Paul Van Ernich

Classical Realism In Oil Paint

How Insolvency Practitioners Abuse Their Position to Maximise Profits

Insolvency practitioners are a highly profitable industry which operates in an environment that creates misery and hardship for millions of employees, customers, shareholders and pensioners.1 They receive a first claim on the cash generated in an insolvent business and can extract fees from every single person who is thrown out of their jobs, loses their home or investments and sees their savings wiped out. They have no interest in preserving the economy or saving jobs; their only concern is their own profit margin.

Unlike accountants, scientists, engineers, designers and computer experts, who must compete for work, insolvency practitioners enjoy a state guaranteed market and can charge whatever they wish. It is not uncommon for trainees to be paid PS80-PS250 per hour and partners to charge more than PS500.

This is an extremely lucrative market which attracts the greedy and dishonest. It is also a highly secretive industry which, in contrast to the railways, telecommunications, gas, electricity and food sectors, does not have an independent regulator. Instead it is regulated by accountancy and law trade associations (known as the Recognised Professional Bodies or RPBs) which were formed to secure economic advantages for their members rather than safeguarding and advancing the interests of stakeholders. The RPBs also do not owe any duty of care to the people who suffer from their actions.

A recent case highlights the extent to which insolvency practitioners can abuse their position in order to maximise profits. In the case of Coopers v Maxwell the insolvency practitioner had been appointed receiver to a limited company and was therefore entitled to charge a fee. The company subsequently went into Creditors Voluntary Liquidation (CVL). The insolvency practitioner had previously carried out valuations of the company and prepared detailed plans to restructure it. The Select Committee found that the insolvency practitioner was not acting in good faith and had failed to follow an ethical guideline that states that a practitioner should have no material relationship with a company prior to its appointment as receiver.

There are 1,834 licensed insolvency practitioners in the UK handling all bankruptcy, administration, liquidation and receiverships (Hansard, House of Commons Debates, 20 June 2000, cols 138-142). It is important to note that only about a third take up appointments. This means that, in practice, the majority of those who do take up appointments are carrying out routine work – not investigating frauds or dealing with cases involving complex issues such as multi-million pound transactions.

The cosy relationship between the state and insolvency practitioners is a major cause of public dissatisfaction. It is not right that they should have a monopoly of all insolvencies and be able to charge whatever fees they like. It is not right that they should be allowed to defraud creditors or manipulate the system.

Despite the fact that insolvencies impose enormous costs on the economy, politicians and civil servants have shown little willingness to tackle the issue. They are more likely to meet with the insolvency lobby than with those who suffer.

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