Insolvency rules: light touch, heavy cost

The coronavirus lockdown has expedited the UK’s experimentation with Chapter 11-style administration. Allowing company directors to retain day-to-day control, rather than hand it to insolvency practitioners, is likely to be popular. Retailer Debenhams has become the first to make use of the new “light touch” process. The rules, which should protect some companies from creditors during the pandemic, were a long time coming. There remains room for improvement. 

Banks and insolvency practitioners, of whom there are about 17,000, have had the cards stacked nicely in their favour through several crises. Costs are high and banks, as secured lenders, rank top of the pile for proceeds. They are often in a position to squeeze more out of wards. The Tomlinson report produced in the wake of the financial crisis found RBS was extracting large sums from distressed companies. One business had spent £256,000 on fees alone in the bank’s Global Restructuring Group. 

Insolvency practitioners, roughly half of whom sit with the Big Four, are still on to a nice earner under the new rules. Fees at partner level easily exceed £1,000 an hour. PwC’s bill for liquidated British outsourcer Carillion came to almost £50m. 

Prem Sikka, professor of accounting at the University of Sheffield, has long called for the government to look into the fees charged. At the top end they surpass earnings of skilled surgeons in the National Health Service. Breaking up the often cosy trinity of bank, insolvency practitioner and accountant hired to carry out the independent business review should also be on the agenda. So far the new rules have not had an impact on the cost of entering administration. 

The expected deluge of insolvencies due to coronavirus accelerates the call to arms — not least to avoid pushing an even bigger number of businesses to the brink. Liquidations are expected to ripple through SMEs. A retail chain such as Oasis, for example, relies on outsourced couriers, garment manufacturers, shopfitters and other small businesses. Tallying the loss of those payments against fees paid to professional firms creates an asymmetric paradigm.

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