Analysis: Insolvency profession under the spotlight

Are insolvency practitioners preying on the vulnerable, or providing a vital service for creditors and businesses?

It is this question - and the level of fees they receive for their administration work - that was raised this week in a joint report by The Sunday Times and More4 News.

They estimated a "magic circle" of ten solicitors and accountancy firms - including Deloitte, PricewaterhouseCoopers and Ernst & Young – had made £3bn in fees during the recession (or over an approximate period of two years) from insolvencies alone.

This seems like a hefty number considering the top ten firms in our Top 50+50 survey made £8.6bn combined in the last year.

Although their numbers are estimates the report still raises issues of whether IPs are value for money.

According to Tony Lomas, PwC partner and the lead administrator for Lehman Brothers' European division, the firm has recovered £15bn for creditors as well as taking control of securities, shares and bonds in excess of £40bn.

The firm scooped more than £150m in fees for its first years' work.

"Our fees have been a small fraction of the value we have recovered to creditors," said Lomas.

"We don't change our charging rate in a recession, we don't add X percent and take advantage."

The Sunday Times refers to the Zavvi administration, conducted by Ernst & Young partners, and claims E&Y clocked up £4.2m in fees. The Big Four firm confirmed it had returned 15p in the pound to creditors. This included £25m to unsecured creditors, a taxation recovery of £5m, £2.3m in book debt recoveries and £1m realised from lease premiums, as well as the sale of some stores as going concerns. Peter Sargent, president of IP trade body R3, estimates E&Y administrators' fees equated to just 4% of the estate.

Sargent points to World Bank data, which finds that in the UK the costs of insolvency are 6% of the estate – it is 7% in the US, France is 9%, Spain 15% and Italy 22%.

"As a proportion of the assets realised, 6% of the estate is a world leader, " he said.

"Let’s be clear about who actually pays for our fees – it is the creditors. These creditors, typically banks and asset-based lenders, are financially literate organisations and they know the value of what we are paid to do."

If a creditor feels they are not getting value for money they can always remove an IP, added Lomas.

"Someone has to deal with it [an insolvency expert], someone has to sort the problem out. To recover the money you need the appropriate qualified people to do it," he added.

These arguments are just the beginning of what now looks to be a long-running investigation into IPs' work.

The Office of Fair Trading recently launched an investigation into corporate insolvencies, and the European Commission will be looking at insolvency procedures in all member states in 2012. The Insolvency Service has also launching a pre-emptive "suggestions" consultation on how the profession can be improved – to be closed later this year.

So the Sunday Times/More4 News report is just the tip of the iceberg. The next few years will see IPs' work and fees come under the spotlight, and change is inevitable.

IPs are saying "bring it on". The scrutiny will either support their way of working, or help bring about change and smooth out some rough edges.

"If as a result [of the OFT enquiry] there is a better understanding of the work done in insolvency, and value recovered, then I think that is a positive outcome," said Lomas.

Further reading:

Insolvency practitioners make £3bn in the recession