Insolvency makeover a step too far

THE INSOLVENCY PROFESSION’S BIGGEST HITTERS are demanding an audience with the government to convince it to change direction by tweaking the industry rather than undertaking a major overhaul.

The concerns are centred on one particular proposal, the introduction of an independent complaints body, which leading members of the profession believe will have a detrimental effect on business, creditors and insolvency practitioners (IPs).

The Big Four and insolvency trade body R3 co-signed a letter addressed to insolvency minister Edward Davey MP in the hope they could persuade him to update existing procedures rather than radically change them.

Tweaking what is already in place is more advisable than introducing another regulatory layer, said Neville Kahn, partner at Deloitte and one of the co-signatories.

“Clearly there can be improvements but not a radical overhaul. Essentially they [the government] are fixing something that is not broke,” said Kahn.

One of the main grievances of introducing a new complaints body is its impact on payment of IP fees. Currently, fees are agreed at the beginning of an administration or liquidation by a creditor committee but, under proposed changes, a single creditor or director can make a complaint to the body at the end of the process. This means that an IP would be forced to withhold payment to all creditors and themself while the issue is resolved.

If the complaint is found to be without merit, the IP might have to include the added time spent waiting for a decision as a time cost and part of the administration expense, reducing creditor returns.

R3 president Frances Coulson said: “These new proposals give the green light to malicious complainants to hold up the process and leave unsecured creditors with nothing.

“Under the new proposals, insolvency practitioner fees can be agreed by the majority of creditors but then challenged at the end by a minority creditor or angry director. The cost of making a complaint is free to the complainant and, if the complaint is not upheld, it will be paid for out of the insolvent estate.”

Failed fee challenges will cost £2m annually (see box), R3 estimates. Lobbyists have already started to estimate the costs associated with this new body: grievances could cost creditors up to £8.2m annually based on 700 complaints and 300 fee complaints.

The trade body predicts that, if there were 1,000 complaints and 2,000 fee complaints in a year, the cost to creditors would increase to £21.5m by £13.3m.

“We support measures to give unsecured creditors more of a say but the degree of increased regulation proposed is disproportionate and counter to government policy to reduce red tape,” Coulson said.

“The proposals are likely to reduce returns for creditors while undermining what is good and sensible in the current system.”

Another concern is that reform could see creditors refrain from engaging with IPs during the insolvency process, waiting until the case is finished to air their grievances.

R3 suggests a better plan would be that unsecured creditors be given increased powers to choose the IP and force them to be more transparent about their fees.

It also believes that government departments, which often become unsecured creditors, should play a bigger part when a company collapses. HM Revenue & Customs and the Redundancy Payments Service (which pays employees redundancy and recoups the cost by becoming a creditor) should ensure that it is always present at creditor meetings and use its bargaining power to make informed decisions to the benefit of all unsecured creditors.

Coulson said: “It is within the government’s gift to harness the market power of unsecured creditors, not by legislating but by doing their jobs as large and repeat unsecured creditors.”

Among the signatories to the letter are PwC partner Tony Lomas, KPMG partner Richard Heis and Ernst & Young partner Alan Hudson.

Vernon Soare, ICAEW director of professional standards, said: “We are supportive of any measures that will help improve transparency and confidence in insolvency procedures, providing they are practical and do not add costs into the system. The key will be to ensure that any proposals are well thought out and evidence-based”.