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Annual Report 2008 Chairman’s Report  In last year’s Annual Report we pointed to the risk of increasing
numbers of personal and corporate insolvencies as the UK economy
slowed down.The Insolvency Service’s published statistics show that in the second half of 2008 individual insolvencies rose by 11.6% compared with the figures for the second half of 2007 and corporate liquidations rose by 40%. It is clear that these trends are likely to continue through 2009. The number of debtors calling National Debtline for advice is reported to have doubled in the early weeks of this year. Against this background there are two main concerns, which will be on the IPC’s agenda during the year ahead and which are reflected in our Recommendations in this Annual Report:
 In Scotland
sequestrations (the Scottish equivalent of bankruptcy) and Protected Trust Deeds rose by 43%, with
sequestrations nearly double the level reached in 2007 – part of this increase being due to the introduction of a
simplified procedure for Low Income Low Asset cases.In addition to those entering bankruptcy or IVAs or their Scottish equivalents many other distressed personal debtors will have entered into informal “debt solutions”, such as Debt Management Plans (DMPs), for which no comprehensive statistics are publicly available. The TDX Group, a leading creditors’ agent, has estimated that 175,000 debtors entered into such agreements in 2006. Two sample survey estimates of the total stock of debtors involved in DMPs carried out last year produced widely divergent figures of 325,000 – 375,000 (from Money Advice Trust) and 600,000 (from R3, the Association of Business Recovery Professionals). CCCS, probably the largest provider of DMPs, has recently announced that it has 100,000 of its clients in DMPs.  We support the measures the Government has already taken to persuade creditors to manage customers with arrears on either secured or unsecured debts sensitively and give them a breathing space to restore their financial position. But we think it is also essential that, where debtors have no realistic prospect of repaying their debts within a reasonable period, they should have access to the statutory forms of debt relief, ie, bankruptcy or an IVA. In this context we welcome the introduction of the Debt Relief Order scheme for debtors with no or very low income and assets. We remain concerned that some debtors whose circumstances would justify either bankruptcy or an IVA, are being denied statutory debt relief either by creditors, who rejected reasonable IVA proposals, or because some debt advisers may prefer to offer solutions other than bankruptcy. The agreement reached in early 2008 between the insolvency profession and the major creditors (the IVA Protocol) has, in the last few months, led to a removal of some but not all of the excessively high hurdle rates and other obstacles erected by creditors. But there are widespread concerns among IPs and their regulators, also expressed in February by Citizens Advice, that debtors with relatively low surplus income, who can only make monthly repayments to their creditors of less than £200, find it difficult to get an IVA. This is because the new fee structure imposed by some creditors makes it uneconomic for IPs to take on such cases. Creditors should be pressed to resolve this problem. The Government should also re-introduce its proposals for a Simplified IVA (SIVA) which, disappointingly, were withdrawn in January. We are also concerned about the lack of public information on the effectiveness of the main forms of “debt solution”. We welcome the Insolvency Service’s decision to start to publish meaningful statistics for the failure rates of IVAs in the course of this year (a topic we first raised in 2005). But it remains the case that no one (apart from the creditors and the debt advice organisations) is in a position to judge how DMPs are working and whether they represent the most appropriate solution for particular debtors. Few of the debt advice organisations publish any statistics and there is little public information available about the duration or performance of DMPs. They are not binding on all the creditors and may, according to anecdotal evidence, offer only short-term relief from interest charges on debts. The TDX Group has estimated that by the end of year one, 20-25% of debtors in DMPs have broken their agreements. We believe a further coordinated effort is now needed from all the government agencies concerned (BERR, the IS, the OFT and the Ministry of Justice) to resolve these problems. The objective should be a suite of complementary statutory debt solutions which, taken together, will cover all distressed personal debtors at all income levels and levels of indebtedness, who have no prospect of repaying their debt in reasonable time, leaving no overlaps or underlaps. In addition, the Insolvency Service and the OFT should work through the IVA Standing Committee in cooperation with IPs, other debt advisers, the creditors and their agents to fill the gaps in information about IVAs and DMPs described above. We make a number of recommendations below on all these issues. At the time of writing this report, we understand the Government is still considering whether or not to introduce legislation to create a Regulated Debt Management Plan. We do not see how a rational judgement on the merits of this idea can be made in the absence of reliable statistical information on the numbers, characteristics and success rates of DMPs. A Regulated DMP, which significantly overlapped with IVAs, would only make the “debt solutions” market even more confusing for debtors and their advisers. Corporate Insolvencies The use of pre-pack sales of insolvent businesses is continuing to increase both in absolute numbers and as a proportion of business sales from administration. This trend has been the subject of recent press comment and Parliamentary interest, mainly because of concerns that they may have an unfair impact on the unsecured creditors of the insolvent company and particularly its trade suppliers. The main characteristics of a “pre-pack” sale are that the insolvent business is sold by the administrator immediately or very shortly after his/her appointment on terms which have previously been negotiated with the buyer, without seeking the consent of the full body of creditors and often with limited or no marketing of the business. Around 50% of pre-pack sales are to connected parties, such as the directors of the insolvent company; though such sales may also take place in “normal” administrations. We agree with the Insolvency Service, the regulators and the insolvency profession that in the right circumstances a properly conducted pre-pack sale can be the best and, sometimes, the only solution available primarily when any sale has to be carried out urgently to prevent the collapse of businesses or when trading in administration pending a sale of the company is unrealistic because financing cannot be obtained. Returns to unsecured creditors are lower in pre-packs than in other business sales from administration. But the evidence suggests that unsecured creditors of businesses sold through pre-packs would fare no better through a normal administration. It is, of course, essential in the case of all insolvencies that any insolvency practitioner advising the company warns the directors of the risks associated with continuing to incur liabilities and that there is no fraudulent or wrongful trading while a pre-pack is being either set up or implemented. We drew attention to the risks involved in pre-pack sales in our Annual Report for 2006. We welcome the fact that the insolvency regulators have now issued a mandatory Statement of Insolvency Practice (SIP 16), which requires IPs to report promptly to creditors, giving them a full explanation of why a pre-pack sale was justified and of how it was conducted. We also welcome the recent statement by the Insolvency Service that they will monitor all the reports made to creditors by IPs under SIP 16. Our recommendations below make some further suggestions on tightening up the monitoring of pre-packs by both the insolvency regulators and the Insolvency Service. Company Directors Disqualification Act 1996: Investigation of “D” Reports We drew attention two years ago to cuts which had then been made in the government for funding available to the Insolvency Service to finance its investigations into the “D” reports, which have to be produced by IPs in their capacity as statutory office-holders into the conduct of the directors of insolvent companies. These reports provide the basis on which the Secretary of State decides whether or not to seek further evidence with a view to disqualifying the directors. We welcome the assurances that the Insolvency Service has given that over the past two years the financing of this work has been put on a more secure footing and that the work of this part of the IS is being reorganised to improve its productivity. The number of “D” Reports requiring investigation is bound to increase as more companies go into administration as a result of the recession. We believe it is crucial that the Insolvency Service is given sufficient government funding to enable it to investigate all “D” Reports which suggest there are reasonable grounds for pursuing a case for possible disqualification. Complaints Handling by the Insolvency Profession and Insolvency Regulators In last year’s Annual Report we made a number of recommendations on the basis of research carried out by Professors Seneviratne and Walters on the handling of complaints by IPs and their regulators. Our recommendations focussed on the arrangements for handling complaints from personal debtors that they had been badly advised. We are disappointed that these recommendations have not yet been accepted by the Joint Insolvency Committee, which brings together all the insolvency regulators. The case for changes in the insolvency regulators’ complaints and disciplinary systems has been further strengthened by a second report, which we commissioned from Professors Seneviratne and Walters, that compares the insolvency regulators’ complaints systems with those in other professions and in financial services. We make a number of further recommendations, based on this report, which we aim to discuss with the Joint Insolvency Committee in the near future. Geoffrey Fitchew Chairman |
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