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Banks accused of doubling company insolvency fees as OFT calls for reforms

Wednesday 30th June 2010

An expert in company administrations has accused high street banks of self-serving behaviour when it comes to appointing insolvency practitioners to struggling businesses. 

Tony Costigan, managing director of Phoenix Companies Consultancy Ltd, has revealed that fees for pre-pack administrations have almost doubled as banks insist on appointing insolvency practitioners from their own panels.
 
He said: “As a company we are encountering more and more cases where the debenture holders, normally the banks, are refusing to accept the directors advising Insolvency Practitioner in favour of their own Practitioners, known in the system as Panel IP’s. The effect is often serious as there is a fundamental difference in respect of the fees charged by a non-panel firm as opposed to a panel firm.” 
 
His comments follow an announcement from the Office of Fair Trading (OFT) recommending far-reaching reforms of the corporate insolvency regulatory regime, in order 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 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.
 
Notably, 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
 
Mr Costigan backed this up, saying: “The banks seem to have an unwritten rule whereby any company that owes them in excess of £200,000 they want to use their own Panel firms as they perceive this as a risk worth protecting. In cases where directors do not stand up for their chosen exit route they are often at the mercy of the panel firm’s who they have had no previous relationship with, and certainly have not worked with them for the weeks leading up to the final decision. Ultimately they lose control and it costs them extra fees.”
 
Citing a recent case study, he told of a director he had seen who had spent his own money on valuations and accountancy fees and had his advising IP rejected by a High Street bank as they wanted to use their own firm who, during negotiations with the director, refused to accept a fixed fee for handling the case.
 
However, the director was at an advantage as he had agreed a fixed fee with a non panel firm as he wanted to be sure that he could in fact afford to purchase the company back via a pre pack admin, covering all professional fees, namely, the Practitioner and the solicitors. 
 
Mr Costigan said that in worst case scenarios, a director’s Personal Guarantee can be called, which causes further financial distress on the individual and their family.
 
In another case, a panel insolvency firm sent 2 senior partners and 1 senior member of staff from Birmingham to London to try to persuade the director to accept them as IP’s. The director consulted with his own solicitors and, having heard the director’s position, the solicitors wrote to the bank suggesting that if the bank refused to accept the directors proposed exit route, any call on the directors Personal Guarantee would be challenged in the Court. 
 
On this occasion the bank accepted the director’s proposals resulting in the pre pack completing with all fixed fees paid by the new company.
 
The OFT has recommended fundamental changes to the regulatory system to deter Insolvency Practitioners from any sharp practices. These include an industry-funded independent complaints handling body with broad powers to review IP fees and actions, impose fines, and return overcharged fees to creditors and streamlining the currently inefficient way in which the regulatory regime makes decisions.
 
There are also plans to reform of the regulatory system by repositioning the Insolvency Service (IS) as the dedicated oversight regulator of the Recognised Professional Bodies (RPBs) and withdrawing its role as a direct regulator of IPs. 
 
Mr Costigan added: “It would appear from the OFT’s recommendations on reform that the Panel IP firms should become more accountable for their actions and their costs. Hopefully this will result in the use of less expensive means of dealing with the insolvent companies, as there is no excuse for Panel Firms to charge what would appear to be extortionate fees when non panel firms can deliver the same service at less cost. 
 
“Further, there is no reason why Panel Firms should use the most expensive law firms available, again, this is using up surplus funds which could be passed on to the creditors, resulting in a better return for the creditors, preserving jobs and allowing the new company to continue and thrive.”
 
The OFT has offered to assist the Department for Business, Innovation and Skills, and the Insolvency Service in taking forward its recommendations.

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