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Full response by the Insolvency Creditors Association to the Public Consultation on the proposed Insolvency Practitioners Regulations 2005.
The ICA welcomes the review of the Insolvency Regulations and wishes to make the following points regarding the proposals as they stand and also make suggestions for amendments.
Bonding
It cannot be emphasised enough that the sole purpose of this form of security is for the benefit of creditors who are the main stakeholders in the insolvency process. Any adjustment to these provisions should be referred to the various creditor bodies for their views. We are therefore disappointed that the list of consultees to the proposals focuses mainly on the professional bodies of the Insolvency Practitioners themselves. We would like to have seen proposals from the banks and the major crown creditors as to their expectations of insurance against fraud in the insolvency profession.
Our first recommendation is that the amount of cover is increased. We are concerned that, in the event of a fraud by an Insolvency Practitioner, the regulations do not adequately protect creditors.
A simple example of this might be a case where there is £100,000 in declared assets and creditors are £1,000,000. In such a case the office holder would be required to obtain cover of £100,000. If the asset were then lost through fraud or wrongdoing by the office holder, a successor practitioner could do no better than to recover £100,000 from the bond. From this sum his costs would be deducted so it would follow that creditors will always bear some loss. Whilst it is accepted that a litigant cannot always recover all its loss, it cannot be right that the regulations artificially limit cover to almost exclude the possibility that a full recovery could ever be made. This point is even more stark where the assets are only £10,000, as the costs of recovery are likely to absorb any money received under the Bond.
We understand that the Enabling Bond is able to meet the costs of any shortfall, but this is not useful where there are a number of claims being made.
We would point out that the current regulations for assessing the amount of cover are very unsatisfactory as far as creditors are concerned. It seems that if a Statement of Affairs is produced by a debtor declaring just physical assets, the office holder will insure for that sum. This fails to cover a possible fraud in insolvency which is a suggestion by an office holder to a director of an insolvent company that he will not investigate Wrongful Trading or any antecedent transactions if he is instructed to handle the liquidation. In our view this ‘Off Statement Asset’ might be much larger than those declared and this is a significant failure in the current system.
The office holder is responsible for insuring against his own fraud and that is a difficult concept in itself. To leave him some discretion as to the amount seems a step too far.
We recommend that the amount of Bond cover be set at the higher of the known assets or the claims of creditors. We point out that the level of potential liability as a result of a fraud by an office holder can only be judged at the level of those who might claim in the future, not the fraudster’s own estimate of the loss. It seems absurd that it could be calculated otherwise. Taking the higher figure of the creditors or assets takes into account solvent liquidations and shareholder protection.
In making this recommendation, we have considered the effect on premiums that will be borne by creditors as an expense of the estate. The current premiums quoted for assets up to £5,000,000 could equally be applied instead to the level of creditors. Therefore in the example given above, instead of paying say £180 to cover £100,000 of declared assets, using the existing tables for a medium sized firm, we could see that insuring £1,000,000 would costs £680. This would seem to be acceptable although we foresee that the actual premium would be substantially less, as insurers would take the view that the actual loss could never be close to the full level of creditors. In short, whilst the headline level of cover would greatly increase, the premiums would not. The premiums in this example are taken from the current Alexander Forbes tables for insolvencies for firms with 2-10 partners.
The next recommendation we would make is in regard to the Enabling Bond. Astonishingly, the cover of £250,000 required by the regulations costs an Insolvency Practitioner only £50 for most firms, and £175 for a sole practitioner. In our view this cover is far too low as the danger that a fraudulent practitioner underinsures his cases is very real. Even if our recommendations on specific bonds were adopted, we would still recommend that the regulations be changed to require a minimum Enabling Bond of £2,500,000 per practitioner. Whilst this is ten times the level of cover and presumes that all practitioners could afford a £500 premium, or even one of £1,750, in reality we expect the insurance market to offer this at a less than a multiple of 10. In any event, this would leave the practitioner paying a fraction of what a solicitor pays for the privilege of membership of his profession.
The above two recommendations would seem to eliminate all of the current gaps in Bond cover under the current system without significant increase in costs to the creditors or the practitioner.
A further concern to us is that the costs of the regulator in making an investigation into a corrupt practitioner might be considerable. We would welcome clarity or changes to enable a regulator to recover their costs in full from an Enabling Bond where fraud or wrongdoing has been committed. This would help confidence in the self-regulation process.
As a further recommendation on this point, the Enabling Bond should be changed to fund an intervention system akin to that in place with the Law Society. The profession has surprisingly poor systems for dealing with the failure of its own members and the Enabling Bond should act as a levy to fund the investigation into and costs of turning around an insolvency practice. Unlike normal insolvencies where just the debtor and its creditors are harmed by the insolvency, the insolvency of an IP firm affects possible hundreds of debtors and thousands of creditors and is of no fault to either. The profession, if that what it is, should be heavily criticised for this. The Enabling Bond should therefore be sufficient to pay out £5,000 per live case open at the time of renewal each year. This means that small firms will pay significantly less than the larger firms but both will see increases. The circumstances of payout of the Enabling Bond would not be on the basis of fraud or wrongdoing alone, but also on the insolvency of the firm or IP. There might be additional triggers where an IP loses his licence but this would have to be considered further. The changes to the enabling bond would mean that the premiums act as a levy on all firms, which is an incentive in itself to get its house in order. The existence of the levy would alleviate some of the costs and difficulties that regulators currently experience when considering withdrawing a licence.
The ICA would like to see further changes in the area of practitioner insurance. We are concerned that insurance for negligence is not effective, particularly in the case of a failing practice. An insistence by the regulators on the existence of run off cover is in our view essential to confidence in the profession. The length of time this might be would be governed in the first instance by affordability of premiums, but the Regulations should allow the Secretary of State to stipulate this for consistency across the profession.
As an alternative, and if such a product were available, we would support a form of negligence insurance that operated in the same way as the current bonding system, in that it attached to the insolvent estate with a single initial premium rather than in an annual premium for the practitioner or practice. Unlike the bond, the practitioner would pay this premium.
This system would avoid the run off issue and the level of premiums paid by a practitioner would vary as to the level and value of work taken on. We feel that the insurers in turn would have a better idea of the limit and nature of potential claims by attaching it to the facts of a particular case. At the same time the creditors would have the comfort of cover for the lifetime of the appointment.
Other Changes to the Regulations
We refer to the list of information to be retained by the practitioner. We note the proposal to retain time records. This seems to overlap the proposed Part 5A – 36A to the Insolvency Regulations 1994. However, subparagraph (4) suggests that information must be supplied for up to 2 years after release yet this information is to be retained for ten years under the Insolvency Practitioner Regulations 2005. We therefore suggest that unless there is an overriding reason not to, 36A(4) should allow the information to be provided up to 10 years after release.
We have reviewed the proposed Regulation 4 of the IPR2005 and wonder whether there might be scope to extend this. The danger of the existing list is that it might be interpreted literally, and misconduct such as a continual and wilful breach of the Statements of Insolvency Practice might be interpreted as to not fall under them.
We feel that additions could be safely made to this Regulation without harm to the practitioners. Stating what is considered to be unfit conduct can only be of use to practitioner and creditor alike. We therefore suggest the following additions.
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