How Do Local Insolvency Practitioners Operate?

Licensed insolvency practitioners can be a vital resource when your company is struggling financially. They can offer guidance and help with a range of options including negotiating informally with creditors via a Time to Pay arrangement or formally through a Company Voluntary Arrangement (CVA). If the situation has deteriorated beyond a point of no return then they can also assist with placing the company into liquidation using a Creditors’ Voluntary Liquidation (CVL).

However, as this article reveals, there are many questions that need to be asked about the way in which they operate. These questions go beyond just the fees they charge. The underlying issues are much more serious.

A number of directors in troubled businesses are recommended an insolvency practitioner by their accountant or solicitor. Whilst professional recommendations are undoubtedly useful, it is essential to check the IP is licensed to take insolvency appointments and that they are a member of a Recognised Insolvency Professional Body (RPB).

There are 1,834 licensed insolvency practitioners. However, only around 1,270 of them are understood to be active in taking appointments. It is thought that trainees, senior staff and partners do most of the work. They are paid an average of PS191 per hour – pushing up the total insolvency fees for even the most straightforward cases.

Insolvencies result in loss of jobs, savings, investments, pensions, family life and customer deposits for millions of people. These losses are a boon for the insolvency industry as they get a priority claim on cash from collapsed firms. They receive their payments before any of the other stakeholders do, such as employees and creditors.

As a result, insolvency practitioners have a hugely profitable business to run. They are able to charge exorbitant fees because the law allows them to set their own charges based upon the hours they spend on each case. They do not have to disclose these charges and there is little transparency in the way they work.

The banks are the largest clients of local insolvency practitioners practitioners. These major UK lenders are reluctant to lend money to businesses they think are likely to fail and they do not see the need to devote a portion of their funds to helping small business and inner city regeneration. They prefer to protect their financial interests by imposing fixed and floating charges on business assets (Christer, 1992).

Despite this, the banks rely on insolvency practitioners to bolster their bottom line. Insolvency practitioners can generate large sums of money by charging for their services at the very moment when a bank withdraws a loan or liquidates a business. This is why it is important to seek an insolvency adviser’s advice early. By seeking their assistance in the early stages of financial distress, a company has the best chance of saving itself. It may not be able to do so in every case but it is more likely than not that a successful rescue or recovery will be achieved.