House of Commons Business, Innovation and Skills Committee The Insolvency Service Sixth Report of Session 2012–13 Report, together with formal minutes, oral and written evidence Ordered by the House of Commons to be printed 29 January 2013 HC 675 [Incorporating HC 1770-i and ii, Session 2010-12] Published on 6 February 2013 by authority of the House of Commons London: The Stationery Office Limited £17.50 Business, Innovation and Skills Committee The Business, Innovation and Skills Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Innovation and Skills. Current membership Mr Adrian Bailey MP (Labour, West Bromwich West) (Chair) Mr Brian Binley MP (Conservative, Northampton South) Paul Blomfield MP (Labour, Sheffield Central) Katy Clark MP (Labour, North Ayrshire and Arran) Mike Crockart MP (Liberal Democrat, Edinburgh West) Caroline Dinenage MP (Conservative, Gosport) Julie Elliott MP (Labour, Sunderland Central) Rebecca Harris MP (Conservative, Castle Point) Ann McKechin MP (Labour, Glasgow North) Mr Robin Walker MP (Conservative, Worcester) Nadhim Zahawi MP (Conservative, Stratford-upon-Avon) The following members were also members of the Committee during the parliament. Luciana Berger MP (Labour, Liverpool, Wavertree) Jack Dromey MP (Labour, Birmingham, Erdington) Margot James MP (Conservative, Stourbridge) Dan Jarvis MP (Labour, Barnsley Central) Simon Kirby MP (Conservative, Brighton Kemptown) Gregg McClymont MP (Labour, Cumbernauld, Kilsyth and Kirkintilloch East) Ian Murray MP (Labour, Edinburgh South) Nicky Morgan MP (Conservative, Loughborough) Chi Onwurah MP (Labour, Newcastle upon Tyne Central) Rachel Reeves MP (Labour, Leeds West) Mr David Ward MP (Liberal Democrat, Bradford East) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/bis. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are James Davies (Clerk), Amelia Aspden (Second Clerk), Peter Stam (Committee Specialist), Josephine Willows (Committee Specialist), Ian Hook (Senior Committee Assistant), Pam Morris (Committee Assistant), Henry Ayi-Hyde (Committee Support Assistant). Contacts All correspondence should be addressed to the Clerk of the Business, Innovation and Skills Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is [email protected] The Insolvency Service 1 Contents Report Page 1 Introduction 3 The Insolvency Service 3 Our inquiry 4 2 The Insolvency Service 6 A challenging period for the Insolvency Service 6 A new delivery strategy? 6 Reductions in the workforce 8 Reorganisation of office locations 10 3 Budgetary pressures 12 Funding arrangements 12 Income streams 12 Funding pressures 12 The funding model of the Official Receivers’ Office 13 Bankruptcy case administration fees – altering the balance 14 4 Impact of budgetary and staffing cuts on the Investigations Unit 16 Published targets for the Service 16 Investigation and enforcement activity 17 Investigation and enforcement costs 18 5 Pre-pack administrations 21 Introduction 21 Reform of pre-packs 21 SIP 16 compliance 23 Penalties for non-compliance 24 Other measures to increase confidence in the insolvency regime 25 Continuation of supply 25 6 Reforms to the regulation of insolvency practitioners 28 Complaints against Insolvency Practitioners 28 Insolvency Practitioners fees 31 Remuneration of IPs 31 7 Conclusion 35 Conclusions and recommendations 36 Formal Minutes 40 Witnesses 41 List of printed written evidence 41 2 The Insolvency Service List of Reports from the Committee during the current Parliament 42 The Insolvency Service 3 1 Introduction 1. Insolvency is the inability to pay debts to debtors, resulting in companies going into liquidation or individuals being declared bankrupt. Companies going into liquidation has the inevitable consequence of job losses, whilst creditors such as suppliers and subcontractors are also hit particularly hard. The impact of this has been thrown into stark relief by the number of large high street chains entering administration with the loss of many jobs. The insolvency service and the insolvency profession have a key role to play in managing not just the financial bankruptcy but also the human cost that comes with business failure. The Insolvency Service 2. The Insolvency Service (the Service) is an executive agency of the Department for Business, Innovation and Skills. The Service exists to provide the framework and the means for dealing with financial failure in the economy and with the misconduct that is often associated with it. It operates under a statutory framework—mainly the Insolvency Acts 1986 and 2000, the Company Directors Disqualifications Act 1986 and the Employment Rights Act 1996 and the Companies Acts 1985 and 2006, as well as from a range of secondary legislation relating to these acts. The role of the Service is to: • administer and investigate the affairs of bankrupts, individuals subject to debt relief orders, companies and partnerships wound up by the court, and establish why they became insolvent; • act as trustee/liquidator where no private sector insolvency practitioner is appointed; • act as nominee and supervisor in fast-track individual voluntary arrangements; • take forward reports of bankrupts’, individuals subject to debt relief orders, and directors’ misconduct; • deal with the disqualification of unfit directors in all corporate failures; • deal with bankruptcy and debt relief restrictions orders and undertakings; • authorise and regulate the insolvency profession; • assess and pay statutory entitlement to redundancy payments when an employer cannot or will not pay its employees; • provide estate accounting and investment services for bankruptcy and liquidation estate funds; • conduct confidential fact-finding investigations into companies where it is in the public interest to do so; • advise BIS ministers and other government departments and agencies on insolvency, redundancy and related issues; and 4 The Insolvency Service • provide information to the public on insolvency and redundancy matters via its website, leaflets, Insolvency Enquiry Line and Redundancy Payments Helpline.1 Our inquiry 3. Our predecessor Committee inquired into the Insolvency Service in 2009, when it held a one-off evidence session with the Inspector General and Agency Chief Executive, and the Deputy Chief Executive.2 In its Report, the Committee raised three key questions: • Was there a case for strengthening the control of the remuneration of insolvency practitioners? • Would the Insolvency Service and the Department be nimble enough to reshape policy if necessary to address concerns about pre-pack administrations and other issues emerging from the downturn in the economy? • Would the funding model be robust enough to deal with any increase in case workload as well as maintaining effective enforcement? 4. We decided to return to these issues to assess progress against these challenges and also to judge how the Insolvency Service had risen to the challenges of operating in the current economic climate. We invited interested parties to submit written evidence on the role and functions of the Insolvency Service, including: • Pre-pack administrations (issues of transparency, their link to ‘phoenix’ companies); • the possible regulation and sanction of licensed insolvency practitioners; • the creation of an Insolvency Ombudsman; • the strengthening of the control of IP’s remuneration; and • the effects of the reductions in the Insolvency Service’s staff and budget. We are grateful to all those who took the time to respond by offering us the benefit of their detailed and thoughtful comments. 5. In early 2012, we held two oral evidence sessions; one with representatives of the Recognised Professional Bodies (RPBs) and a representative of Prospect (Insolvency Branch); and another with the then Inspector General and Chief Executive of the Insolvency Service, Mr Stephen Speed, together with his deputy, Mr Grahame Horne. 6. In May 2012, it was announced that Dr Richard Judge would be replacing Stephen Speed as Inspector General and Chief Executive of the Insolvency Service.3 In October 2012, we decided to hold a further evidence session with the Insolvency Service to get an update on 1 http://www.bis.gov.uk/insolvency/About-us 2 The Insolvency Service, Sixth Report of Session 2008–09 (HC 198), published on 6 May 2009 3 Insolvency Service Press Release, New Chief Executive for The Insolvency Service, 29 May 2012 The Insolvency Service 5 issues from the new Chief Executive, as well as hearing his plans for the future of the Service. 7. While the Service considers that it is well placed to handle the challenges facing it, a number of specific discrete concerns have been raised