“Following the recent coverage in the Sunday Times and More 4 news, I think that the voice of creditors should be sought in how the insolvency profession reforms itself.

“Over the last decade or so I have been involved in a number of high profile (and not so well-known thanks to Tomlin orders) cases involving the misconduct of insolvency practitioners.  This work has led me to examine in great detail, areas of our work and legislation that most of us do not consider.  My recent work on Clydesdale v Smailes has looked hard at what an IP does in a pre-pack and where the risks lie for all concerned.  This year I have also been appointed following the failure of four separate insolvency firms where the IP has lost his licence.  2010 appears to contain many more challenging investigations into the conduct of insolvency practitioners.

“There are a number of areas that we as a profession need to address.

1. Unlimited time resolutions.  These do not exist in any other trade or profession and will not last.  It also causes IP’s to slip into bad habits by not maintaining a relationship with those in whose interest they act.  It is not enough to say that we do a good job or that sometimes we do not get paid in full.  Our reputation is damaged by the way in which our interest in the creditors wanes the moment that they have agreed the resolution.  In my view a resolution ought to carry a monetary limit to be valid.  Once the limit was reached, then the IP ought to be forced to seek a further resolution. 
2. Insurance and Bond claims.  In all bar one case I have dealt with in the last decade, whether the IP had PII cover was a major issue.  PII insurers drop their client the moment a claim comes in and often I have played a minor role it what becomes a major battle between IP and insurer.  Aside from the acute distress that this causes the IP who thought he was covered, this is not a satisfactory way to protect the public. Similarly, bond cover creates the illusion of protection from fraud but this is far from the case.  The value of a general bond has not increased in 23 years and should be in excess of £5m to be fit for purpose. Equally the rules for setting a bond and ensuring a bond is taken out simply do not consider what happens when a claim is made.  This lack of protection puts our status as a profession in grave danger.
3. Regulation.  It was shocking to me when I realised the limitations that our regulators have to work under.  Our work in dealing with legal issues, ethics and handling funds is closer to a specialist lawyer than an accountant, yet our regulation is based on accountancy principles.  It is a simple fact that we should be regulated as if we were lawyers with the same levels of inspection and with the power for regulators to intervene to protect the public’s funds that we hold.  Our regulators don’t even have the power to appoint a new officeholder if they take away the licence of a delinquent IP.
4. Education.  The original intention of the examination process was to ensure a minimum level of qualification of IPs.  In formulating the exams, it appears that it is envisaged that the candidates would already be qualified in law or accountancy but there is no requirement for this to be the case.  As a result it is possible to just sit three 3-hour papers and become an IP.  An IP may have fewer qualifications than a junior accountant and yet can take on difficult work with a minimum of experience.  We need to consider examinations structured over years where every aspect of ethics, accountancy and law is tested.  If the candidate is already qualified, then some papers might be opted out, but this should be our minimum.

“I would welcome the views of creditors on these points.  What are your experiences of IPs and where do you believe we need to improve?”

If you would like to respond to Stephen Hunt, please email him at stephen.hunt@griffins.net

Begbies latest Red Flag report focussing on Q3 2009 contains the following headlines:

• Statistics from recessions over the past 40 years confirm that insolvencies peak between one and two years after GDP stops shrinking; scarce credit after this recession may intensify this effect, causing a substantial rise in insolvencies during 2010 and into 2011.
• The number of companies with significant and critical financial problems has fallen in absolute terms both year on year and quarter on quarter, principally reflecting the impact of HMRCs Business Payment Support Service, which has seen more than 215,000 companies defer payment of 3.79bn in tax liabilities.
• The fall in adverse actions against companies this quarter is, to some extent, symptomatic of increasing credit availability and growing business confidence, although adverse actions typically fall in this quarter as key sectors such as leisure enjoy their strongest quarter, and the holiday season both slows enforcement activity by creditors and eases cash flow pressures. This easing of corporate stress is reflected in the ICAEWs latest Business Confidence Monitor in which the Confidence Index has risen from -45.3 in Q1 to +4.8 in Q3, a level not seen since Q3 2007.
• Evidence is mounting that we maybe at the mid-point of a W shaped recession, with a deluge of business failures likely in 2010. Similarities can be drawn with the recession of the early 1980s which also saw a temporary rise in business confidence in 1981 before rapidly deteriorating in 1982.
• Sectors most impacted by adverse actions in Q3 2009 were Engineering and Recruitment, with Critical actions up 31% and 12% respectively on last year. Engineering companies form a large part of supply chains to major manufacturing operations and industrial projects, so they are most vulnerable in the current climate. The Recruitment sector is a victim of rising unemployment, which typically continues and peaks well after the end of GDP shrinkage

Red Flag Alert looks at information daily and compares detrimental data monthly, quarterly and annually, categorised as either Significant or Critical. The experience of Begbies Traynor is that a significant number of those companies with such financial problems tend to subsequently enter into a formal insolvency procedure within a year.

Ric Traynor, Executive Chairman of Begbies Traynor Group, said:

“The third quarter Red Flag Alert statistics demonstrate that the UK maybe in the eye of the storm. The well-intentioned government efforts to prop up struggling companies may provide a necessary lifeline in the short-term, but will ultimately prove futile in many cases. Both banks and trade creditors are also holding off wherever possible in the hope that business fortunes may improve, but Begbies Traynor supports the view of many leading economists that the UK is currently at the midpoint of a W shaped recession.

“Despite the recent UK stock market rally, private equity groups remain on the sidelines, with recently reported UK deals in the third quarter being at their lowest level for 25 years, a clear indication that they believe that the worst is not yet behind us.

“There is every reason to suggest that the unemployment and insolvency peaks of this recession remain some way off. Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies are lagging indicators, and thus seem certain to rise in 2010.”

This article comes from Insolvency News, the leading news site for the insolvency profession. 

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