2 April 2014

BPIF responds to Insolvency Service consultation on strengthening the regulatory framework and fee structure for Insolvency Practitioners

On 21 March the BPIF responded to an Insolvency Service consultation paper on strengthening the regulatory framework and fee structure for Insolvency Practitioners (IPs). Welcoming the proposed reforms set out in the paper, the BPIF expresses support for the Government's aim of assisting creditors in insolvency situations by simplifying the fee structure to align the interests of IPs more closely to those of creditors, which it believes should increase returns to the latter. It also stresses that the proposed reforms are essential to restoring public confidence in the handling of insolvencies and in helping to ensure that the profession delivers the best possible outcomes for creditors. 

The consultation was launched last month by Insolvency Minister Jenny Willott MP, following two earlier independent reports commissioned by the government that identified both a failing in the regulatory system  - a 2010 OFT market study into corporate insolvency and Professor Elaine Kempson's review of IP fees, published in July last year. These reports identified failings in cases where there is no secured creditor 'controlling' an IP's fees and little effective oversight by unsecured creditors. Each year IPs realise approximately £5bn worth of assets from corporate insolvency processes, and in doing so charge about £1bn in fees, distributing some £4bn to creditors. In 2010 the OFT found that in just over a third of insolvency cases where unsecured creditors receive a pay-out, fees were estimated to be 9% higher in like-for-like cases than where secured creditors 'control' an IPs fees. Despite discussions with the profession and the regulators, little has changed to address this market failure and the impact this has on the position of unsecured creditors in insolvency situations.

The consultation notes that the most common way for IPs to set their remuneration is on a per hour basis, and disquiet often focuses on the headline hourly rates firms charge and the lack of control over the number of hours charged. The Insolvency Service consider more needs to be done to ensure that creditors and others can have confidence that the fees charged by IPs properly reflect the value of the work they carry out. The consultation sets out a number of proposals to simplify the IP fee charging structure, including restricting the use of time and rate as a basis for remuneration to cases where there is tight control over the work being done (generally, either by a creditors' committee or secured creditors). The consultation also considers ways to increase creditor engagement and also the role regulators have to play in ensuring fees taken in an insolvency case represent value for money.

The BPIF agrees with the Insolvency Service's proposal that IPs should take their remuneration either as a percentage of realisations or as a fixed fee, apart from in those cases where there is tight control over the work being done (i.e. by a creditors' committee or by secured creditors), as opposed to the current method of "time and rate". It argues that percentage of realisations should be the presumed method for setting remuneration, and that other methods of charging should be adopted only for specific aspects of casework (e.g. using fixed fees for statutory duties and time and rate only for investigation work). It concludes that this would align the interests of IPs and unsecured creditors more closely and would offer greater value for money.

The BPIF points out that while the majority of printing companies employ less than 25 people, the industry's customers are significant in size and include major corporates. It notes that the relative bargaining power of this customer base frequently results in terms of business being applied to commercial contracts that require printing companies to extend significant levels of credit in order to secure or retain business. This results in many printing companies having a high level of exposure in the event of a major customer becoming insolvent, which invariably results in them becoming unsecured creditors when this occurs.

The BPIF adds that the printing industry also suffers from the impact of pre-packaged sales in administration, with a relatively high incidence of pre-pack administrations causing significant damage to both creditors and competitors alike. It voices concern that an IP who has previously provided advice to a company on the potential for a pre-packaged sale in administration has an inherent conflict of interest should they later accept a formal appointment as administrator with a view to subsequently executing a pre-pack sale. The BPIF therefore argues that any IP advising a company prior to on a pre-pack sale should be precluded from becoming the administrator for the company concerned, in order to curb the incidence of cases where an IP attempts to secure new business by inviting distressed businesses to enter a pre-pack before other options (such as open marketing of the business for potential sale) have been properly explored.

A copy of the BPIF's response to the Insolvency Service consultation paper can be found here.

A copy of the consultation can be found here

For copies of the two independent reports on which the consultation is based, please see:

http://www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245 (OFT 2010 Report) and

http://www.bis.gov.uk/assets/insolvency/docs/insolvency%20profession/ip-fees-review-july-2013.doc (Professor Kempson's 2013 report)