Is it time for politicians to stop meddling with insolvency?
Insolvency practitioners save thousands of jobs and pull many companies back from the brink, so is it time for politicians to stop meddling with the regime? Ian Harper reports.
The UK's insolvency profession "is a crucial part of UK plc". That's the assertion made by Andrew Tate, vice-president of R3, the trade body for insolvency professionals.
Figures compiled for R3 by ComRes show that from 2013/14, practitioners helped rescue about 20 per cent of insolvent businesses. Some 6,700 of these (41 per cent of formal insolvencies) continued trading in some way after entering insolvency, helping to save around 230,000 jobs.
Notwithstanding this apparent success, the UK insolvency regime hasn't been immune from political tinkering over the past few years, and several of the practitioners we spoke to feel it's time for a break to let things settle down.
David Menzies CA, director of insolvency at ICAS, says: "Changes to IP remuneration, pre-pack administration, the introduction of partial licensing, regulatory powers and insolvency rules modernisation have all been tackled by the previous government administration and are to be implemented by the profession in the coming 12 to 18 months. That's quite a lot of change, and we would like to think that there will be a period of reflection as all of those changes take effect before further substantial changes are contemplated."
Graham Bushby, head of restructuring and recovery at Baker Tilly, warns: "The increased cost of regulation and change could drive a number of insolvency practitioners out of the market with the result that the work could be pushed back to the government."
More issues to address
Nevertheless, there are still issues practitioners would like to see addressed by the insolvency minister Anna Soubry. For Graham Bushby, the key one is a need to promote a "rescue culture".
He says: "There's little empirical evidence to suggest that administrations are promoting a rescue culture. More could be done by the Government to encourage the use of company voluntary arrangements to promote a rescue culture. The current moratorium provisions in relation to this procedure are ineffective and little used which, combined with the almost ubiquitous demand for punitive extended terms and contributions, act as an effective barrier to access and do little to promote a rescue culture or entrepreneurial society."
For Yvonne Brady, head of corporate restructuring at law firm HBJ Gateley: "The time may be right to look at a Scottish equivalent for the Law of Property Act – receivers whose sole duty is to dispose of charged property, which is property against which any debts are secured. At the moment we need to use liquidation or administration under the Insolvency Act to deal with property."
Central to a "rescue culture" is preserving jobs and Graeme Smith, leader of Henderson Loggie's business recovery and insolvency team, wants Anna Soubry to prioritise consultation with employees in an insolvency situation.
David Menzies agrees: "A significant area which attracts attention from politicians and the wider public is the treatment of employees when a company is facing insolvency. The inherent tension between employment law and insolvency law needs to be tackled."
Life after City Link
The high-profile collapse of delivery business City Link at the end of last year saw some 2,700 jobs lost. A joint report from the House of Commons Business, Innovation and Skills and Scottish Affairs committees concluded that the company's private equity owners, Jon Moulton's Better Capital, were "morally, if not legally, responsible for the difficulties that many of these individuals and small businesses now find themselves in", and called for tougher sanctions on company directors to protect staff and creditors.
But are such sanctions appropriate or necessary? Claire Middlebrook CA, managing director of Middlebrooks Business Recovery & Advice, thinks introducing overly tough sanctions may put people off doing business in the UK, but she adds: "That being said, the current scheme could be seen to be easy on directors."
Eileen Maclean, a director of specialist firm Insolvency Support Services, says: "A lot of the criticism over City Link came about because self-employed contractors lost out in the administration of the company, and the self-employed are not automatically classed as employees. Given there are more self-employed contractors in many sectors, I think there's a debate around the changing nature of work and workforce composition, and there is perhaps an argument for widening the definition of 'employee' in insolvency."
What are you charging anyway?
Most professions must now disclose their charges up front and under rules announced by then business minister Jo Swinson on 3 March, IPs in England and Wales must provide upfront estimates of the cost of insolvency work from 1 October. What impact might this have?
Derek Forsyth, head of business recovery and insolvency at Campbell Dallas, says: "IPs are now becoming used to the process of providing fee estimates at the outset of insolvencies and not only in relation to bank appointments. With the creditors effectively paying for the insolvency, prima facie this provides greater transparency to them and a clearer expectation at the outset of the possible recovery to them. In practice, the full facts behind a company's demise and its assets and liabilities are not always made clear at the outset and, in providing an estimate of fees, IPs must be aware of the fact that things may not be as straightforward as they have been portrayed."
However, while Graham Bushby welcomes steps to improve transparency, he cautions against driving the insolvency market into a transactional regime driven by price. He says: "There's a risk that the consistent downward pressure on fees without a real understanding of the complexity of the process will render smaller appointments uneconomical and will push firms out of the market, as well as undermining the thoroughness of the process, particularly in relation to the investigation of director conduct. This would result in more insolvencies being dealt with by the government and the encouragement of bad behaviour by directors."
In his view, the UK regime outperforms those of other key economies, including the US, Australia, Germany and France.
The "pre-pack" process, under which the sale of the business and its assets is negotiated prior to formal insolvency procedures, aims to save the viable elements of a business and avoid the negative impact of an insolvency. Criticism from some quarters over the potential for abuse in this route led to the introduction of a new pre-pack regime, which is set to come into force in October or November. Not everyone is happy with the new approach, however.
Tom MacLennan CA, partner with restructuring and insolvency advisers FRP, says: "It's difficult to see what value is going to be added by the introduction of the pre-pack panel, which is an entirely voluntary pre-transaction event that has to be initiated and paid for by the acquirer and where no account need be taken of the panel member report by the insolvency practitioner or acquirer."
Yvonne Brady says: "In theory, the 'testing' of the pre-pack proposed should ensure more robustness on the other side of the sale. In practice, time can be very limited while funding is still difficult to get. The pre-pack option, while not perfect, may be the only chance for a business and its people. That said, the profession has worked hard to ensure that the pre-pack process has credibility and real commerciality behind each deal."
Sian Aitken, corporate recovery partner at law firm CMS, looks to the EU: "With member states increasingly competing for the most flexible and successful restructuring procedures, a number of IPs will be hoping the Government looks seriously at introducing a formal restructuring procedure, backed by legislation and carrying the benefit of recognition under the EC Regulation."
But the most commonly repeated wish is for improved awareness of the insolvency regime and what it does. Eileen Maclean says: "The media, IPs and government have a role to play in making sure that our contribution to the economy, and the complexities of what we do, are understood and valued."
Graham Bushby agrees, adding: "We would like the Government to avoid 'change for change's sake', and only introduce measures that add value to and streamline the process while promoting a rescue culture and regularising the market place in terms of the legislative and regulatory framework. It is our view that the wider public (and some MPs) do not have a great understanding of the complexity of the insolvency process, the experience and education required, as well as the need to grapple with legislation affecting many different industries."
For Claire Middlebrook, easing the jargon would help: "I would like to see a simplification of the language used, but still imparting the same message, which would allow greater engagement and understanding of what it is we do."
Read the full version of this article in the September 2015 edition of The CA magazine.
ICAS hosts Insolvency Practitioners' Conference
The ICAS Insolvency and Restructuring Conference takes place on 11 and 12 November at the Gleneagles Hotel, Auchterarder.
Bringing together various experts in the insolvency arena, this conference is a combination of case studies, lively discussions and technical updates on topical matters. AS well as high-profile speakers, inclduing Fergus Ewing MSP, the conference includes workshops for practitioners in three distinct strands: personal insolvency, corporate insolvency and restructuring. Find out more and book now.