The insolvency gremlins

Unlicensed debt advisers and conflicting regulatory bodies are still holding reform at bay, says John Verrill


In 1986 the Government created by statute a new profession, that of the licensed insolvency practitioner. The key driver behind the move to license insolvency professionals was a cleaning up of the profession. The Government hoped to exclude those whose probity would not stand close scrutiny, and to a certain extent the initiative worked.

However, there is still a degree of nervousness, both at the Department of Trade and Industry (DTI), the ultimate licensing body, and among the profession’s regulators (there are eight separate regulators for a profession totalling at most 2,000 practitioners) that the licensing and monitoring of insolvency practitioners has not been effective enough in stamping out Spanish practices.

There are operating in the market, openly and aggressively, a number of unlicensed debt advisers who occupy the murky territory between companies and individuals in financial difficulty on the one hand, and on the other insolvency professionals who may act as insolvency practitioners in relation to hapless debtors. Many of these unlicensed advisers charge an unjustified fee for what purport to be rescue attempts which fail, and then introduce the debtors to licensed practitioners in order that the corpses receive a decent burial.

Unfortunately, this kind of arrangement is uncomfortably commonplace.

The connection between the practitioners and the debt advisers tends to encourage leniency on the part of the practitioners when investigating and reporting on the directors’ conduct for the purposes of disqualification proceedings; and worse, there is strong evidence that some practitioners pay introductory commissions to the debt advisers in these circumstances.

There are two schools of thought on the payment of commissions: one is that they are an outrage and should be outlawed completely; the other is that, provided disclosure is made and that the commission is paid from the practitioner’s fees and approved by the creditors’ committee, then there is sufficient transparency to dispel any disquiet.

What can never be acceptable is that a secret commission is paid to any introducer of work out of the assets of the company which would otherwise go towards meeting the claims of creditors.

Commissions can be disguised in a number of ways. In some instances, insolvency practitioners instruct debt advisers to investigate directors’ conduct in exchange for a fee, usually inflated. In other instances their services are engaged for the purpose of collecting book debts, again for an inflated commission. The payment to an unlicensed debt adviser of fees for valuation services is another means of disguising the commission.

Any payment from the estate of the debtor requires to be disclosed on the abstract on receipts and payments which the practitioner must, in the case of an insolvent company, deliver to Companies House. Clearly, there is a need to be vigilant to ensure that such items are not being taken from the assets of companies in which creditors have claims.

The position here is not at all helped by the proliferation of regulators described earlier.

There are at least two separate investigators or monitors, there is no level playing field in terms of punishment and it is perfectly possible (where the insolvency practitioners on a case are regulated by separate recognised bodies) for a disciplinary infraction in relation to a single case to be the subject of two separate sets of disciplinary proceedings. This is difficult to coordinate and hampers the prosecution of delinquent behaviour. It adds to the costs of regulation of the profession and significantly impairs its efficiency.

The time has come for the Government and the insolvency profession to embrace the concept of a new, single regulator in order that this emerging profession can be seen to have come of age in the application of proper professional standards.

As ever, the rotten apples in the barrel mean that, in image terms, the jobs of the squeaky-clean become that much harder when judged cynically by a sceptical public.

It is time for change, but this will not be addressed by the upcoming Enterprise Act, which reforms insolvency law. The Government has let it be known that there is no further appetite for using parliamentary time to reform insolvency. It is for the profession to put its house in order by embracing this challenge and forming a new regulatory body, lest one is imposed, as in Australia.

John Verrill is the vice-president of R3 (the Association of Business Recovery Professionals)