Newsroom

BPF welcomes greater powers for landlords in insolvencies

Landlords should be given greater powers to influence the fees charged by Insolvency Practitioners (IPs) according to the Office of Fair Trading – a report the BPF welcomes.

The OFT agreed that unsecured creditors such as landlords are disadvantaged in insolvency situations compared to secured creditors (banks); this group not having such control over the fees charged by Insolvency Practitioners (IPs) and a reduced understanding of how to become involved in any given insolvency.

The result is that unsecured creditors are hit with higher fees and lower returns in insolvencies compared to when secured creditors are involved in the process.

The OFT report demonstrated that the fees charged by Insolvency Practitioners are 9% higher when the secured lenders recovered all of their debts, compared to when the full debt was not recovered and banks still have a vested interest in exerting pressure to reduce IP fees. In situations where banks have recovered all of their debts, the unsecured creditors are reliant on regulation and the ethics of the Insolvency Practitioner to act in their best interests – a much weaker position – as the costs of getting involved are perceived to outweigh the benefits.

The OFT recommended that the disadvantage of unsecured creditors in this situation be lessened.

Another of the OFT’s recommendations is to change the regulation of IPs in order to provide creditors with greater confidence that IPs will be held to account for their actions. The BPF has long held the belief that the regulation of IPs needed to be strengthened as currently there are too many regulatory bodies which are too ineffective at policing the system.

Ian Fletcher, Director or Policy (Real Estate) said:

“Since the start of the recession, landlords have been buffeted by a number of high profile insolvencies. In the main, the majority of these insolvencies have been successful, due in part to landlords commitment to see successful retail businesses weather the storm. However, that is not to say that changes don’t need to be made, especially around IPs fees and the extent to which they are held to account by their professional bodies. We are therefore pleased to see the OFT highlight these areas as needing to be addressed and we urge the Department of Business to act on them.

Notes to editors

The OFT’s Market Review of Insolvency – “The market for corporate insolvency practitioners” – can be found here:

http://www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245

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.

In the other 37 per cent of cases, secured creditors are paid in full, and their interest in IP fees and actions ceases. In these cases, the OFT found that the remaining, unsecured creditors - such as HMRC, small businesses and customers - are often unable to exert influence on the IP whose actions are then mainly constrained only by regulation and ethics.

The OFT report produced three remedies to increase the efficiency and effectiveness of the regulatory system. In particular it proposed:

A – establishing an independent complaints body to increase the efficacy and consistency of complaints on insolvency, and allow a cost – effective route of fee assessment.

B – setting clear objectives for the regulatory regime

C – amending some of the detailed regulations to better align the interests of Insolvency Practitioners with the interests of the wider creditor group.

The OFT's Market Study into corporate insolvency was launched in November 2009 following concerns raised within Government, the Insolvency Service and the industry itself, and reports by the World Bank which showed the costs of closing a business in the UK were higher than other countries with similar or even better recovery rates. 

Administration is an insolvency procedure which has as one of its aims the rescue of businesses in financial distress. While a company is in administration, the IP is responsible for running the company in place of the directors. Creditors' voluntary liquidation (CVL) is a procedure in which an IP is appointed to 'wind up' the affairs of a company that is unable to repay its debts.

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.

For more information, please contact James Anderson janderson@bpf.org.uk or 02078020104