There remains much economic uncertainty ahead and it seems that insolvency practices are likely to continue to remain important drivers in accountancy firms. However, insolvency practitioners are facing increased regulation and public scrutiny. They need to remain on top of their game to navigate safely through stormy waters, as Ross Goodrich reports.

Background

Although full figures for 2010 are not yet available, the ranks of authorised insolvency practitioners have increased, so that, for example, by September 2010 the Insolvency Practitioners Association membership had increased from 456 at the beginning of 2009 to 500 by September 2010. Anecdotal evidence also suggests that accountants used to dealing with large mergers and acquisitions in the boom times have been turning their skills to assisting distressed companies and working on large insolvencies. The increased profile and renewed interest in insolvency work is hardly surprising given that in 2010 the Office of Fair Trading (OFT) reported that fees earned by insolvency practitioners in a year are around £1bn for corporate insolvencies. This boom has had other consequences. Although this article can only touch on some of these, they are a reminder of some of the risks facing professional practices and their insolvency professionals.

Increasing regulation

First, there have been calls for increased regulation, with a particular focus on protecting unsecured creditors. “Pre-pack” administrations, which have been the subject of controversy, have already been subject since 1 January 2009 to SIP16, which seeks to encourage transparency. Now the Insolvency Service is consulting on the reform of regulation. These proposals follow the OFT’s June 2010 Market Study on the market for corporate insolvency practitioners. The main recommendations centre on the creation of an independent complaints body, changes to the regulatory structure and amending some of the detailed insolvency provisions, particularly to give unsecured creditors more opportunities to influence the actions of insolvency practitioners. It is envisaged that an independent complaints body would take over the complaints handling functions from the authorising bodies, such as the ICAEW, the ACCA and the Law Society. The new body would have powers to deal with complaints regarding fees (fee disputes currently need to be addressed through the courts). The suggestion is that this would enable minority creditors to make complaints relating to the level of fees charged, even where fees have been approved by the majority of creditors. This move stems, in part, from the OFT’s finding that creditors overpay around £15m in fees each year in the administration process, largely because unsecured creditors may have less power to command lower fees than larger, repeat customers, such as banks.

The Insolvency Service estimates that a new complaints process would generate 1000 new complaints a year, although it recognises that there is significant uncertainty attached to this estimate. There would clearly be an impact on those insolvency practitioners who are forced to reduce their fees as a result of complaints. However, depending on the system ultimately chosen for funding, there may well be an impact on all licensed practitioners in terms of increased licence fees (quite apart from the risk of being exposed to dealing with time-consuming complaints). The proposals are at the consultation stage and would require primary legislation.

Complaints and claims

Many disgruntled creditors complain to the authorising bodies in any event. Although the 2010 figures are not currently available, complaints in 2009 totalled 621. Sanctions in 2009 ranged from withdrawal of licences to fines and costs orders up to £5k and £13.5k respectively. However, in order to influence the insolvency process, disgruntled creditors who feel that their interests are being prejudiced have to approach the courts for relief.

Court intervention

Generally, the recent reported court decisions are positive news for insolvency practitioners. Courts are reluctant to intervene in the decisions of liquidators and administrators. For example, in Abbey Forwarding v Hone1, the court pointed out that the test for intervention was a high one and that there needed to be evidence that a liquidator had done something so utterly unreasonable and absurd that no reasonable person would have done it. Here, the directors and shareholders of a company in liquidation sought to replace the liquidator and also sought an order that they could take over the conduct of an appeal to the first tax tribunal. They argued that the only reasonable course would be for the liquidator to prosecute the appeal, something she had decided not to do. The court rejected the application on the basis that the liquidator had taken a reasonable position in relation to the appeal. In a similar vein and in the context of administrations, in Finnerty v Clark2, the court declined to remove an administrator on the basis that, if an administrator was unbiased and entitled to reach a relevant conclusion on the material before him, his decision should be respected.

Misfeasance claims

Liquidators and administrators may also be open to misfeasance claims under section 212 of the Insolvency Act. Such claims will be aimed at situations where there has been a misapplication of funds or some form of breach of trust. However, the threshold for a misfeasance claim is substantially higher than the threshold for intervention referred to above. It is, therefore, no surprise that there are no recent reported decisions about misfeasance claims against insolvency practitioners.

However, it is not all (relatively) plain sailing. Although the court took care not to criticise the conduct of the insolvency practitioners involved, in Hobbs v Gibson3, the court was called upon to remove liquidators, who had been appointed by default when the process moved from administration to a creditors’ voluntary liquidation. The procedural muddles were such that this was the only reasonable course the court felt it could adopt, although the court commented that it would not lightly intervene.

A particularly stark example of things going wrong is Rubin v Cobalt Pictures Ltd4. In a lengthy and highly critical judgment, the court took the view that the conduct of the administrators of a film company had been unreasonable to such an extent that it awarded indemnity costs against the administrators. It also ordered that the costs were to be paid personally, rather than out of the administration funds. The administrators had sought an order to enable them to sell the company and its assets, including those subject to a fixed charge. The court found that the administrators had not properly investigated an assignment of the company’s assets and had failed to engage with the secured creditors before bringing the application. The court was not impressed by arguments that the administrators did not have the resources to investigate and take action regarding the assignment of the assets. What appeared to be a relatively simple assignment will have turned out to be very costly indeed. The costs all round were reported to be many hundreds of thousands of pounds, and this is the type of financial exposure any firm will wish to avoid.

In conclusion

So what conclusions can we draw? Whilst Insolvency Service statistics show a decrease in administrations and a slight increase in compulsory liquidations, industry commentators suggest that there are many more insolvencies to come. Press reports also remain filled with well-known business names entering into administration. The boom times are likely to continue for insolvency practitioners. The courts remain willing to allow insolvency practitioners to get on with the process and to exercise reasonable judgement. However, those doing this type of work need to bear in mind the likely impact of increased competition, closer scrutiny by the regulators and the possibility of protracted and potentially costly court action.