Business Innovation and Skills - Minutes of EvidenceHC 675

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 24 January 2012

Members present:

Mr Adrian Bailey (Chair)

Katy Clark

Julie Elliott

Margot James

Simon Kirby

Ann McKechin

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Frances Coulson, President, R3, David Kerr, Chief Executive, Insolvency Practitioners Association, Vernon Soare, Executive Director, Institute of Chartered Accountants in England and Wales, and John Milsom, Chairman, Joint Insolvency Committee, gave evidence.

Q1 Chair: Good morning and welcome. Thank you for agreeing to be interviewed by us. We are not actually scheduled to start until 10.30 am, but given that we have a lot of questions to get through, it would be helpful if we could just go through the preliminaries now. First of all, just for voice transcription purposes, could you introduce yourselves, starting with Vernon on my left?

Vernon Soare: Thank you, Chairman. My name is Vernon Soare, and I am the executive director with the Institute of Chartered Accountants in England and Wales, or ICAEW. We are the largest regulator of insolvency practitioners in the UK. We also have 140,000 members who advise and work in businesses or in audit practice.

Frances Coulson: Thank you, Mr Chairman. I am Frances Coulson. I am president of R3, which is the trade body for insolvency practitioners. We have 97% of insolvency practitioners as our members, and also specialist lawyers and others-students and so forth.

David Kerr: I am David Kerr, chief executive of the Insolvency Practitioners Association. We are the recognised professional body specialising in insolvency, monitoring about a third of the UK’s licensed practitioners.

John Milsom: Good morning. My name is John Milsom. I am chairman of the Joint Insolvency Committee, which is a standard-setting body, comprising of members of each of the RPBs. I am also a licensed insolvency practitioner and a partner in KPMG.

Q2 Chair: Thank you very much. Just before we start, we have a lot of questions to ask you. I am conscious that, with four experts here, if all four of you talk at great length on every question, we could be here for a very long time, so perhaps one person answering and others adding or objecting to any comments that that person has made would be the easiest way to do this. Please do not feel obliged to contribute on every question if it just means repeating something that somebody else has said. We will not think ill of you if you do not wish to comment on something, unless we specifically demand that you comment on it.

May I just start with a fairly general question? How would you describe the latest insolvency figures? I suspect, Frances, that you are perhaps the best placed to lead on that.

Frances Coulson: Yes. I think that for a long time people have expected a surge in insolvency figures. We are not seeing that in formal insolvency. We are seeing a large number of what we have termed "zombie businesses"-businesses that are limping along and not going into formal insolvency. That is, I think, because traditionally there is a lag between a recovery in the economy and an upturn in insolvencies. Because the recovery, if there is one, is so slow, we are not seeing an increase in the insolvency figures. This is perhaps surprising to many, but we are not particularly expecting an upsurge in formal insolvency for quite some time.

Q3 Chair: Would it be fair to say that, while the perhaps surprisingly low level of insolvencies, given the general economic situation, is welcome, ironically, as the economy improves and presumably the asset base of some of those companies improves, they would be more vulnerable to going under than they are at the moment, as creditors move in? Is that a reasonable observation?

Frances Coulson: That is a reasonable observation. We have seen, for instance, an increase of 19% in company dissolutions, because there are no assets so companies are just falling off the register rather than restructuring, perhaps because there is not enough there to rescue. As creditors see more of an asset base, they may feel that they can recover their security. That may also have a benefit in clearing out and giving a little bit more competition in the market, where, as I say, if businesses are limping along without much competitive benefit, that is not necessarily a good thing. Where interest rates are low, there is not a great incentive for lenders to tip companies over if interest is being serviced.

Q4 Chair: Anybody else wish to add or object to anything there?

David Kerr: I would make the observation that this is not perhaps a typically shaped recession. The pattern we are talking about is the one we have seen before, but is not the one we are seeing this time.

Q5 Chair: Moving on, what would you describe as the prime purpose of the Insolvency Service?

Frances Coulson: From our point of view, the Insolvency Service is primarily there, as a Government agency, to deal with the administration of estates and the passing on of asset –based estates to private practice. On the one hand, there are a large number of companies, as we have seen, that go into insolvency with no assets and need an administration structure to deal with the closing down of the structure-obviously, on the personal side, this is similarly the case in bankruptcy.

The other side is in terms of the disqualification of directors-the investigation of poor behaviour by directors, moving on to the disqualification of those directors. That is something that we feel is a very important part of the service’s role. It is something that we are a little concerned has perhaps dipped over the past few years. Disqualifications have halved1 over the last couple of years. Practitioners make reports to the Insolvency Service in terms of director behaviour. If they put in a report saying that directors have behaved badly, they obviously want to see that taken forward to disqualification. Very low numbers-only 20%2-of reports are being taken forward to disqualification. This is partially because we have seen a dip in funding. That is something that we are concerned about because it affects other businesses where directors are perhaps behaving better.3

Vernon Soare: A secondary purpose of the Insolvency Service is to act as the oversight body to oversee the work of the recognised professional bodies, the RPBs, like ourselves. That is an important function. They cannot carry out the detailed regulation-that it delegated to us under legislation-but they are the oversight body to review what we do.

Q6 Chair: I was going to ask what service it provides that cannot be delivered by the industry. Do you think that, realistically, the industry could provide such an oversight service itself?

Vernon Soare: I do not think that the industry itself should-often professional bodies are accused of being self-regulated, with all the pejorative overtones of that phrase. It is necessary and right that Government Departments, in this case BIS and the Insolvency Service, actually have an oversight role. They can be seen to be independent of the profession, as they are not reliant on the profession in that sense and can stand back and be objective about what we do.

David Kerr: I think all of us and the service acknowledge that it is doing some things that perhaps it ought not to be doing, which muddies the waters in terms of that oversight function, for example directly authorising insolvency practitioners where it does not have the mechanisms in place to discipline them and do so on in the same way that the RPBs do. So removing itself from that function will enable it to enhance its oversight role.

Q7 Chair: Could you tell us what RPBs are?

David Kerr: Recognised professional bodies: the Institute, the IPA and the others that are licensed to regulate practitioners directly.

Q8 Chair: How would you assess the performance of the Insolvency Service in the last year or so?

Frances Coulson: I think that the service has had to work under very difficult circumstances. It has had two large voluntary exit schemes. Obviously it has had difficulties. Its funding model is predicated on being funded by the fees that are paid in terms of bankruptcy and winding up. Strangely, that works when there is a lot of formal insolvency, but when there is not, self-funding does not work. The service is having to work in quite difficult circumstances. Where you have voluntary exit schemes, you then get reallocation of staff and retraining issues, and so on and so forth.

Q9 Chair: Coming back to the original question I asked, as you say, ironically, a low level of insolvencies presents greater difficulty. If there is a sudden upsurge, given the reduction in staff that they had, do you anticipate difficulties there?

Frances Coulson: I think that given the large numbers of staff who have left the service, it could cause problems. What is needed is an efficient system for an initial taking on of cases and then a rapid transfer of cases that are appropriate out to the private sector, where they can be dealt with quickly. That is down to computer systems and an appropriate system.

John Milsom: It is a difficult period for the service, a period of change, not just in its funding and structure, but also, as David and Frances have both said, in the economy. I think that it will be well-served to be clear in setting its objectives, and the policy it wishes to achieve and its agenda during the year, working with the RPBs to achieve those goals. It is sometimes quite difficult-certainly it has been during the past 12 months-to see what the service has been trying to achieve. It has been slightly reluctant, in a period of change, to bring forward what it is seeking to achieve.

Q10 Julie Elliott: Moving on to the reform of insolvency practitioner regulations, are the Government’s priorities-with a general move towards more self-regulation-appropriate for the industry?

Vernon Soare: I am not sure actually that we are being subjected to that, or asked to be more self-regulating. The discussions that we have had with the <?oasys [pc10p0] ?>Insolvency Service following the Insolvency Service consultation about the future of regulation had not indicated to us that we are essentially being left to our own devices. We will still be overseen, and indeed there are some proposals on the table to rationalise some of the regulation that currently takes place from eight recognised professional bodies, perhaps into a smaller number, or at least in some way to give a more consistent line from the regulatory bodies. As far as we are concerned, we will still be overseen by the Insolvency Service, and inspected, as it does at regular intervals.

David Kerr: It is a process of delegated statutory regulation. As Vernon says, it is subject to oversight by the Insolvency Service. I think most observers have recorded positively the great benefit that comes from having professionals involved in the regulation process and the expertise that they bring. We have increased lay input into the process. They are on most of the RPBs. Recently we had lay members introduced for the first time to the Joint Insolvency Committee that John chairs. There is more external scrutiny going on, even though primarily, it is, as you say, a self-regulation system.

Q11 Julie Elliott: The Government have announced the creation of a single independent regulator. Do you all support that?

John Milsom: It is very difficult to support that when we have got different legislation governing Northern Ireland, Scotland and England and Wales, so it would be quite difficult to implement. One can see some value in having a smaller number of regulators to get better consistency and transparency. I wonder whether the legislative changes that would be required would actually be of benefit in the longer term, because one would hope that the attraction that insolvency practitioners are getting at the moment reflects the economy and one would hope that the economy improves. In the longer term, a smaller number of regulators and the Insolvency Service not being a regulator has to be a good thing for consistency and transparency.

David Kerr: The Minister’s statement was interesting as I read it because, although there was reference to seeing merit in the benefits of a single regulator, potentially, the Minister was keen to engage with the profession through officials at the Insolvency Service to see whether the objectives-greater consistency and so on-could be achieved through other means. We are actively engaged with the service at the moment in a package of measures, particularly on the complaints side, with a view to doing just that. We think that we can probably achieve the objectives that the service is looking for, and the OFT raised, short of that step.

Frances Coulson: Certainly, in R3, we cannot make too much of the consistency for our members and also for the general public. It is good for reputation of the profession. But we are very concerned that changes that are made are proportionate. At the end of the day, cost comes out of the creditor’s pocket. You are always starting off with less than 100% of the money. Some of it is about communication, making it easier for people to complain, making the sanctions common, and generally making what is being done visible to the public.

Vernon Soare: I would just add that, as with David, my reading of the Minister’s statement was, while he was still potentially minded to move to one regulatory body, that is not the current intention. Indeed, as David mentioned, we are working with officials to see how the current system can be improved. Obviously we all have the goal of making sure that the regulatory process commands public confidence and that the complaints system is seen to be fair and effective. We believe it is already, but there is always more you can do to educate creditors and complainants to make it more accessible. That is what we are currently working on with the Insolvency Service staff.

Q12 Julie Elliott: Why do you think that there are so many representative organisations and regulatory authorities? It does seem a lot.

Vernon Soare: I am often asked this question-also, in the wider accountancy profession-and normally my answer is: history and geography. That is not quite a detailed answer but I think it is a reflection of the fact that, over time, there have been historical differences. Different professions had obviously had an interest in insolvency and been licensing their members. That is really the genesis of why there are so many bodies. Probably you would not start from there.

Q13 Julie Elliott: Do you think they are all needed now?

Vernon Soare: My view is that we probably do not need as many. I have to declare an interest as my organisation is the largest. Our view is that we probably do not need that many. Some are very, very small, and you have to wonder about the economies of scale. You also have to wonder about the effectiveness of very small bodies, and their ability to bring all the necessary resources into the regulatory framework. That is obviously an issue for the Insolvency Service itself, to look at the effectiveness of individual bodies. Generally speaking, our view would be that there should probably be a reduction, but not a reduction to one. Even though we are the largest, we do not want to see one. We do no think that one is a good idea. A little bit of competition, in the best sense, among regulators keeps us all on our toes.

Q14 Julie Elliott: A couple of you have touched on this question: would the creation of a single regulator remove the need for the Insolvency Service?

Frances Coulson: It is difficult, as Vernon says, to go to a single regulator. For instance, in the legal profession-I am a solicitor-accountants are being authorised to undertake certain legal work and therefore they will be regulated by the ICAEW, not the Solicitors Regulation Authority. There are different streams. For example, some practitioners are chartered accountants and others are insolvency practitioners who have come through a different route. <?oasys [pc10p0] ?>If you are a very large firm and you have a multidisciplinary practice, with some accountants and insolvency practitioners, you may choose to have one regulator that can deal with both, from cost and consistency purposes. But you might not be a chartered accountant; you might be in a firm that solely consists of insolvency practitioners. We have a large number of small businesses, micro-businesses and sole practitioners, so we are concerned that they are not forced unnecessarily into the wrong box or the wrong circumstances.

David Kerr: If I may, coming back to the Chairman’s opening comments about the purpose of the Insolvency Service, if, going forward, that includes setting regulatory objectives for the system, oversight and policy-making, then arguably those things would still be separate from a regulator that is dealing with the operational functions of the regulatory system.

Q15 Julie Elliott: This question is for John. If the Government was to recommend a single independent regulator, who would be responsible for standard-setting in the industry? Would creating a single regulator make transparency and consistency easier?

John Milsom: I think a single regulator may well make transparency and consistency easier to see, but I think we can get there in a more cost-effective manner. I think it would be difficult to achieve in the near-term because of the legislative changes that would be required. Even with a single regulator, because you have different legislation, you are still going to have to deal with the inconsistencies between those regulations and laws. It is not a panacea, unfortunately.

Q16 Julie Elliott: Finally, David, what is the current status of the Commons Sanctions Guidance? Is it still the intention to publish the guidance early this year?

David Kerr: Yes, it is very much on the agenda of the Joint Insolvency Committee. I have been doing some work on that with colleagues in the other regulators. It will be back on the agenda for the next meeting. We are trying to get it to the position where we can tidy up the loose ends and agree it between us and then publish it.

Q17 Ann McKechin: Let me first declare my interest as a member of the Law Society of Scotland, which I know is one of the regulatory bodies within this combination today that we are examining. I just want to press the panel a little more about the issue of complaints. What is the current level of complaints in the industry? Do you think that there are sufficient safeguards at the moment for vexatious and frivolous complaints? Obviously, insolvency practitioners are not necessarily the most popular people when they come into a new case.

Frances Coulson: Unfortunately, we come into an unhappy situation, as a rule. It is partially a question of education. The system that we have been working on with the Insolvency Service envisages a single portal for complaints, something that is easy, perhaps on the Insolvency Service website, which could also assist with education. For example, you could have FAQs so that people understand the role an insolvency practitioner has. Partially owing to legislation, creditors get large amounts of paper, going into some detail, but often that is information that they cannot necessarily cope with, particularly smaller creditors. It would be helpful to have bullet-point FAQs and an easy point of entry, so that you filter that out. Then the service could filter the complaints to whichever is the relevant RPB for that practitioner, and those complaints would then be dealt with quickly and efficiently.

David Kerr: Our experience of dealing with complaints tells us that, as Frances hinted, complainants are quite often complaining because they are unhappy, inevitably. On investigation, quite often it turns out that they are complaining about lack of understanding of the process, understandably, or their concern about the outcome. On investigation, quite often the nub of the problem is not the conduct of the practitioner, but of course the practitioner is in the firing line. We do get a lot of complaints that we end up having to filter out of the system. That quite often involves providing explanations to complainants, at which point maybe they go away less unhappy than they were. That is just part of the process that we have to absorb within the regulatory system, to deal with those and deal with them properly.

Vernon Soare: Can I just add our experience of numbers of complaints? Interestingly, our complaints over the whole of ICAEW number about 2,000 a year. Of those, about 10% relate to insolvency practitioners, so actually the number of complaints that we get is above the norm for the generality of our members, but, as Frances said, it is partly a result of the fact that in administration and liquidation there will always be parties who feel that they have lost out. Therefore there is a sense in which you would expect insolvency to generate more complaints, because it is inevitable that, when businesses fail, there are going to be dissatisfied people.

On the point you asked about vexatious and frivolous complaints, I think we have to start, as regulatory bodies, from the point of view that we have to deal with each complaint on its merits. I think that it is all too easy for a regulatory body to be accused of not taking complaints seriously. So in a sense we try very hard to go to the other extreme. How we handle complaints is part of the review that the Insolvency Services carries out on us from time to time.

Q18 Ann McKechin: You have obviously made your points clear as to what you think about having one regulator. The Government have been consulting about an independent complaints body. Some of you are regulated already in your professional capacity by independent regulators. That is the case for the Law Society of Scotland. But that is not the case for all of you, and is not the case for those who are regulated by the Insolvency Service. Would you consider that a complaints body that is independent would go some way to addressing the problems people feel about it being an inside job and not getting a fair deal?

John Milsom: If I answered your previous question slightly differently, part of the problem here is that-we have talked very much about process so far-you have an individual who is unhappy with another individual. It is very difficult for a first individual to go to the second individual to say, "I am unhappy with what you did". That is part of the problem we have. Rather than somebody complaining directly to an IP, or, as Vernon and the other members have said, seeking to understand the process, there is a visceral reaction, saying, "I am going to complain about this person to somebody who can make a difference". As Frances said, we need to manage their expectation. If we have a common portal, using the Insolvency Service to improve general understanding, I do not think we need a common complaints process, because we have a very effective process. What we need to ensure is that the RPBs are consistent and transparent in how they deal with the IPs and make sure that when people complain they get a human reaction-a little bit of sympathy, perhaps-while trying to improve their understanding.

Q19 Ann McKechin: I take your point, but the issue is that, unlike other professional relationships, it very often is not a direct service provider/client relationship, where the norm in complaints services is to say to the client, "Go and have a meeting face-to-face with the company concerned to discuss the case", which very often saves a lot of cases turning up at the complaints level in the way that is recorded through your various organisations. In this case, many of the people concerned are not your client but they have a direct interest. I could put to you the alternative, that, actually, the need for independence, given that fact that they do not have that direct client relationship, is even greater than in normal professional relationships.

John Milsom: The difficulty with that suggestion is that if they do not go through the first steps of communicating with me, even though I am not their direct provider of the service-with an unsecured creditor, for instance-I am still obliged, as an IP, to provide them with information, and I would be foolish, as an IP, to ignore the simple questions that can be easily answered. There is a line between the frivolous and the vexatious. One person’s vexatious comment is another person’s perfectly reasonable request for additional information; there is a balance there. So I, as an IP, do have to interchange with these people and need to communicate with them. I think that there should more communication at that level. One of the changes that happened in April 2010 is that we are now encouraged to communicate more. That is going to take some time to filter through our systems. But that is going to improve things. I do not think that an independent body, which will then immediately become an arbiter of what was and was not, with the benefit of hindsight, reasonable, will improve things.

David Kerr: I agree with John largely. We said in our response to the Insolvency Service consultation last year that we could see some merit in an independent body, provided it was a decision-making body and that it was proportionate from a cost point of view. Coming back to John’s comments about the portal and the rest of it, we can achieve a great deal of independence and consistency through this package of measures that we are talking about with the service at the moment. In addition to that first entry point though the service, which increases accessibility for complainants, coupled with the Common Sanctions Guidance and with some joint activity at review and appeal level, which we are talking about with the Institute, along with a common place where the adverse decisions are published, so that that is more open and transparent as well, and along with the Insolvency Service potentially acting as the gatekeeper at the front part of the process, thereby enhancing its oversight of the RPBs and the way it handles complaints, we will have a package of measures that will increase accessibility, consistency, and independence as well.

Vernon Soare: Can I just add one comment? If the outcome for unsecured creditors of putting together an independent complaints body was a better outcome at the end of the day, then there would be a strong argument for moving to an independent regulator. However, I do not think that there is evidence currently that the current system is failing. In fact, I think that it is working better than is perceived. One of the problems with complaints systems generally is that, in terns of trying to get to the right outcome, there is a lot of expectations management needed. I wonder whether the creation of a new independent complaints body, which will be launched with a lot of expectation, would actually disappoint in the end, because it would have to go through basically the same process as the RPBs currently go through. If it could be demonstrated that there would be better outcomes then there is obviously a policy argument there, but I do not think that the evidence is there currently.

Frances Coulson: Practitioners are obviously regulated and if there is a complaint against them they are investigated by their RPB and may be disciplined. The Insolvency Service has indicated that it is giving up its direct regulatory role and going back to being just an overseer of the others. Our principal concern with having a separate body is the cost of that, because at the end of the day that has to be funded in some way.

Q20 Ann McKechin: I will come back to that point. If a single complaints body was to be established, which of the four models put forward in the consultation paper would you prefer and why? Which, very quickly, is the most preferable?

Frances Coulson: We have opted for model two, to have an independent joint appeals process, so that any error in law or regulation can be dealt with. We are in favour of rationalisation of the number of regulators, that is fair to say.

Q21 Ann McKechin: You would accept the argument for consistency in judgments?

David Kerr: I think that comes from the Common Sanctions Guidance. Even if you have one body making decisions, they still have to be consistent in their decision making from one hearing to the next. The guidance will be a big factor in that.

Q22 Ann McKechin: If you favour the creation of an appeals complaints body, where should this be based and how should the body be funded? That is a point you have made, Frances-where would the money come from?

Frances Coulson: RPBs are funded by licence fees.

Vernon Soare: But ultimately the money would come from the creditors because the charges would filter down through the recognised professional bodies from insolvency practitioners and creditors.

David Kerr: The model we suggested was effectively putting in a complaints decision-making body that was probably no more expensive than the Insolvency Practices Council, which is about to be disbanded, for which there is a levy of £50 a year charged to insolvency practitioners. One could argue that it is a one-in, one-out basis that would allow you to fund it without a huge increase.

Q23 Chair: Fees, the vexatious issue. Has the SIP 9 note-the amendment in April 2010-remedied any of the frustrations felt by creditors in fee-setting for insolvency practitioners?

David Kerr: Can I just make one point on that before we get into the substance of the question? There is a new SIP 9, that came out at the beginning of November last year, approved by all the bodies, which goes a bit further than the short-term fix that was issued at the time of the 2010 rule changes and introduces some new restatements of key principles about reasonableness and costs being commensurate with work needing to be done. That is a relatively new standard which was issued subsequent to the 2010 rule changes.

Vernon Soare: In terms of proportion, of the 200 to 250 complaints that the ICAEW received about solvency last year, only 15 were to do with fees.

Q24 Chair: Is this a relatively insignificant problem?

Vernon Soare: I do not think that it is insignificant, because obviously if a set of creditors are concerned, they are concerned. But I think that, in terms of the issues around fees, which we understand can be very emotive-we are not trying to deny that-again, we come back to this issue of what creditors understand and what the public understand about how fees are charged. We go back to the Insolvency Service, and maybe the RPBs, to do some more education. There is a lot in the newspapers about fees currently being charged in the Farepak case, et cetera. What probably many people will not know is that there is a creditors’ committee, or liquidation committee, made up of interested creditors, including HMRC, who will monitor the fees being incurred by the insolvency practitioner. There is a big education issue here-not to minimise the angst that fees generate.

David Kerr: Just to add a point about the 2010 rules: it is too early to know whether the changes that were introduced then have made a big difference to creditors. I do not think that any assessment has been made of the impact of those rule changes.

Q25 Chair: I think Vernon touched on this. I was going to specifically ask this to Frances. How do you propose to give unsecured creditors, including HMRC and the Redundancy Payments Service, greater influence in the fee review process?

Frances Coulson: We would certainly encourage more participation and we do encourage it, but it is difficult. In a large number of cases, creditors have obviously already lost money, and they make the decision that they are not going to invest time in dealing with the post-insolvency process. It is a bit like getting shareholders to engage in controlling directors’ remuneration; it is quite difficult to get people to participate. Certainly where there is a creditors’ committee it is much easier, because they are much more directly involved in discussing what work is being done and what fees are being charged. But in a lot of cases, it is difficult to get people. You only have to have three people for a creditors’ committee, but you cannot even get three volunteers.

We think that the Revenue having a greater involvement, because it is an unsecured creditor in a quarter of the cases, could make a big difference, but that is obviously a resource issue for it as well.4 We can do better in terms of fee estimation. You go in to a job at a crisis point, when you are not necessarily aware of all of the circumstances, so it can be difficult to give fee estimates, but we can do a bit better with that. Experienced practitioners will know that, in certain circumstances, a job ought to cost around X much, and we should tell creditors that.

John Milsom: Our problem is getting creditors to participate.

Q26 Chair: How widespread is the practice of having creditors’ committees with insolvencies?

John Milsom: In an insolvency, as a working practitioner, you want creditors involved, but, as Frances says, getting them to participate is very difficult.

Q27 Chair: Have you any idea of what proportion of total insolvencies result in a creditors’ committee being formed?

John Milsom: No.

Frances Coulson: I expect it is low.

John Milsom: It is going to be low. The difficulty then is-and this is one of the changes that were brought about in April 2010 and will actually filter through-beforehand, at the outset, for instance in an administration, the administrator could get the basis for his fees approved for the length of the assignment. Now, you can have rest periods and you can re-engage with the creditors. The purpose of this has to be that the person who is paying for the service should decide how much the service is worth, which is why you want creditors’ committees to be formed. But getting them to do it is very, very tough. They do not want to, for the simple reasons that, if they are not seeing any return and it is going to take their time, then why, economically, would they do it? It is simple economics for them. I have a lot of sympathy with them. The difficulty that then arises is that under some of the other models it has been suggested that we could start paying to go on committees. That would be wrong, because then you would have a professional group of people going on committees. I do not think that that would improve the lot of the unsecured creditor. So what you then have to say is, "OK, is there a general educational step that could be taken?" I think that that is something that the Insolvency Service needs to encourage creditors to participate in the process. We can do some of that education, but it has to be a more general education from the Insolvency Service as well.

Frances Coulson: I also think that a greater use of online engagement, as things move on, becomes cheaper and easier for people to engage. At the moment, people have to come to a meeting, have to read voluminous papers, and it may become easier and we may be able to find more ways of trying to get people to participate.

Q28 Chair: Would it be possible effectively to devise a model of creditor engagement and, if so, which body would really be entrusted with developing it?

David Kerr: The Institute of Credit Management might have some interest in pushing that. Following John’s point about creditors not having a financial interest at all, , even where creditors do have a financial interest but it is small, there is a difficulty in getting them to engage and spend time and effort when they are more interested in moving on to make the next sale. The ICM certainly might have a part to play.

Q29 Chair: If an online model could be devised then obviously the level of physical engagement is that much easier, isn’t it?

John Milsom: Once you have a committee there is an awful lot of interaction that goes on. We would still come back to the same point about getting a committee or a representative group to actually respond. Even with email, if we had a 10% barrier to approve our fees, we would then be scrabbling around to get over 10% and would probably spend half our life on the phone, calling people up and saying, "Can you press the button and say yes or no?". After a while, you lose interest in whether it is yes or no; you just want an answer.

Q30 Chair: Okay, I think we have covered that issue. Moving on, and referring back to the previous discussion on an independent complaints body, should such a proposed body have the power to review the fees and remuneration charged by IPs?

Frances Coulson: Fees are quite a difficult area, because obviously it is a collective process. There are mechanisms for creditors to challenge fees if they consider that they are excessive, and for them to be looked at by the courts. If practitioners’ fees are challenged, they will invariably give detailed breakdowns. It is in their interests to do that. They do not want a complaint to go further and they certainly do not want to be in court because of the attendant cost that goes with that.

If we are talking about creditor engagement, the difficulty is that, if a creditor has not engaged throughout the process and has had no say at all, and then suddenly, at the end, says, "I am unhappy with those fees" and makes a complaint, that may very well be an unrepresentative complainant. If 90% of the creditors have said, "Yes, we have agreed those fees", what do you do with the one complainant who is unhappy? It is quite difficult to do something with a mechanism. As Vernon says, we have been working with the Insolvency Service, looking at how we can bring fees into the complaints procedures. They are dealt with by the RPBs now, but we are looking at making that more transparent and more engaged so that if fees are excessive, we are trying to find a mechanism for looking at that as a conduct issue and a disciplinary issue. There are procedures for solicitors, for example, in terms of dealing with fees, but that is a one-on-one situation-you contract with your solicitor, they provide a service, you have agreed what the service is and what the fees are. Creditors are a collective body and so it is difficult: you might have 90% agreeing and 10% not agreeing, who can then challenge the fees in court.

Q31 Chair: Would an independent complaints body potentially act as a sift to prevent cases having to go to court?

Frances Coulson: It is still very difficult. If you took a larger case, for example, and the amount of work and knowledge in terms of the case that would need to be undertaken-such as a court would undertake, and even a court sometimes has to engage independent reviewers and experts to look at the fees-it is difficult to see how a complaints body, unless it was quite heavily funded, could look at such large cases. If someone had challenged the fees in the Lehman Brothers case, for example, the work that would be necessary to review each and every step taken in such a case-whether the commercial decisions taken by the practitioner were correct at the time, the amount of work was correct at the time-with hindsight would be very difficult.

David Kerr: I think that the two things are separate. There is a valid question about whether the complaints system-the present one or something different in future-should embrace complaints about fees. We are actively engaged with the service on that. We have a meeting scheduled next week with the other regulators as well to talk about that and other aspects of the complaints system. It is being looked at very actively. But the question is, whether the complaints system, whichever body it is that is making decisions, should be able to deal with complaints, especially one where the complainant might be a minority creditor, not on a committee, outside of the eight-week window provided in the 2010 rule changes, and in what circumstances then the regulator would be expected to deal with that complaint and do something about it.

John Milsom: We do want an efficient system as well. It would be wrong for an IP to have his fees approved, either through a meeting of the general body of creditors or a committee or even going to court, and then have somebody be able to stymie that system by being able to say, "Hold on a second, I do not like this, I want to go to the independent complaints body". That would not be in the best interests of the other group of creditors, because the IP is going to have essentially to put the case into a sort of limbo.

Q32 Chair: How do you think that costs for a fee-related complaint should be paid where, first of all, the IP is found to have overcharged and, secondly, when they have not overcharged?

David Kerr: If it was in the complaints system as now, then if a case is found against the practitioner, the practitioner will ordinarily pay costs to the body that has taken the action. Presumably, if a case was not found then the costs would be borne by the regulator.

Q33 Margot James: I have a general question to start with: how effective are pre-pack administrations in your view?

Frances Coulson: Pre-packs are one tool in the panoply of tools that a practitioner has in terms of business rescue. Research undertaken by Dr Sandra Frisby shows that pre-packs produce a slightly better return for unsecured creditors than an ordinary business sale. A pre-pack is a tool that is available. It does work well in a large number of cases. As with any system, there are areas where there may be some abuse. I think it is a useful tool for business rescue and job rescue, particularly where the value in the business is its people.

Q34 Margot James: I noticed in your submission that you mentioned this research by Dr Frisby. Has anyone else done any research on the effect of pre-packs on unsecured creditors or is it just the one study?

Frances Coulson: She is the only study that I am aware of.

Vernon Soare: She has cornered the market, as far as I am aware.

Q35 Margot James: So with just one study, we perhaps should not set too much store by it.

Vernon Soare: One study is not definitive, but a lot of this is the view of the effectiveness. You can judge the effectiveness of a pre-pack from different perspectives. It depends who you are looking at. From the employees’ perspective, pre-packs, on the evidence we have to date, assist greatly in maintaining employment. From the creditors’ point of view, that may not be their desired first outcome. Interestingly, there is a lot of press focus on pre-packs, for the reasons such as the idea that maybe the directors of the former company are getting off lightly, et cetera. As a proportion, they are still running at approximately 25% of administrations. As Frances has mentioned, they are but a tool. It is not as if virtually all administrations are pre-packs. It is up to the judgment of the individual insolvency practitioner. Of course, they do have to give their reasons for using a pre-pack tool in the statement to creditors.

Q36 Margot James: What confidence have you got that they are only being used in appropriate circumstances and with a reasonable degree of transparency?

Frances Coulson: The practitioners are putting their reputation and regulatory position on the line. They are taking commercial decisions quickly in what is usually quite a distressed situation. Certainly in, for example, small family-run businesses there is quite often no other interest. The misconception arises in that people think that the directors have got away with it, have just walked away and got their business back, and the creditors are left high and dry. The practitioner has a duty to do the best for the creditors, which is what he or she is doing, but sometimes the creditors do not appreciate it. What is forgotten about is the second stage of the process. Simply because the business has been sold back to the directors does not mean that the directors, further down the line, perhaps in a liquidation exit-and we propose that in a sale to a connected party there should be a liquidation exit, probably with a secondary practitioner-that the directors’ behaviour will not be reviewed and that they will not have action taken against them personally to recover money for the creditors under some of the antecedent insolvency actions that can be taken. Because the pre-pack happens at the primary point, that is what everybody is concerned about and that is what upsets the creditors. Sometimes there is a little less interest in the secondary process, which requires a bit more forensic examination of what the directors did before the insolvency, looking at the accounts, inappropriate credit raised and so forth. Actions are taken against directors for recovery in those circumstances.

John Milsom: Pre-packs are not a new tool. They have been around for many years-20 or 25 years, probably more. I remember doing my first one over 25 years ago. They have been around for that length of time. You have to ask yourself why they are more prevalent now. They are more prevalent now because of the changes that were made in the 2003, in the Enterprise Act, which shifted the weight of interests of the various parties.

It now means that it is very difficult for me as an IP. If, on day one, I am faced with borrowing with £1 million-I am personally liable for that £1 million-am I going to trade it, or sell the business in the very near term to protect the jobs and make a similar, if not better, return to the creditors? That is why there are more around. It is a complex set of factors that have changed over the last 20 years that have led to more pre-packs. They are not a panacea and IPs should assess the alternatives and explain those alternatives. SIP 16 is very clear on what IPs should give to creditors. It is pretty effective, albeit that that there is a level of poor disclosure by a group of IPs that the regulators need to work with.

David Kerr: Your point about transparency is central to it. We can check that up, as we do, on monitoring visits to practitioners. We have some measure of the degree of non-compliance through the monitoring that the Insolvency Service does. It gets all the copies of the SIP 16 statements from practitioners and, where appropriate, refers complaints to the RPBs. Compliance has gone up, the number of complaints has gone down, and we are in a much better place now than we were two years ago.

Frances Coulson: We also think that there are couple of changes that could be made that could reduce the use of pre-packs. One is more certainty in the range of expenses in administration that are administration expenses, which have been extended by the courts on an ongoing basis. If administrators knew, going in, as a certainty, what was going to be an administration expense, they would be more able to trade a business. The other change that we have been calling for relates to this: where a business goes into administration, certain suppliers have to continue to supply, but some suppliers will also change the terms of supply, so that you go in thinking that you are going to be able to have your supply at X price and the prices have changed simply because you are going into an insolvency procedure, which makes it impossible to estimate effectively, to run your management accounts and estimate whether you should trade that business. We think that, provided that the supplier is going to get paid, there should be a change to say that they must continue to supply on the same terms, to enable that business to be traded through into rescue. The suppliers are getting paid-they are not suffering a detrimental change in terms. We think those are two quite simple changes that our members say could save 2,000 more businesses a year.

Q37 Margot James: You started that answer by saying, "If we wanted to reduce the number of pre-packs"; is that because you think it is too high and should be reduced?

Frances Coulson: No. There is a lot of adverse press about pre-packs. They are a tool that is available to practitioners and they will use their judgment as to what is most appropriate in the circumstances. It is a matter for Parliament to decide as to whether you do or do not make them available. We have to work with what there is. In whichever circumstance, the practitioner will decide what is best for that circumstance.

John Milsom: Removing our ability to do pre-packs would be bad for the economy, because it would lead to more job losses. Again, you have to look at what you are trying to achieve with your insolvency policy. If you are looking for effective economic recycling of assets and the preservation of jobs, pre-packs are generally a good thing. If you have some other aim, maybe you want to get rid of pre-packs, but I think it would lead to job losses.

Vernon Soare: The Insolvency Service itself over the past couple of years has been reviewing the SIP 16-the Statements of Insolvency Practice 16-statements issued by insolvency practitioners. Its latest figure is from 2010. It is doing a review for 2011. In its view, about 80% to 84 % of the statements issued complied with the SIP 16 requirements. Now, that instance does not answer questions necessarily as to whether it was the right tool at the right time but it gives an indication that, in general, the usage of pre-packs and the explanations to creditors are improving. There is always more that can be done.

Q38 Margot James: What do you say to the accusation that pre-packs can create job losses further back in the supply chain by allowing companies to get rid of or dump debts, and the effect that has on suppliers and the people that they employ?

Frances Coulson: If the company does not have a pre-pack sale, it does not mean that it will not go into some sort of insolvency, and therefore that the supplier will not suffer a loss anyway. The principal complaint that is made is that the directors get the company back and lose the debt. But, as I said, that is not to say that they will not be pursued for that later down the line. Just because it is not a pre-pack does not mean that there will not be an insolvency. Again, we go back to education, looking at suppliers and their risk assessments and credit checks and so forth. I know that the ICM have been working on getting more education out there about that.

Q39 Margot James: To what extent do you think that any economic value preserved by a pre-pack sale would otherwise transfer to alternative ventures if a pre-pack was not undertaken?

Frances Coulson: I know we have been called a nation of shopkeepers, but I think it is fair to say that, as I understand it, 30% GDP in this country is from small family-run businesses. In a large number of cases, nobody else would give the business a go. It is fair to say that it is a valuable tool, particularly in the SME sector. If you want people to try and then try again, then you have to have some sort of mechanism whereby they can do that. That is not a policy decision for us to make, but I think that it would have an effect if that tool were taken away, particularly on the SME sector.

Q40 Margot James: What about the concerns of these unsecured creditors about the abuses of pre-packs? Do you feel that there is validity in them? What do you think of the proposal that was made last year of introducing the three-day rule?

Frances Coulson: We have lobbied hard for a fourth alternative. I can understand the concern about a sale to a connected party and why creditors would feel disgruntled about that. Again, transparency and so forth are important, but, we think, after the event. It goes back to what I said about the secondary set of processes in pursuing the directors for any wrongdoing, and indeed looking at what the administrator has done. We have proposed something else if you have a sale to a connected party, apart from the three options that the Minister has proposed. Dealing with those, there is the three-day notice, which is working days so is effectively a week: this would make funding and keeping staff very difficult. It is a very useful tool in people-based businesses, as I said. You may lose your key staff, and I am not sure how you would continue with funding. Another option of the Minister’s was conditional sale, but again it is difficult to get somebody to enter into a conditional sale, because of the expense of that and so they may then lose the business. There was also an application to court; again, going back to the smaller businesses, an application to court is expensive and may preclude the sale happening at all.

We proposed as a fourth option, that, if there was a sale to a connected party, there should be a compulsory liquidation exit-because you can dissolve a company out of administration if there is going to be no dividend to unsecured creditors-with a second IP, perhaps with a small pot of money from the sale proceeds reserved. It may be the Official Receiver or the Insolvency Service that takes that secondary role. This would mean that the actions of the directors were looked at, action could be taken to pursue the directors for any wrongdoing and the actions of the administrator were looked at. If you want to stop abuse, we think that that is the correct way to do it, without taking a tool away from business rescue.

John Milsom: The difficulty with the proposals is that the first set of proposals was introduced and there are clearly some difficulties with the statutory instrument. We are all interested to see if it is going to be reissued with those matters dealt with. The devil is definitely in the detail. Insolvency is a very technical area. There are acres of legislation to get to grips with. Having another piece of legislation that does not fit in with everything else is going to make our lives much harder. You go back to the issue of whether you really want to take away a tool that can rescue jobs or whether you want to limit that tool in some way. It is a question of balance, between taking a tool away and making sure that you curb the excesses of its use.

David Kerr: Pat of that is deciding what weight you give to creditors who complain about abuse when what they mean is that the abuse is that someone has been allowed to start up again, using the same assets and the same premises and so on. Their concern is that they have lost money, and they say that they have lost that money because of a pre-pack. As Frances says, they have not lost money because of the pre-pack, they have lost money because the company was insolvent, and whether it went into an administration, pre-pack or otherwise, or it went into liquidation, they have lost their money at the point when the insolvency practitioner comes in. There is an issue about their perception of the process.

Q41 Margot James: How prevalent do you think that the practice of creating phoenix companies is? From a reading of the press, you might think it was quite widespread. In your experience, how frequent is this process of phoenix companies?

Frances Coulson: It has always happened and it will always happen in a certain small percentage of cases.

Q42 Margot James: You said earlier that the number of director disqualifications has lowered. Is this not a factor in the encouragement of more people to proceed down this rather cavalier path with suppliers’ money?

Frances Coulson: Yes. The two tools that would tackle the abuse, whether it is in pre-pack or liquidation or anything else-phoenixes have always happened in liquidations-are first, to have an effective disqualification regime and to have an effective prosecution of directors who ignore the disqualification order, which also happens. Prosecutions are relatively limited because of resource issues. Second, to make sure that practitioners are enabled in bringing actions against directors to hit them in the pocket and take the money that they may have gained from going through the phoenix process. You have to make those two areas effective. Disqualification has to be funded to enable that to happen effectively. Disqualifications have reduced by over half since 2009.5

Vernon Soare: The Insolvency Service itself in its report in 2010 estimated that about 70% of pre-pack sales were to parties connected with the insolvent company. That is quite an interesting statistic. Of course, it does not necessarily mean that the directors or connected parties were at fault. There is a big difference between poor management leading to the folding of a company and economic circumstances being right against it. However, that is the most recent statistic that the Insolvency Service itself has put out. It begs the question as to the circumstances in which the pre-pack administration is sold on to those with a previous connection to the business.

David Kerr: That may not be entirely the same management. One case I was looking at yesterday involved new investors, but one of the directors from the previous company was involved in the new one. That would be in the 70%. I think that Sandra Frisby’s research did cover the proportion of the cases that she looked at with a connected sale so there is that information available.

John Milsom: I would not stake too much on Sandra’s very good work. It could reflect the world some years ago now. We have a fast-moving economy-perhaps not as fast as we might like, but it has changed-and pre-packs are being used slightly differently now, in part because you have large concerns with very complex financial instruments and complex financial structures. Where you have an operating group of people who have a knowledge of the business you want to retain them, because they are people who can actually keep the employment going. The fact that they may not be the CFO and the designer of the financial instruments that the company used might be a good thing. There is a balance there, again.

Frances Coulson: Our members have been working with the Insolvency Service to improve the "D" forms that our members have to submit-they have to report on directors when a company fails. A very high proportion-almost 80%6-of practitioners putting in an adverse report felt that they were not being taken forward appropriately. We have been trying to make the process easier, both for the practitioner and for the service when it is looking at them. At the end of the day, it is sort of "for want of a nail": it has to be funded so that disqualifications can happen. Although that is a down-the-road benefit, it is a benefit to the economy to do that.

Q43 Nadhim Zahawi: Do you believe that an insolvency practitioner providing advice to a company on the potential for a pre-pack has an inherent conflict of interest when accepting a formal appointment as an administrator with a view to subsequently executing a pre-pack sale? If so, do you believe that such a conflict extends to circumstances where the insolvency practitioner has had an ongoing prior relationship with that company in the context, say, of undertaking review work for a lender?

John Milsom: If you have undertaken that review work, first of all, management do not welcome you with open arms, because you are there for a particular reason, so there is a natural tension between you and management. You are doing a critical review of their work. If you do that job well, you gain an understanding of what their business objectives are and the value of that business. To then have you replaced and a new IP coming on the day that you are appointed, and imagine that they can then gain the knowledge that you may have accrued over three or four months, is not reality. It would not work very well, and you would probably see businesses being sold for a smaller value or, even worse, being sold back to the management who you have challenged very hard over a 16-week period, who can then just buy the business back from the new guy who does not perhaps have the benefit of your knowledge.

There is a conflict-of-interest issue. I completely accept that. There are very stringent ethical requirements. In fact, in the last 12 months we have brought in a new statement of insolvency practice, SIP 1, to codify the code of ethics as well, because we recognise that, if I have had a significant professional relationship with a business, it would be inappropriate for me to become the insolvency practitioner. That is what the code of ethics says. There will be examples. I work for a large firm; if my firm had done £50,000 worth of VAT work three years ago, I do not personally regard that as being a significant professional relationship, but I do recognise that somebody else may say that £50,000 is a great deal of money.

Frances Coulson: I think that, as John says, there is a difference between going in to do a review-perhaps at the instigation of a lender-and doing work to look objectively at the management and finances of the business and then being appointed, as opposed to having a relationship over a longer period, having been engaged by the board to advise them on things going forward. That latter is a different type of relationship and may well give rise to a conflict. Those are things which practitioners take very seriously, again, in terms of their regulators, which would look at them very closely in those circumstances.

David Kerr: The ethics code does cover it to a large extent. Perhaps the other area of potential conflict, which I am sure that most practitioners are keen to avoid, is getting involved in advising the directors personally in that prior period where, again, there could be difficulties because of director reporting duties.

Vernon Soare: From the ethical point of view and the way that regulators look at it, there is a code of ethics, there is SIP 1. I think that sometimes this needs to be viewed in the long term. If an insolvency practitioner is knowingly going into a job where they are conflicted, facing the potential of complaints by creditors, regulatory action by their regulator and their firm being put up in lights as having dabbled in that, then, unless they are going to make their fortune on that one administration and retire, they have a career to consider. You need to consider that that is a very heavy professional consideration to take into account. Interestingly, we get very few complaints about independence issues coming through. We get quite a lot of complaints, but they are not independence-based complaints.

Q44 Nadhim Zahawi: Do you believe that a requirement for a different insolvency practitioner to accept appointment as administrator would improve confidence that pre-packs are only used in appropriate circumstances?

Frances Coulson: No, I actually do not think that that would make a difference. The difference comes in, as I said before, a liquidation exit, when you are at the stage of post-mortem and antecedent transaction. Of course there is a certain amount of engagement that has to take place with a company before formal insolvency and you have to try to understand the business quite rapidly, but I do not think that that would improve the confidence in pre-packs. I think that it is an education process. It is quite difficult, because pre-packs now have a bad name and there has been a lot of press about them.

John Milsom: I think that pre-packs have got a better name over the last 12 months because they have been seen to work very effectively in protecting jobs. The East London Bus Company, La Senza, Blacks: there is a whole series of cases where they have been very well used. I think that if you were to introduce a new IP to do a pre-pack, all you would do is change the nature of the problem. People work with people. If I was asked to replace some guy who had done the work a couple of weeks before and I did not like him, I would maybe not say why I cannot do that transaction. Eventually there will be accusations of a cabal: "You always work with that guy". That cannot be right either. All you do is change the nature of the problem. I do not think that there is a problem there. IPs, in the vast majority of cases, use pre-packs appropriately. I am not saying that there is not occasional abuse or poorly explained pre-packs-I completely accept that-but I think that, in the vast majority of cases they are appropriately used.

Frances Coulson: Of course there is the overlay of secondary cost.

Q45 Nadhim Zahawi: I was about to say that none of you mentioned costs.

Frances Coulson: We have to come back to the issue that there is never enough money to pay creditors in circumstances in which we go in. Anything that duplicates cost or adds cost unnecessarily is something that we obviously need to avoid.

David Kerr: Critically, as well, would it make a big impact on creditors’ perception of the pre-pack process? If you had a second IP coming in, and assuming that most of the transactions you are undertaking now would still be undertaken but by a different practitioner, the creditors still will not find out until after the event, and they may not be any happier about it than they would have been had it been the same IP, so you may not solve the problem

John Milsom: I think if the main lenders thought they could get a better return and it would give them greater clarity, they would have already pushed us to this. They are pretty forceful with us in any event around fees and their expectations of us. I think that if it was going to work we would have got there in any event.

Q46 Nadhim Zahawi: In your experience, are there more effective alternatives to pre-packs, either here or internationally? Have you seen anything more effective than that?

John Milsom: I have worked in the States quite extensively. Chapter 11 has a very good press and is quite a useful system. It has lots of attractions. However, it is cripplingly expensive. The company has to pay for a plethora of advisers who are very often value-destructive because they spend more time squabbling over the assets than they do trying to protect the jobs. I think that we have a very good system in the UK. It is effective, and the fact that other people want to come to the UK and use it demonstrates that. I do not think that there is a better system for our economy.

Q47 Nadhim Zahawi: It is interesting that you mentioned that. Anecdotally, and we would have to test this, I would say that Chapter 11 has a better brand halo around it-that is, the company can protect itself-than pre-packs. With pre-packs, there is the perception that they can get away without paying their suppliers and just start all over again, easily.

John Milsom: I am not quite sure. I recognise that it does have a better perception. Having worked with it extensively, it is fascinating that it has got that, because, essentially, the directors who crashed the car get given the keys again to take the car round the track one more time. That is what debtor-in-possession must mean. The fact that they have a group of lawyers in the back, saying, "left", or, "right", "change gear" or "stop", or "brake", makes life much harder for them. It gives a limit to it. But equally, there are a number of-I mean, the joke is that it is the 22 now. It was 11 and it has gone down again.

Q48 Nadhim Zahawi: From a suppliers’ perspective, there is value destruction on both sides, either to you guys or to a bunch of lawyers.

John Milsom: It is not necessarily Chapter 11, but some of the parts of Chapter 11 that are actually appealing, such as cure payments, which mean that you have to make whole a particular creditor if you decide that you want to trade with that person over a longer period of time, i.e. through the Chapter 11. You do not want businesses trading in that limbo, zombie sense, being traded by people like me. It does not make sense. You would have to change the whole regime in the UK and remove an IP, who is very often a ringmaster and can bring sense to a very difficult situation, and stop the petty squabbling over whether somebody gets 1.1p or 1.15p. We have a very good system. If you talk to people in the US they are always surprised how effective IPs in the UK can be in complex restructurings.

Chair: Can I just leave that now as we are moving on. Ann has a question on the R3 Holding Rescue to Ransom campaign.

Q49 Ann McKechin: A very quick question to Frances. You launched this campaign in March last year. I think I am right in saying that you estimated that if the campaign was successful, you could potentially reduce the number of pre-packs by about a fifth. Would that be right?

Frances Coulson: Yes.7

Q50 Ann McKechin: What success have you had and what legislation would need to be changed if you cannot get voluntary agreement?

Frances Coulson: We get a sympathetic hearing and we are trying to keep it high up the agenda. If change was to happen, now would be good, because now is when the economy is suffering. In terms of a change, it would be to Section 233 of the Insolvency Act. It is not a very large change that is needed. The legislation needs updating a little anyway, in terms of who can and who has to continue supply, for example. But it would be better if you had a pay-as-you-use system when you are in administration, rather than a supplier being able to say, "Well, we are just going to cut off the supply", or, "We are going to supply, but the price has gone up by three times", as that makes it very difficult for the practitioner to take a decision to trade that business, because he or she does not know at what overhead they are going to be trading that business.

Q51 Ann McKechin: Are there any international equivalents? In other parts of Europe, for example, are these schemes standard or do they operate a different system?

Frances Coulson: I am not aware of any.8

Q52 Simon Kirby: If it is all working so well, why is there need for change to insolvency rules? If there is a need for change, what would you like to see changed?

Frances Coulson: In the main, the insolvency legislation in this country works well. The Insolvency Act has lasted a very long time, and the Enterprise Act brought in changes to help with the rescue culture. The changes that we have pressed for are: no change to trading terms in administration; and fixing in legislation what is an administration expense because of the uncertainty that arises out of cases such as Nortel, and so forth, in expanding the range of things that are administration expenses. Practitioners need certainty in order to be able to make their decisions.

John Milsom: The rules are quite old-1985 or 1986-and the way we operate and the way that the general economy operates are very different now. The ability to communicate with people electronically would be really useful. To have that in the legislation quite clearly would be very useful. To take away some of the duplication and make it a more streamlined set of rules would be very useful as well. It is quite easy now to get a copy of the insolvency rules, to google a particular section. The difficulty as a layperson is that it is incredible complex. Having some simplification in the rules would be useful not just for IPs, but for the general public.

David Kerr: There have been a number of changes in the rules since 1986. There is a consolidation exercise underway at the moment with the service, and that is probably needed, just to bring it all back together into one place again.

Frances Coulson: Some of it is updating. Some people cannot cut off supplies to a business in administration, so you cannot lose your electricity, but you might lose you software licences. In this day and age, IT is perhaps almost as important, so updating in some cases is helpful.

Q53 Simon Kirby: Can I press you on that? Is there a need for anything other than updating and simplification?

Frances Coulson: It is tweaks, really. Those are the two principal tweaks that we would have said are necessary. The system does work well, and when we have spoken to various people, in Opposition and in Government, that is what our consistent line has been. It is good for rescue. All of the tools are there in terms of pursuing poor directors or rescuing businesses. In some cases, the key is having the budget and the will to do it.

David Kerr: The answer is that there probably are not any single major issues that need to be amended, but there are a series of smaller things that could be tidied up. The service has consulted on those and has a list, and they will be factored into the consolidated rule changes.

Frances Coulson: We do not disagree on any of them. It is just getting a window to do it.

Vernon Soare: Can I just make one comment about whether the system needs to change? I think that we would say that any changes must be evidence-based. We see, not just here, but in the audit profession as well, a lot of calls for change without having a good look at the evidence. I would give one cautionary note. We talked a lot about a single complaints body. As I said, if it gives better policy outcomes, well, fine. But it is interesting to note that when the Office of Fair Trading did their original review of insolvency-and a lot of that was used for the Insolvency Service’s own report-the criticisms they made about complaints, for example, were based without coming to visit any of the regulators to look at what they were doing. Yes, let there be change, if there is an evidence base for it.

On the positive side, we have spoken about better engagement by creditors, particularly, where possible, HMRC, which is a big player, and also, better creditor education. I do not know how you do that, but, I think, a better understanding of things-not just pre-packs, but the whole system-is needed. We have responsibility as regulators and trade bodies to educate the media, apart from anything else, who have a lot of preconceptions. At the end of the day, the other key thing is that prevention is better than cure. If we can, we should advise businesses so that they do not get themselves into positions where they go into administration. The ICAEW has a business advisory service. We advise about 1.5 million small businesses. While I obviously do not wish to take business away from my colleagues at this table, if we can do that, and get back behind the cause, that is probably better than getting into these situations in the first place.

David Kerr: One final plea on the rules changes, any of them, including the one potentially coming in in spring on pre-packs, is to make sure that the service gets the information out so that the profession can respond to them and be consulted on them before they are set in stone.

Chair: Thank you. That concludes our questions to this panel. Thank you. I shall just say what I say to all panels: if by any chance you realise in retrospect that there is an answer to a question that you would have liked to have given but did not, please submit it in writing. Similarly, if you feel that there is an answer to a question that we did not ask but should have, feel free to do so. If we feel that there was a question that should have been asked but we did not ask it, we may well do the same to you. Thank you very much.

Examination of Witness

Witness: Tony Butcher, President, Prospect (Insolvency Branch), gave evidence.

Q54 Chair: Good morning, Tony and thank you very much coming to speak to us today. For voice transcription purposes, could you just introduce yourself?

Tony Butcher: My name is Tony Butcher. I am the president of the insolvency branch of Prospect. We represent what might be called the professional examining staff and directors-up to director level-in the Insolvency Service.

Q55 Chair: I shall start with a fairly general question-well, perhaps it is not that general. Has Prospect been consulted on the service’s delivery strategy?

Tony Butcher: In some respects, there are two answers to this, a quantitative and a qualitative answer. In quantity terms, yes, definitely. We have no objection or complaints as a trade union, and the staff cannot have any either, to the engagement, as it was put in the submission by the Insolvency Service, which started at about this time last year and was rolled through until November, which was post the date upon which the service made a decision on what it called the delivery strategy. It started in meetings with both trade unions, including PCS, before the directing board had come to any conclusions, when it was constructing its report and doing its analysis. It showed us the results of it and told us what it intended doing. It did it. It then took on board the recommendations from the trade unions that the service personally take ownership of it and not hide on the fifth floor of our headquarters, but go to each office to explain it and themselves, not only while the consultation period was going on, but also after the decision had been made. On those terms, the service has engaged and consulted with not only the trade unions but also all members of staff.

In qualitative terms, that is where there may be a difference of opinion between the trade unions and our senior management. One of the things that is drummed into you when you enter the Insolvency Service is "never assume", and always to test assertions that are made. When the delivery strategy was in its consultation stage and all the options were laid before trade unions and staff, in a roadshow of office visits, the staff then put on their professional heads and asked the directors the same sort of questions that they would ask directors of failed companies, that is, testing the assertions made on the basis of the options. What rather sticks in the throats of members of staff and members of the trade unions is that we do not feel that, to coin a phrase from 10 minutes ago, change has been based on evidence. When questioned, a lot of the basis of the options, and then the decisions, was founded on assumptions. We challenged those assumptions and we still do not feel that we have got satisfactory answers.

In the original terms of reference, there is no reference at all to delivery strategy so we did not concentrate on that in our submissions. There is quite a lot of literature and analysis that has been done. Can I suggest that, if the Committee wishes to see this, we can provide it to you very quickly, by email? It goes into the detail that I have just been referring to.

Q56 Chair: That would be helpful. My next question was: how do you think that the Insolvency Service has managed this period of change, but I think that, to a certain extent, you have pre-answered that. Could you summarise what you think have been the flaws in the consulting?

Tony Butcher: For the delivery strategy? Essentially, it is not evidence-based. A lot of assumptions were made on individual office requirements. The most obvious one that people noticed was that a blanket assumption was made on the number of face-to-face interviews that each office would be required to do. It did not take into account local variances. It also did not take account of the reality of the number of face-to-face interviews that had occurred over the preceding decade, or certainly in the last two or three years. It was based on a coefficient, based on expected inputs of bankruptcies and company liquidations.

Q57 Julie Elliott: In your view, what will be the impact of reducing local offices and focusing on a more regional call centre type of operation? In particular, representing, as I do, a northern constituency, there only one seems to be one office in the north of England and none in the north-east and Cumbria.

Tony Butcher: The Insolvency Service’s decision to reduce its estate, which is effectively what it is, and effectively centralise certain functions, is something that we fundamentally disagree with. The Insolvency Service has, over the past 20 years-I have been in it for over 20 years-changed vastly from the monolithic entity of 20 years ago. It has reacted to all the pressures that have come on all Government services to reduce cost, such that it has streamlined its operations within the local offices. We do not feel that taking away-I am not going to say work-functions from a locale will have any long-term benefit. You lose the local knowledge, and you lose flexibility. The one reason why the Insolvency Service has put forward the delivery strategy as it has is that it is saying that it needs flexibility to deal with the fluctuations in case numbers. We have done that locally in the past. In the individual local offices, it allows the office manager-effectively the Official Receiver-to use their resources in the way that they see fit at that office.

The Insolvency Service has rather undermined itself in the delivery strategy, because in moving towards the end product-how it will be in four or five years’ time, which is something we cannot see because we do not know where things will be, we just know what they believe the organisational structure should look like-it has stated that it will not be moving people. It has stated that the work can be done where people are now. Our view is that, if it can be done where people are now, why do you need to move them? That has a very large cost and a very large impact on the efficiency of the service and its ability to perform its functions. The Insolvency Service has put forward a costing for the delivery strategy, essentially for closing and rationalising offices and moving individuals, of £33.5 million. That is what is known as a big-bang cost, that is, if everything happened on the same day and went smoothly. The Insolvency Service management has conceded that the reality is that it will not be a big bang, because there cannot be a big bang. There will be double-running. Therefore the £33.5 million costing must be incorrect. We cannot see any long- or short-term benefit.

Q58 Julie Elliott: How will it work, moving into these regional hubs? What practical problems do you think will arise?

Tony Butcher: There will be an internal problem in the sense that the staff who will be moved and corralled into certain functions in a centralised location will be expected to form the core of the examining staff who do the investigation, because of the career structure. They will be corralled into at most eight places, whereas the investigations will be in another 17 places in addition to those eight. The insolvency-examiner role is a very complex one. It takes a long time to learn it because, if you think about it, you are dealing with everything. We deal with the whole social and economic interaction. The Insolvency Service has broken down the examining role into three levels, which we think is a false dichotomy-well, it is a trichotomy-in that, if you are investigating a failure or bankruptcy or a big company, you cannot know one third or two thirds of an offence, allegation or technical matter. You have to know everything. So you learn from your colleagues around you and from doing cases. There is a benefit for the whole, which includes what is classed as the administration of a case, to be in the same locale as the investigation of the case. Almost by osmosis, you will find things and note things. It is also an informal audit check.

Q59 Julie Elliott: There have been some significant redundancies in the past few years. What has been the impact of those redundancies and voluntary exits on the staff working for the service?

Tony Butcher: We have not had redundancies, we have had voluntary exits. We lost 474 posts in April last year. There are another 108 offers at this point, so we are likely to lose another 100. As you can tell from the figures that the Insolvency Service has provided, we will be losing a third of our workforce in just over a year. By the very nature of exits, they are likely to be of experienced staff in quite senior positions-the sort of people who are relied upon to pass their wisdom on to the generations of new entrants, which has meant that this year there has been a very big impact.

In our submission, we pointed out that the Insolvency Service may look as though it has produced the same amount of work as it had done in the past, in terms of the output being measured by disqualifications or bankruptcy restrictions, but that is a lagging indicator, because when an investigation occurs for a bankruptcy, it takes a year, and for a company it can take two years, or maybe even longer, before you get the outcome-the order or the undertaking, or the hearing of the case. The important thing to look at is how fast we are able to do our work. What we submitted was that there has been a significant impact on the ability of the Insolvency Service to progress work that was in progress. The reality of the way that staff-the disqualification investigation teams especially-had to deal with this loss of staff was that, with staff who were lost, their cases got transferred to the people who were already there or who had come in. Those cases were done or were work in progress. The cases in progress have progressed, but the cases behind lagged, and have not been done. This means that this year and next year will be when the overall impact will be noticed.

Q60 Julie Elliott: What impact has it had on staff morale? How is staff morale at the moment?

Tony Butcher: I think it is fair to say that they are all uncomfortably numb. They have been buffeted by many events. We touched on the delivery strategy that comes from a problem with the funding model for the Insolvency Service. We can go back and back, and there have been a lot of pressures on the Insolvency Service generally in the past two or three years, which have resulted in short-term decisions having to be made very quickly by the management. This has of course impacted on the staff morale, if morale is a word that we can use. The innate professionalism of the staff has resulted in the work still being carried out to a high level. But it cannot carry on that way. We can all pass on anecdotes of individuals. I do note from my contacts around, and especially at relatively senior levels on the investigation side, that the pressure is telling. They have had to assimilate not only one set of new investigators but a second set, with possibly a third set coming along, in various places where they did not have people before. Rather than managing people in one place, they are now managing new people in three, four or five places. It has put a lot of pressure on a lot of senior people. Individually, they are just about coping.

Q61 Julie Elliott: Finally, you mentioned 100 people waiting to exit the service. Are you expecting any more redundancies after that, or do you think that that is the end of this restructure?

Tony Butcher: What happens next is for management to answer. The business planning they have done for the next year is predicated on a certain level of cases coming in. If those cases do not come in, they have to deal with it and go through the same thing again, probably.

Q62 Margot James: The 11% cash cut in the investigations budget-how has that affected services?

Tony Butcher: What happened was that we immediately lost 40 short-term appointees. I was about to say, traditionally-in effect, it is traditionally-but since 1992, when the Public Accounts Committee criticised the Insolvency Service for a lack of investigatory effort, 20 years ago, we were given resources by the previous Government to investigate properly. The Insolvency Service brought in some contractors, mainly Antipodean and South African solicitors. So we brought in that talent. They have an innate knowledge and capability, but they do not have the technical knowledge so we relied on our internal managers, of whom I ended up being one, as an example, to produce work. Since then, which is 20 years ago, the investigatory effort was mainly staffed in the disqualification unit by short-term contractors. There has always been a long-term plan to reduce that and have our own staff do it, which is a good thing. We are now at that point, and it has been forced and rather rushed by events, of which that was the major catalyst or starting gun. The impact of this was that some very experienced staff, who were dealing with some quite difficult cases, had to go.

Q63 Margot James: When was that?

Tony Butcher: That was in June 2010. It was quickly followed by the VES or exit scheme. That was predicated, not on the budget cuts in 2010, but on the problems in the Official Receivers, with their income streams. It had an impact on the investigatory effort, as we submitted in our written submission.

Q64 Margot James: The investigations unit has been accused of targeting the easy-win cases. How true is that?

Tony Butcher: The investigatory effort of the Insolvency Service starts with its case-targeting, in that the parameters determine what cases are looked at. If there would be any change of the scoping of what the Insolvency Service regards as worthy cases for investigation, it would be at that point. What happened with case-targeting was that a change in directorates and management coincided with many other events. The director, I understand, drew up what is called a public interest grid, so that they could target cases that were appropriate. I do not have specific knowledge myself of that, but I am sure that if the Committee wishes to know more details of it they can ask the Insolvency Service for it. It is a public interest grid and it scores cases. If there were to be any changing of the parameters it would be there.

Do we perceive it? In my job, I am at the other end, where the cases have been investigated and it is about to be decided whether we should disqualify someone. I see the end point and the fruits of it. The case mix is no different from what I have seen before, so I cannot honestly say that we have seen a different case mix. That is not quite the answer to your question, but if there were to be a change in the scoping, it would be at the case-targeting stage-once it has passed for investigation, it is investigated thoroughly, or as thoroughly as it can be.

Q65 Nadhim Zahawi: We have received evidence that the staff making the decision to refer complaints for further investigation are of junior grades. Is this true, and if so, do these staff have adequate training?

Tony Butcher: As a branch and as members of the Insolvency Service, we would hold to the Carltona and Philips principles of differentiating between investigators and prosecutors, and also of the right people making the decisions at the right grades. When the change in that case-targeting occurred, we did make inquiries about the appropriate people making the decisions. I cannot tell you that I have got a definitive answer to give you. I cannot give you that because we did not get a definitive answer. We do know that the change in case-targeting resulted in a change of processing, which I understand included the idea that now when "D" returns or complaints come in, they are measured against the grid to which I referred. So the actual mechanics of that is something that I would suggest that you can ask in detail from the Insolvency Service management team themselves. The perception of staff is that, because there was such a large set of changes, especially in that area, that gave rise to suspicion. There was a perception that there was an introduction of people at a lower grade to do some part of the work. As to whether that was simply to do with bureaucracy and not a qualitative decision-I am sure that that is something that you would wish to ask the Insolvency Service itself.

I think that you might be referring to Mr Clough’s submission. He used to work for what was called the Companies Investigation Branch. I have made some specific inquiries about that, in terms of how that section has been rearranged. In effect, it is different labelling of what already existed. The critical point for us in relation to how the Insolvency Service has been able to perform is that it coincided with the budget cuts I referred to, plus the VES scheme that resulted from the Official Receivers having to cut the number of staff. It is to do with people leaving and new people coming in and needing to be trained. It is part of the lagging indicator that I referred to and the lagging problems. It is because we have had to move so many people around to do so many new things, all at the same time.

Q66 Nadhim Zahawi: So, could it be that the levels of complaints have also decreased because of a perceived lack of confidence in the process?

Tony Butcher: I do not know why there is a lower number of complaints. The Insolvency Service, within the relevant directorates, is making inquiries and has put people on to specific reporting to find that out. They have not reported yet as far as I know. Specifically in regard to the number of criminal referrals, I know that that has been noted and is being investigated. It is ongoing, so I do not know what the answer to that is.

Q67 Nadhim Zahawi: Do you think the service could do more to explain how it prioritises the cases which are targeted for enforcement action?

Tony Butcher: If the insolvency practitioners who input on company disqualifications-if we are talking about that-are not aware of what our prioritisation is, that would suggest that there is a need for it.

Q68 Ann McKechin: Tony, your union has expressed concern about the current funding model for the Official Receiver Services. Could you quickly outline what your main concerns are?

Tony Butcher: Seven or eight years ago-within the last decade-the way in which the Official Receivers were funded changed. Before then, in essence, the Insolvency Service went to its parent department and said, "This is how much money we need to do what we need to do", and it got it, or thereabouts. But then it was changed. Now, Official Receivers have to effectively break even and get in as much as they spend, which is why there is a so-called notional loss.

We think that that is fundamentally flawed. It is completely irrational. The clue is there in what we are called: we are called the Insolvency Service. We are dealing businesses and individuals who have not got any money or assets. We are going to deal with a lot of cases where there are no assets or only minimal assets, which will not contribute to paying the administration fee that we are supposed to charge and recover. The reality is that, in the simplest terms, in the present funding model the Insolvency Service is given an amount of money for the Official Receivers, and then has to give it back. It gets it back by charging fees, which means that over a three-year cycle we are supposed to break even. We think it is thoroughly irrational. We also think that it is unfair on creditors. We do not think the creditors should be funding absolutely everything. The Insolvency Service and Official Receivers exist for a reason. We are dealing with failure and performing a court function and a function of the state.

Q69 Ann McKechin: Your proposal is that there should be further Government funding of the service. If I could put the contrary argument: given that this involves, in effect, people who enter into private commercial contracts and take a risk that the person that they supply the service to may not have enough money to pay the bill at the end of the day, why do you think that the taxpayer should be taking an increased share of the cost, given that there are, frankly speaking, likely to be more of these types of cases?

Tony Butcher: I would not like to sidestep this, but I was thinking about this on the way down, and I remembered that the Insolvency Service, with all that it does-and it does a lot of things-had running costs of £203 million. They were reduced to £143 million. Now, that figure is going to reduce even more. I have a simple proposition: why don’t we give the Insolvency Service £143 million and ask Mr Speed, who is the chief executive, "What can you do with that?", because we will not be spending any more money then, will we?

Q70 Chair: I think by the silence-you say, "We will not be spending any more money", but surely they are supposed to get it back. How would they get it back? We have heard one half there. We would like the other half.

Tony Butcher: Our contention is that the Official Receivers section should not be expected to break even. It should be expected to make recoveries that contribute to reducing or mitigating the cost of running that side of the business. The consequence of the suggestion I made, which brought silence in the room, is that, if we follow that logic towards the investigation side-and I am sure we are going to come on to how to fund that-there is a block on utilising the resources of the Insolvency Service, which is people. You cannot send investigation cases to the Official Receiver to do. You cannot send the people in the Official Receivers to do the investigation, because if that happens, it comes out of the cost of IES, the £32 million that is given to investigate.

So, if the Insolvency Service was told, "Here is the money, here is £143 million-do it", it could use that money, that is effectively in the Official Receivers’ offices at the moment as an untapped resource, to do that extra work. It is not extra money in terms of the Government giving us extra money. It is producers being allowed to produce more with the money that we are being given.

Effectively, we have to recognise that the very nature of the Insolvency Service is that it is going to be unable to recover its costs, because it is dealing with insolvent businesses. The present funding model is thoroughly illogical. Not only does it produce the effects that I heard you describe earlier, in the present economic cycle, if case numbers go up and asset values do not, then the notional loss increases even though there is a need to have more resources to process and investigate more cases. That is built in to that funding model. It is thoroughly illogical.

Q71 Simon Kirby: I want to ask a hypothetical question. What would you say to a small business in my constituency that might welcome the savings of £60 million, say that you are being very selfish, and would welcome the money to cut corporation tax, VAT and red tape and try to remain solvent? That is, at the end of the day, what we want-jobs and employment. As a hypothetical supplementary question, that same business might ask how and who pays for the 500 union members that are employed by your union?

Tony Butcher: I will leave that matter aside, about who pays for the 500 members.

Simon Kirby: I was just wondering.

Chair: I do think that that is part of rather a different issue and we need to focus on the purpose of the inquiry.

Tony Butcher: Why does the Insolvency Service exist? That is my starting point. Why does the Official Receiver exist? The Official Receiver came along as a statutory officer of the court in the 1880s because of scandals in the private sector in Victorian times, which was not administering insolvent estates in an appropriate way. The Insolvency Service and the Official Receivers have a basis in fact and reality about what can happen when a market goes wrong. That is what we do. The present Minister of State has often been quoted as describing us as the plumbers of the economy. If you do not get the plumbing right, the whole house falls down. It is a value judgment that Government will have to make, and the Committee can make a recommendation in terms of what is it right to do in terms of policing the market and ensuring that rogue and incompetent business entities are removed.

Q72 Simon Kirby: I accept all of that but my question is, in a climate of limited funds, how do you justify arguing for increased spending? Every other part of Government is having to make these difficult savings.

Tony Butcher: We have already had £60 million of savings in a year, which is a huge amount to lose. It is just under a third of a relatively large organisation. To reduce it further may render the organisation incapable of performing its statutory functions. It will come to a point where it has to make a decision as to what its priorities are within its statutory obligations, and some of those may not get done. If they are not being done, that will impact ultimately on small businesses-small businesses are the ones that get hit most, we can see that-and the taxpayer, ultimately through HMRC. If people are allowed to remain hiding behind limited liability, they cause an imbalance in the local market. The worst thing that can happen to a local business is another local business taking them for a ride. You can say, "Something must be done about it"-well, we are the something-must-be-done people. The Insolvency Service is the backstop. If we do not do it, no one will. If you want something done, we are the people to do it.

Q73 Ann McKechin: On this element about the fee level, I take your point about how we have debtor petition bankruptcy cases, and if people do not have any money, then how much can we reasonably ask them to pay as a fee? If it is too high then presumably your argument is that people will not present themselves for bankruptcy.

Tony Butcher: Sorry, I misunderstood. That is a slightly separate issue. That is about the bankruptcy fee, to make yourself bankrupt or be made bankrupt. That is different from the administrative fee that feeds into the funding model. There is a school of thought within the Insolvency Service that we are effectively pricing ourselves out of a market. We do not like to refer to it as a market, because we do not think it is a market, but if we think of it in those terms, we are making it too expensive to go bankrupt. If you look at the alternatives, they are cheaper, in the sense that there is no immediate cost to individuals. The consequence of that is that people in dire financial straits are more likely to go down another route. Whether that is the right route or not is a moot point. It is certainly noticeable, and has been reported back by members in each Official Receiver’s office, that the reason why we are getting a lot of cases where people have no assets is that we are getting a sizeable number of cases where the assets have gone because they have gone down another route.

Q74 Ann McKechin: The more profitable ones are going to the debt management companies?

Tony Butcher: Yes, you can say that. There is nothing left. We are just left with an eviscerated husk, which is another reason why we have financial problems. It is also another reason why we are there-we are performing a function of public good.

Q75 Katy Clark: The figure of a cut in the budget of a third in a year is absolutely massive. Could you outline very briefly how that has affected the service in terms of the amount of work that has been carried out and the quality of the service?

Tony Butcher: Briefly? The impact, as I have alluded to and described earlier, is internal change on a huge scale. The consequence of that is that things get delayed, essentially. I shall concentrate on the enforcement side, because that is what the terms of reference were-unless you want to talk about something else, like the Official Receivers. On the enforcement side, because of the internal chaos-I would use the word "chaos", but I am sure that senior managers would not be happy with that; I am sure she is smiling behind me-things are not done quickly. If things are not done quickly, then insolvency practitioners are effectively saying, "What are you doing about something? I sent this six, eight, nine or 10 months ago, and have heard nothing about it". They have heard nothing about it because we have no one to give it to at that point.

Q76 Katy Clark: So you are saying that there are bigger backlogs?

Tony Butcher: There is a backlog.

Chair: I will move on to the bad debts write off. In the context of this, I believe something like £81 million was written off in 2010-11. Can I just bring in Katy on the last annual report?

Q77 Katy Clark: The last annual report from the Insolvency Service stated that £15.7 million, I think, of bad debt had been written off to the cost of the taxpayer. What do you think are the reasons for that and in your opinion is that acceptable?

Tony Butcher: This really flows from the flawed funding model and the nature of insolvency. What it refers to is the funding model being that we charge a fee and try to get the money back. If we do not get the money back, it goes down as a bad debt. That is all that it is. In previous times, that was regarded as just being the cost of dealing with insolvency-that there are cases where there are no assets, and there is insufficient income, so you write them off as a bad debt, because they are and that is just the way it is. The question within the accounts-if is just an accounting matter and whether the Insolvency Service was correct in deciding that a figure of 12% was right for bad debt write-offs or if it should have been higher-is, to be fair to management, in a sense looking at things in hindsight. The economic cycle is an unusual one. We have had a big recession. Whether they would have the ability to guess that it would be greater than 12% is something that I would not like to criticise them on. I think that is was unforeseeable. I would not say this area is a red herring, but I think that it is a recognition of the impact of the funding model. It creates a notional loss. You are basically creating a balance sheet on which the Insolvency Service looks insolvent.

Q78 Chair: I can see the basic problem with the model insofar as if you have a statutory obligation and, in order to fulfil that obligation, it costs so much money, and you are supposed to compensate by fees from the organisations you are dealing with, if they cannot contribute those fees, then obviously you are caught between a rock and a hard place. It comes back to the prioritisation issue. Is there an argument, given your limited resources and the funding issue, for prioritising those cases on which you can actually get a return?

Tony Butcher: Can I ask you to be more specific? The Insolvency Service is a very big organisation and it works in very different ways. Are you talking about the Official Receivers here?

Chair: Yes.

Tony Butcher: We have a statutory obligation. We have to do what we have to do under the Act.

Q79 Chair: So is it simpler, with a company where there is absolutely nothing there, and there are no assets-

Tony Butcher: If there are no assets, there are no assets. There is nothing to retrieve, so therefore there is a notional loss. It is the same with bankruptcies.

Q80 Chair: What I am trying to say is could you have, if you like, one model of service delivery for such a company, where there are no assets, and another for a company where there were assets?

Tony Butcher: That appears to have intellectual coherence, but the reality is you do not know what the asset position is until you investigate it. You rely to a large degree, at the very first instant, on the director or the bankrupt providing you with information. Accuracy of that information depends on many factors, which could include the honesty of that individual. It could also be that they are not recognising what they are being asked to provide. It is only after you have done an initial investigation or perusal-whichever phrase you wish to use-that you <?oasys [pc10p0] ?>can assess whether there may be further assets. Especially in bankruptcy, there are a lot of referrals to the Official Receiver for matters which they could not possibly know at the time. So, it is post-event that they get told that somebody has got something or had something at the time. So if you decided to separate out cases at an early stage, saying, "This is a NINA-no income, no assets-and this one is something else", another acronym that I cannot think of at the moment, then you have to have the mechanism to move it from one place to another. You are creating essentially unnecessary bureaucracy within the system. If you treat every case the same, you will find things or not find things. With the ones where you do not find things, you just have a notional loss.

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Q81 Chair: Have you just created a new word for the Insolvency Service or did it exist before?

Tony Butcher: What one is that?

Chair: NINA?

Tony Butcher: I have stolen it from the Insolvency Service. I will not claim that.

Q82 Chair: I think that you have explained that last point very lucidly. Thank you for your evidence. I will repeat what I said to the previous panel: if you think that there is anything else that should be added, please feel free to submit it.

Tony Butcher: I will submit to you by email the thing that I referred to earlier.

Chair: Thanks very much.


[1] Note by witness: The percentage of reports taken forward by the Insolvency Service has reduced from 45% in 2002-3 to 27% in 2010-11

[2] Note by witness: This should read only 20% in 2009-10 and just 27% in 2010-11

[3] Note by witness: The Insolvency Service estimates a net benefit of £88,000 to the market for every company director disqualified (in terms of potential economic damage that they would otherwise cause). Therefore, the total potential savings to creditors from disqualifying unfit directors is estimated at £143.2 million in 2009-10. Should disqualification rates return to 2002-03 levels, the benefit to the economy would be an estimated £247.4 million in 2009-10.

[4] Note by witness: We suggest that HMRC set up their own fee review teams to consider IP fees, based on their existing and effective Voluntary Arrangements Service (VAS). This non-regulatory solution would be self-funding and would see unsecured creditors playing a much more active role in fee-setting.

[5] Note by witness: This figure is in error and should read “the percentage of reports taken forward by the Insolvency Service has reduced from 45% in 2002-03 to 27% in 2010-11”.

[6] Note by witness: This should read 75% of practitioners, putting in an adverse report, felt that they were not being taken forward appropriately.

[7] Note by witness: R3’s research estimates that if the campaign were successful there would also be an additional 2,000 businesses saved each year.

[8] Note by witness: The US’s Chapter 11 has some similarities to R3’s campaign and obliges continued supply. This ‘automatic stay’ prevents suppliers terminating their contracts with a company on the grounds of insolvency alone and we understand that it works well (please note, we would not recommend introducing Chapter 11 in its entirety to the UK ).

Prepared 5th February 2013