Understanding your insolvency practitioner (IP) Part 2

Seek advice from an independent professional when considering any insolvency procedure
Seek advice from an independent insolvency expert before contacting an IP

It’s fair to say the laws surrounding the insolvency regime were written largely by and for insolvency practitioners (IPs).

The legislation governing insolvencies throughout England and Wales came into force with the passing of the Insolvency Act 1986. These laws were updated 30 years later with the enactment of the Insolvency Rules 2016.

The 2016 update offered an opportunity to make the insolvency process smoother, quicker and more creditor-friendly. Sadly, that didn’t happen. Instead, we have a situation where IPs regularly hire lawyers to interpret the rules.

An IP’s reliance on legal advice highlights 2 incongruities:

  1. Some IPs prioritise their interests over those of the creditors they serve
  2. How comprehensively can the average business owner understand rules that IPs need lawyers to decipher?

It’s important to understand the insolvent company or person’s assets are the crucial element of any insolvency procedure. A licenced insolvency practitioner (IP) must take control of the assets before any procedure can commence.

Effectively, an IP acts as a de facto trustee, holding funds on the creditors’ behalf. Their chief duty is to realise assets as cash for the benefit of unsecured creditors.

IPs pay themselves first

Although IPs pay themselves before distributing any funds, creditors are responsible for:

  • Appointing the IP
  • Setting the basis of the IP’s remuneration

Subsequently, it would be reasonable to describe unsecured creditors as the IP’s employer in a statutory insolvency procedure. Nevertheless, IPs frequently take advantage of creditors who are generally ignorant and naïve.

In most cases, creditors distance themselves from the insolvency process for 1 of 2 reasons:

  1. They don’t understand what’s going on
  2. They don’t believe the procedure will deliver them a fair dividend

For example, imagine a company enters a statutory insolvency procedure owing another business £50,000. From experience or talking with peers, the owner of that business will consider themselves lucky to receive £2,500 (5p for every £1 they’re owed).

As a result of creditor apathy it’s become customary for a significant proportion of the monies due to creditors in statutory insolvency procedures to be:

  • Diverted
  • Camouflaged
  • Swallowed up into the IP’s fees

To avoid this happening, seek advice from an independent expert as soon as you’re notified about an insolvency procedure. They can negotiate on your behalf, and help you replace an IP appointed either by the insolvent or default with 1 chosen by creditors.

Read part 1 of ‘Understanding your insolvency practitioner (IP)’ here.