Shining a spotlight on current complaints aimed at the insolvency industry

What are the recent complaints and reports on the insolvency industry? After a number of busy years for insolvency professionals, they are finding themselves and the industry under the spotlight.

Recent action by the Insolvency Service

What are the recent developments?

Press Release: Insolvency Service winds up eight companies for abusing the insolvency regime

Eight companies that were guilty of serious financial irregularities relating to insolvency proceedings or that offered inaccurate and financially damaging information have been wound up by the High Court in the last six months. The closures are part of an ongoing investigation by the Insolvency Service into unregulated companies offering insolvency advice following reports of abuse.

What had the companies done?

According to the press release by the Insolvency Service, directors of struggling companies were given the impression by the companies that:

  • pre-pack administrations were a closed process designed to benefit them rather than creditors
  • asset values would be kept low
  • avoiding disqualification was a matter of giving the right answers to questions from the Insolvency Service’s investigators

The marketing materials produced by the companies also risked bringing the insolvency regime into disrepute by making generalised, unsubstantiated and disparaging remarks about the insolvency profession.

What action was taken?

The Secretary of State applied to court for winding up orders on grounds of public interest pursuant to his powers under section 124A of the Insolvency Act 1986. The assets of the companies will now be under the control of the liquidator. The conduct of the insolvency practitioners connected with the companies will be assessed by their professional bodies to decide what action should be taken.

Why is this important to the industry?

Pre-pack administrations have long been in the headlines and investigations such as this help to stop some of the companies operating on the wrong side of the line while casting a warning to others. Firms offering creative solutions to businesses will need to be cautious with their approach and marketing materials to avoid finding themselves in the glare. Whether the Insolvency Service stems the flow of operators on the wrong side of the line will depend on the resources the it puts behind the cause and the ease with which new companies can be incorporated to fill the gap left.

The restructuring divisions of banks

What is the background to this?

Banks imposing punitive charges on SMEs

Daily Telegraph, 1 August 2013: Banks have been accused of malpractice by ‘impeding lending’, according to a new government report. The document, handed to business secretary Vince Cable, says ‘disturbing patterns of behaviour’ have been revealed, accusing banks of imposing punitive charges on struggling small businesses in order to maximise their own returns. Such actions would be counter the government’s agenda for growth.

There has been a suggestion that some of the restructuring divisions of the major banks may soon find themselves under the spotlight.

Who is the focus of this complaint?

The Telegraph has recently reported on a dossier of research prepared by government advisor Lawrence Tomlinson setting out alleged malpractice in the banks’ restructuring divisions.

What have the banks done?

It is understood that the dossier focused on action taken by banks, such as punitive fees and increased interest rates, in relation to borrowers transferred to the restructuring division following a default or deterioration in the business. The dossier also focuses on the relationship between the banks and the panel firms instructed to carry out the independent reviews and the fees charged for independent business reviews. Concern has been expressed that the banks are imposing their choice of consultant on companies, which can lead to conflicts of interest, particularly if the consultant subsequently takes an insolvency appointment.

What are the arguments?

It is clear that businesses in the restructuring divisions of banks find the process difficult, from the increased management time spent dealing with the banks to the costly advisors that need to be engaged and be paid for by the business. On the other hand, banks will strongly argue against any criticism of high fees and increased interest rates on the basis of increased risk of continuing to lend to the borrower in an insolvency situation. However, in the current climate of fragile economic recovery, the government will be keen that businesses are given the best opportunity to survive.

Pre-pack administration review

What is the background to the review?

Press Release: Review of pre-packs

A review will be carried out to determine how pre-packs are working in practice and if additional steps are required to protect creditors, jobs and business value. This stems both from concerns at the prevalence of phoenix companies and the desire to supplement incoming provisions designed to boost transparency and prevent abuse.

Why are the government focussing on pre-pack administrations?

Pre-pack administration—where negotiations for the sale of a company’s business and assets take place before an administration and the sale executed immediately upon the appointment of an administrator—remains a focus of the government, which announced in March 2013 a review of the use of pre-pack administrations by Teresa Graham. Ms Graham is due to present her findings at the end of 2013 with a final report ready for publication in spring 2014.

Pre-packs have always received a mixed press, from the creditors who lose out in a pre-pack to those who consider them to be an effective tool for rescuing the business. Earlier proposals that included requiring insolvency practitioners to notify creditors in advance of a pre-pack and allowing three days for the proposals to be challenged were dropped after objections from the industry but pre-packs are clearly something that remain on the government’s radar. The scope of the new review is to determine whether pre-packs are in the interests of creditors and the wider economy with a focus on how creditor confidence in the procedure can be improved. We must wait for the findings of the review and any changes to the industry that may result.

For more information, see Practice Note: What is a pre-pack administration sale?

Independent review of insolvency practitioners’ (IPs) fees

What are the most recent developments?

There has been some good and bad news for IPs on the subject of their fees. An independent review by Professor Elaine Kempson published by the Insolvency Service found that the current system of controls on remuneration works well where a secured creditor plays an active part in an insolvency.

Why is the system working when a secured creditor is involved?

The secured creditor has an interest in keeping fees low as fees will affect realisations. In return, the IP has an interest in keeping his place on bank panels and winning repeat work and systems put in place by banks have resulted in IPs tendering for jobs and working for fixed fees, which have all worked to keep fees low.

What is going wrong when there is no secured creditor?

The report found that in a sizable minority of cases, where control of the IP’s remuneration and disbursements lay in the hands of unsecured creditors, the current statutory provisions did not exert the controls as intended, particularly in corporate insolvencies. The reason for this was found to be the lack of competition for the jobs and the lack of oversight by the creditors. While the IP is working for the body of unsecured creditors, the contact with and involvement of the individual creditors is limited—for example, few creditors will attend and vote at creditors' meeting.

What can be done?

The report considers a number of ways of improving the situation, from increasing competition for IPs to empowering the unsecured creditors by improving the transparency of the processes and the information available to creditors. Given the challenges identified in the report, it remains to be seen if any of these suggestions are adopted.

For more information, see Practice Note: Overview Document

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