but has not been
quite so good for the bad times, with in particular smaller suppliers
facing real challenges. Do you think that the position of unsecured
creditors has got worse or better since the Enterprise Act?
Mr Speed: I think from one perspective
it has got better. We have moved away from—and the statistics
report this—administrative receivership where one person
would go in, sort themselves out and leave everybody else hanging
out to dry. The amount of administrative receiverships has fallen
very steadily since that came in, and indeed has been substituted
by administration where the purpose is rescue, so I would argue
that the policy framework was designed to help businesses in that
position in a more effective way than it would have done before.
In practice, of course, what is happening now is something we
have not seen for 15 years or so, and, of course, if you look
at the panorama of business failure, if I can put it like that,
it would be very difficult to de-convolute the outright effect
of recession as opposed to the effects of the change in the law
which took place six years ago.
Q74 Chairman: Have you learned the
lessons from post-legislative review of the Enterprise Act?
Mr Speed: I will ask Graham to
comment in a moment but, as you may know, we published a rather
hefty set of tomes round about this time last year. We can point
to specific things in there where a lot of work went into that,
and that was indeed in fulfilment of the pledge we made during
the passage of the Act itself. It is worth pointing out that we
were not in the same economic times as we are now when we wrote
that and, as some famous person in history said, it was a little
bit early to draw any firm conclusions. I think it was Deng Xiaoping.
Mr Horne: I think that is really
what the evaluation we carried out said, that it was a bit early
to say and we need some really hard data as to how well it is
doing, bearing in mind the transitional arrangements it will take
some time before it starts impacting. The information we have
so far is that it is achieving what we set out to achieve. The
jury is still out as to whether it is in fact increasing rescue
rates and increasing returns to creditors, and we will certainly
need to carry on evaluating it.
Mr Speed: One thing I think it
did show was that the average speed of administration has fallen
quite substantially since the Act came in. I think it has fallen
from about 17 months to about 12. I hear what you said earlier
about an indefinite moratorium for Chapter 11, but in practice
I think the faster you can do these things effectively the better
it is for all the people concerned.
Chairman: I just leave you with the thought
that phoenix pre-packs in SMEs might be the focus of political
concern. That may be wrong but that is the view I am coming to.
Shall we move on to other aspects of insolvency law and policy?
Lembit Öpik: My biggest single concern
is what look like extortionate fees which are charged in a position
where those who can challenge them are usually economically vulnerable.
Do you have a particular view on that, or do you think this should
be covered under licensing, Chairman?
Chairman: No, it is part of what I said
at the beginning about our last section of questions—the
unpopularity of insolvency practitioners. Fees are seen to be
very large. It is a question I am not happy about.
Q75 Lembit Öpik: It seems to
me that the client is basically in a really vulnerable position
and therefore the fees can pretty much be set in what amounts
to a monopoly situation.
Mr Speed: I do not think it is
a monopoly situation. As you would expect, I think, The Insolvency
Service talks to insolvency practitioners and their representatives
quite frequently and I often hear anecdotes of people scrapping
quite hard to get particular appointments, so I would not say
that.
Q76 Lembit Öpik: What would
you say once the relationship has been established? I could be
wrong about this. It seems very—
Mr Speed: Once the relationship
has been established the people who need to take control of what
is happening in relation to fees are the creditors. We do not
live in a society in which we regulate prices; we have to rely
to some extent on competition, but creditors do have powers, for
example, to object to fees that administrators are proposing and
they can and sometimes do get the administrators changed. Therefore,
perhaps one of the cultural lessons we need to draw from this
is that creditors need to be better educated and better facilitated
to use the opportunities that they already have in law to get
together and decide what it is that they want to pay for in the
administration.
Q77 Lembit Öpik: The issue for
me though is that the creditors are in a vulnerable position.
As the Chairman has already pointed out, often they are in vulnerable
financial circumstances themselves. I think every MP has probably
been in the situation where one has ended up brokering between
creditors and somebody who is trying to decide who gets what.
You have said that there is a facility for creditors to work that
out. Is there any way that we can make that more robust to give
creditors more influence, or certainly a feeling of more potency,
when it comes to the setting of fees, some of which, I have to
tell you, sometimes have looked rather gratuitous and opportunistic?
Mr Speed: Can I deal with the
"gratuitous and opportunistic" first? I think it is
helpful to remember that insolvency practitioners are very highly
qualified, highly trained, regulated professional people, most
of whom are either accountants or lawyers. I suspect you will
find that the sorts of fees they are charging are concomitant
with what you would expect to pay an accountant or a lawyer. I
think part of the difficulty is going to be a perceptual difficulty,
that when you are in distress and do not have any money that is
going to sound like a lot of money. I think we need to be a bit
careful about using words like "extortionate". It may
well feel extortionate but whether it is or not is a different
question. As I say, we do not regulate prices: we are not a competition
regulator either so, in that sense, fees are not something that
we directly take a view on.
Mr Horne: Just talking about the
Statement of Insolvency Practice which we talked about, SIP 16,
there is one about fees as well. The point about fees is that
they have to be approved by creditors. There is a SIP, I think
it is 9, which says the insolvency practitioner must explain to
the creditors why the fees are how they are. I think what we also
need to do, in the light of the current circumstances, is check
that that is being adhered to by insolvency practitioners as well;
that they are giving the creditors enough information for the
creditors to make an informed view as to whether or not they will
approve these fees. Of course if he does not get his fees approved
he will have to go to court to get them approved and there will
be some court supervision. There is a process there but I think
we have to see that SIP 9 is working and make sure that insolvency
practices are explaining themselves effectively.
Q78 Mr Clapham: Before we leave the
scene, particularly in relation to chapter 11, which can be enormously
difficult—particularly where you have got a company in the
UK that is taken over by an American company and then consequently
where the insolvency issues are heard in the American courts;
again, particularly in relation to long-term liabilities, for
example, where there may be asbestos; and I am thinking here in
terms of the Turner and Newall issue—do you have a list
where you would have your expert administrators, receivers et
cetera that you would recommend actually be the people who are
associated with a given company, given the complexities?
Mr Speed: I think there may be
a slight misunderstanding here: we do not get involved at all
in administration work; we do not do that whatsoever. The only
type of company work that we get involved in is where a company
has been compulsorily wound-up by the courts—and the Official
Receivers would deal with that as a matter of course. We do not
do any of the other forms of insolvency.
Q79 Chairman: Could I just ask you
a question about how law and policy is actually shaped. We have
heard criticism, not necessarily of you but of the system, that
you are overseeing a piecemeal development of personal insolvency
laws which risks undermining its effectiveness; we know with the
Debt Relief Orders it is unclear how that fits into the existing
regime; and we have also heard about an awful lot of proposals
from the Department which have been dropped, and consultations
on more than 15 other proposals including the use of electronic
communication and repealing or otherwise restructuring parts of
the insolvency legislation. It seems that we could do more to
perhaps look at the way the law is actually shaped in this area?
Mr Speed: The law is shaped broadly
by periodically looking at it strategically in the round. The
last time we did that was in relation to the Enterprise Act, where
I think we started by issuing a White Paper in 1999 which led
to the passage of the personal and corporate insolvency provisions
in that Act. Periodically the insolvency world lifts itself up
and has a good hard look at itself; and prior to the Enterprise
Act that would have happened by means of The Cork Report
in the 1980s which led to the Insolvency Act. In between, as it
were, those big upheavals, what the Service tries to do is a sort
of care and maintenance job, if you like: it is to make sure—because
the world does not stand still and because also, as Graham hinted
earlier, we do learn lessons from some overseas jurisdictions
as we go round and talk to them—the system remains fit for
purpose, and also really remains as good a system as we can make
it for all of its users. It is at two levels really: it is an
occasional huge strategic drains-up, if you like; and then the
job we do in between that is to make sure if something is not
working quite right that we can fix it.
| 
