‘Taking the Profit’ is a campaign run by the British Property Federation, aimed at securing a fair deal for all unsecured creditors who are at present being let down by the insolvency system.
We support a rescue culture, and appreciate that businesses in trouble need room to reorganise their affairs, but do not believe that unsecured creditors are always treated fairly by the insolvency system, and when they do have cause for concern that the current system allows them to complain easily and without the fear of further loss.
In 2010, the Government said that it would tighten up on pre-pack administrations and to make it easier for creditors to make complaints against Insolvency Practitioners, but after two years of u-turns and broken promises continues to fail to act.
We think unsecured creditors, and the competitors of those companies who play the system, deserve better.
What's the issue
When an insolvent business is able to escape its liabilities others suffer. For smaller unsecured creditors this can make the difference between survival and insolvency. For larger businesses, such as those in the property industry, some of the big retail insolvencies have transferred tens of millions of pounds from pensioners’ savings that are invested in property, to the new buyers of the insolvent business, often private investors or the previous owners.
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Why is it important
A particularly controversial aspect of the insolvency system is pre-pack administrations. These have their place in the tools available to Insolvency Practitioners and can be an effective way of rescuing a business. However, the speed and lack of transparency in the process can also provide scope for abuse, particularly where the company in trouble is not subject to open marketing, and especially when it is bought out of administration by its directors or other people closely connected with the company that failed – a so-called ‘Phoenix pre-pack’.
A particularly invidious practice is growing, mainly in relation to pre-pack administrations, where the terms of the sale are kept deliberately vague, and at the same time landlords are leaned on by an agent of the buyer of the company, with or without the knowledge of the Insolvency Practitioner, to extract concessions on existing leases of profitable stores. This is often under the threat that if concessions are not given then that property will not feature in the sale.
The result on profitable stores is simply to transfer profits from pensioners’ savings in property to the new buyers of the business. Another consequence is that it puts rival retailers at a disadvantage. This reinforces failure, rather than promoting success.
What we're doing about it
The BPF is not calling for wholesale reform of the insolvency system. We are calling on the Government, however, to tighten up on those areas of concern that it has identified as being a problem but, after two years of broken promises, has failed to address. We are urging the Government to:
- Amend the Insolvency Practitioners’ professional conduct rules, so called SIP16, so that an Insolvency Practitioner must be clear which assets are part of the sale, on which it is seeking to negotiate, and which it does not want.
- Amend SIP16 so that it frowns on any collusion between the Insolvency Practitioner and buyer or their agent to extract concessions on leases that are part of the sale.
- Speed up the process of achieving better regulation of the insolvency sector, including a single contact point for making complaints and one that does not involve unsecured creditors having to go to court. It is now nearly two years since the OFT called for such measures.
- Tighten up the rules on advertising by Insolvency Practitioners. The cost of the process should not be part of any advertising pitch. Advertising should be about rescue, not about seeking to encourage businesses to pass on their liabilities to the state, while escaping obligations to staff and creditors, and at little cost to the directors of the insolvent business.
- Ensure that services supplied and used during the ‘notice of intention’ period of insolvency are paid for.
