Should Insolvency Practitioners expect tougher times ahead?

According to a recent press release, Business Minister Ian Lucas has announced that the Government will shortly consult on new measures to boost confidence in the “Pre-Packaged” Administration Process including possible changes to the law.

Some of the options that will be considered may include:

•    Putting SIP 16 on a statutory footing with penalties for non-compliance;
•    provision for automatic scrutiny of the directors and administrator actions by the Official Receiver (who is regarded as a trusted and independent public official) following a Pre-Pack.
•    Making it impossible for the person advising on a Pre-Pack to become the administrator; and
•    Requiring Court or creditor sanction for Pre-Pack deals involving connected parties.

Given that the regulatory bodies that govern the conduct of IPs already have the ability to discipline and fine their members to penalise them for non compliance with SIP 16 it remains to be seen whether placing any of the SIP 16 requirements into a statute will in fact improve compliance.

More scrutiny of the administrator and director’s actions by the Official Receiver may allay some of the public’s concerns surrounding the use of Pre-Packs but will not necessarily mean that Practitioners are any more or less compliant when they fill out their SIP 16 report.

If an IP advising on a deal is unable to become the administrator in a “Pre-Pack” sale, this will cause difficulties for the insolvency profession and there will be more uncertainty and difficulty regarding pre-packaged sales.  This will increase the costs in due to the need for 2 IPs which will impact on the return to creditors.

 If Court or creditor sanction for Pre-Pack deals involving connected parties is introduced the fees and expenses in the administration will necessarily increase as will lawyer involvement which may in fact then reduce the return to creditors rather than maximise their recovery.

The  industry may be better placed to raise public awareness about the use of Pre-Packs and their benefits thereof to boost public confidence rather than simply incur more cost due to more regulation.  More guidance could be given by the Insolvency Service who should focus on the specific cases of bad practice and not taint the whole industry with criticism that should remain with a few IPs.

It has to be remembered that SIP 16 is a relatively recent regulation (introduced on 1 January 2009) and guidance issued by the Insolvency Service was only issued at the end of October 2009.  Until that time, IPs have been quoted as saying that they felt that they were being examined without knowing exactly what the pass mark requirement was.

Now that SIP 16 has been in existence for over a year and two reports have been published upon the compliance concerning SIP 16, we may find that by the time the next report is published, compliance has in fact increased and further consultation and statutory review is unnecessary.

If not the IPs can expect a somewhat rougher ride than that they have enjoyed of late.