67/10 24 June 2010
The OFT has today recommended far-reaching reforms of the corporate insolvency regulatory regime to build trust in the market and ensure that it works in the best interests of creditors and the wider economy.
Each year, Insolvency Practitioners (IPs) in the UK realise about £5 billion worth of assets and earn approximately £1 billion in fees from corporate insolvency procedures.
An OFT market study published today found that while the market often works well, it may not work in the best interests of all creditors in over a third of administrations and creditors' voluntary liquidations (CVLs), procedures which together account for 75 per cent of income earned by IPs.
The OFT found that secured creditors such as banks, who in effect appoint IPs, have a strong incentive to control fees and direct the activities of IPs in the 63 per cent of cases where there are insufficient funds for secured creditors to recover all their debts.
In the other 37 per cent of cases, secured creditors are paid in full, and their interest in IP fees and actions ceases. In these cases, the OFT found that the remaining, unsecured creditors - such as HMRC, small businesses and customers - are often unable to exert influence on the IP whose actions are then mainly constrained only by regulation and ethics.
The OFT found evidence that IPs charge around nine per cent more, like-for-like, when it is the unsecured creditor who pays, rather than the secured creditor. The OFT's assessment of the market suggests there may be further problems such as overly long liquidation proceedings and insufficient oversight of the use of pre-packaged administrations. While the OFT has received numerous complaints, it has not been possible to quantify how widespread or damaging such practices may be.
To address the concerns, increase trust in the system, and deter IPs from sharp practices, the OFT recommends fundamental changes to the regulatory system, which is currently unable to effectively protect the interests of small creditors. These include:
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