Throughout this year our focus has been on the challenges facing businesses and individuals caused by the economic downturn. Each year we examine one of the Department's agencies; this year we decided it would be timely to look at the Insolvency Service; rarely in its history has there been a greater need for its functions to be performed with efficiency and effectiveness.
We commend the Insolvency Service and its staff for the generally effective and efficient way in which its functions are discharged. We urge, however, a redoubling of efforts to ensure that high levels of service are maintained throughout the economic downturn. This must include action to address concerns about the insolvency regime that have been raised during this inquiry.
In particular, public confidence in the insolvency regime will be damaged unless prompt, robust and effective action is taken to ensure that pre-pack administrations (when a company's business and assets are sold on terms that were negotiated between the buyer and the administrator before the company formally entered administration) are transparent and free from abuse. Unsecured creditors tend to be kept in the dark and recover even less than they would in a normal administration. This causes particular outrage where the existing management buy back the business and continue to trade clear of the original debts ("Phoenix pre-packs"). Pre-packs of this kind fuel understandable concerns about illegitimate, self-serving alliances between directors and insolvency practitioners. The interests of unsecured trade creditors must take a higher priority, especially in "phoenix" pre-pack administrations. The insolvency system, the Insolvency Service and the insolvency profession all risk real reputational damage if the situation is not addressed. More worryingly, many SMEs appear to be suffering unreasonable financial harm with no corresponding benefits to the wider economy. Where there are good reasons for an insolvency practitioner agreeing to a pre-pack, which there can often be, this must be explained clearly and fully. Where there are no good reasons for entering a pre-pack, this must be exposed before the damage is done.
In view of this, we welcome the introduction of the new practice statement, Statement of Insolvency Practice 16, which aims to increase the transparency of pre-packs. We also welcome the Insolvency Service's commitment to monitor its implementation. This is a responsible first step, but the recession makes this a matter of considerable urgency. There must be systematic monitoring of the situation by the Insolvency Service and the Department. If the new practice statement does not prove effective then it will be necessary to take more radical action, possibly by giving stronger powers to the creditors or the court.
In the meantime, we encourage anyone who suspects the abuse of pre-packs to contact either the Insolvency Service or the body that licenses the insolvency practitioner concerned. We also encourage large creditors, particularly Her Majesty's Revenue and Customs, to take an active role in rooting out abuse.
It may be inevitable that insolvency practitioners' remuneration is perceived as unduly high by many creditors. There must, however, be sufficient opportunity and information to allow creditors to ensure that fees are reduced where that perception is justified. We therefore welcome the Insolvency Service's commitment to monitor whether insolvency practitioners are complying with the current practice statement governing the approval of their fees. We urge the Insolvency Service to make its findings publicly available. We also urge the Government to respond to these findings and to consider the case for strengthening control of insolvency practitioners remuneration beyond the limited powers currently exercised by creditors.
More generally, the Department for Business, Enterprise and Regulatory Reform must work with the Insolvency Service to ensure that its funding arrangements are sufficiently robust to handle the very high levels of insolvency that are almost inevitable at a time of steep economic decline. Appropriate funding is needed to ensure that we all benefit from a world-leading insolvency regime, both now and in the future. In particular, the Department for Business, Enterprise and Regulatory Reform must provide the Service with sufficient funding to meet any increase in demand for its investigation and enforcement activities, and to ensure those activities are effectively publicised. We recognise the heavy demands on public expenditure, but maintaining confidence in the market is a central task of the Department and, in the light of regulatory failures elsewhere, we are surprised by the lack of commitment shown by the Department in this crucial area. The sums involved are, after all, very modest.