In this blog I present two fictional scenarios that could force Insolvency Practitioners dealing with banks into potential ethically difficult decisions. Professionals will say that this sort of problem comes with the territory and that they are driven purely by their statutory duties as Liquidators / Administrators or Supervisors.
As Administrators, for example, there are duties to secure the best possible outcome (not necessarily the highest dividend) for all creditors. Administrators also act as officers of the court and are bound by legal conventions such as obtaining the best possible price for assets sold and by Agency – not making a secret profit etc. as well as by the terms of their license (blogs passim). Throw into this mix that Insolvency Practitioners are mostly commercially motivated, often associated with accounting firms and so, seek to nurture their relationships and markets to secure future appointments…
In a small, specialist, engineering firm the managing director and major shareholder is found to have been withdrawing cash from the business to fund his luxury lifestyle. The business has entered Administration with large debts to HMRC, trade creditors and to the bank. The Administrator has found evidence to show that some of the cash withdrawals were potentially fraudulent but the successful sale of the business to a new consortium, which includes the current owner, would fail if the owner were to be reported for possible disqualification as a director.
The Administrator must weigh the good chance of repaying creditors with the small likelihood of securing a successful disqualification.
In a medium sized hotel company in Administration the outcome for the bank, as secured creditor, is only partial repayment of its debt. Unsecured creditors will receive nothing. In such a situation the secured creditor will be asked to guarantee the Administrator’s fee (as outlined in the 2010 Office of Fair Trading report on the market for corporate insolvency). As the OFT report notes, the efficiency of the Administrator is likely to be managed carefully by the bank as every penny paid as a fee is one penny less in bank repayment.
However, the Administrator discovers that several of the long-term hotel loans were accompanied by mis-sold interest rate swap products. A successful compensation claim against the bank could not only repay the bank in full but also deliver a dividend to unsecured creditors. The bank, of course, may be none too happy with the Administrator and choose not to offer future appointments if it is sued for compensation.
What should the Administrator do?
OFT(2010) The market for corporate insolvency practitioners: a market study [pdf]. Available at: http://webarchive.nationalarchives.gov.uk/20140402142426/http:/www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245