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By Phillip Sykes, president of R3, the insolvency trade body

06 Jul 2015

In 2014, over 18,000 UK businesses entered a formal insolvency procedure. Insolvency is a fact of the economic cycle, but there is much more to it than winding up struggling businesses. Business and job rescue, tackling fraud and director misconduct, and the opportunity for a ‘fresh start’ are all integral to the UK’s insolvency landscape.

Insolvency practitioners regularly work with companies to help directors return the business to financial health. Timing is everything: if an insolvency practitioner is called in early enough, there are generally more options for business recovery; options for recovery reduce the longer a business struggles. In insolvencies last year involving an insolvency practitioner, over two-in-five businesses continued operating afterwards. That’s about 230,000 jobs saved.

In a formal appointment, an insolvency practitioner is first and foremost responsible to that business’ creditors. Business rescue is often also the best way to achieve a positive outcome for those owed money. 

It’s to creditors that the insolvency practitioner reports and it’s the creditors that help monitor and inform the insolvency practitioner’s work. Indeed, creditor engagement is one of the most important parts of the insolvency process. 

There has been a lot of work over the past year or so to boost creditor engagement, and trust and transparency in the insolvency regime. From October, for example, insolvency practitioners will provide creditors with a clear up-front estimate of the cost of work before it starts, with any further work requiring further consent. ‘Pre-pack’ administrations involving a sale to a ‘connected party’ will soon be subject to oversight by a member of a ‘pool’ of independent business experts. And R3, the trade body for the UK’s 1,700-strong insolvency profession, has worked with business organisations to protect physical creditor meetings from government attempts to restrict them in the recent Small Business, Enterprise, and Employment Act. 

R3 has also been keen to help creditors understand more about how the insolvency process works. A new website, www.creditorinsolvencyguide.co.uk, has been set up to guide inexperienced creditors through the (often complex) process. The website helps to differentiate between the different types of insolvency procedure and tries to answer, in one place, the many questions that insolvencies raise. 

There are more projects coming up where the insolvency profession will need to work with business groups to ensure the insolvency regime continues to meet the needs of creditors and debtors alike.

Principal among these is the need to press government for a decision on insolvency litigation as part of the 2012 Legal Aid, Sentencing and Punishment of Offenders Act. The legislation was introduced to cut down on the ‘no win, no fee’ cases but has ‘swept up’ insolvency litigation too: this is where insolvency practitioners go after directors of insolvent companies (and others) holding onto creditors’ money. Research estimates that at least £160m per year is returned to businesses and taxpayers owed money. Following lobbying from R3 and others, insolvency litigation is currently exempt from the Act: it was due to expire in April 2015 before the government postponed making a decision on this issue until later this year. 

It is absolutely vital that the government takes the side of creditors on this: not only would making the exemption permanent be a financial boost to businesses that depend on money being repaid after insolvencies, it would send a message to those directors tempted to hold onto money that does not belong to them. 

It will be a busy year ahead, and R3 will work closely with all those with an interest in the UK’s world class insolvency regime to make sure business rescue, trust and transparency remain paramount.

All views expressed in guest blogs are that of the authors, and not of the British Chambers of Commerce.