Annual Report 2009
In this year’s Annual Report we review the economic, policy and legislative changes in personal and corporate insolvency over the ten years since the IPC was set up; we also comment on the IPC’s work over this period. We identify the main issues which we think any incoming government may need to address in the course of the next Parliament.
Personal insolvencies in the UK totalled 159,000 in calendar year 2009, representing a fourfold increase over the last ten years. In addition, even larger numbers of debtors are thought to be in informal Debt Management Plans (DMPs) and consolidated loan arrangements. The numbers are likely to remain high for some time to come and could rise further, depending on the strength of the economic recovery.
These increases in numbers were accompanied by a revolution in the ways in which debt advice is provided and marketed. Although not-for-profit organisations (Citizens Advice, National Debtline, CCCS and Pay Plan) continue to play an important role, a high proportion of Individual Voluntary Arrangements (IVAs) and DMPs are now provided by over 150 commercial firms which advertise their services on the internet and television and mostly
advise their customers through call-centre staff.
Government policy in this area should have two main aims. First, to ensure that there is a suite of accessible and understandable statutory debt solutions which combine appropriate debt relief to insolvent personal debtors of all income levels and for all levels of indebtedness with a reasonable level of repayments to creditors from those debtors able to make them. Second, to improve the advice given to distressed debtors, which we believe may
not always be appropriate. We are concerned in particular that some debtors may be put into DMPs or IVAs when bankruptcy may be the better solution, that other debtors may be unreasonably denied an IVA by their creditors or are required to make an inappropriate level of contribution, which may later cause an IVA to fail; and that some debtors cannot afford the fees charged for bankruptcy.
With these aims in mind, we recommend the following actions should be considered by any incoming government:
- There should be a single lead government department responsible for policy-making on personal indebtedness and insolvency. So far as possible personal insolvency cases should be dealt with outside the courts
- Policy must be based on more authoritative and comprehensive evidence. Specifically, government should press debt advice firms to provide regular statistics on the numbers, duration and completion/failure rates for DMPs and consolidation loans comparable to those now available for IVAs
- Further research is needed into the reasons why IVAs and DMPs fail. One way of carrying out such research would be to ask debtors applying for IVAs or bankruptcy about their experience with other types of debt solution
- The introduction of the Debt Relief Order has made bankruptcy more accessible for those on very low income. We see no reason why this option should be denied to low-income debtors with debts in excess of £15,000, who are deterred from bankruptcy by rising fee levels. We suggest that the IS should consider
removing this ceiling
- We do not currently favour the Ministry of Justice’s suggestion for a Regulated DMP. It could well overlap unhelpfully with IVAs and with both Protected Trust Deeds and Debt Arrangement Schemes (DAS) in Scotland and the regulatory arrangements envisaged would overlap (expensively) with the responsibilities of the Office of Fair Trading (OFT) and the Insolvency Service (IS). If the evidence justifies a scheme providing statutory relief from interest and other charges for debtors, who can repay their debts in full, the Scottish DAS should be looked at to see if it may provide a model for the rest of the UK
- There should be more “joined-up” regulation and monitoring of the large debt advice firms which offer statutory debt relief (IVAs and DROs) and informal debt solutions such as DMPs. In the long-term there may be a case for a single system of regulation covering all debt advice firms and the key individuals in them. In the short-term the IS and the OFT should co-operate more closely. The same arrangements for handling debtors’ complaints about bad advice should apply to all debt advisers, including IPs, as recommended in our last two annual reports
- With a view to improving access to IVAs, the IS should reintroduce its proposals for a Simplified IVA. We support the proposal in a recent consultation document issued by the IS to amend the Insolvency Act 1986 to make it possible for IPs to be licensed to act solely in personal insolvency procedures or solely in corporate procedures or both.
We believe that the UK’s corporate insolvency procedures (including the reformed administration introduced by the Enterprise Act 2002 (EA 2002) are working broadly satisfactorily during a downturn in which realising value from insolvent companies is particularly challenging for IPs. The increased use of pre-packaged administrations (“pre-packs”), ie, the negotiated sales of struggling businesses before they enter administration followed by the rapid execution of the sale, has been much criticised by unsecured creditors who are not consulted in advance and usually recover little of their debt, and by business competitors who see “pre-packs” as frequently enabling a failing competitor to shed its debts and take business from them.
The IPC’s view is that “pre-packs” can be acceptable as a means of realising higher returns for creditors when public advertisement of the business would diminish its value.
But they can be abused particularly if no attempt is made by the IP to find alternative buyers or get a credible valuation. We are also sceptical of claims that “pre-packs” save jobs, because even where the “pre-pack” may temporarily save jobs in the particular business rescued, there may be off-setting job losses in trade suppliers and competitors.
We therefore strongly support Statement of Insolvency Practice 16 (pre-packaged sales in administration) (SIP16) which require IPs to report promptly and comprehensively to the full body of creditors about the reasons for and outcome of any “pre-pack” they conduct. However, we share the concern of the IS, which has now monitored all SIP16 reports for the last twelve months, that too many IPs do not give the creditors a full explanation of why a “prepack” sale has been chosen and how their interests have been protected. Overall, we do not consider major changes are needed in the UK’s corporate insolvency system, which ranks well compared with other developed countries in terms of recoveries for creditors and costs. Specifically, we see no merit in suggestions that some form of the Chapter 11 provisions of the USA’s insolvency legislation would benefit the
The legal costs associated with Chapter 11 are prohibitive and the increased protection it would give to the “debtor in possession” could well produce even stronger complaints from trade competitors and suppliers than we now see in the case of “prepacks”.
We do however recommend that the government should keep the policy and legislation governing corporate insolvency under review in the following ways:-
- The Insolvency Service (IS) should continue to monitor the effectiveness of the EA 2002 in achieving the objectives of the Act and its impact on the costs of insolvency procedures and their returns to creditors
- The IS should continue to monitor SIP16 reports on “pre-packs” until there is a satisfactory level of
compliance. The RPBs should subsequently monitor an adequate sample of such reports for each IP. If levels of disclosure in SIP16 reports remain unsatisfactory, SIP16 should be given statutory backing
- The IS is currently consulting on a number of suggestions for tightening the regulation of “pre-packs”. We agree that IPs who have negotiated a “pre-pack” sale no longer have the necessary objectivity to act as the administrator in judging whether the sale is in the interests of the generality of creditors and should refuse such appointments in line with the provisions already in the Code of Ethics for IPs. The RPBs should give specific guidance to this effect
- The IS should commission continuing research on the performance of “pre-pack” and other sales to previous directors and, if there is evidence of abuse, should consider how best to deal with it.
Finally, we believe it is essential that the IS should have sufficient resources to police the Company Directors’
Disqualification Act by investigating all reports by IP office-holders which contain prima-facie evidence of misbehaviour. We were also dismayed to learn that neither the IS nor Companies House have the resources or a system for monitoring compliance by directors with disqualification orders or undertakings.
We recommend that the IS and Companies House should work together to set up a monitoring system at the earliest opportunity.
The Regulation of the Insolvency Profession
We consider that the majority of IPs carry out an often difficult job competently and conscientiously. They have to master and apply a formidable body of legal, accounting, financial and commercial knowledge and skills. They often have to take rapid decisions in difficult circumstances and can be exposed to significant risks if they get things wrong.
With the exception of the complaints procedures we believe that the current system of devolved regulation is broadly satisfactory. The work done by IPs as office-holders is heavily (sometimes over heavily) regulated. The monitoring system, however, seems relatively “light-touch”. Visits to firms regarded as low-risk are infrequent and focus on systems and procedures. There may be a case for monitors inspecting larger samples in “high-risk” areas such as “pre-packs” and on the personal insolvency side firms and IPs with relatively high IVA failure rates. But we recognise that in a small profession regulatory costs must be tightly controlled and in the case of corporate insolvencies that the creditors are also able to challenge serious abuses through the courts.
The delegation of authorisation and regulation to seven bodies (eight including the Secretary of State) allows problematic differences of approach. There is also a risk that those RPBs which represent the legal and accountancy professions may sometimes give priority to what is convenient for most of their members who are not IPs rather than what is particularly appropriate for the specialist insolvency profession. The question of a single regulator is not currently on the agenda and there are arguments for and against such a change. However, within the present system, the IS should continue to encourage the RPBs to move towards a single set of monitoring standards, a uniform frequency of monitoring visits carried out by a joint monitoring team and to set up a single reformed complaints and disciplinary system which allows complainants to take their case to a fully independent arbitrator.