Changes seem to be happening thick and fast in insolvency law. Since 2000, the Government has given us two important pieces of primary legislation, the Insolvency Act 2000 and the Enterprise Act 2002. Now it proposes new procedures for consumer insolvency. Is the revamped 1986 legislation keeping pace with economic and social realities and expectations, or has it become too complex and unwieldy to survive for another two decades?
Insolvency statute law is vast and increasingly difficult to penetrate. When you look at how the legislative changes introduced since 2000 have had to be accommodated within the 1986 Insolvency Act, you feel the need for a cold towel and a strong coffee. What other act has sections numbered 72 A through H (including a Section 72 DA and a Section 72 GA) and schedules headed A1, B1, 2A and 4A?
Your sympathy goes out to the draftsmen of the 160 or so new provisions. Just take the procedures for companies: since 1986 there have been seven processes. When you add in new variations and adaptations introduced by the Insolvency Act 2000 and Enterprise Act 2002, the list is very long. It includes:
- Company voluntary arrangements (with or without moratoria).
- Administrations (old and new style, some ordered by the court and some initiated out of court by the company, its directors or floating charge creditors).
- Administrative receiverships (still surviving in some circumstances).
- Members’ voluntary liquidations.
- Creditors’ voluntary liquidations.
- Compulsory winding-ups (sometimes preceded by provisional liquidations).
No wonder some are calling for a wholesale rationalisation of the statutory regime.
Regulatory time lag
One area that stands largely untouched by post-1986 reform is the regulation of insolvency practitioners. This key recommendation of the Cork Committee was a novel feature of the 1986 legislation. It was designed to clean up the profession by getting rid of unqualified, and sometimes unscrupulous, ‘cowboy’ liquidators by putting in place a mainly self-regulatory authorisation and supervision system, not unlike the system under the Financial Services Act, also passed in 1986.
But regulation of insolvency professionals now seems to lag well behind regulation in financial services and other areas. The regulatory time lag is apparent in three areas.
First, there is the patchwork of licensing and recognised professional bodies (five in England and Wales, three in Scotland and three in Northern Ireland) that resembles the fragmented system swept away when the Financial Services Authority (FSA) became the single regulator for financial services three and a half years ago. The FSA has its critics, but no one now seriously argues that there should be a return to the inefficiencies, inconsistencies and confusions of the pre-2001 regime. Viewed against that development, insolvency regulation looks outdated. Judging by the results of the regulatory survey by R3 (the trade name for the Association of Business Recovery Professionals), insolvency practitioners themselves seem to feel that change is needed.
Second, regulation under the Insolvency Act does not cover the whole range of debt advice, management and insolvency services. It does not cover the numerous debt management companies operating at the margin of the profession. Here, regulation is at its weakest, and the risks could be significant.
Debt management companies deal with over-indebted individuals and typically provide the following services:
- Advice on restructuring debts, altering debt repayments and achieving an early resettlement of debts.
- Contact with creditors to negotiate arrangements and debt management schemes.
- Managing informal arrangements and debt management schemes where the debtor makes payments to the debt manager to be distributed to creditors.
- Reviewing debtors’ financial circumstances and payment commitments.
The Office of Fair Trading (OFT) licenses these companies. It estimates that there are 50-70 debt managers in the UK providing services to around 100,000 individuals per year – much more than the number that goes through formal bankruptcy and individual voluntary arrangements procedures each year. But the OFT does not have a full regulatory toolkit: it cannot make rules (although it has issued guidance); it cannot supervise or investigate concerns without the cooperation of the company concerned; and its only enforcement tool is to revoke or refuse to renew the debt manager’s licence. Worryingly, this gap in coverage may become wider if the Government’s proposals on consumer insolvency are not implemented with an appropriate regulatory structure.
Third, the system does not include a comprehensive complaints-handling system and ombudsman service. An efficient system with an ombudsman could not only help to resolve issues between individual insolvency practitioners and debtors and creditors more effectively, it could also help to identify regulatory risks and promote compliance with professional standards and best practice.
Since 1999, there have been moves towards greater coordination of regulation between the recognised bodies (with the creation of the Joint Insolvency Committee) and greater public interest involvement (with the creation of the Insolvency Practices Council). Although both are substantial steps forward, they fall short of bringing the benefits that the profession and public could gain from a single regulator and insolvency ombudsman.
New proposals on consumer insolvency
The multiplicity of procedures and terminology is not so great in the field of personal insolvency, but the Government may add to the existing complexity with its (generally welcome) new consumer insolvency proposals.
The proposals flow from real concerns that, despite the 2002 Enterprise Act reforms, the personal insolvency regime is still incapable of dealing with a growing number of consumer debtors. With consumer debt at around one trillion pounds, there could be a major social problem just waiting to happen.
The Government set out its proposals in two related consultations: the Department of Constitutional Affairs’ ‘A Choice of Paths – better options to manage over-indebtedness and multiple debt’, and the Insolvency Service’s ‘Relief for the Indebted – An Alternative to Bankruptcy’. These could add three new procedures (debt relief orders, enforcement restriction orders and compulsory arrangements with creditors), and two new insolvency professionals (a debt relief intermediary and an approved debt manager) to the list of insolvency processes and functionaries.
Rationalisation may not be high on the Government’s agenda, but unless it combines the implementation of its consumer insolvency proposals with a review of the current legislation and regulatory structure, we will be left with a fragmented, complex and unwieldy regime which will need consolidation and reform in the not too distant future.
Richard Peat is a menber of 13 Old Square’s insolvency group. He was assited in this article by David Graham QC and Richard Astor, also members of the insolvency group.