Weekly Blog by Philip King, CEO of the ICM -'Directors must take responsibility for their actions'

I received the report from the House of Commons Business, Innovation and Skills Committee on The Insolvency Service (Sixth Report of Session 2012/2013) recently. In more everyday parlance, this was the report from the Select Committee that met last October and heard evidence from the Insolvency Service, R3, the Insolvency Regulatory Bodies and others. One of the comments in our submission has been somewhat over-stated,  and our words used out of context, but I am particularly pleased at the inclusion of another reference which says: 'The Institute of Credit Management summarised the concerns of many of those who submitted evidence to us when they commented: "We would be greatly concerned if the reductions in budget [of the Insolvency Service] resulted in a degradation or reduction of Disqualification Unit activity. We believe any such dilution of activity would send entirely the wrong message to delinquent directors at a time when corporate insolvencies are likely to increase".'

 

In connection with the disqualification of directors, the report points out that 'disqualifications have halved over the last couple of years………whilst the number of directors disqualified each year has remained relatively stable over the past decade (approximately 1,200 a year), the number of cases of misconduct identified by Insolvency Practitioners in the same period has risen from 3,539 to 5,401…..the disqualification rate has fallen from 45% in 2002-03 to just 21% in 2011-12.'

 

It is widely accepted that the UK is one of the easiest countries in which to start a business, and that's good, but business owners need to show some responsibility in return for the 'veil of incorporation' which limited company status affords them. If a company can be formed with £1 issued capital and the directors have no personal liability, there have to be consequences if they are found to be guilty of misconduct that leaves their creditors out of pocket. Insolvency Practitioners are required to submit a return identifying where they believe misconduct to have occurred and they have the right to expect their report to be acted upon. Currently only 20% of reports are taken forward to disqualification and that's not good enough so I'm delighted that the Report recommends 'that the Department provides the Insolvency Service with sufficient, and if necessary, additional funding to disqualify or sanction all directors who have been found guilty of misconduct.'

 

Let's encourage entrepreneurship and initiative but let's not turn a blind eye on sharp practice that leaves suppliers with bad debts and impacts negatively on their business and the wider economy. I happen to believe there should be a minimum amount of issued capital required to form a limited company so that directors and business owners take their responsibility more seriously but I'll save that argument for another day. In the meantime, let's hope the Select Committee's recommendation is fulfilled. It definitely needs to be.

Weekly Blog by Philip King, CEO of the ICM - 'A case of the tail wagging the dog'

Ed Davey announced last Thursday that the Government is not going to seek to introduce new legislative controls on pre-packs at this time because it is not convinced that the benefit of new legislative controls presently outweighs the overall benefit to business of adhering to the moratorium on regulations affecting micro-businesses.

It's hardly surprising that the announcement has caused a furore and been presented as a victory for the insolvency profession and a massive blow for creditors. Indeed, there was a blog over the weekend that drew attention to my comments and those of Frances Coulson, President of R3, as epitomising the two positions. To be frank, this suggestion misses the point. My anger and frustration is not at the decision not to introduce legislative changes, even though I think they had some merit.

I am not fundamentally opposed to pre-packs and I believe they can be of enormous benefit when used correctly and appropriately. What I am fundamentally opposed to, however, is the abuse of pre-packs and the phoenix situation when the same directors continue what is, to all intents, the same business, but without previously incurred debts, leaving creditors high and dry. Two of the key benefits of the proposed changes were the notice period that would allow creditors to communicate with insolvency practitioners and bring what might be important and relevant information to their attention (a notice period that the Court could agree to be waived in certain circumstances), and the requirement that the IP should make a declaration in advance that he believed the pre-pack to be the appropriate solution in the circumstances; psychologically, so much more powerful than making that statement after the event as part of the SIP16 process.

But perhaps what really frustrates me is the obvious waste of time, resources and effort, and the justification for the decision that has nothing to do with what is right or wrong. A consultation launched in March 2010, and the subject of numerous meetings with stakeholders, papers, and discussion, has now been kicked into the long grass (as I feared it would) with an assertion by Ed Davey that he has asked his officials "to undertake an urgent review in conjunction with stakeholders of how the existing controls on pre-packs have been working.......". Surely that 'urgent review' could and should have been carried out as part of the consultation process? I am all for cutting regulation and red tape, and I am encouraged by the Government's ambitions and success in reducing bureaucracy through the work of the Better Regulation Executive under Lord Curry, but when the regulations argument justifies policy decisions, it feels too much to me like the tail wagging the dog.

I certainly do agree with those who, in the debate since last week, have suggested that suppliers might - and should - pay more attention to credit risk management in order not to be in the frame (or at least to control their exposure) when a pre-pack, or any other insolvency, happens.

Weekly Blog by Philip King, CEO of the ICM - What would convince you?

A few weeks ago, in the light of an Insolvency Service consultation, I started making noises through my blog, the pages of Credit Management magazine and the ICM Briefing to gauge the depth of our Members' feelings. I also started a discussion on the ICM Credit Community LinkedIn group http://linkd.in/iF2Q0b asking a simple question: Do you engage in insolvencies after you suffer a bad debt?

The fundamental issue for me then and now is how we get credit professionals to engage more actively in insolvency procedures to ensure they get the best outcome, and so that they are better able to monitor the activity and efforts of the IP. I sought to find out what might encourage our Members to engage more, or whether they simply saw it as a complete waste of time and effort. The responses have been most interesting, with some clear themes emerging.

One of the themes is that credit professionals who understand insolvency procedures understand that engagement delivers tangible benefits. They are better able to ensure the best outcome for their business (even though that outcome is rarely, if ever, likely to be particularly good and merely the best of a bad job!): sometimes, knowledge and engagement can identify options that might not otherwise have been considered.

A further theme is that credit professionals who do not understand insolvency currently will very much need to in the future. I'm glad to say these are still very much part of the ICM qualification pathway; they are included in our short-course menu, and are often the subject of debate and discussion at our regional and branch events.

The one question that wasn't really answered was what would encourage those credit professionals who consider involvement a waste of time and effort to do so. We might not have all the answers just yet, but the ICM has started to work more closely with organisations like R3 and the IPA and is increasing awareness of the key issues with a regular column in the magazine. It is a start, but there is much more to be done if we're going to convince the unconverted!

www.icm.org.uk