The Insolvency Service - Business and Enterprise Committee Contents

Conclusions and recommendations

The Insolvency Service

1.  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. (Paragraph 11)

Pre-pack administration

2.  Criticisms 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 15)

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 25)

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

5.  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 - possibly through independent arbitration - of insolvency practitioners' remuneration beyond the limited power to do so currently exercised by creditors. (Paragraph 29)

Funding arrangements

6.  The 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. (Paragraph 36)

Redundancy payments

7.  The 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

8.  It 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. (Paragraph 44)

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. (Paragraph 45)

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. (Paragraph 47)

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 53)

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 55)

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