INSOLVENCY PRACTITIONERS could pay a heavy fine for working with the government on bankruptcy cases.
Exposure to liability and losses may be on the horizon for insolvency practitioners signed up to government bankruptcy and liquidation rotas under a pilot scheme currently being tested in Stoke.
Changes to the way the bankruptcy cases are divided out from the Insolvency Service to practitioners could see some forced to take on cases with no right of refusal. The professions’ largest trade body R3 has issued a cautionary note to those signing up to the trial. So why is such a controversial trial taking place?
In Stoke the Secretary of State’s Insolvency Service is trialling the new appointment of last resort rota for insolvency practitioners to receive a bankruptcy or liquidation appointment. If the case is turned down by the first two insolvency practitioners (IPs) then the third is compelled to take it.
Currently the rota consists of the government’s official receiver’s Insolvency Service appointing an IP on its rota. There are several rotas around the country divided up by region, e.g. London, Stoke, Blackpool etc. The IP can refuse a case no matter how many have refused before them. However, many try not to do this because an IP is essentially sent to the bottom of the pile.
But why change a system many in the profession believe works fine? According to RSM Tenon head of bankruptcy Mark Sands, this could be part of an efficiency drive for the Insolvency Service, which has seen its budget slashed in the crackdown on public sector spending.
Currently the service will conduct some investigation into a bankruptcy or liquidation to check if there are recoverable assets. If there are, it will pass the case to an IP on a rota. The IP will then be given a few days to conduct minor investigations of their own, before making a decision as to whether they will take on the case. If lots of IPs are refusing a case the service is left out of pocket, having spent days trying to find a practitioner with no results.
This efficiency drive could ensure cases are passed onto IPs without the service having to scour the rota for days, or even weeks, on end while also moving the case off its desk and processed quicker.
Another explanation could be that several large firms are on rotas around the country and are too big to take on smaller cases so refuse any that do not meet their asset recovery criteria. The Insolvency Service could be left spending time and money working their way down a rota list with several IPs from larger firms refusing to take on cases. The latest pilot could be its attempt to force those on the list to take on the cases regardless of their own criteria, to be on its list you must play by its rules.
R3 has warned its members to think carefully about their participation on the rota: “Members should consider carefully their decision, bearing in mind cases that reach the ALR rota have been turned down by two IPs on the Secretary of State rota; and while some may yield rewards, others may result in exposure to liability.”
Currently an IP may come across a case with little funds to recover their fees and creditors returns, but consisted of some fraudulent activity so further funds could be recovered through court processes. The IP is able to hand the case back to the Insolvency Service. The government will then take on the risk, as no case is a sure win, to pursue those funds through the courts.
However, under the new trial the appointed IP would have to decide if it is worth pursuing the fraudulent activity through the courts and take the risk they may not be able to recover their fees if they lose. Or the IP could decide they may not have the funds to pursue the fraud at all.
If the pilot is rolled out, the impact on the working practices of IPs on the rota could be huge. They would have to take on more cases if others decide to drop off the rota.
The costs suffered from the loss-making cases would have to be recovered by charging higher fees says PKF partner Philip Long.
Many believe this trial will eventually find its way around the country and all rotas will work in this manner.
However, according to the Insolvency Service the trial is small scale and low key. There are just ten insolvency practitioners signed up in Stoke. There is a possibility that the pilot will later be rolled out in Blackpool which has 26 IPs on its rota.
The service also claims the trial was “designed at the request of local IPs to deal with cases which the Service regards as marginal in terms of asset recovery, but which the locals were anxious to take appointments in”.
There have been six appointed cases already with the Insolvency Service claiming it will evaluate the results of the pilot towards the end of the year, but practitioners have been warned, by their insolvency trade body, beware of the case behind door number three.
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