Conclusions and recommendations |
The Insolvency Service
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. (Paragraph
of pre-packs are at their sharpest where existing management buy
back the business following private negotiations with an insolvency
practitioner and then continue to trade clear of the original
debts through a new "phoenix" company. This means that
unsecured creditors are initially kept in the dark and then left
empty handed. The phoenix company may also have some advantage
over competitors who honour their financial obligations. The anecdotal
evidence in media reports and confidential letters to the Committee
suggest that "phoenix" pre-packs affecting smaller companies
with high levels of unsecured trade creditors cause particular
concern and are more likely to damage the supplier base without
corresponding broader benefits to the overall economy. (Paragraph
3. Public confidence
in the insolvency regime is being and will be further damaged.
Prompt, robust and effective action is needed to ensure that pre-pack
administrations 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. 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. (Paragraph
4. 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 urge 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, in particular Her Majesty's Revenue and Customs,
to take an active role in rooting out abuse. (Paragraph 26)
Insolvency practitioners' fees
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 - possibly through
independent arbitration - of insolvency practitioners' remuneration
beyond the limited power to do so currently exercised by creditors.
Insolvency Service's Chief Executive, Mr Speed, assured us that
arrangements for funding its case administration work are sufficiently
robust to handle a dramatic increase in insolvencies if this were
to happen. While we hope that this assurance is not tested, at
this stage we can only hope that he is correct. Both he and his
staff will understand the serious consequences if he is not.
Insolvency Service must consider changing its agreement to operate
a redundancy payments scheme on behalf of Her Majesty's Revenue
and Customs by ensuring that in future years there is an entitlement
to recover extra funding based on a higher workload. We welcome
the fact that this year any interdepartmental wrangling over funding
has been set aside to give priority to ensuring victims of the
recession get the payments to which they are legally entitled.
This should become permanent. (Paragraph 37)
Investigations and enforcement
is surprising and disappointing that the Secretary of State has
reduced the funding for investigation and enforcement activities
for 2009-10, despite the expectation that there will be an increase
in the number of cases referred to the Insolvency Service. It
is unacceptable that the Service's new target requires it to achieve
no more than the same number of successful enforcement outcomes
than was achieved for 2008-09. This would mean that as the recession
bites there will be proportionately fewer wrongdoers facing sanctions
for their misconduct. This is unlikely to inspire confidence among
the insolvency practitioners and creditors who report wrongdoing
but see no sign of it being investigated or penalised. The Department
for Business, Enterprise and Regulatory Reform must provide the
Service with sufficient funding to meet an increase in demand
for its investigation and enforcement activities and it should
amend the target to ensure that the number of successful outcomes
the Service is expected to achieve in 2009-10 is increased to
ensure it is proportionately equivalent to the target in 2008-09.
9. While the Service
is securing sanctions against a considerable numbers of individuals
at present, there is a need for additional funding to promote
this more widely in order to create the best possible deterrent
effect. 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.
10. 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.
We welcome the Service's shift to projecting demand for its services
based on a lower and upper range, but we believe that its funding
and targets should be based on the expectation that activity will
be at the mid-range, rather than the bottom end, of the scale.
11. The Insolvency
Service must increase the transparency of its regulatory activities
as a matter of priority. More generally, the Department for Business,
Enterprise and Regulatory Reform should take the earliest available
opportunity to provide the Service with the same range of powers
to discipline its licensed members as are available to the other
Recognised Professional Bodies. We recommend that the Department
and the Insolvency Service should undertake a cost benefit analysis
of the case for establishing an insolvency ombudsman. (Paragraph
12. Current economic
conditions face the Insolvency Service with considerable challenges.
The Service itself recognises this, and has some plans in place
to meet them. However, we have three concerns. Is there a case
for strengthening control of insolvency practitioners' remuneration?
Will the Service and the Department be nimble enough to reshape
policy if necessary to address concerns about prepack administration
and other policy issues which may emerge as a result of the recession?
And is the service's funding model sufficiently robust to deal
with the expected increase in workload, and, in particular, to
maintain an appropriate level of enforcement activity? (Paragraph