New law, insolvency regulation and the rescue culture
The UK insolvency regime began preparing for the 21st century with the Cork Report in 1982. That led directly to the Insolvency Act 1986, introducing the rescue mechanisms of administration and voluntary arrangements. Major refinements followed with the Enterprise Act 2002, enhancing the new mechanisms and facilitating the constructive use of insolvency procedures.
Since then, however, it has not been entirely plain sailing:
- administration is widely seen as terminal: "going bust" is a common media description although the procedure is designed as a temporary opportunity for restoration;
- the effectiveness of administration has been seriously blunted by various rent, pension and other claims being elevated to the status of administration expenses, payable before creditors;
- similarly, TUPE (the implementation of the European Acquired Rights Directive) and its application by employment courts has stymied business rescue and failed to preserve employment;
- pre-pack administrations have been occasionally abused and widely misunderstood; and
- an erroneous perception of insolvency practitioners charging huge fees whilst failing to act in creditors' best interests has been allowed to emerge.
Many of these challenges can be attributed, at least in part, to the insolvency profession not explaining itself sufficiently well, either generally or in individual cases and either to creditors and other stakeholders or to the media and politicians.
The influencing of legislative change has certainly improved, led by the trade body, R3, whose recent success in persuading the government to abandon its ill-advised proposal to require 3 days' notice of business and asset sales to related parties is noteworthy.
However, more needs to be done to remedy defects in the law. Take for example the undue emphasis on rescuing the company (usually a valueless capital structure that is no longer fit for purpose) rather than the business, the craftable value creation unit at the heart of the enterprise, which can often be restored to health, perhaps under different ownership. More specifically, incursions into the administration expense regime need to be halted to restore the value of administration as a rescue tool. Goods and services actually used during an administration are proper expenses that should be paid, but contracts should be terminable by administrators (with damages constituting an unsecured claim). Post-insolvency Financial Support Directions from the Pensions Regulator should also, statutorily, constitute an unsecured claim. TUPE should be revised at least to exclude liquidation and liquidation-type administration sales.
Another area where legislative change is necessary is insolvency practitioner regulation. We need a single regulator that is and is seen to be independent and effective. Nothing less will do, despite the self-interested argument of some of the existing self-regulatory bodies.
The final area for improvement is a cultural issue for many practitioners. The art of communicating - through whatever might be the best medium - to all the relevant stakeholders in the distressed environment of a formal insolvency, where many have lost money, is often neglected by practitioners. They do so at their peril. This is especially so because a few communication failures damage the whole profession. The debacle of poorly explained IPs' fees and the contortions of the legislation and professional guidance on disclosure that were imposed because of public dissatisfaction is a case in point. IPs of course also need to communicate publicly - and in this age of instant 24/7 media coverage that is a skill to be learnt and honed.
Has the rescue culture lost its way? We certainly need more appropriate legislation, but the impetus for the right changes must come from the insolvency profession.
Date: 31st January, 2012
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