Memorandum submitted by the Association
of Business Recovery Professionals
EXECUTIVE SUMMARY
R3 believes that the Insolvency Service provides
a valuable service to the UK. The professionalism and commitment
of the staff and its management in discharging their obligations
should be recognised. R3 and the Insolvency Service, along with
the subordinate regulators, inhabit shared space in the open system
that is the insolvency industry; and share many of the challenges
and satisfactions available to those who act in the service of
the debtor and creditor communities, and the country as a whole
overlain by the current insolvency legislation.
ABOUT R3
R3—The Insolvency Trade Body—represents
97% of all licensed Insolvency Practitioners (IPs) who help individuals
and businesses in financial trouble. There are approximately 1,700
IPs in the UK, who are licensed and regulated to give best advice
and apply statutory, licensed procedures. Whether as accountants
or lawyers, IPs deal with personal and business insolvencies,
from large to small businesses; and help from "turnaround"
to formal insolvency procedures. 89% of IPs state that that they
give their first hour of advice for free.
MAIN RECOMMENDATIONS
R3 believes that the Insolvency Service should:
— report more fully on how it regulates
the multiple regulators, so demonstrating that standards are applied
consistently across the industry;
— provide fuller details of its operations
as a direct regulator of Insolvency Practitioners (IPs), in order
to demonstrate equal treatment of all IPs across the industry;
— be awarded greater resources to promote
the industry within Government, parliament and the general public;
— be allowed to "punch at and
above its weight" within Government on issues which have
an impact on insolvency in the UK;
— support R3's goal to protect the
title "Insolvency Practitioner" thereby offering greater
protection to the public and R3 members;
— relinquish Crown immunity;
— ensure that creditors' legitimate
calls for creditors' meeting and "Secretary of State"
(IP) appointments should not be frustrated by the Official Receivers
(ORs);
— evaluate ORs work as a free-standing
area of activity to establish the true cost and benefits;
— be resourced fully to ensure that
the projected increase in the number of Directors meriting disqualification,
can be investigated appropriately;
— further investigate, adapt and introduce
into the existing UK regime compulsory financial education for
Directors' of failed businesses and personal bankrupts;
— require the Regulators to fully ensure
the application of SIP 16 to ensure Pre-packs are processed correctly;
— have the lead role in protecting
public policy on insolvency issues;
— manage/oversee all insolvent debt
solutions to ensure consistency and coherence;
— review its plans and find either
time to introduce SIVAs as originally planned or reflect on how
the planned procedure can be accommodated under the current insolvency
regime;
— collect figures on Debt Management
Plans (DMPs) to build a more meaningful picture of the number
of insolvent people in the UK; and
— take the lead have sole responsibility
for the regulation of DMPs, so that these "missing debtors"
are brought within the formal insolvency regime.
1. THE INSOLVENCY
REGIME
1.1 The value of the industry to the UK economy
R3 believes that the UK's insolvency industry
requires no fundamental changes—it is largely fit for purpose.
The centre for economics and business research (cebr) in "The
value of the insolvency industry"[1]
conducted an independent study into the economic significance
of the insolvency sector and its potential future contribution
to UK prosperity. Some of the key findings are that the UK insolvency
industry:
— saved 910,000 jobs in 2006 in businesses
suffering financial problems;
— ranked ninth out of 127 countries
for speed with which it deals with troubled businesses; and tenth
out of 175 countries for the amount recovered for creditors (above
the USA in both areas);
— employs 12,700 people directly; and
makes a direct contribution to GDP of £780 million; and
— plays a vital role in maintaining
a business environment in which entrepreneurship is encouraged
and the economy can flourish.
1.2 Recommendation
R3 believes that UK's insolvency regime does
not require an overhaul, "managed evolution" is sufficient.
1.3 R3 projections on the growing number of insolvencies
R3 members surveyed in October 2008 (18% response
rate) predicted a significant increase in the numbers of business
and personal insolvencies in 2009—a 41% increase in the
number of business insolvencies (13,091 in 2007, 15,693 for 2008
and 18,440 for 2009) and an increase in the number of personal
insolvencies (121,796 in 2007, 132,700 for 2008 and 148,352 for
2009), a predicted 22% increase from 2007-2009. In addition, members
expect more complex cases.
1.4 Recommendation
R3 believes that the private sector part of
the insolvency industry uniquely has the skill and experience
to deal with the volume and complex nature of expected insolvencies;
and that moves to increase the Official Receivers' (ORs) activities
be curtailed.
1.5 Multiple regulators
Insolvency Practitioners are individually licensed
by one of nine regulatory bodies.[2]
The Insolvency Service as a "regulator of the regulators"
must ensure that appropriate standards are applied consistently
across the industry. This is challenging for an industry where
the multiplicity of regulators cover differing fields (accountants
and lawyers) and jurisdictions (England & Wales, Scotland
and Northern Ireland). Key aspects of the regulators' work, which
includes the adoption of new regulations, disciplinary procedures
and monitoring, are not reported or recorded on an insolvency-industry
wide basis and there is no public evidence (as in its annual report)
of the detail of the Insolvency Service's regulation of the regulators.
1.6 Recommendation
The Insolvency Service should report more fully
on how it regulates the multiple regulators, so demonstrating
that standards are applied consistently across the industry.
1.7 The Insolvency Service as a Regulator and
the "Regulator of Regulators"
The professional bodies derive their power to
regulate IPs from the Insolvency Act 1986 (section 391). They
carry out this function under terms agreed with the Insolvency
Service which are set out in a Memorandum of Understanding. The
Insolvency Service also has powers to regulate insolvency practitioners
directly, but this is conferred by a different section of the
Act (section 392).
1.8 The Service therefore acts both as supervisor
of the regulators, and as a direct regulator itself (of some 90
IPs). However, because of the nature of the legislation, there
is a difference in the powers available to the professional regulators
and the powers available to the Insolvency Service. The professional
regulators employ a wide range of sanctions which they apply depending
on the transgression. The Service does not have this range of
sanctions; only the removal of a person's licence, or a limitation.
This means that there is unequal treatment, depending on whether
a practitioner is licensed by a professional regulator or by the
Service. This may be seen as providing an incentive for some to
choose to be licensed by the Insolvency Service, because they
are subject to a less punitive system than applied to those regulated
by the professional bodies.
1.9 The Service also has its own operational
"managers" in the shape of Official Receivers, who are
not licensed insolvency practitioners. We comment on this further
below.
1.10 Recommendation
The Insolvency Service should provide fuller
details of its operations as a direct regulator of Insolvency
Practitioners, in order to demonstrate equal treatment of all
IPs across the industry.
1.11 The profile of the Insolvency Industry
Despite the contribution the insolvency industry
makes to the UK economy, the industry's profile is low as compared
with other sectors and industries. Through our own activities,
R3 is aware that the economic and social importance of insolvency
is insufficiently understood within Government and Parliament
as a whole. Whilst those within the Industry accept some responsibility
for the lack of understanding (R3's parliamentary activities,
including establishing an APPG on Insolvency is aimed at addressing
this issue), this may also be attributed to the Service insufficiently
projecting what it does. Whilst the Service undertakes activities
such as research (staging a third annual research seminar in 2008,
in conjunction with R3), its limited PR output, and a lack of
public circulation of any forecasting work means its efforts are
sub-optimal.
1.12 The IS's position within Government means
that as an Agency it is "one step removed"; which raises
questions about levels of understanding within the Department
for Business, Enterprise and Regulatory Reform and beyond. Succeeding
BERR Ministers have had large portfolios of other responsibilities,
so the degree to which "insolvency" is addressed is
inevitably limited. Indeed, the BERR Select Committee's limited
interest to date evidences a low ranking of importance.
1.13 Recommendation: The Insolvency Service
should be awarded greater resources to promote the industry within
Government, parliament and the general public.
1.14 The Insolvency Service's Interaction with
other parts of Government
There are examples where "joined up Government"
by the Service within its own and other Departments could be improved,
which includes the Ministry of Justice, Department of Work and
Pensions, Department for Education and Skills (as was) and the
Financial Services Authority.
1.15 We give some examples of instances where
cooperation between the Insolvency Service and other departments
have been helpful, and others where they have been less successful:
1.16 A good result—Empty property rates
in administrations
Problems were caused for companies in administration
by the Trident Fashions case, in which it was held that
companies in administration had to pay empty property rates as
a priority expense, even though this brought no benefit to the
administration. The Service was instrumental in persuading the
Department for Communities and Local Government to recommend a
change in the law to remove this problem.
1.18 A less good result—Transfer of Undertakings
Protection of Employment regulations (TUPE)
The TUPE Regulations 2006 are the primary policy
responsibility of the Department for Work and Pensions. They give
effect to EC Directive 23/2001, containing important provisions
regarding the transfer of employees in insolvency proceedings,
and are therefore of policy interest to the Service. The insolvency-related
part of the Regulations were defectively drafted, and were not
capable of giving proper effect to the Directive. We understand
that this was pointed out to the DWP by the Insolvency service,
but was ignored. The Service tried to mitigate the acknowledged
problem by issuing guidance on how they thought the regulations
should be applied. However, a recent EAT case, Oakland v Wellswood
(Yorkshire) Ltd shows both that the regulations are defectively
drafted, and that the guidance issued by the Service was incorrect.
1.20 Recommendation
The Insolvency Service should be allowed to
"punch at and above its weight" within Government on
issues which have an impact on insolvency in the UK.
1.21 Protecting the title
Insolvency work is highly skilled, requiring
experience and extensive training. We believe the interests of
those who we serve is damaged by the activities of those who purport
to be qualified, using mimicking terms like "licensed insolvency
consultant" or simply "insolvency practitioner".
We seek the Service's support to have the word "insolvency
practitioner" designated "words cognate", thereby
affording greater protection to the public and our members. Alternatively,
we call upon them (and other branches of government, eg the OFT)
to act quickly and decisively to counter misleading and damaging
behaviour by such unlicensed "experts" (sic).
1.22 Recommendation
The Insolvency Service should support R3's goal
to protect the title "Insolvency Practitioner" thereby
offering greater protection to the public and R3 members.
2. COMPETITION
ISSUES
2.1 The Service competes directly with professional
insolvency practitioners in some areas, but the standards which
apply to them are less rigorous than those which apply to the
private sector. This is mainly in the area of small liquidations
and bankruptcies; the Insolvency service is not equipped to deal
with large or complex cases.
2.2 Historically, IPs were appointed in most
small bankruptcy and compulsory liquidation cases where there
are assets. By law, cases start off with the Official Receiver
(OR), but a private sector IP may be appointed in one of two ways:
a meeting of creditors convened for the purpose by the OR, or
by direct appointment by the OR (acting on behalf of the Secretary
of State) on a rota basis.
2.3 In recent years, ORs have kept more of this
work in-house in regional trustee and liquidator units. This was
a policy decision, and a deliberate change from the earlier policy
that cases should go out to the private sector whenever possible.
This has caused hardship to some small IPs practices, which have
relied on this work and we are unconvinced that the benefits claimed
are justified.
2.4 ORs are meant only to keep straightforward
cases, with difficult cases going to IPs. The Service claims that
by doing more cases themselves they get a better deal for the
creditors because they can do the work more cheaply. There are
two points to note regarding this:
2.4.1 (i) On quality of work/return to creditors,
many R3 members report that ORs only do the minimum necessary
to realise assets, without taking any extra steps to try to add
value by increasing receipts into the estate "pot".
It should be noted that one of the major recipients of this estate
pot is often Government itself through HMRC. So, whilst ORs base
costs are less, it may be questioned whether they represent the
best value for creditors when viewed alongside realisations.
2.4.2 (ii) There are frequent complaints
from IPs that the Service disregards the wishes of creditors by
refusing to hold a creditors' meeting. Where 25% by value of creditors
requisition a meeting, the OR must hold one (sections 136 and
294), but are frequently reported as refusing to hold one. Similarly,
even when the necessary 50% of creditors vote in favour of a Secretary
of State appointment, this is often frustrated by some ORs.
2.5 As regards the differing standards, it should
be noted that ORs do not have to comply with all the rules and
regulations applicable to IPs (SIPs); are not required to pass
the JIEB[3]
exam, are not subject to the same regulatory regime, do not have
to be bonded; and, following the decision in Mond v Hyde,
are immune from suit for negligence. In view of all these factors,
it can be seen that ORs have a considerable advantage with regard
to costs.
2.6 Recommendations: The Service should relinquish
Crown immunity; ensure that creditors' legitimate calls for a
creditors' meeting or a Secretary of State IP appointment are
not frustrated by the ORs; and should evaluate OR area's work
as a free-standing activity to establish the true cost/benefit
of that division.
3. CORPORATE
INSOLVENCY
3.1 Directors' Disqualification
By law, when a business fails, a report is made
by the IP on the conduct of the Director/s of that business during
the last three years of trading. Should any of the behaviour of
the Director/s be identified as "dishonest" or "blameworthy",
the IP is required by law to submit a report to the Service, outlining
the areas of concern. Depending on the level of seriousness, the
report could lead to a period of disqualification for the Director/s
(between 2-15 years). This process acts as a protection for the
general public and other businesses, preventing Directors who
are "dishonest" or "blameworthy" from setting
up another business. Approximately 1,200 directors are disqualified
on an annual basis.
3.2 R3 understands that given the limited resources
within the Service, not all of the reports submitted by IPs are
pursued (for reasons such as a lack of evidence to exact a disqualification).
A number of IPs assert that it is due to the lack of resources
that not all reports meriting action are investigated, leading
to fewer, justified disqualifications; and there is a fear that
"easy cases" are taken on in order to meet targets.
The current economic climate is such that that fraud/dishonest/blameworthy
behaviour will increase. Therefore, the already tight resources
the Service has at its disposal must be increased to cope with
the expected increased number of cases.
3.3 Recommendation
R3 calls on the Government to provide extra
resource to the Insolvency Service to ensure that they can act
on the expected increased number of cases for disqualification.
3.4 Canadian post-bankruptcy rehabilitation scheme
There are no requirements for a Director of
a UK company to undertake any training or qualifications to be
a Director. Compulsory financial education for Directors of failed
companies could help more future businesses survive. R3 believes
that a scheme adopted in Canada[4]
could be usefully adapted and deployed for individuals and Directors
who have faced financial difficulty.
3.5 Recommendation
R3 believes that the Insolvency Service should
further investigate, adapt and introduce into the existing UK
regime compulsory financial education for Directors' of failed
businesses and individual bankrupts.
3.6 Pre-packs
A pre-pack is a deal for the sale of an insolvent
company's assets which is put into place before the company goes
into a formal insolvency process. Pre-packs have been the cause
of much controversy, as it can seem as though a business, from
one day to the next, has kept almost the same name, staff and
owner/ managers or directors, but because it has been "pre-packed",
has "shrugged off" its unsecured debts. Pre-packs are
deployed successfully when a business' principle assets are the
employees, forward contracts or intellectual property, as in all
service businesses. "Trading on" such a business when
it is almost certain to enter insolvency is virtually impossible
as staff, suppliers and customers abandon the company, leaving
effectively, no business.
3.7 There is clear evidence that pre-packs perform
better than business sales in preserving employment (although
this is not a statutory purpose of the legislation). Research
commissioned by R3[5]
demonstrates that the entire workforce is transferred to the purchaser
in 90% of pre-pack cases. The corresponding figure for business
sales is just 62% of cases. Ongoing research suggests that creditor
returns for pre-packs are largely similar as in traditional administration
cases. Unsecured creditors of large companies receive around 27%
on average, although this plunges to only 5% of 6% for small firm
cases.
3.8 Pre-pack sales are increasing sharply in
number, most notably in administrations. In terms of going concern
sales, by May 2005 the majority (53%) were effected through the
use of a pre-pack, and this tendency has continued into 2006.
Insolvency Practitioners predict that the number will continue
to rise in 2009 and 2010 given the economic downturn. The main
areas for their use are the professional services sector and the
construction industry.
3.9 R3 has helped to draft best-practice guidance
on pre-packs for Insolvency Practitioners, in order to address
the reporting and "transparency" issue. The best practice
guidance—"SIP 16", was introduced in November
2008.[6]
3.10 Recommendation
R3 believes that the number of Pre-pack cases
will increase in 2009 and 2010 and, rather than curtailing their
use, the Insolvency Service with its subsidiary Regulators should
fully and quickly apply SIP 16's provisions.
4. PERSONAL INSOLVENCY
4.1 Individual Voluntary Arrangements (IVAs)
Individual Voluntary Arrangements (IVAs) were
introduced under the Insolvency Act 1986 as an alternative to
bankruptcy for businessmen in excessive debt. However, increasing
levels of consumer debt resulted in a huge increase in the number
of non-business individuals seeking IVAs, rising from 400 in 1987
to a peak of 44,000 in 2006. Despite the current economic climate
and increasing levels of personal debt, the number of IVAs fell
to 42,000 in 2007 and our estimate for the number in 2008 does
not exceed 38,000. This is counterintuitive, and reflects (mainly)
banks counter-measures to restrict IVA numbers.
4.2 During 2006, banks began to tighten their
criteria for approving IVAs (NB 75% of creditors by value must
approve an IVA) and many imposed so-called "hurdle rates",
the most well known is HSBC's "40p in the £" requirement.
A number of informed commentators, including R3, believe IVAs
in 2007 could have reached 65,000, but for bank intervention.
The underlying demand and need for IVAs has not reduced. R3 believes
that excessive blocking of IVA approvals is a frustration of public
policy. Insolvent debtors have three choices if an IVA is not
approved: bankruptcy, a Debt Management Plan (DMP) or "hanging
on as best they can".
4.3 Recommendation
The Insolvency Service has a role in protecting
public policy on insolvency issues, which includes campaigning/
highlighting the IVA issue and so should more fully use or enlist
powers as necessary to achieve this.
4.4 Proposed changes to personal insolvency
There are a large number of legislative initiatives
which are about to be introduced to deal with personal debt. Those
in the process of being introduced include: Debt Relief Orders
(DROs), Enforcement Restriction Orders (EROs) and changes to the
Administration Orders (AOs) scheme, all of which deal with differing
levels and kinds of debts. R3 is concerned that these measures
are being introduced in a piecemeal and disjointed fashion by
differing parts of Government. There does not appear to be a discernable
coherent policy to tackle the underlying problem of personal debt.
4.5 Recommendation
R3 believes that the Insolvency Service should
manage/oversee all insolvency debt solutions to ensure consistency
and coherence.
4.6 Simplified Individual Voluntary Agreements
(SIVAs)
SIVAs were proposed by The Insolvency Service
as a "third option" to bankruptcy and "normal"
IVAs, aimed at debtors of less than £75,000 (a group one
might call "the indebted poor"). With a proposed 51%
of creditors needed to agree a SIVA (75% of creditors approve
an IVA), and with reduced costs, this was a solution designed
very much with the debtor in mind, but also with benefits to creditors.
4.7 The Service suddenly announced in November
2008, after three years of work, the withdrawal of their SIVA
idea apparently finding only at the eleventh hour that after three
years of work, the Legislative Reform Order (LRO) solution was
"inappropriate". R3 believes that abandoning SIVAs leaves
a whole swathe of personal debtors with fewer options; and the
faith they place in banks to allow a "market solution"
to be unjustified and misplaced.
4.8 Recommendation: R3 calls on the Insolvency
Service to review its plans and find either time to introduce
the SIVAs as originally planned or reflect on how the planned
procedure can be accommodated under the current insolvency regime.
4.9 Debt Management Plans (DMPs)
A DMP is an unofficial, but formalised agreement
between an individual who is in financial difficulty and their
creditors. Such people are technically insolvent. DMPs can be
appropriate for some individuals, providing a structured way to
repay debt. However, they are unregulated, meaning that some plans
can become "debt slavery", as there is no guaranteed
debt write off; freeze in interest or charges; and they can run
for decades (R3 has heard of a 70 year plan).
4.10 There are no official records of the number
of DMPs currently in place in the UK. Whilst this data is very
difficult to collect, this situation is clearly unacceptable.
R3, working with YouGov,[7]
found that 600,000 UK residents state that they are currently
in a DMP. This number dwarfs the number of UK residents who are
in current formal insolvency arrangements—approximately
150,000 people in an IVA (Individual Voluntary Arrangement) and
300,000 people who have been or are currently declared bankrupt.
4.11 R3/YouGov research also found that 19%
of those in a DMP state that the plan is due to last over 10 years,
with 29% of those stating that they did not know how long the
plan was due to last. By comparison, an IVA usually lasts five
years; and bankrupts are discharged after one year.
4.12 There is concern amongst many IPs that
banks are deliberately refusing to approve IVAs to force debtors
into DMPs. R3 believes this preference for DMPs may be due to
the fact that accounting and current banking regulation allow
lenders to disguise or mask these "impaired" lendings,
thus presenting an inaccurate picture in their balance sheets.
Banks, we believe, can categorize DMP debt as "rescheduled
and performing" and so are not required to raise bad or doubtful
provision against it as with IVA debt.
4.13 Her Majesty's Court Service (HMCS) is currently
looking at proposals for statutory Debt Management Plans. The
proposals are in an early stage and currently do not contain any
finalised detail. There are many unanswered questions: who would
be eligible for the DMPs; will the same structures such as professional
advice and legal protections that surround bankruptcy and IVAs
be available to people looking who enter into DMPs; will bonding
be required; and, most importantly, who would manage the regulatory
regime (HMCS has stated it wouldn't want to)?
4.14 Recommendations
R3 calls on The Insolvency Service to collect
figures on DMPs to build a more meaningful picture of the number
of insolvent people in the UK; and take the lead/have sole responsibility
for the regulation of DMPs, so that these "missing debtors"
are brought within the formal insolvency regime.
1 "The value of the insolvency industry",
centre for economics and business research (cebr) July 2008 www.r3.org.uk Back
2
Institute of Chartered Accountants in England & Wales (ICAEW);
Insolvency Practitioners Association (IPA); Association of Chartered
Certified Accountants (ACCA); Solicitors Regulation Authority
on behalf of the Law Society of England and Wales (LS); Institute
of Chartered Accountants of Scotland (ICAS); Insolvency Service
on behalf of the Secretary of State (SS); Institute of Chartered
Accountants in Ireland (ICAI); Law Society of Scotland (LSS) and
the Law Society of Northern Ireland (LSNI). Back
3
JIEB-Joint Insolvency Examinations Board Exams. It is a requirement
to pass the JIEB exams to become a licensed Insolvency Practitioner.
For further information see http://www.bppprofessionaldevelopment.com/insolvency/jie/ Back
4
(see the Services own publication: Bankruptcy-A Fresh Start.
Insolvency Service, DTI publication, April 2000, at paragraphs
7.19-7.21, (paragraph 4.8). Back
5
"A preliminary analysis of pre-packaged administrations-a
summary", Dr Sandra Frisby, The University of Nottingham,
August 2007. Back
6
https://www.r3.org.uk/members/default.asp?dir=r3library&pag=statementsofinsolvencypractice&i=342 Back
7
R3/YouGov "debt tracker"-surveyed 3,329 participants
in 31 July to 5 August 2008. Back
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