Wrong Target for the Parliamentary Inquiry on Fair Business Banking

Posted on: 25 February 2021 by Dr John Tribe, Senior Lecturer in School of Law. in Blog

In looking at the impacts of both Brexit and the current pandemic on businesses, insolvency issues are at the fore for many. With this in mind, the All Party Parliamentary Group on Fair Business Banking have recently launched an inquiry into the relationship between banks and insolvency practitioners. In this blog, John Tribe, a Senior Lecturer in the School of Law, argues that they should re-focus their inquiry and instead focus their investigations on the corrosive dominance of secured creditors in insolvency.

As night follows day criticism of the insolvency profession manifests itself around peak insolvency periods. 2021 will witness one of the biggest tides of insolvency ever encountered in the UK. When the Government’s corona virus financial support measures for businesses and citizens stop, and the full ramifications of Brexit kick in, there will be an insolvency tsunami. Indeed, the Government’s Insolvency Service are already consulting on changes to personal insolvency law to meet this increased demand.

When insolvency practitioners, the paratroopers of the accountancy profession, are doing their challenging and pressurised work they invariably seem to receive bad press on a similar cyclical basis to recessions. It is almost like a diarised schedule of complaints. Critical voices come from across the board. These include the BBC who have investigated the insolvency profession on numerous occasions and the wider financial press. The insolvency profession also gets involved itself with a certain amount of navel gazing and self-flagellation. The same pejorative language gets wheeled out time and again with phrases such as “grave diggers”, “cowboy liquidators” or “crooks in suits”. But is any of this really fair or indeed accurate?

(Image by Paul Silvan on UnSplash)

With the 2021 insolvency tsunami comes the inevitable critique. The All Party Parliamentary Group (APPG) on Fair Business Banking have launched an inquiry into banks and their relationship with insolvency practitioners. In launching the inquiry Kevin Hollinrake MP, Co-Chair of the APPG, stated in relation to a properly functioning insolvency industry: “The APPG has also received its fair share of complaints about the system. This is why we thought now would be a good time to conduct our review, identify any failures and suggest practical ways they might be addressed.”

So why another inquiry and why this specific focus on the insolvency system and insolvency practitioners? It may have been thought that five (5) separate professional regulators for an industry of roughly 3,000 appointment taking insolvency practitioners would be sufficient regulatory oversight, but apparently not. Insolvency practitioners are also officers of the court and have regular judicial oversight of their work. Over 140,000 solicitors have to make do with the solitary Solicitors’ Regulation Authority. Valuable parliamentary time will now be used to investigate supposedly errant insolvency practitioners and their relationship with banks. The pressures of dealing with the fallout from Brexit and the ongoing Corona virus pandemic are not sufficient grist for the current Parliamentary mill. The APPG want to get the drains up on a profession that is already over regulated.

(Former UK Government Office for Fair Trading Logo)

The Wrong Target?

The Office of Fair Trading (OFT) did a similar review of the insolvency profession in 2010 with their investigation of the market for corporate insolvency practitioners. The OFT held, amongst other findings, that “when the secured creditor is paid in full, the remaining unsecured creditors find it hard to control or influence the process, and are harmed as a result.” In the ensuing decade little has changed primarily because of the dominance of banks. It is the power and influence of the key stakeholders - secured creditors - that is the main issue, as identified by the OFT and many others. It is not the relatively subordinate part played by insolvency practitioners within the insolvency system.

This secured creditor dominance is the critical point and it should be this power and influence that the APPG focus on – not the minutiae of insolvency provisions or the tangential role of insolvency practitioners or their (over) regulation. The critical point is how banks wield power in the insolvency system and perhaps more generally – the APPG itself has the support of five banks. It is not the insolvency profession which is systemically problematic. Insolvency practitioners operate in a strict regulatory environment with judicial oversight whilst using a statutory toolkit sanctioned by the Legislature following careful policy formulation.

(UK Government Insolvency Service Logo)

The premise of the APPG inquiry is therefore flawed. It is the wider system within which the insolvency processes sit which is problematic and in particular the banking lobby with its dominance over the power of appointment of IPs and control of insolvent estate management and distribution. More than that, banks have previously influenced the very direction of insolvency law reform itself ensuring that the system continues to be geared to their needs as opposed to the needs of employees, suppliers, unsecured creditors and many other stakeholders. The Enterprise Act 2002 reforms to receivership and “transmuted” administration procedure evidence this. The third statutory aim of administration is basically receivership. You can view the changes to the Insolvency Act 1986, Schedule B1.

It is commendable that the APPG committee want to look at the way in which banks engage within the lending system when it fails - but this does not necessarily mean that insolvency practitioners are automatically complicit in the problematic elements of the management of illiquidity. Solicitors are no more generally responsible for the parlous state of the criminal justice system. Both sets of professionals are operating in systems that Parliament has mandated.

(Image by Romain Dancre from UnSplash)

Recurrent Themes?

In an article published in 1982 Professor Sir Roy Goode QC asked: “is the law too favourable to secured creditors?” The answer continues to be yes and the APPG review will only serve to deflect from the underlying systemic point that banks dominate. Insolvency practitioners are creatures of legislation operating within a professionally regulated environment.

We will always need insolvency practitioners to deal with insolvent estates as long as we have a system based on credit. It is rebalancing the various stakeholders in the insolvency system, so that the law is not too favourable to secured creditors, which should be the focus of the APPG inquiry.

Dr John Tribe

John’s research interests are in private law, including insolvency, bankruptcy history, company, charity and equity and trusts.

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