Sadly, they often effectively write off what they’re owed as soon as they hear a customer is in administration. This understandable sense of resignation lets unscrupulous administrators further exploit the lack of controls and gorge themselves on failed businesses.
Lots of companies lose out, but so does the taxpayer – HM Revenue & Customs often takes a back seat, too.
Last month, a Government-commissioned review by Elaine Kempson of Bristol University concluded that there is “clear evidence” that in a “sizeable minority of cases” where the control of administrators’ costs and fees lies in the hands of unsecured creditors, the insolvency system is “not working”.
Incredibly, days after that review was published, the Department for Business, Innovation and Skills (BIS) proposed reducing the requirement to keep creditors informed during administrations even further.
The plans – part of a drive to cut red tape – involve removing “unnecessary” processes by reducing the number of physical meetings with creditors, abolishing some record-keeping requirements and reducing the need to seek creditors’ approval for certain actions.
While the Government claims the proposals won’t hurt creditors, Stephen Hunt, an insolvency practitioner at Griffins, strongly disagrees. “I wonder whether [the Government] would consider the same in law and reduce the requirement on solicitors to tell their clients what is going on, or in medicine – a doctor [not] having to tell a patient about the procedure they are undergoing. In a profession with so few controls, it is unwise to be removing more in the name of reducing red tape.”
The 2002 Enterprise Act – intended to create a “rescue culture” to allow more companies to be saved – reduced the ability of creditors to influence insolvency practitioners and as a result their attendance at meetings declined. This unintended consequence is being used as justification for further reducing the power of creditors. It’s a bizarre move when Prof Kempson’s review found creditors can have considerable influence on fees when they are able to engage in the insolvency process properly.
Ignorance isn’t bliss for unsecured creditors – as long as they’re kept out of the loop, some administrators will be able to feast on the remains of companies at their expense.
That these ill-advised proposals form part of the Government’s “Red Tape Challenge” points to a broader concern. A promise to “light a bonfire” of red tape is welcome, but policymakers must be careful that the fire is given the right fuel.
Removing the wrong piece of legislation can be just as damaging for business as adding poorly conceived rules to the statute book.