Caroline Clark, director of RMCSC and a fellow of the Insolvency Practitioners Association and R3, looks at the recent changes to the insolvency profession and how insolvency practitioners can help build trust through their work.

Insolvency changes

Change and uncertainty have been part of the everyday life of insolvency practitioners for some years as new Rules became effective from 2017, anti-money laundering compliance became regulated and the slow but inevitable change in the regulation of insolvency practitioners continued in the background. And of course, the pandemic and lockdown in 2020 and 2021 affected us all; not least insolvency practitioners because of the introduction of the Corporate Insolvency and Governance Act 2020 (CIGA 2020), brought in to help and support the economy.

But it is important to take a step back and take a long-term view of all these changes, many of which are linked to, or have been influenced by, similar and ongoing concerns in the government or among creditors. These have been discussed many times in the past but perhaps now, at a time of major anticipated change in the insolvency profession, insolvency practitioners could themselves make some changes to their work and how this is presented to stakeholders in the insolvency profession.

Insolvency techniques

An important skill for officeholding insolvency practitioners is to be able to recognise and make the most of an opportunity to maximise realisations for creditors. A good example of this is the prepack sale of the assets of an insolvent company, a transaction largely negotiated before the company goes into administration. The sale is completed after the company goes into administration and, as a going concern sale has been achieved, it is seen as most likely that a good consideration will have been achieved for the sale of the assets.

The procedure should be compliant and the speed of the negotiations and transaction means that the administration is unlikely to be as costly or risky as the trading administrative receiverships of the 1980s and 1990s, which went on for several weeks or even months before a sale of the company could be completed.

To an insolvency practitioner the benefits of a prepack sale seem obvious but it is well known that other stakeholders in the insolvency profession distrust and dislike prepack sales, almost as a matter of principle. Prepack sales are seen as just a way to sell assets quickly, without proper marketing and valuation and we are all familiar with the resulting changes in legislation and procedure.

Corbin and King

A presentation at the recent ICAEW insolvency conference gave another excellent example of insolvency practitioners making the most of the opportunities available to them, for the benefit of creditors. The case known as Corbin and King (re Corbin and King Holdings Ltd) demonstrated how a moratorium could be used to give time to a group of companies in financial difficulty so that the financial problems could be managed. In the discussions after the presentation, it was suggested that moratoria could be used as a restructuring tool perhaps used before CVAs to find time to put the CVA in place.

Using the moratorium as a tool to assist with other insolvency procedures is arguably not the same as the quick, light touch insolvency procedure that the Chancellor brought in with CIGA 2020 to assist with the ‘V shaped recovery’ then forecast for the economy coming out of lockdown. It is perhaps another situation where the actions of a skilled insolvency practitioner to make the most of a combination of legislation and circumstances for the benefit of creditors could be misinterpreted by other stakeholders in the insolvency profession.

Ethical issues

Anger and mistrust generated by prepack sales possibly contributed to a 2018 court case, Ve Vegas Investors IV LLC v Shinners. The judge decided that a conflict of interest arose as the nature of the prepack sale resulted in claims against the directors that were to be investigated by the administrators, the very people who had advised the directors about the prepack sale in the first place.

The ethical implications of prepack sales have not all been resolved and the case of Ve Vegas Investors IV LLC v Shinners is to be specifically considered in a July 2022 IPA training webinar about the ethics of giving advice and avoiding conflicts of interest. As the insolvency ethical code points out: ‘Consideration should always be given to the perception of others when deciding whether to accept an insolvency appointment’.

Could it be possible that skilled and experienced insolvency practitioners, while giving emphasis to maximising realisations for the benefit of creditors in individual cases, do not consider enough the perception of other stakeholders and the reputation of the wider insolvency profession?

In its 2022 insolvency conference, the ICAEW included a session about building integrity and avoiding moral bankruptcy in professional practices and it seems that the RPBs, at the time when their future role in the insolvency profession is uncertain, are considering wider questions about the insolvency profession and how it will progress in the 21^st century.

Summary

It is certain that the UK economy will need a successful, reliable and ethical insolvency profession in the future and the existing insolvency profession will be an excellent place to start. Hindsight can be a marvellous tool and it is possible to see that changes in legislation, regulation and case law in the past few years have been influenced by wider concerns about the work of insolvency practitioners.

Stakeholders who may not fully understand all the work carried out by insolvency practitioners are quite rightly asking for changes and it may be that a consideration of the wider impact of decisions in individual cases, and how this is presented to creditors and to others, could assist in bringing these changes about.

About the author

Caroline Clark is director of RMCSC, a fellow of the Insolvency Practitioners Association and R3, and has an MBA. She established RMCSC in 2013, providing consultancy advice for insolvency practitioners about compliance with insolvency and anti-money laundering legislation.

See also

Does insolvency legislation support the stakeholders in the insolvency profession?

The future of insolvency regulation: The Insolvency Service consultation

What you need to know about Corporate Insolvency and Governance Act 2020

How will The Administration Regulations 2021 affect the sales of assets in administrations?

Find out more

Corporate Insolvency and Governance Act 2020 (Legislation)

Image: Getty Images

Publication date: 11 July 2022

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.