by Prem Sikka, Professor of Accounting, University of Essex.
(From Legal Week, 12 October 2000, page 30)
Whilst road hauliers, lorry drivers and farmers blockade oil refineries to demand economic concessions, one group unlikely to do the same are the entrepreneurs and employees of businesses in financial distress. Some have every reason to vent their anger as they feel that Britain’s insolvency practices have made them easy pickings for accountants and lawyers acting as insolvency practitioners. Hard working entrepreneurs and employees lose their savings, investments, jobs and homes, insolvency practitioners get richer.

Their complaints have a common thread*. They relate to the practitioner's conflicts of interests, poor regulation and accountability of the insolvency industry. In many cases the finger is pointed at accountants who act for banks. Typically, a bank asks an accountancy firm to report on the affairs of businesses with fluctuating or seasonal cash flows. If the accountancy firm says that all well it will only get a one-off fee. Subsequently, if the business fails the bank can accuse the accountancy firm for negligence and hope to recover its losses. But if the reporting accountants say that the business in question is heading for the rocks, the chances of a negligence lawsuit by banks are reduced. The same accountants can also make a pitch to become receivers and/or liquidators by claiming that s/he already knows something about the business. If their sales pitch is accepted the accountants can then hope to collect fees for a long period. Thus the economic reward system encourages the placing of perfectly good businesses into receiverships.

Of course, receivers and liquidators can’t do as they wish because they are supposed to be accountable to the Creditors’ Committee. The real difficulty is that ordinary creditors have little time to become involved in the workings of the Creditors’ Committee and others (e.g. employees, consumers, local community representatives) are excluded altogether. The Committee is dominated by the receiver and the secured creditor - in many cases a bank. There is no legal requirement for the receivers/liquidators to finalise the receivership or liquidation expeditiously. Some have dragged on for more than ten or twenty years. Examples include Stone Platt Engineering, Coloroll, J.S. Bass, Exchange Travel and Polly Peck. Neither the Department of Trade & Industry (DTI) nor any regulator takes any interest in these long running insolvencies. Meanwhile, the insolvency practitioners and their advisers continue to collect fees.

Most of the insolvency work is done by trainees in major accountancy firms. Yet the fees charged are exorbitant. The Maxwell administrators are expected to charge more than £100 million. The BCCI liquidators are expected to make more than $500 million. At the other end of the scale fees are also high. One receiver sold the assets of a business for £180,000 and charged fees of £50,000. One pub lady was bankrupted for failure to pay a bill of £4,500 and the insolvency practitioner charged a fee of £120,000. These episodes may be uncommon but are not isolated stories.

Receivers are supposed to run the business and try to rescue as much as possible. But most have little business training or appreciation. They are expected to run a wide variety of businesses ranging from farms, manufacturing businesses, football clubs and jewellers. My research has documented instances where receivers who could not tell the difference between real and fake jewellery and proceeded to give away the genuine stuff at knock down prices. Some receivers taking over farms sack the staff and then find that they don't have any knowledge of milking cows, feeding animals or processing cheese. None of this helps to rescue businesses or secure good prices for the liquidated assets. The documented case studies show that in some cases receivers rejected perfectly good bids for a company’s assets and then subsequently sold the assets at a very low price to a company in which the receiver had a major business interest.

Nearly half of all the insolvency practitioners work for big eight or so accountancy firms. The firms make millions from the state guaranteed market of insolvency. Yet they are not obliged to publish any meaningful information about their affairs. Thus the stakeholders to an insolvency have little information about the charge-out rates, job rescue rates, average fee, the details of any regulatory action or anything else.

A ‘duty of care’ to all stakeholders can impose a powerful check on the conduct of the receivership, but receivers generally owe a ‘duty of care’ only to the party appointing them, in many cases bank. The aggrieved parties could refer their grievances to the regulators but the insolvency does not have independent regulation. Instead, the insolvency industry consisting of around 1,800 practitioners (of whom only 1,270 are actively looking for work) are regulated by no less than eight accountancy and law trade associations. This inevitably results in a lot of duplication and waste. The accountancy and law trade associations act as quasi-courts and legislators, but do not owe a 'duty of care' to the parties affected by their actions. They do not have representatives of stakeholders on their councils. Their main function of these organisations is to advance the economic interests of their members.  They cannot combine their trade association and regulatory roles.

For the period 1995-1999, some 2,400 complaints have been lodged with the insolvency regulators, but they have little chance of any honest hearing. The insolvency industry does not have an independent complaint investigation procedure. The current system is 'captured' by the very interests that it is supposed to regulate.  The aggrieved parties could take their case to an independent ombudsman, but the insolvency industry unlike the financial services, railways, gas, electricity and telecommunications industry, does not have one.

Faced with deaf and dumb regulators and the DTI, some may well be tempted to emulate road hauliers and farmers. At the very least, the insolvency industry needs an independent regulator, an independent complaints investigation system and an ombudsman to provide fast and cost effective way of adjudicating complaints.
*For further details see “Insolvent Abuse: Regulating the Insolvency Industry”, written by Jim Cousins, Austin Mitchell, Prem Sikka, Christine Cooper and Patricia Arnold, published by the Association for Accountancy & Business Affairs.