Memorandumf submitted by The Insolvency
Service
INTRODUCTION
1. This memorandum briefly describes the
work of The Insolvency Service ("The Service") as well
as highlighting some current issues and future challenges that
The Service faces.
2. The Service's role is to provide an effective
and efficient insolvency regime for citizens and businesses. It
operates under a statutory framework mainly comprising:
— the Insolvency Acts 1986 and 2000;
— the Company Directors Disqualification
Act 1986; and
— the Employment Rights Act 1996 and
the Companies Act 1985.
3. BERR Ministers determine the policy framework
within which The Service operates, drawing on the knowledge of
our specialist staff. The Chief Executive is responsible for the
day to day running of The Service, and reports to Ministers on
the execution of policy, progress towards targets, and proposals
for future developments.
OVERVIEW
4. The Service became an executive agency
of the Department of Trade and Industry in 1990 and is now an
agency of the Department for Business, Enterprise and Regulatory
Reform (BERR). For the greater proportion of its work, The Service's
costs are covered by fees charged for its services.
5. The Service employs some 3,000 staff
(of whom around 2,500 are permanent and 500 are agency staff).
It operates out of 36 locations across Great Britain, most of
which are official receiver's offices working with local county
courts. The head office is in London, but a substantial proportion
of The Service's corporate services are delivered from its offices
in Birmingham.
6. The Service has six main areas of work:
Policy
The Service combines its operational responsibilities
with the role of leading on insolvency matters for government
generally on behalf of BERR Ministers. The Service maintains the
complex framework of legislation as well as developing policy
to ensure that the insolvency framework remains world-class and
fit for purpose. This work is funded by an administration budget
from BERR, which is £2.1 million in 2008-09.
Regulation of Insolvency Practitioners
On behalf of the Secretary of State, The Service
is responsible for the oversight of the system of regulation of
insolvency practitioners (IPs). Most IPs are authorised by one
of seven professional bodies. The remainder, fewer than 100, are
authorised directly by the Secretary of State. This activity is
funded by fee income, which in 2007-08 was £0.9 million.
Insolvency Case Administration
The Service's official receivers (ORs) administer
the compulsory winding up of incorporated businesses and the bankruptcies
of individuals upon appointment by the courts as liquidators or
trustees. This work is carried out by 42 ORs (supported by some
1,800 permanent and 300 agency staff) located throughout England
and Wales. Insolvency case administration is funded by fees that
are set at a level to recover costs from a combination of petition
deposits and asset realisations. In 2007-08, the costs were £14.9
million for companies and £110.7 million for bankruptcies.
The ORs are answerable to the courts for the conduct of individual
case administrations.
Estate Accountin
The Insolvency Services Account (ISA) provides
banking facilities to ORs and IPs in relation to the estates of
bankruptcies and compulsory liquidations. This activity together
with the associated estate accounting is funded by fees and the
total cost in 2007-08 was £3.9 million.
Investigation and Enforcement
The Service's investigation and enforcement
activities aim to ensure that dishonest, reckless or irresponsible
bankrupts and company directors are identified and dealt with
in a timely manner. There are three main strands to this work:
— ORs investigate the causes of failure
in the cases they administer. Where they find misconduct, they
prepare reports with a view to obtaining either bankruptcy restrictions
or director disqualifications and, where appropriate, they refer
cases to prosecutors for criminal investigation. Bankruptcy restrictions,
introduced in 2004, have the effect of extending the time during
which individuals are subject to the restrictions of bankruptcy.
— In addition, The Service is responsible
for investigating and then taking forward proceedings against
directors of companies that are subject to administration, administrative
receivership and voluntary liquidation, where the IP office holder
has formed the view that there is unfit conduct.
— Using Companies Act powers, The Service's
Companies Investigations Branch (CIB) carries out fact-finding
investigations into live companies.
With the exception of the bulk of investigation
work carried out by the ORs, The Service's investigation and enforcement
work is funded by means of a BERR programme budget. In 2008-09,
this budget is £37.7 million.
Redundancy payments
The Service is responsible for the payment of
claims from the National Insurance Fund made to people whose employers
have either become insolvent or who have refused to honour an
employment tribunal award. Some 120 staff are engaged in this
activity and in 2007-08 they handled 76,416 claims. This work
is funded from an administration budget from HM Revenue and Customs
(HMRC), created from a transfer out of the National Insurance
Fund and agreed with The Service via a service level agreement.
In 2008-09, the cost of this is expected to be £8.3 million.
7. The Service is committed to delivering
excellent service to all of its customers, many of whom are in
considerable financial distress. Our customer service approach
across all our business areas has been independently recognised
by the award of Charter Mark accreditation, which The Service
has held continuously since 1998.
8. Insolvency work is complex and our ability
to deliver high quality customer service depends critically on
the professional abilities of our staff. The Service makes substantial
investments in training and developing its staff to the necessary
professional levels and this, and our work more generally in learning
and development, has been recognised by the award of the Investors
in People standard, which the Service has now held for nine years.
THE INSOLVENCY
FRAMEWORK
Personal
9. The personal insolvency framework recognises
the importance of getting the balance right between the needs
of the indebted and those of their creditors. A portfolio of existing
or planned statutory procedures ensures that, whatever an individual's
circumstances, a suitable remedy is available, as follows:
— Bankruptcy provides debt relief and
rehabilitation for those who cannot pay their debts and ensures
that any assets are shared out fairly amongst creditors;
— Debt Relief Orders (DROs) which will
be available from April 2009 to those who find themselves currently
financially excluded from other procedures. DROs will provide
cheap and easy access to debt relief for those on low incomes,
with no assets of value, who are overwhelmed by relatively low
levels of debt;
— Individual Voluntary Arrangements
(IVAs) allow people with unmanageable debt but steady incomes
and/or assets to reach a formal compromise with their creditors,
thus avoiding bankruptcy;
— Enforcement Restrictions Orders,
which are expected to be available from late 2010, will provide
short term assistance via enforcement relief to those who encounter
a sudden and unforeseen change to their financial circumstances;
and
— County Court Administration Orders
(CCAOs) are a court-based procedure and provide for regular payments
to be made towards creditors. Total debts must not be more than
£5,000 and the procedure requires regular income. The Ministry
of Justice have plans to reform CCAOs and increase the total debt
level to £15,000.
Policy responsibility for the last two of these
procedures rests with the Ministry of Justice.
10. In addition to these statutory procedures,
it is possible to reach informal agreement with creditors. The
principal means by which this is done is Debt Management Plans
(DMPs). DMPs are not regulated and they are not legally binding.
Corporate
11. The corporate insolvency framework exists
to facilitate the orderly and effective handling of the affairs
and assets of companies that have become insolvent. The regime
has two key distinguishing features:
— it aims to protect, as far as is
reasonable, the interests of creditors; and
— a high priority is given to the rescue
of existing companies and businesses, where possible.
The framework gives confidence to investors,
businesses and other stakeholders by providing a range of appropriate
and proportionate procedures.
12. The UK system provides routes to rescue
and is both highly regarded by external commentators and ranks
well internationally. The World Bank "Doing Business Report
2009" ranks the UK joint 8th out of 155 countries for the
speed with which it deals with troubled businesses; and 9th out
of 155 countries for the amount recovered for creditors. This
compares with joint 23rd and 15th for the USA, joint 37th and
40th for France and 20th and 33rd for Germany. The routes to rescue
are administration and company voluntary arrangements (CVAs).
13. In administration, the management
of an insolvent company is handed over to an IP whose primary
duty is to effect a rescue subject to acting in the wider interests
of the creditors. Substantial reforms introduced in the Enterprise
Act 2002 made the process faster, fairer and focussed on rescue.
It achieved this by making the process easier to enter and giving
companies a one year period to come up with a plan or for the
business to be rescued, during which time creditors cannot take
action (a moratorium).
14. The term "pre-pack administration"
refers to a deal for the sale of an insolvent company's business
or assets, which is put in place before the company formally goes
into administration. The sale is then executed immediately following
the appointment of the IP.
15. The Government's view is that pre-pack
administrations have a useful role to play in preserving jobs
and economic value and activity. However, the Government also
believes that the interests of creditors must be protected and
therefore welcomes the adoption, on 1 January 2009, of the Statement
of Insolvency Practice 16. This requires detailed disclosure to
creditors of the reasons for the use of the pre-pack approach
and an explanation of why this represented the best interests
of creditors.
16. A CVA enables directors of a
viable company to reach a legally binding agreement with creditors
for repayment of all or some debts over a period of time in full
and final settlement. This procedure provides a light-touch alternative
to administration in which the existing management stays in place.
A short moratorium stops individual creditors taking action whilst
a rescue plan is put together.
17. Where a business cannot be rescued,
the insolvency framework provides liquidation procedures
(either creditors' voluntary liquidation or compulsory
liquidation) to ensure the winding up of a company's affairs
and the orderly distribution amongst creditors of any assets.
In addition, administrative receivership allows the holder of
a floating charge to appoint an insolvency practitioner to deal
with assets subject to that charge, which can include the whole
of the company's business.
POLICY DEVELOPMENT
AND REGULATION
Development
18. The Service works to maintain and develop
the insolvency regime to make sure that it remains world-class
and fit for purpose. Policy developments currently in train include
the following.
— A revised advertising regime across
all insolvency proceedings comes into force on 6 April 2009 (subject
to Parliamentary approval). Whereas current legislation requires
all key insolvency events to be advertised in both The London
Gazette and a newspaper, in future the latter will no longer
be required. This will save creditors around £17 million
per year and help further to reduce some of the stigma associated
with bankruptcy.
— DROs, which (subject to Parliamentary
approval) come into force in April 2009 (see paragraph 9).
— From October 2009 (subject to Parliamentary
approval), measures aimed at modernising insolvency proceedings
to reduce costs and improve the returns to creditors will take
effect. The changes include provisions allowing electronic communication
between insolvency office-holders and consenting creditors as
well as the use of websites to "deliver" documents in
insolvency proceedings. Estimated annual savings are £25
million.
19. In response to academic research which
indicated that the IVA remedy introduced in 1986 needed to be
updated, The Service set up a number of stakeholder working groups
in 2007. One of the recommendations of those groups was that the
efficient handling of straightforward consumer IVAs could be improved
by stakeholders agreeing a number of best practice methods. A
number of possible changes to the IVA procedure were also identified,
principally aimed at streamlining the regime and making it cheaper,
quicker and more transparent for simple cases. Such cases would
be known as Simplified Individual Voluntary Arrangements (SIVAs).
To implement SIVAs legislative change would be required and we
originally considered a Legislative Reform Order (LRO) to be the
appropriate vehicle.
20. Further consideration of best practice
methods resulted in the launch of a protocol on 1 February 2008,
which is voluntary and applies to both IVA providers and creditors.
The protocol sets out a standardised approach to the format for
presenting an IVA proposal to creditors as well as to what constitutes
a debtor's income and expenditure. It also contains an agreed
set of standard terms and conditions for use in straightforward
consumer IVAs, which covers matters such as: the start, duration
and effect of such an arrangement; a debtor's duties and obligations;
and the supervisor's functions and powers.
21. The Service decided in November 2008
to withdraw its proposals to introduce a SIVA by means of a Legislative
Reform Order. This decision reflected both our developing experience
of the operation of the protocol as well as concerns about (a)
whether the desired policy outcome could be achieved by non-legislative
means, (b) whether it removed burdens and (c) whether it was clear
that it would not add new burdens. The Service will, later this
year, undertake an evaluation of the operation of the protocol
to determine whether it is meeting the legitimate needs of debtors,
creditors and IPs. The IVA Standing Committee, chaired by The
Service and including organisations representing debtors, creditors
and IPs and their regulatory bodies will oversee this evaluation.
INSOLVENCY PRACTITIONER
REGULATORY FRAMEWORK
22. The Secretary of State regulates and
monitors seven "recognised professional bodies" (RPBs)
to authorise the majority of insolvency practitioners, numbering
around 1,600; and directly authorises around 100 insolvency practitioners.
A key part of The Service's role is to provide guidance and disseminate
required practice to ensure that those bodies regulate their practitioners
effectively and to an appropriate standard.
23. The Service works closely with the RPBs,
both directly and through the Joint Insolvency Committee, to set
and assure standards of professional practice and it monitors
the regulation of IPs undertaken by the RPBs. In order to achieve
consistency in regulation, we have a memorandum of understanding
with each RPB which sets out the standards that the RPBs need
to meet in order to retain recognition and to satisfy The Service
that they are complying with that standard. We also carry out
monitoring visits to RPBs and, as part of those visits, attend
an investigation or disciplinary committee meeting to ensure that
their procedures are effective in practice. To ensure consistency
in regulation, The Service complies with the memorandum in respect
of the IPs who are licensed directly by the Secretary of State.
INSOLVENCY CASE
ADMINISTRATION
24. The main objectives of the work of the
OR administering bankruptcies and compulsory liquidations are:
— To maximise returns to creditors.
In addition to the realisation of bankrupts' assets, ORs also
use their powers to ensure that bankrupts who have surplus income
contribute further to repaying their debts through income payments
orders (IPOs) and income payments agreements (IPAs).
— To administer bankruptcy to relieve
debtors of overwhelming debts and enable creditors to write off
irrecoverable debts earlier. Bankruptcy orders are made by the
courts on either the petition of a debtor or creditor and ORs
act (in the first instance) as trustees of the bankruptcy estate
for the benefit of creditors.
— To administer the winding up of companies
where the court has ordered a compulsory winding up. In this case,
the OR is appointed liquidator, unless the creditors have decided
that that role should be taken on by an IP.
— To investigate the conduct of bankrupts
and directors whose cases they administer and take action where
appropriate (see paragraph 6).
25. In 2007-08, ORs had 67,218 new cases
to administer. In the period 1 April to 30 September 2008 36,487
cases were received, 1,765 more than in the same period last year.
26. A key issue for The Service in times
when insolvency case loads change quickly is planning the capacity
needed to ensure that we can maintain levels of service. To achieve
this, The Service relies on its ability to recruit agency staff
at both administrative and professional levels while maintaining
a permanent staffing level appropriate to the longer-term level
of underlying case load.
27. Because of the specialist nature of
its work, The Service needs to recruit and develop staff that
can combine excellent administrative, investigative and interpersonal
skills. The Service's Examiner Development Programme offers a
suite of mandatory qualifications up to degree level to all professional
examiner staff, which are externally accredited by Nottingham
Trent University, with whom The Service has enjoyed a long and
fruitful partnership.
REDUNDANCY PAYMENTS
28. The Redundancy Payments Service, based
in Watford, Birmingham and Edinburgh processes and pays claims
for statutory redundancy and other payments from former employees
of insolvent companies which the insolvent company has not paid.
Payments, and the costs of administering them, are paid out of
the National Insurance Fund.
29. The current economic climate has had
a significant impact on the number of claims The Service is receiving.
It is expected that this financial year the number of claims will
be substantially higher than last year. By the end of December
around 129,000 claims had been received in this financial year,
a 60% increase over the number of claims handled in the whole
of the last financial year.
30. The Service aims for 92% of claims to
be paid within 6 weeks, and 78% paid within three weeks.
ESTATE ACCOUNTING
31. Although IPs acting as liquidators in
voluntary liquidations can now choose their provider of banking
services, many still use The Service's Estate Accounts Services
because they are tailored specifically to insolvency estate account
management and offer a competitive rate of interest.
INVESTIGATION AND
ENFORCEMENT
32. The Service's various activities in
this area are summarised at paragraph 6.
33. The objective of The Service's investigation
and enforcement work is to remove from markets those who are deemed
unfit, by virtue of their conduct, to be market participants.
The removal of bankrupts from credit markets and the disqualification
of unfit directors is aimed at protecting those whose interests
may be put at risk. As a consequence, general confidence in the
proper functioning of credit markets and the corporate world increases.
34. The ability to seek resolution of disqualification
proceedings by way of a legally binding undertaking was introduced
in 2001. Prior to that date disqualifications required an order
of court. Corresponding provisions for bankruptcy were introduced
in 2004 with the advent of bankruptcy restrictions.
35. Currently some 80% of disqualification
proceedings are settled by the acceptance of an undertaking from
directors, most of which are offered before court proceedings
are commenced. The corresponding figure is around 90% for bankruptcy
restrictions. The high undertaking rate makes the process very
cost effective as early resolution saves vital public resources.
36. The Service operates a hotline to enable
members of the public, insolvency practitioners and creditors
to "blow the whistle" on apparent misconduct, particularly
by bankrupts and directors who are ostensibly contravening bankruptcy
restrictions or disqualifications. Valid complaints are sent to
BERR prosecuting lawyers for criminal investigation or passed
to our ORs or CIB for further investigation. This facility provides
an excellent way of ensuring that those instances of abuse that
are of most concern to the public are addressed.
37. Until recently, the cost of all enforcement
and investigation work was funded by means of a programme budget
allocation from BERR.
38. During 2006-07 BERR's budgets came under
pressure and this led to a 7.5% (or £3.3 million) reduction
in the budget for that year. As pressure on BERR budgets was expected
to continue in subsequent years a review was undertaken of the
work carried out by ORs in enquiring into the causes of failures,
the disposition of assets and the conduct of directors and insolvents.
As a result some of costs of the work carried out by ORs were
moved from taxpayer funding to fee funding. This switch allowed
the funding level originally agreed for 2006-07 to be restored
in 2007-08. In total some £10 million of the funds used to
finance investigation and enforcement activity is now drawn from
fee income.
39. Looking to the future, as insolvencies
increase and incidences of director misconduct grow (as usually
happens in an economic downturn), The Service will need to maintain
rigorous processes to ensure that the instances of misconduct
which most merit action in the public interest continue to be
targeted.
"ENABLING THE
FUTURE"
40. This is a £72.2 million strategic
investment programme of IT-led change which is designed to enable
The Service to develop as a modern, fit-for-purpose organisation
that is ready to face the future with confidence; to improve further
its services and to meet increasing and rapidly changing customer
expectations by providing electronic delivery channels. It also
enables The Service to continue to attract and retain the people
of the high calibre that it needs.
41. The provision of a refreshed underlying
infrastructure had been delayed due to problems encountered by
the supplier. While this has impacted on the timing of the delivery
of other projects within the programme, the programme as a whole
remains within budget.
42. One legacy project, CAMEO, was halted
in late 2004, resulting in a write off of £7.65 million in
the accounts for 2006-07. It has been replaced by the Estate Accounting
System (EAS) project, which is ready for deployment in June 2009.
43. Losses totalling £1.32 million
have also been written off in respect of two ongoing IT projects
(ISCIS and CHAMP) in the 2007-08 accounts. These are not IT failures.
In these instances, early decisions have been taken to move to
an alternative underlying product to meet business requirements.
These decisions have already produced further identifiable benefits,
such as enabling the consolidation of different IT applications
into one, with the consequential benefits of improving information
flow and accountability. As a result, the cost of ISCIS is expected
to be within the original business case forecast including the
loss written off. A new tender is being undertaken for CHAMP and
should result in a contract being awarded in March 2009.
9 January 2009
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