In 1982 Sir Kenneth Cork reported the long awaited findings of the committee he led into insolvency in England and Wales as he looked forward to a system of dealing with debt contracts for both individuals and corporates that would more appropriately reflect the wishes and needs of modern society. Cork saw that the “credit society” in which we live would have “casualties” and that, for the most part, was due to bad luck, unexpected loss and simply taking risks that did not always pay off (some call that entrepreneurialism).
Cork’s aims were:
- To review insolvency law and practice;
- To consider a comprehensive system of insolvency
- To suggest possible less formal procedures as alternatives to bankruptcy and corporate winding up.
The key changes that were ultimately enacted in The Insolvency Act 1986 included the Licensing of Insolvency Practitioners; the introduction of “Voluntary Arrangements” whereby individuals and corporates could agree to a binding settlement with their creditors and thus avoid formal bankruptcy or winding up and “Administration” for corporates, allowing a legal action-free breathing space within which a corporate debtor might be restructured, sold or liquidated for the benefit of all creditors. Director Disqualification legislation was also enacted to provide punishment for insolvency offences by company directors.
So, 30 years on we can ask – what is the state of the market? Which, if any, of Cork’s laudable intentions have been delivered? What unexpected implications have we seen?
- According to R3, The Insolvency trade body, there were 1,738 licensed IPs registered in 2010. The overall number stays about the same. Numbers specialising in SMEs, personal or large corporate will be smaller. Licenses are only available to those with experience and qualification via stringent exams. This creates a small cardre of IPs available for appointments. In 2010 the (then) Office of Fair Trading considered the market power that this gave to IPs but concluded that this did not work against the public interest.
- Corporate Voluntary Arrangements have barely taken off. In 2016 there were fewer than 400 – against 13,000 liquidations. They are seen as costly, risky and often creditors do not want to leave directors in control. Many CVAs end in failure – the cards are stacked against them.
- Individual Voluntary Arrangements have soared to almost 50,000 – around half of all Individual Insolvencies. Bankruptcies in 2016 numbered fewer than 15,000 being outstripped by Debt Relief Orders (smaller bankruptcies) by about two to one. Much is due to the desire for the courts to avoid dealing with small cases and much to the entrepreneurialism of a few IPs using call centres and IT systems to provide a “packaged” product to consumer debtors.
- Administrations have become the “regime of choice” for floating charge holders, such as banks, where there remains some possibility of business rescue or asset sales. Streamlining the court process for Administration has also allowed very swift action by IPs and the rise of “pre-pack” Administrations – which to many smell of “Phoenixism”.
- 1,209 Directors were disqualified during 2014/2015. The Insolvency Service’s excellent infographic (below) gives more detail but hides the fact that owing tax and fraud top the list for long disqualifications.
Cork’s report certainly achieved its aims as stated above, but 30 years on the reforms it sparked have also changed the “market” for Insolvency beyond the scope it envisaged. On balance we have a more optimal legal structure with many individuals and companies enjoying “rescue” possibilities closed to them before 1986. The cost, however, has been a “marketization” of the area – a recognition of commerciality rather than a focus on the need to provide a legal resolution to debt contracts.
Insolvency Law and Practice – Report of the Review Committee, 1982, Cmnd 8558. HMSO, London.
Office of Fair Trading, 2010, The Market for Corporate Insolvency Practitioners, available at: http://webarchive.nationalarchives.gov.uk/20140402142426/http:/www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245 [Accessed on: 8th May]
The Insolvency Service, 2015, Stakeholder Newsletter, Summer 2015, http://content.govdelivery.com/accounts/UKIS/bulletins/112c695#link_1409090444046 [Accessed on: 7th May]
R3, 2010, The future of Insolvency Practitioner Regulation, https://www.r3.org.uk/media/documents/technical_library/Press,%20Policy%20and%20Press/The%20future%20of%20insolvency%20practitioner%20regulation.pdf [Accessed on: 8th May]
Dr Keith Pond is the Associate Dean (Teaching) in Loughborough University's School of Business and Economics, and a senior lecturer at The London Institute of Banking & Finance.