Chairman’s Report

This is the IPC’s 6th Annual Report and my first as Chairman. The Council’s membership has also almost completely changed in the last two years. So it seems appropriate to recall the Council’s terms of reference and to explain how we interpret them.

The IPC’s remit is to represent the public interest in the work of the insolvency profession and, where we judge it appropriate, to make recommendations to IPs and to the RPBs, which regulate them, on ethical and professional standards and how these are enforced. At the most general level the Council’s aim, in representing the public interest, is to help to sustain and strengthen public confidence in the integrity and effectiveness of the UK insolvency regime.

Under this general heading there are three main objectives we seek to promote in our work:-

• The need for insolvency procedures and IPs to maintain the appropriate balance between the interests of creditors, debtors and of IPs themselves, having regard to the over-riding aim to achieve the best outcome for creditors in the circumstances of each case;
• The need for IPs and the RPBs to be seen to act professionally, fairly and transparently in all their dealings with debtors, creditors and members of the public; and for IPs to be fully accountable for the protection and use of the assets entrusted to their care;
• The need to promote better public knowledge and understanding of the different insolvency procedures; and the need for better statistical information to enable both insolvency professionals, policy makers and the general public better to judge the effectiveness of the different procedures.

All the recommendations made by the IPC both in previous years and in this Annual Report fall under one or more of these headings.

Our work in 2005 has been dominated by the very rapid growth in personal insolvencies, caused by the preceding growth in credit card and other consumer debt and perhaps also by the new bankruptcy regime introduced by the Enterprise Act 2002. The IS’s statistics show that in 2005 there were 47,287 personal bankruptcies and 20,292 new IVAs, representing increases of 31.7% and 88.7% respectively over the 2004 figures. Substantially higher numbers are involved in informal debt management schemes.

Most economists expect this rising trend to continue for some time ahead. As a consequence a large number of people will be going through either a formal insolvency procedure or an informal debt management scheme in the next 5 to 10 years. At the end of 2005 the total number of personal debtors involved in bankruptcy proceedings or an IVA was 95,291.

These trends reinforce the view which the IPC has taken in successive reports from 2000 onwards that IPs and their regulators must take and be seen to have taken all reasonable steps to ensure that personal debtors receive fair, courteous and professional treatment from their IP throughout the process, whether acting as a trustee in bankruptcy or as the nominee or the supervisor of an IVA.

Against this background our work last year centred on four main aims:-

• That all individual debtors should be given full and clear information and “best advice” on the options available to them. The rate of failure of IVAs, while falling, is still apparently around 30%. We have also received both direct and anecdotal evidence of cases, albeit a small number, where IVAs have been recommended and set up for debtors whose only income was unemployment or disability benefit payments and who clearly could not meet the repayments required by the IVA;
• That the RPBs and the IS should have regular annual statistics on the completion or failure of IVAs and on their financial outcomes to enable them to monitor both the effectiveness of IVAs as a policy instrument and the performance of the IPs they regulate;
• That IPs should give prompt and courteous replies to all correspondence they receive from creditors, debtors and the general public; and v That debtors and creditors should be given clear information by IPs about their fees before being asked to enter into commitments and that in seeking approval for their fees IPs should provide their creditors with sufficient information to judge whether what the IPs have done represents value for money.

Some welcome further progress was made on some of these issues in 2005. As regards IVA statistics, the IS has implemented one of the recommendations we made last year and is now able to use an electronic data-base to produce statistics on the failure/completion rate of IVAs both in aggregate and for individual IPs.

On fees the revised Statement of Insolvency Practice 9 (SIP9) should lead to creditors being in a better position to judge whether or not the fees requested by IPs are justified as representing a reasonable reward for the work undertaken. As we have said in previous reports, we believe that the large majority of IPs do an often difficult job with diligence, skill and integrity and that abuses arise only in a minority of cases.

But we believe that on the four issues mentioned above there are further improvements which can and should be made. Our recommendations in this year’s Annual Report set out the further measures that we believe are needed in the near future.

Later in the report we describe the responses we gave to two recent initiatives by the IS and the insolvency profession respectively for dealing with personal insolvencies. First, the IS has proposed that debtors who have insufficient income and assets to make any significant repayment of their debts should be able to get debt relief through simpler administrative procedures. Second, an independent working party, chaired by the IS, has made proposals for a simplified and lower-cost IVA (a cause the IPC has championed since 2003).

We support the general thrust of both these proposals, which will provide a more flexible range of options and speedier procedures for personal debtors. But these objectives must not be at the expense of seeking the best possible outcome for the creditors, which rightly remains at the centre of insolvency procedures. Our responses to the two consultation documents also stressed the need to maintain effective safeguards for creditors. It remains in everyone’s interest that the strong sense of obligation felt by most borrowers to repay their debts should not be weakened.

There are two other issues not covered in our recommendations that deserve highlighting. First, the recent rapid growth of firms or separate businesses within larger groups, which specialise in personal debt cases (sometimes described as IVA “factories”) creates a situation that was understandably not foreseen when the present system of insolvency regulation was set up in 1986. The IS and the RPBs, unlike other “fit and proper” financial regulators, are limited by law to regulating only the individual IPs they license and not the firms which may employ them.

In some of these firms a small number of IPs may be supervising a sizeable number of junior staff, who, together with the IPs, may be expected to meet commercial targets set by the owners or managers of the firms. It is important that in such firms the IPs are able freely to exercise their independent professional judgement on the appropriate treatment of individual cases.

We suggest that the RPBs may need to consider with the IS what steps they can to take to satisfy themselves that in such cases the firms’ systems and procedures adequately protect the IPs’ independent professional status. In the longer term, the IS may need to consider seeking additional powers to regulate firms which offer regulated insolvency procedures such as IVAs as part of their business model.

Secondly, we have noted that corporate administrations are now also on the increase, though compulsory and voluntary liquidations remain low. This is a tribute to the development of a lively “turnaround/recovery” culture, which we generally welcome. But IPs can be presented with difficult conflicts of interests, particularly where a company, which they have been advising, goes into administration prior to a pre-arranged sale or management “buy-out” (so-called “prepacks”). This is an issue we plan to look into during 2006.

Finally, I would like to thank most warmly, for the considerable contributions they have made to the IPC’s work over the past years, three retiring IPC members: Robert Bertram, Peter Horrocks and Roger Page. At the same time we welcome their successors: Hamish Anderson, Dianne Hayter and David Tracy. A special word of appreciation and our best wishes go from myself, from Graham Kentfield, my predecessor and from all past and present members of the Council to David Harrison who retired at the end of January after 6 years as Secretary of the Council. Whatever successes the IPC has achieved owe a large part to David’s hard work, intelligence and powers of organization as well as his persuasiveness and sense of humour. We also welcome Mike Stancombe as his successor, who brings a wealth of knowledge about the insolvency profession.

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