House of COMMONS









Tuesday 27 January 2009


Evidence heard in Public Questions 1 - 95





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W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935


Oral Evidence

Taken before the Business & Enterprise Committee

on Tuesday 27 January 2009

Members present

Peter Luff, in the Chair

Mr Michael Clapham

Lembit Öpik

Mr Anthony Wright


Witnesses: Mr Stephen Speed, Inspector General and Agency Chief Executive, and Mr Graham Horne, Deputy Chief Executive, The Insolvency Service, gave evidence.

Q1 Chairman: Gentlemen, I am sorry to have kept you waiting for a few minutes; we had some other business today. I am also sorry we are slightly light on the Committee today. We have got some colleagues on Bill committees which does sometimes happen. Can I say how grateful I am to you for coming and for the memorandum you provided the Committee with before this evidence session, and ask you, as I always do, to introduce yourselves?

Mr Speed: Certainly, Chairman. I am Stephen Speed, Inspector General and Chief Executive of The Insolvency Service.

Mr Horne: I am Graham Horne, Deputy Chief Executive.

Chairman: As I think you understand, this is a session about two things, our general scrutiny work of the non-departmental public bodies which come under the Department for Business, Enterprise and Regulatory Reform aegis, and we will be asking you questions about that initially, but we also want to ask you questions about insolvency practice and policy, particularly in the light of the current recession, and pre-pack administrations which we will be asking you questions about a little later on in the evidence. We will begin if we may with some questions on the routine scrutiny of your organisation.

Q2 Lembit Öpik: You have been in the job now about six months; is that right?

Mr Speed: About 15 months.

Q3 Lembit Öpik: Sorry; I was a year out. In that time presumably you have had a strategic look at the Grant Thornton recommendations.

Mr Speed: Yes.

Q4 Lembit Öpik: To be quite specific about those, they recommend improving vetting procedures, increasing career development opportunities for the workforce and also introducing a new regional or national management structure for all investigative staff. How do you feel about those recommendations? There would obviously be quite a bit of structural and strategic change if you were to take on board those recommendations.

Mr Speed: I feel very positive about those recommendations. You are right: as a newcomer coming into the Service I felt the need to get a little bit of help to look at the picture from the strategic level, particularly in relation to the way we carry out our investigations and enforcement work. We worked, as you say, with Grant Thornton to do that and I felt that their recommendations were very positive. I would just draw attention to the fact that, of course, Grant Thornton were quite impressed with the quality of the work that we do, but on top of that had a number of suggestions for how we might improve it further, particularly in regard to our effectiveness and efficiency. We have taken a number of steps already since that report was delivered to us. I think the most obvious one is that on 1 January this year we did indeed make the structural change that they had recommended, so we have brought together into a single organisation within The Insolvency Service three rather major components of our investigation work. We have brought together the companies investigations branch, which looks into the affairs of live companies, our disqualification investigations teams, who are the people who investigate allegations brought to our attention by talking to practitioners, and also a team we call the enforcement team. They carry out a range of functions which in the legislation are secretary of state powers. There is a separation of duties that we have had for some time. We have brought all those together, and you were right to draw attention to the fact that one of the things I am very interested in achieving as a result of that is that our examiners, who are very highly qualified and well-trained people, have a broader career prospect ahead of them. There was a tendency, I think, in the past for people to arrive in the Service and tend to stay in the stove pipe in which they arrived and I would like to see that broken down; I would like to see people starting to use their skills in different parts of the organisation.

Q5 Lembit Öpik: So you feel that you are achieving a better connection between the three silos that you are describing?

Mr Speed: Absolutely. In a sense one of the unintended but nevertheless extremely good by-products of having Grant Thornton in was that it catalysed a whole range of discussions within the Service which have really borne fruit in the last 12 months. It has now become a matter of routine that all the different enforcement and investigation parts of the Service do not just talk to each other but do business together and think carefully about how they can share their learning with each other, so yes, it has been very positive.

Q6 Lembit Öpik: In essence do you feel you are achieving the career development opportunity target, which was a recommendation set for you, by bringing those together?

Mr Speed: You do not achieve something like that overnight, but I am very confident that we will. There are structural issues to overcome and also cultural issues. In organisations as big as the Service you tend to find that there are cultures in different places. I do not think it is going to be a particularly difficult job but it will take a little bit of time. Certainly in the discussions I have had with our professional investigators in all the different parts of the Service they have been very positive about this and are quite looking forward to seeing them come to fruition.

Q7 Lembit Öpik: Moving on from though still slightly connected to that, is it your intention to handle more insolvency cases through official receivers rather than contracting them out, if you like, to private practitioners?

Mr Speed: That is quite a complicated question and I know it is a matter of some controversy with some of our stakeholders, so let me explain the underlying philosophy. The vast majority of the cases that our official receivers deal with are bankruptcies in which there is no real value, and our view is that even if we wanted to invite other people to take those cases on we probably would not be able to because there is no value in them. In a sense the official receiver has a position of appointee of last resort. There is, I think, a degree of questioning in the public mind about some cases we do where there are considerable assets, and what I would like to say about that is that we will only do cases with assets in them where the realisation of the assets is entirely straightforward and we can do it quickly and cheaply, and we will do those because the underlying objective of what we are trying to do is to return as much money as we can to creditors. Where we come across cases where the realisations are going to be too complicated and our staff are not sufficiently trained, and we do come across 1,000 or so cases a year where we have been the initial appointee, we will usually seek a secretary of state appointment of a private sector insolvency practitioner.

Q8 Lembit Öpik: Do you have any strategic intention to develop that in-house capacity to handle more complicated cases or are you saying that you do not think that is good use of the Service's time?

Mr Speed: We are satisfied with the policy that we have at the moment. We recognise that some of our stakeholders have some reservations about it and on that basis I am very pleased to be able to say that we have agreed with the trade association for insolvency practitioners, R3, that later in the year we will do some joint research with them about the costs of doing this sort of work in different scenarios. We always like to keep an open mind but it seems to me that the underlying public policy objective which we must focus on is trying to return as much money as we can to creditors.

Q9 Lembit Öpik: Obviously, how much you do has an impact on the profession as a whole. Have you given any consideration to the potential impact on the quality and viability of the profession as a whole, it being dependent on how much you do yourselves?

Mr Speed: It is perhaps helpful to remember that the profession does a great deal of the work itself already. Certainly on the corporate side our estimate is that insolvency practitioners will be doing about three-quarters of corporate cases, plus, as I mentioned a moment ago, we seek secretary of state appointments in more complicated company winding-up cases. The most recent figures I have got are around 1,000 in the year. On the personal side, of course, insolvency practitioners do individual voluntary arrangements (IVAs). In addition, we would seek secretary of state appointments where bankruptcy cases are complicated, and I think in the last year we have done about 5,500 of those, so even in that area where we do seem predominant we reckon that something like 44% of the work is being done by the profession.

Q10 Lembit Öpik: Finally, I want to ask you the degree to which you might be hampered by a lack of understanding by businesses and also by the general public in terms of the insolvency services which are available. Obviously, very few people go through it at all, and no business wants to, so is there a barrier to the effectiveness of applying the Service's, and indeed the sector's, skills effectively?

Mr Speed: I think you have to start from the proposition, do you not, that, like it or not, insolvency is a pretty complicated subject? That is what I have found, certainly in the last 15 months, and for an individual who has managed to get themselves into some form of financial distress there is quite a lot of choice out there, and, of course, if you are in distress choice can mean difficult decisions. We would certainly support any measures across government or the voluntary sector, or indeed anyone else, to make sure that people get the best advice they can. The contribution we make to that is not so much in providing individual advice, which we really believe we cannot do, but nevertheless in making sure that the channels people use have access to the best and most authoritative guidance that we can give them. We have a very proactive approach to providing information. If I can give you some examples, we hold the national statutory database for bankruptcies and IVAs and we get about seven hits a minute on that database, about 3.5 million a year, so a lot of people are interested in that sort of thing. We have about 40 information leaflets available as hard copy, download, even MP3 format for some of them, and you will find most of those in any citizen's advice bureau you go to and lots of other help offices that you might need to use. Indeed, one of our leaflets that is very popular is entitled Alternatives to Bankruptcy and that is designed to first of all make people recognise that there are alternatives and try to give them some information about what those alternatives may be. I think I am trying to give you the message that we take very seriously the responsibility we have as custodians of the system to try to give people the best information we can about it.

Q11 Lembit Öpik: If a business is about to go insolvent is there any guaranteed methodology for advice from, say, their own accountants which makes sure that that business knows the procedures?

Mr Speed: Certainly an accountant would be expected to be extremely familiar with the corporate insolvency provisions. Indeed, most of the insolvency practitioners we deal with are accountants or lawyers, so I would expect that to be the case. I think I will use the opportunity of your question to stress that the most important thing that a company or an individual can do is to take advice and act early. A lot of the most difficult cases that we see, and I am sure that insolvency practitioners see, are where people have not recognised their problems early enough and have allowed them to become overwhelming.

Q12 Mr Wright: Is the request by the department to reduce your case administration fees by 15% over the next couple of years going to affect the service quality that you can provide?

Mr Speed: I will ask Graham to say a word about the detail of that in a moment, but our view is that it is not. Our view is that, like any other part of government, we should be subjected to pressures on our efficiency, pressures to do the job we do better on a continuous basis, and that target was agreed with our parent department a year and a half ago on that basis. I would like Graham to explain, but we are fairly confident that we are going to be able to deliver that without difficulty.

Q13 Mr Wright: You said that was with agreement with the department. Was that a figure that you put forward that you could achieve or was it through negotiation or compromise?

Mr Speed: We would not want to put forward a figure we could not achieve. It was a figure we put forward on the basis that it seemed to us to be reasonably consistent with the pressure that the department generally was under to reduce its costs across the piste. I think you will find that most departments are facing the prospect of having to do their work with 5% year-on-year administration cost reductions, and we feel that we needed to be kept to the same discipline, provided, as your question implies, that we can continue to offer the level of service which we have offered in the past.

Mr Horne: The principal way in which we are going to achieve it, which, as you said, is challenging but we think achievable, is through an IT-led programme of change. We are investing some £70 million in IT systems which we think should bring about a net benefit of £30 million or £40 million and it is that which we think is going to be the main way in which we will achieve those efficiency savings. As well as achieving efficiency savings the IT will also help us improve our service to customers through such things as the speed of processing, improving the quality of the output and also making services accessible online.

Q14 Mr Wright: I am in a difficulty when we start talking about IT and improved services. There is always slippage in the cost. You mentioned, was it, £75 million?

Mr Horne: It is £72 million.

Q15 Mr Wright: Is that a realistic figure? Are we going to see slippage in terms of the time for implementation? Are there going to be difficulties and errors within the system? That is where I find it is difficult when you rely on savings in the Service of up to 15% and you can deliver those, but - and there is always a "but" - it is all to do with the fact that you need to modernise your IT and that all the timescales generally slip.

Mr Horne: The programme is now sufficiently developed for me to have a degree of confidence that we will deliver it in the summer, so it is not as though this is a way away. We have had some issues over the last few months, like every IT programme does. I am pleased to say we have kept within the £72 million budget so we are quite close to delivery. I am confident the £72 million budget will still be sufficient to deliver the changes. We are quite well advanced with the development of the systems. We expect them, as I say, to go live in the summer and then we will start reaping the benefits from those systems, which will be productivity and efficiency savings which will then feed through into case administration.

Q16 Mr Wright: Of course, the other part of the equation is the fact that you rely quite heavily on a number of incomes from various sources which are really outside your control. There is funding from BERR and the recovery of legal costs in court proceedings. Does that make it difficult to predict what level of service you can provide and would it not perhaps be far better for you to know exactly what your budget is going to be rather than relying on an unknown quantity?

Mr Speed: That was the way that the Service was run up until 2004. The problem with that is that it puts a huge amount of risk on the department because the department, having to fund in particular the case administration work, then bears the risk of having to deal with significant changes in the caseload, such as we have seen in some parts of our organisation recently, without having the funds to back that up. The great advantage to the Service of the net funded regime which came in in 2004 is that where we are delivering public services we are able to collect fees to cover the costs of what we do.

Q17 Mr Wright: So you do not find that a difficulty, predicting the level of service that you can provide, because you obviously assume that you are going to get recovery of legal costs?

Mr Speed: Predicting the volume of demand that is put upon, for example, the official receivers or the redundancy payment service, is incredibly difficult so I would not want to pretend that that is easy, but in the official receivers' area the point is in a sense that every case we do brings in the income that we need to cover the costs of doing it.

Q18 Mr Wright: You have said that you can deliver the service at the level that you have done before, but you did approach the department for a supplementary estimate in 2008-09 for £14 million in relation to case administration. What was the reason for that?

Mr Horne: What happens is that on our fee funded side we get fee income and the fee income equals costs, so as part of the parliamentary approval process we have to ask for a supplementary estimate to say our costs have increased, but it is a net zero because our fee income has also increased. The reason it has gone up by £14 million is that we have more cases. On the case administration side, more cases equal more fees and therefore it zeroes off, which is not true on those parts of the business which are funded from a programme budget.

Q19 Mr Wright: I am sure somebody with an accountancy degree will be able to understand but an engineer would not be able to do that perhaps.

Mr Horne: I suppose the point is that we were not asking for more money from Parliament. It is the accounting side of the transaction which balanced off to zero.

Q20 Mr Wright: So at the end of the day it is just a paper transaction?

Mr Horne: On the case administration side more cases equal more fees, and therefore the fee should cover the cost of carrying out that administration.

Q21 Mr Wright: And this is an annual event, that you call for a supplement if there are more cases?

Mr Speed: Whenever the case volume is different from the projections that we have made, clearly we have to adjust our books as we go through the year.

Q22 Chairman: Just to be absolutely clear that I have understood that correctly, the BERR winter supplementary estimate said that £14 million was a "bad debt provision for case administration fees", £14 million in relation to case administration fees that the Service no longer expects to recover. I am probably just not understanding. You say that it nets out and yet there is a £14 million bad debt provision.

Mr Horne: But our fee structure is based around the fact that we predict a 12% bad debt rate.

Q23 Chairman: 12%?

Mr Horne: Yes, but that is built into our fee structure, so in asking for that estimate I think it is something to do with the way the accounts have to be approved by Parliament. What we were not asking for was £14 million worth of public money to write off bad debts because that had already been covered by the fees we were collecting.

Q24 Chairman: So this is just a bookkeeping exercise?

Mr Horne: It is a bookkeeping entry, yes.

Chairman: I think we might seek some greater clarification subsequently just to make sure we have got that right, but we will not linger on the point today.

Q25 Mr Clapham: Looking at the current economic challenges, if I can just refer to my own town, in Barnsley over the last year we have seen unemployment increase by 82%. Given the severity of the downturn, is it more severe than you expected or less severe, and do you feel that you have the resources to be able to deal with the situation as we move forward?

Mr Speed: Would you forgive me if I do not indulge in economic punditry because it is not really something I am skilled to do? What I am happy to talk about is the extent to which the change in economic circumstances has affected the Service. It is clear that we have seen -----

Q26 Chairman: Just a second. It is a key planning assumption, is it not?

Mr Speed: We certainly make planning assumptions but we have to -----

Q27 Chairman: So what is your planning assumption about the numbers this year?

Mr Speed: This year we said that we would see 74,200 cases going through the official receivers' offices.

Q28 Chairman: Compared to, for last year?

Mr Speed: I think it was round about 70,000. I would need to check that for you.

Q29 Chairman: So a very modest increase, is what you are saying?

Mr Speed: Yes. If I could just put a bit of colour on that, bankruptcy numbers actually fell flat about 18 months ago - a little longer ago than that, actually - and until as recently as summer they have remained flat. At this time last year, when we were writing our corporate plan, you can see that we were in very different circumstances.

Chairman: I will not steal Mr Clapham's questions from him, but thank you.

Q30 Mr Clapham: The key assumptions, of course, need to be adjusted. We have seen, as you say, the increase in insolvencies from 70,000 to 74,000.

Mr Speed: That was last year compared to this year.

Q31 Mr Clapham: So quite a modest increase, and, given the indication that that is going to continue to increase, there must be some need for you to adjust your planning assumptions.

Mr Speed: We have adjusted our planning assumptions during the course of the year, yes. We are now having this year round about 78,000 cases instead of the 74,000 that we originally thought.

Q32 Mr Clapham: But you feel that you have got the resources to cover that?

Mr Speed: Oh, certainly, for that sort of increase, yes. We will not have any difficulty coping with that.

Q33 Mr Clapham: You have quite obviously set the targets that you feel you have the resource to meet. Given that situation, which of your targets is likely to come under the most stress as we move into a situation where the economic scene becomes more severe?

Mr Speed: Obviously, it is a question of degree, but the target that will come under most stress most quickly is likely to be the target for enforcement.

Q34 Mr Clapham: Given that, and enforcement being a major part of the work that you do, do you feel that you can still deal adequately with that with the staff that you have, or will you be needing to call on staff from outside to come in and assist?

Mr Speed: Enforcement is one of the areas which is not fee funded; it is funded by the taxpayer, and therefore we have a budget from the department to carry out that work, so it is not in our gift to flex, as it were, the size of the organisation. This is the point I was making to Mr Wright earlier in relation to the move forward, that we made fees in April 2004, but that does not affect this part of the business. If we were to see a sharp increase in complaints about the conduct of company directors, or indeed about live companies, then we would have to deal with that against the background of discussions with the department, I suppose, about the resources available to us.

Q35 Mr Clapham: One of the things that we do know about an economic downturn is that the statistics indicate that there is an increase in wrongdoing. Given that situation and what you have said about enforcement, is it more likely that you are going to have to call for extra resource, particularly bearing in mind the budget? Is the budget going to be sufficient to underpin the enforcement work that is required?

Mr Speed: We do not have a budget for next year yet. That is something we are talking to the department about.

Q36 Chairman: You do not have a budget for 2009-10?

Mr Speed: We were given an indicative budget, as everyone was at the beginning of the comprehensive spending review period, but we do not have a specific agreed budget for next year yet.

Q37 Chairman: When will that be agreed?

Mr Speed: We are working with the department on that at the moment.

Q38 Chairman: But it is only two months away.

Mr Speed: The same goes for the whole of the department. We are in it with everybody else.

Q39 Mr Clapham: I heard what your reply was to Mr Öpik. Given that we are likely to see this increase, do you have sufficient numbers of official receivers to mean that you can deal with it, or do you see yourselves being much more reliant, for example, on agency staff, and do you feel the agency staff are sufficiently qualified to be able to deal with a lot of the work that is going to come forward?

Mr Speed: In relation to the official receivers' work, the short answer to that is yes. We have a policy, and have had for some time, of bringing into the organisation what we call short-term appointees. It is a rather unhelpful term. What it actually means is people who are fully qualified either in law or accountancy. There is a pretty active market in these people outside, I am pleased to say, so we are able to draw on that market to act as a buffer for our work, and we already have a number of those people working in the official receivers' offices because, of course, apart from the blip that I mentioned a moment ago, bankruptcy cases in particular have been rising quite steadily since about 2003.

Q40 Mr Clapham: Given what we said at the beginning of the questioning session about changes in structure, have you put any measures in place that would, for example, mean that there is going to be more regional engagement than there has previously been, or is that something that is likely to develop over the next two or three years?

Mr Speed: One of the things that I think The Insolvency Service is very proud of is the fact that it is not just a regionally but a very locally based organisation. We have 36 buildings around the country, we have 42 official receivers around the country. We have an office, as you may know, in Sheffield and we have two offices in Leeds. The reason we are disposed that way around the country is that some of the work that the official receivers do, particularly the investigations work they do into potential misconduct of bankruptcy company directors, requires from time to time that we do face-to-face interviews with people, so we think it is quite important to be present in the community and we have specially designed offices to allow our customers to come in and see us. In terms of other parts of our work, the redundancy payments offices, for example, we have those in Watford, Birmingham and Edinburgh, and they divide the country up according to where the headquarters of companies whose ex-employees that they are dealing with are, and, as I said earlier, in relation to most of the rest of what we do, we have three concentrations of staff. I think it would be helpful to point out that one of the biggest concentrations of staff we have is in Birmingham and there is also a pretty big group of people in Manchester. We have bits of most parts of The Insolvency Service both in Birmingham and in Manchester.

Q41 Mr Clapham: On the redundancies issue, this is a very important one. Do you feel that your funding is fit for purpose in the current situation? I will tell you why I raise that. A little earlier today in the tea room, and all the chaps go off in the tea room, I was talking to a colleague about his particular situation in his constituency and he was referring me to companies that went insolvent or shed labour rather than going completely out of business and yet the people who were waiting for their redundancy pay have been waiting since October and some of them still had not received it. Given that situation, does it not indicate that possibly your funding may not be fit for purpose in a situation where the recession is increasing in severity?

Mr Speed: I think we have got a very good story to tell on that, and I would like just to make the point that the only redundancies that we deal with are those which arise from corporate insolvencies, so they may not include the case that you are talking about, but Graham is very close to this area and perhaps he would like to comment on it.

Mr Horne: We have seen a large increase in the number of redundancy claims we have in this process. We processed less than 80,000 last year. This year we think it will be over 160,000. Despite that we are still meeting our target of processing 78% of claims within three weeks, so the case you are referring to I am certain is not one that we are handling because we are processing our claims very quickly. There are circumstances where employees are made redundant and their employer does not pay the redundancy they are due but they are not formally insolvent, so therefore it is not in our system because the company is not formally insolvent. What they can do, however, is go to an employment tribunal and get an order that the company pay and then we will pay out and seek to recover it from the company. There is this state buffer that if the company either cannot pay because it is insolvent or will not pay, provided a tribunal makes an order, we will then be able to process the claim.

Q42 Mr Clapham: So you do not see a situation arising where, for example, the Service is likely to be out of pocket as a result of redundancy arrangements? I mean out of pocket with, for example, the relationship with HMRC in the funding that you receive?

Mr Horne: No. The HMRC, as you say, fund us for administering the redundancy payment scheme. We have had a large increase in the cases we have had to administer. We have had discussions with them and they have said that they have no difficulty in giving us more money so that we are able to cope with the higher body of claims, so we are confident that next year we will be able to cope with the volume of claims that we think we will have to deal with.

Q43 Mr Clapham: If things do get worse, and the indication is that they are likely to get worse before they get better, do you feel that you have sufficient resource to be able to bring in the qualified people from the private sector who are going to be able to assist in an appropriate way?

Mr Horne: On the redundancy payment side it is processing work. It is done by comparatively junior staff. How we have coped so far is by using our experienced staff to manage groups of temporary staff, and that is what we would expect to do in the following year, taking the dedicated and committed workforce we have got who are there processing claims at the moment and using them to lead teams of people we bring in. We have seen a 100% increase and we are still hitting our targets. We could easily cope with quite a large increase next year through this use of our dedicated staff to manage temporary staff.

Q44 Mr Clapham: And that will generally apply to, shall we say, the general case administration as well?

Mr Speed: Broadly speaking, yes, it would. We have got, I think, a considerable way to go before we would face serious difficulties in coping with an upturn in demand in that sort of work.

Q45 Lembit Öpik: I understand that you feel that you are covered. What happens if there is a 40,000 increase? I do not think that is going to happen, but what do you do? What is the mechanism? Do you go to the Government to get private practitioners out to try and deal with that backlog?

Mr Speed: One of the things the Committee may want to note is that we will be putting our corporate plan before Parliament in about two months' time, so if this inquiry is still ongoing you will be able to have a look at what we have concluded we should do. We are, obviously, in a position where we are thinking about what we should do. Should there be an increase? Should cases increase by 10% or 20% or 30%, or maybe even 35% or 40%, - and I am talking now about the official receivers' work, not the redundancy payments work that Graham was talking about - we could cope. At the top end of that it would get more and more difficult but we could cope. My own feeling is that that is unlikely to happen despite the economic climate outside, not least because the level of bankruptcy which we are dealing with is already at a historic high. You might have seen our quarterly statistics at the end of September, that on a seasonally adjusted basis that was the highest level of bankruptcies on record. Beyond that we have to start thinking quite differently, as your question implies. We would certainly be wanting to have discussions with the insolvency profession outside to see how we might cope.

Q46 Lembit Öpik: Is there a mechanism through which you can ensure that Government and ministers are cognisant of what you think are the trends as you see them?

Mr Speed: Oh, yes. Very simply, I write a quarterly report about the state of play across the whole of the Service to my minister and we talk pretty frequently. He is pretty well appraised of what is going on.

Q47 Chairman: I just want to test this question of director misconduct during the recession in a bit more detail before we turn to pre-packs. One of the obvious ways in which directors can misbehave during a recession is to trade when knowingly insolvent, for example. They place large orders with suppliers, knowing they are unlikely to be able to afford them. There have not been very many prosecutions for trading when knowingly insolvent over the last few years. This is an area that is likely to increase, it seems, during a recession. It is a natural defensive response. I think it is evil but the intention quite often is probably to keep the business going. Sometimes it is built on assets which can be sold in a pre-pack administration, and we will come to that later, but this question of funding for director misconduct does concern me. What are you asking for for the financial year? It is £37.9 million this year, 0.5% higher than the previous year. What increase are you looking for in the New Year?

Mr Speed: I would rather wait to see what the department says it is able to help us with. One thing I have said to the department is that I think it would be helpful for the confidence of the market generally if, instead of investing all the money that we get into front-line activities, we were to invest a very small top slice of that money in putting more effort and more resource into publicising the work that we do with a view to creating a better deterrent effect. We do do some of that but my own feeling is that we do not do enough of this and we do not do it well enough.

Q48 Chairman: Publicity?

Mr Speed: Publicity, yes. I think knowledge of the types of sanctions which are available and of the consequences of misconduct probably is not as good as it should be, so, almost in a perverse way, you are suggesting we need more money and I suggest what we need is a little bit of money to do something different.

Q49 Chairman: That is in the evidence and people in the profession have said to us that they think you should. They take part of the responsibility for the low profile of insolvency work and they say The Insolvency Service itself could also do more.

Mr Speed: I agree with that. I do not want to words in other people's mouths but I suspect the department would be fairly comfortable with that.

Q50 Chairman: A truly well-functioning capitalist economy demands the stiffest punishments for abuse.

Mr Speed: Yes. You talked about a specific type of director misconduct. If I could give you a flavour of what we do actually do, in terms of director misconduct on an average working day in this country round about five directors will be disqualified as a result of work that we do, round about six or seven bankrupts will have bankruptcy restrictions placed upon them as a result of what we do, and somewhere in the country, again on average, one person per working day will be convicted of committing an offence on the basis of evidence that we have brought to a prosecuting authority. It is probably worth also pointing out that, in relation to director disqualification, at the moment we are achieving an average disqualification period of round about six years. If you are somebody whose business is running businesses that is a pretty serious sanction to have put upon you.

Q51 Chairman: As long as Companies House monitors it properly and makes sure that new companies are not being formed with disqualified directors.

Mr Speed: I have read the transcripts and we do talk to Gareth pretty frequently.

Q52 Chairman: I note and welcome what you said about publicising your work more. Let us look at this thorny question of pre-pack. I have had a copy of an email to you yesterday which said, talking about the Radio 4 programme File on Four, "Growing numbers of unsecured creditors are being short-changed by chief executive officers who move liabilities and debts to a beleaguered company within their organisation and then call in the administrators to that company. This practice is perfectly legal and is performed in the name of preserving jobs, but at what cost?". I have a lengthy one here which I received this morning just before I came to the Committee, and I think this summarises the situation rather well. I will not name the person; I will happily show it to you afterwards. "It seems inconceivable that the law allows small companies to be put into jeopardy whilst the administrators collect huge fees. The banks and the Revenue" - the Inland Revenue - "are preferred when they already have help from the Government and the buyout teams can usually trade these invaluable assets and goods which have been supplied, and supplied at no cost to them, by the unsecured small businesses. We are currently suffering as a result of a pre-pack administration which left us with a considerable bad debt. As this was billed during the VAT quarter ending November 08 we have had to pay the VAT on this at 171/2 % against no income and we will be unable to claim against the bad debt until the end of the next VAT quarter." That is a policy question that I had not previously considered. "Of course it is good news that many jobs have been saved but it seems to be at our expense. We are unable to borrow on those bad debts so are facing grave difficulties in trading as a direct result of the rescue of our client company. This is our 37th year of trading," - so this is an established business - "so we are old campaigners and have been through recessions before, but this pirate's charter will surely make this particular downturn even more painful for the small business". "Pirate's charter" is the phrase that you and I heard on Radio 4 as well. I could take you through the series of questions. Is there anything you want to say first before I do that?

Mr Speed: I will just correct one point in that, if I may, which is that it is no longer the case that the Crown has preference in insolvency. That was removed in the Enterprise Act. I could talk to you about our thoughts about pre-packs and all that if you wish or I can answer your questions.

Q53 Chairman: Let us see how we go on the questions. I think it is fair to say that the balance of evidence we have received about The Insolvency Service, and I do not want to pre-judge our report, has been pretty favourable to the Service. There are concerns of detail here and there but we have not really heard a litany of complaints against The Insolvency Service, so you can congratulate yourselves on that. We have got quite a lot of complaints about insolvency practitioners and I suppose that is inevitable because no-one likes insolvency practitioners because they are doing an unpleasant job, but I think some of those complaints might be legitimate. I want to move on to policy work here. A good company can have a bad balance sheet; that is possible, and a going concern is always preferable to liquidation because that gives as much overall value to the company as possible. Also, I am coming to the view that pre-pack is a problem for smaller businesses and not the bigger businesses. Most big companies will differentiate between financial and trade creditors and try to look after trade creditors in administration. Is that fair comment?

Mr Speed: I do not think I can answer that question. One of the interesting characteristics of pre-packs is that we are still learning about them. You have, I dare say, had information from Sandra Frisby, who is one of the leading academics in this area, who indeed has been working very closely with R3, and to some extent with us as well, so we need more and better particulars on that sort of thing. One point that struck me while you were reading out the email that you had had, and you are right: we did have a copy of the other one yesterday, is that it seems to me there is a considerable amount of confusion in the quite extensive dialogue that has been going on recently in the press and elsewhere about the position of unsecured creditors. There seems to be an inference being drawn by a great many people that somehow a pre-pack is uniquely prejudicial to unsecured creditors when I think the real position is that unsecured creditors are going to lose anyway, and therefore in the round the sum of things is that the evidence suggests that pre-packs do preserve jobs, economic value and goodwill in a business that has become insolvent or got into difficulty, and therefore, from a public policy perspective, there is an argument, I think, that greater value can be preserved through that route.

Q54 Chairman: I have some sympathy with that but I have got to drill down to the detail. Generalised comments about all pre-packs being bad is not helpful. Let us look at what formal insolvency actually does. It destroys all value in the company effectively, does it not?

Mr Speed: Yes.

Q55 Chairman: And also - and this is perhaps more controversial - when the big accountancy companies like Deloittes and PWC get into a business, and I have no particular cases in mind here, they make huge money in fees for collection, and also the administrator takes on effectively personal responsibility for getting cash for the business, so actually there is direct pressure on the administrator to have a fire sale of assets and get the thing off his books as quickly as possible.

Mr Speed: I would argue that the greater pressure on the administrator is to fulfil his statutory objectives, which are set out very clearly in the Enterprise Act and amendments to the Insolvency Act, and those are very clear and the centrepiece of what the Government was trying to achieve in the Enterprise Act, which was the better development of a culture of rescue for businesses before they completely fail. An administrator is bound by the Enterprise Act amendments to act first of all, in the interests of all the creditors, whether they be secured or unsecured, to try to rescue the company itself that is in difficulty, failing that to try to preserve as much of the business as possible, and that would include a pre-pack, it would include a business sale, a trading on, whatever, and only failing all of those avenues to liquidate the business and distribute the assets to the creditors. I think the difficulty with pre-packs is, as I said earlier, that they are one technique that is available to insolvency practitioners. They are unregulated but they are a technique that is available, but I do not think they cause the effects that people worry about uniquely differently from, for example, trading a business on or selling a business on after administration has begun.

Q56 Chairman: I think there is a difference. The view I am coming to provisionally, and it is only anecdotal evidence so far, is that the promise of pre-packs is all right particularly for smaller companies that go into administration, which typically rely more on their trade credit to finance the operation than the more sophisticated business might, so having long periods of payments to your suppliers is the way you keep going in business quite often. You use trade credit to finance your business, and some big companies do too. Some of the supermarkets one thinks of do, and the fact is they are not being particularly noble, but it is particularly true of small businesses. They rely on trade credit and so there are large numbers of unsecured trade creditors, and do not forget that 99% of all businesses in the UK employ fewer than 50 people so it is a huge issue in terms of employment in the UK. Another test also is where the company is effectively a phoenix company with the existing ownership and management. Often it is good to have the same ownership and management because they are the best placed to run the company and give it a fresh start, but often this combination of factors - smaller companies with a large amount of trade credit and a phoenix company emerging, which is effectively the same business all over again with just the trade creditors dumped rather painfully - seems to be where the issue arises. In macroeconomic terms this may not be of huge significance but good pre-packs of big companies might deliver macroeconomic benefits, but the impact on a lot of small businesses in a recession can be very serious.

Mr Speed: And we heard some excellent examples of that on the File on Four programme.

Q57 Chairman: Including from my own constituency.

Mr Speed: Yes, indeed, and clearly when that happens to you that is not a nice thing. I am still struggling though to understand why it is that we draw a distinction between what would happen in a pre-pack in a given situation to those people and what would happen where the administrator cannot sell the business and effectively has to liquidate it. Those unsecured creditors are going to be pretty much in the same position either way. What I struggle with is trying to see what specific evil pre-packs bring. One of the things that people talk about a great deal is this phoenix business, that is to say, where a connected party, which is a polite way of saying the same person in many ways, ends up with the business again, and I would draw a little bit again on some of the research that Dr Frisby has done, which shows that, to the extent that connected party sales fail a second time down the line, that second failure is very rarely connected with the first. That suggests that these connected party transactions on the whole are innocent, ie, they are people who have run into innocent failure, want to start again, and where they fail the second time the failure is not connected with what happened to them the first time.

Q58 Chairman: This Committee believes in failure. We believe failure is very important, the principles underlying it. There is nothing wrong with that at all because it happens that some people fail and sometimes we have heard evidence that people who have failed have gone on to be better business people the second time around; we can understand that, but there are a lot of anecdotes, particularly in the printing industry, for example, about individuals behaving in a predatory manner.

Mr Speed: Perhaps we need to look at this from a slightly different angle, and I would like to invite Graham to comment on some work that he has been doing, which is that we have to use all the tools at our disposal. We have talked already about the enforcement regime that we have. We have regimes which I mentioned earlier which allow us to disqualify directors. We also, of course, oversee the Insolvency Practitioner Regulation Framework and I think it is very important to get on the record -----

Q59 Chairman: Regulation we want to talk about at the end of our session.

Mr Speed: Yes, sure, but it is germane to this as well because the parties who are concerned with this are the company directors, their financiers and the insolvency practitioners. I have talked about the duties that insolvency practitioners are under. Directors have their own duties under company law. What we have is a suite of powers which enable us to test whether those duties have been adhered to, and Graham might like to say a bit about SIP 16 and the extent to which we think that is quite a big step forward but also what The Insolvency Service is doing in parallel with the introduction of SIP 16 to try to get a better handle on this question.

Mr Horne: As you may know, SIP 16 came into force on 1 January. It imposes duties upon administrators to disclose certain things to creditors in relation to the actions they took prior to their appointment. They have to give details of how they were introduced to the company, what work they did prior to their appointment, what marketing they did at the company, what valuations they took of the business, really to explain to creditors why they felt that a pre-pack was the best thing for them, and it is really down to the administrator's judgment as to, in this case, whether the best thing was a pre-pack. What the SIP 16 statement does is put on record the insolvency practitioner's explanation of why he or she came to that decision. What we are going to be doing is practically policing those SIP 16 statements. We are going to be getting every SIP 16 statement into our office and we are going to be looking at them to see two things: one, that the administrator has followed not just the letter but the spirit of SIP 16, and we will be asking more questions of administrators about whether they did take the right decision in those cases, not second-guessing their commercial judgment but trying to say, "Have you really explained to creditors why you chose this particular route?", so we are looking at how the insolvency practitioner has behaved but also how the directors have behaved. Clearly, for there to be an abuse there probably has to be negligence (at best) on the part of the insolvency practitioner and abuse on the part of the director. We will be able to use the regulatory and enforcement sanctions available to us to approach it on both fronts.

Q60 Chairman: If you have the resources to do it.

Mr Horne: We are going to prioritise this. With the resources we have got we will certainly be putting this as one of our priority activities.

Q61 Chairman: My political experience is that when issues climb up the agenda they usually do so for a reason, not by accident. There is never smoke without some fire. I was going to ask you what steps you will take to monitor the new guidance. I think you have answered that question.

Mr Speed: I just wonder for the transcript whether we should say that SIP 16 stands for Statement of Insolvency Practice 16.

Q62 Chairman: Can I ask as a matter of fact in pre-pack administration what role the court has, what role you have, what happens?

Mr Horne: There is no role for the court in the sense that what the administrator does is that he or she decides that that is the best thing to do for the creditors. The sale is effected on the same day as the appointment or shortly thereafter. The administrator then has to put a proposal to the creditors which explains to the creditors what he or she has done in their interests, and the creditors can vote, if they are going to receive some money, on whether or not they agree with the administrator's proposals. It depends whether the creditors are going to be getting some dividend but there is a proposal that he has to put to creditors. He has already sold the business and you might say, "What are the creditors voting on?", but they will be given the information as to why that has already happened, and if they do not like what the administrator has done they will be able to go back to the administrator and ultimately back to the court if they really think that the actions of the administrator have not been in the best interests of the creditors.

Q63 Chairman: You see, we are dealing with some quite disadvantaged people, are we not? My constituent on the programme lost £54,000 in a pre-pack and then lost more money with the following company. That is his pension fund gone, effectively. He had no redress at all, did he?

Mr Horne: It is difficult for small creditors to take court action but they can raise it with the administrator, they can raise it with the administrator's professional body, they can raise it with us. Government is often approached in these cases as well. HMRC are often a creditor and I think they can have a proactive role to play in this.

Q64 Chairman: I suspect we will see more and more of these unsecured small business creditors coming to us and saying, "We have had our fingers burned". What advice should we give them? What should we tell them to do?

Mr Speed: I am not one to give business advice. It does seem to me though, just as a matter of common sense, and I saw this in one of the press articles recently; I think it was in the Financial Times, that this is a time in the economic cycle when all businesses have to be looking very hard at whether they have priced their own risk properly, and that sounds a slightly sophisticated term, but whether they have covered their base properly.

Q65 Chairman: The trouble is here that the bigger problem is getting credit insurance. In fact, it has been put to me that credit insurers are not treated properly as stakeholders in insolvency, and that is one of the reasons why they are having problems with credit insurance now. Do not answer that point now but it is an observation. Absent credit insurance there is a huge problem out there.

Mr Speed: I will not answer the question substantively but we have had a very useful discussion with the Association of British Insurers a mere matter of months ago, so we are engaged with them.

Q66 Chairman: Yes, but it has got worse recently. The Government, to be fair, is looking at what it can do here with some urgency.

Mr Speed: We have got anecdotal stories out there, we have all heard them. The difficulty is getting some systematic evidence that there is -----

Q67 Chairman: The whole business class cannot get access to credit insurance where they used to.

Mr Horne: But if creditors wish to raise concerns they have about how the administration has been handled we have a hotline, we have an enforcement email address. We would certainly want them to email us.

Q68 Chairman: We should put aggrieved creditors in touch with you. That is the answer to my question.

Mr Horne: Indeed.

Mr Speed: It is a very helpful hook for me to say that we would like our hotlines - we have hotlines for all the different types of misconduct that we investigate - to be used more. As I said earlier, we would like to get some more publicity out of all these avenues, yes.

Q69 Chairman: I just want to test a few other things before I move on. One of the claims made for pre-pack administrations is that they preserve jobs but it has been put to me that it is TUPE that does that, the Transfer of Undertakings Regulations. It is not actually the pre-pack; it is the legal requirements. Actually, with pre-pack administrations quite often the jobs are shed subsequently over a period of time and the protection is the protection of TUPE.

Mr Speed: That is difficult to comment on. Again I go back to Dr Frisby, who is the expert in this area, and her research seems to prove reasonably conclusively that pre-packs do preserve jobs. I cannot comment on what happens afterwards because I do not know.

Q70 Chairman: I have not seen Dr Frisby's research. My suspicion is that it deals with the whole range of pre-pack administrations, and statistically in the bigger administrations it is done often consensually with creditors, so her conclusions could be valid, but for smaller administrations which are not done consensually, they are imposed on trade creditors, they would not be valid. That is my amateur hunch on this, and in a recession we must protect the smaller businesses too. Let us go on to Chapter 11. It has been put to me that a lot of Chapter 11 administrations are actually the American version of pre-pack.

Mr Horne: The first thing to say about Chapter 11 is that I do not think the experts agree amongst themselves as to whether or not it would be good or bad for this country. One thing that Chapter 11 does is that, because it has got an indefinite moratorium and leaves the directors in charge, it means that the company carries on almost ad infinitum, sometimes even when that was not the best thing to do. You said earlier on that you believe in failure and I think one point about Chapter 11 is that it almost tries to get rid of failure. At one point I think 50% of the airline seats of American airlines were from airlines in Chapter 11, and I think there is a point there about competition in the market place and whether Chapter 11 is anti-competitive. Chapter 11 is just an insolvency process. It does not stop companies going into insolvency. The question I have asked myself is, is it better for returning value to creditors and for preserving jobs than what we already have? One observation I would make is that it is very debtor-friendly whereas we have had historically quite a creditor-friendly system.

Q71 Chairman: All that you are dealing with is issues of balance; it is a balance of interests, the balance of the ongoing business against the creditors, and here I think you have a different question of balance. I put to you earlier on that at present the balance of pressures on the administrator is to have a fire sale to get rid of the business, to move it on very quickly, not necessarily in the best interests of the wider economy, the company or the creditors; it is a process that has to be gone through, whereas in Chapter 11 with safe havens and debtor-in-possession arrangements it is possible for the company to take some time to think about what is the best model in the interests of the company. With the best will in the world, an accountant coming in knows nothing about how to run a business. He only knows how to get the value of assets.

Mr Speed: An administrator has 12 months, and indeed, if he or she should find 12 months is not sufficient, he or she can go to the court to have that administration extended, so I am not sure that the time itself is a barrier to similar achievements in administration. I would also go back to the point I think I made earlier, which is that the principal objective of administration is rescue. We must not lose sight of that. That is really what an insolvency administrator is bound by law to try to achieve in the interests of all of the creditors.

Q72 Chairman: Have you looked at the new French "safeguard measures", I think they are called? I will not use the French. Have you looked at what their implications are, because that is something closer to the debtor-in-possession arrangements in the US, is it not?

Mr Horne: Yes. We have spent some time looking at other systems round the world. We have taken a lot from New Zealand and Australia. The French have recently done some interesting work which we are looking at and seeing whether there are things we can import, because we are always keen to see if there are things we can, quite frankly, steal from other regimes that would work in the UK economy. Going back to Chapter 11, one of the issues we raised earlier was TUPE. One of the advantages of the American Chapter 11 system is that you can break contracts, which is very good to keep the company going but perhaps not so good for employees whose contracts are broken or creditors who get their contracts broken, so again there is a balance in all these systems.

Mr Speed: And, of course, TUPE derives from European law which the Americans are not yet bound by.

Q73 Chairman: I am just wondering if some of the benefits claimed for pre-pack are over-claimed; that is all I am putting forward. I have a concern about whether the Enterprise Act was good for the good times but has not been quite so good for the bad times, with in particular smaller suppliers facing real challenges. Do you think that the position of unsecured creditors has got worse or better since the Enterprise Act?

Mr Speed: I think from one perspective it has got better. We have moved away from - and the statistics report this - administrative receivership where one person would go in, sort themselves out and leave everybody else hanging out to dry. The amount of administrative receiverships has fallen very steadily since that came in, and indeed has been substituted by administration where the purpose is rescue, so I would argue that the policy framework was designed to help businesses in that position in a more effective way than it would have done before. In practice, of course, what is happening now is something we have not seen for 15 years or so, and, of course, if you look at the panorama of business failure, if I can put it like that, it would be very difficult to de-convolute the outright effect of recession as opposed to the effects of the change in the law which took place six years ago.

Q74 Chairman: Have you learned the lessons from post-legislative review of the Enterprise Act?

Mr Speed: I will ask Graham to comment in a moment but, as you may know, we published a rather hefty set of tomes round about this time last year. We can point to specific things in there where a lot of work went into that, and that was indeed in fulfilment of the pledge we made during the passage of the Act itself. It is worth pointing out that we were not in the same economic times as we are now when we wrote that and, as some famous person in history said, it was a little bit early to draw any firm conclusions. I think it was Deng Xiaoping.

Mr Horne: I think that is really what the evaluation carried out said, that it was a bit early to guess, and we need some really hard data as to how well it is doing, bearing in mind the transitional arrangements it will take some time before it starts impacting. The information we have so far is not achieving what we set out to achieve. The jury is still out as to whether it is in fact increasing rescue rates and increasing returns to creditors, and we will certainly need to carry on evaluating it.

Mr Speed: One thing I think it did show was that the average speed of administration has fallen quite substantially since the Act came in. I think it has fallen from about 17 months to about 12. I hear what you said earlier about an indefinite moratorium for Chapter 11, but in practice I think the faster you can do these things effectively the better it is for all the people concerned.

Chairman: I just leave you with the thought that phoenix pre-packs in SMEs might be the focus of political concern. That may be wrong but that is the view I am coming to. Shall we move on to other aspects of insolvency law and policy?

Lembit Öpik: My biggest single concern is what look like extortionate fees which are charged in a position where those who can challenge them are usually economically vulnerable. Do you have a particular view on that, or do you think this should be covered under licensing, Chairman?

Chairman: No, it is part of what I said at the beginning about our last section of questions - the unpopularity of insolvency practitioners. Fees are seen to be very large. It is a question I am not happy about.

Q75 Lembit Öpik: It seems to me that the client is basically in a really vulnerable position and therefore the fees can pretty much be set in what amounts to a monopoly situation.

Mr Speed: I do not think it is a monopoly situation. As you would expect, I think, The Insolvency Service talks to insolvency practitioners and their representatives quite frequently and I often hear anecdotes of people scrapping quite hard to get particular appointments, so I would not say that.

Q76 Lembit Öpik: What would you say once the relationship has been established? I could be wrong about this. It seems very -----

Mr Speed: Once the relationship has been established the people who need to take control of what is happening in relation to fees are the creditors. We do not live in a society in which we regulate prices; we have to rely to some extent on competition, but creditors do have powers, for example, to object to fees that administrators are proposing and they can and sometimes do get the administrators changed. Therefore, perhaps one of the cultural lessons we need to draw from this is that creditors need to be better educated and better facilitated to use the opportunities that they already have in law to get together and decide what it is that they want to pay for in the administration.

Q77 Lembit Öpik: The issue for me though is that the creditors are in a vulnerable position. As the Chairman has already pointed out, often they are in vulnerable financial circumstances themselves. I think every MP has probably been in the situation where one has ended up brokering between creditors and somebody who is trying to decide who gets what. You have said that there is a facility for creditors to work that out. Is there any way that we can make that more robust to give creditors more influence, or certainly a feeling of more potency, when it comes to the setting of fees, some of which, I have to tell you, sometimes have looked rather gratuitous and opportunistic?

Mr Speed: Can I deal with the "gratuitous and opportunistic" first? I think it is helpful to remember that insolvency practitioners are very highly qualified, highly trained, regulated professional people, most of whom are either accountants or lawyers. I suspect you will find that the sorts of fees they are charging are concomitant with what you would expect to pay an accountant or a lawyer. I think part of the difficulty is going to be a perceptual difficulty, that when you are in distress and do not have any money that is going to sound like a lot of money. I think we need to be a bit careful about using words like "extortionate". It may well feel extortionate but whether it is or not is a different question. As I say, we do not regulate prices: we are not a competition regulator either so, in that sense, fees are not something that we directly take a view on.

Mr Horne: Just talking about the Statement of Insolvency Practice which we talked about, SIP 16, there is one about fees as well. The point about fees is that they have to be approved by creditors. There is a SIP, I think it is 9, which says the insolvency practitioner must explain to the creditors why the fees are how they are. I think what we also need to do, in the light of the current circumstances, is check that that is being adhered to by insolvency practitioners as well; that they are giving the creditors enough information for the creditors to make an informed view as to whether or not they will approve these fees. Of course if he does not get his fees approved he will have to go to court to get them approved and there will be some court supervision. There is a process there but I think we have to see that SIP 9 is working and make sure that insolvency practices are explaining themselves effectively.

Q78 Mr Clapham: Before we leave the scene, particularly in relation to chapter 11, which can be enormously difficult - particularly where you have got a company in the UK that is taken over by an American company and then consequently where the insolvency issues are heard in the American courts; again, particularly in relation to long-term liabilities, for example, where there may be asbestos; and I am thinking here in terms of the Turner and Newall issue - do you have a list where you would have your expert administrators, receivers et cetera that you would recommend actually be the people who are associated with a given company, given the complexities?

Mr Speed: I think there may be a slight misunderstanding here: we do not get involved at all in administration work; we do not do that whatsoever. The only type of company work that we get involved in is where a company has been compulsorily wound-up by the courts - and the Official Receivers would deal with that as a matter of course. We do not do any of the other forms of insolvency.

Q79 Chairman: Could I just ask you a question about how law and policy is actually shaped. We have heard criticism, not necessarily of you but of the system, that you are overseeing a piecemeal development of personal insolvency laws which risks undermining its effectiveness; we know with the Debt Relief Orders it is unclear how that fits into the existing regime; and we have also heard about an awful lot of proposals from the Department which have been dropped, and consultations on more than 15 other proposals including the use of electronic communication and repealing or otherwise restructuring parts of the insolvency legislation. It seems that we could do more to perhaps look at the way the law is actually shaped in this area?

Mr Speed: The law is shaped broadly by periodically looking at it strategically in the round. The last time we did that was in relation to the Enterprise Act, where I think we started by issuing a White Paper in 1999 which led to the passage of the personal court insolvency provisions in that Act. Periodically the insolvency world lifts itself up and has a good hard look at itself; and prior to the Enterprise Act that would have happened by means of a court report in the 1980s which led to the Insolvency Act. In between, as it were, those big upheavals, what the Service tries to do is a sort of care and maintenance job, if you like: it is to make sure - because the world does not stand still and because also, as Graham hinted earlier, we do learn lessons from some overseas jurisdictions as we go round and talk to them - the system remains fit for purpose, and also really remains as good a system as we can make it for all of its users. It is at two levels really: it is an occasional huge strategic drains-up, if you like; and then the job we do in between that is to make sure if something is not working quite right that we can fix it.

Q80 Chairman: It does not feel "strategic" to me, certainly. Here is the evidence we have had from the Association of Business Recovery Professionals, paragraph 4.4: "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, Enforcement Restriction Orders and changes to the Administration Orders 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".

Mr Speed: You are referring there to two pieces of work I think the Ministry of Justice are doing.

Q81 Chairman: They want you to oversee all this?

Mr Speed: Yes, I am aware of that and could not possibly comment.

Q82 Chairman: That normally means, yes!

Mr Speed: What I would say is I would not want the Committee to have the impression that we are not working extremely closely with our colleagues in the MoJ, because we are. There is also a consultation going on at the moment that they are working on in relation to debt management plans; and we have been working with them extremely closely for many months now. It may be confusing, I suppose, to the outside observer looking at the fact that different bits of Government appear to hold different parts of the system, but I would like to assure the Committee that we worked in a very joined up way - in particular with the Ministry of Justice, and of course with the Court Service who we work very closely with on the bankruptcies and compulsory winding-up orders that we deal with anyway which come to us from the courts.

Mr Horne: If I could just say about Debt Relief Orders, we certainly think there is a strategic fit there because the reason we are going to introduce Debt Relief Orders is to cater for really, as I characterise it, the people who are too poor to go bankrupt, because there are people with low levels of debt who cannot afford the deposit you need to be able to go bankrupt; and so the Debt Relief Order scheme is aimed at the financially excluded with low levels of debt and no income so they can get debt relief, which they cannot currently get through the bankruptcy process.

Mr Speed: Can I just take a step back to your broad and more strategic question, and just advertise the fact, if I may, one of the things we look at is international comparisons of how insolvency regimes work around the world; and you may be aware that the World Bank has done some work on this recently. I do not want to blow our trumpet too hard but, when we are under fire about whether we should do this, that or the other, it is worth remembering that according to the World Bank's own data we rank about eighth out of 155 companies for the speed with which we deal with insolvency in business in this country, and ninth for the amount that we recover for creditors, which is of course the point we started this discussion with earlier. In all of those cases we actually do considerably better than some of the other countries we have talked about during the course of this hearing. I think it is very important we just remember that that is where we are. We are not in a place where things are fundamentally broken.

Q83 Chairman: It is just interesting to me that we have had two legislative reform orders: one of which has been dropped in relation to IVAs because it is considered primary legislation is a better way of dealing with that now; and the advertising requirements which are nugatory, to say the least, but actually at the margin I thought were unhelpful in a recession to small businesses and I wrote to object to that particular order - and I believe that is not being proceeded with now or is being sent back for further consideration anyhow. There are an awful lot of proposals floating around which do seem to get dropped which is rather strange?

Mr Speed: One of the recommendations that was made to the Insolvency Service, certainly two, three or four years ago, and I think it was the House of Lords that made the recommendation to us, was that the body of insolvency rules, as opposed to primary legislation, had become almost unusably complicated, disparate and so on; and so we undertook a very major piece of work, really to try both to consolidate that but, to do more than that, to modernise the rules. The rules do not allow, for example at the moment, for electronic transmission of documents; they do not allow the use of websites for the posting of documents; all the sorts of things we are used to dealing with; a pretty mammoth exercise. Our law consolidation textbook that we use in the office is something like 450 pages worth of rules; and we are working with the Insolvency Rules Committee, which is a committee of very learned people who work with the Lord Chancellor, to promote that. Some of the measures you have been talking about have come out of that work. I would not say that we are simply picking things out because we fancy it, but those things came out of a determined and consistent approach to try to modernise the rules.

Q84 Chairman: Why are so many of them being delayed or withdrawn?

Mr Speed: In relation to simple IVAs what I would say is that our underlying policy objective remains where it is. Graham might wish to comment a bit more on that in a moment, if we may. In relation to advertising, we only found out that one yesterday.

Q85 Chairman: They are two small ones, but there were 15 other proposals which have been dropped as well I am told?

Mr Speed: We have not dropped those.

Q86 Chairman: You have not?

Mr Speed: No.

Q87 Chairman: "Increasing the use of electronic communication and repealing or otherwise restructuring parts of the insolvency legislation", this is not true?

Mr Speed: We have not actually tabled the Instruments for those yet.

Q88 Chairman: You might just correspond about the details. I have not got a list of the 15 in front of me and I do not want to mislead you.

Mr Speed: Yes, and they are part of the bigger programme which is coming.

Q89 Chairman: Let us just turn quickly to regulation finally. Is there a conflict of interest between the Service's role as a regulator and actually competing as a licensing authority against the other licensing bodies it regulates? Are you a conflicted regulator?

Mr Speed: I could see why people might reach that view. What I would say is, I do not think there is because we do not compete with the regulated professional bodies. We do not go out and market our regulation as something we would like people to sign up to. It happens to be there in statute, and if somebody approaches the Service to be directly licensed by the Secretary of State then that is a service we are statutorily required to deliver. I do not think it gets in the way at all of the work that we do in overseeing the seven Recognised Professional Bodies who oversee the vast majority of insolvency practitioners.

Q90 Chairman: On this question of seven bodies - seven bodies to license 1,618 insolvency practitioners - that seems a bit strange to me. Consistency seems a bit difficult to achieve with such a plethora of bodies?

Mr Speed: There are two points there: there is the consistency point; and the "it looks a bit odd" point. On the latter, that was my view too when I took the post but you always have to work out what the history of this is. The history of this, I suppose, is simply, as I mentioned earlier, insolvency practitioners are either, on the whole, accountants or lawyers; and I think somebody in the past presumably must have taken the view that since there was already a self-regulatory regime for both of those professions, there was no point in inventing something new and different for what is actually a relatively small number of people, about 1,600 or 1,700 people. Consistency comes down to how we do our job - both directly with the recognised professionals and also through the Joint Insolvency Committee, which is a committee of the eight of us who get together to work these things through. I think there has been some criticism of the fact that perhaps we are not as transparent about the way we do this.

Q91 Chairman: That was exactly my next question.

Mr Speed: Let me take that one on the chin. I would be prepared to accept that as what I might call "a helpful bit of feedback". We are now looking to see how we can make a step- change in the level of disclosure that we might put, for example, in our annual report and accounts, and I think there are three parts to this: firstly, about what the regulatory bodies themselves have done during each year in relation to their population of insolvency practitioners; secondly, about what we have done as a direct licensor in relation to it - our population of about 92 IPs; and, thirdly, about the way in which the Service has sat at the top of the pyramid and overseen the work of the regulator bodies. I would agree, I think, that we need to do more to shine a light on that. It goes back to the related point I made earlier: one of the most important things the Insolvency Service is able to deliver is confidence in the market. I think the more information we can put out the more helpful it is going to be.

Q92 Chairman: Do you need more powers to discipline the individuals you license?

Mr Speed: It is certainly true that we do not have the gradation of sanctions that is available to the Recognised Professional Bodies, and I suppose it would be fair to say that it would be good if we did. I think we are pretty effective: we can disqualify or revoke licences. We have the power actually also to restrict the terms of licences that we offer; normally we would offer three years but we can reduce that down to six months, which has a slightly penal effect of requiring an IP to be licensed twice in 12 months, which is quite expensive. Where we do find things amongst the IPs that we license directly, we will have some pretty robust conversations with them, and we will agree plans; and we will agree our visit programme to the IPs on a risk basis - so the ones we are most worried about we will visit most often; and, where there is an action plan in place, if we found that action plan was being disregarded I think we would start to look at the stiffer powers that we have.

Q93 Chairman: In an ideal world you would have a greater range of powers, but you are coping?

Mr Speed: In an ideal world all eight regulators would have the same powers, yes.

Q94 Lembit Öpik: On the question of the seven bodies, I understand from what you have said how that has come about. Forgive my ignorance, but is there a common code which you would agree with those seven bodies so everybody is working to the same hymn sheet?

Mr Speed: To start with, we have a Memorandum of Understanding with each of the regulatory bodies. I am going to take a punt here but I think it would be fair to say they are all pretty much the same. That is the starting point. The second thing is the Statements of Insolvency Practice, which we have referred to a couple of times during the hearing, and there are something like 13 of these statements. These apply to all our insolvency practitioners by whomever they are regulated, and they are mandatory and have regulatory force. In addition, on 1st January, along with all the other regulators, we published a Code of Ethics, again agreed through the process of using the Joint Insolvency Committee, which is the forum where we do this sort of stuff together. That is the long answer: the short answer is, yes, I think!

Q95 Chairman: I have got to the end of my questions. Is there anything you would like to say that you have not had an opportunity to say during the questions you have been asked?

Mr Speed: I would like to take the opportunity since we can, and put it on the record, just to pay tribute to the staff of the Insolvency Service who, as some of you will have observed during the discussion, are under a lot of pressure at the moment but are continuing to deliver really what I regard as very high quality services to our customers. Around about nine out of ten bankrupts that we deal with tell us they were giving them a good or very good service; and many of these people are people who are in quite serious financial distress themselves, and personal distress. I would like to pay tribute to our staff. I would also observe, Chairman, that the Insolvency Service is quite a complicated, complex thing to try to understand. If it would be of any help to the Committee, you would be very welcome to come and visit us and see what we do, because I think that would give you a more concrete flavour about some of the things we have been talking about today. If that is of help to you, please let us know.

Chairman: Particularly if our worst fears come to pass about what is going to happen this year that might be helpful - I hope they do not. Gentlemen, thank you very much indeed for your evidence, we appreciate it.