Insolvency practitioners poorly regulated, says expert

Generic image of an empty pocket
Image caption Creditors are left out of pocket as insolvency practitioners abuse the system, an investigator says

Stephen Hunt's work offers a rare insight into the darker side of insolvency.

With more than 15 years experience as an insolvency practitioner, he makes a living investigating those accused of letting the profession down.

"We have about 500 insolvencies where we're appointed specifically to investigate or review the conduct of the previous insolvency practitioner," he says.

"It's a lot. There's a steady flow of work which requires investigating."

When firms go bust it is the insolvency practitioner's job to get the best price for the creditors from the remaining assets through the administration process, or try to get returns if a company is forced into liquidation.

These can be emotional, highly charged affairs, with insolvency practitioners having to act decisively in complex situations amid angry creditors.

Three frauds

In this maelstrom, there is no shortage of opportunities for insolvency practitioners to hide malpractice, according to Mr Hunt.

And although there are eight different governing bodies in the UK looking into allegations of malpractice, the system of self-regulation is ineffective and wide open to exploitation, he maintains.

During one recent investigation, "one of the insolvency practitioners created a spreadsheet called, 'the randomised time generator'," Mr Hunt recalls.

"He typed in how much money he wanted and it created fake time entries, so he could charge about £500,000 on that spreadsheet - which was entirely fake time."

Image caption Investigator Stephen Hunt says the regulation of insolvency practitioners is ineffective.

In another case, Mr Hunt discovered how three people from the same firm were fraudulently siphoning cash.

"The partner was stealing money. Unbeknown to him the manager was stealing different money and unbeknown to both of them the junior person was stealing cash," he says.

"It was only when we investigated that we found contradictory documents that made us realise there were actually three frauds and not one."

A recent report from the Office of Fair Trading (OFT) backs up some of Mr Hunt's observations. It found that those who complained about the conduct of insolvency practitioners had little confidence in the regulatory bodies.

"We interviewed over 1,000 unsecured creditors and of those who had complained, the vast majority felt the outcome of the complaint process and the way it was considered were unreasonable," says OFT project director David Stallibrass.

And even those within the business had concerns.

"We were surprised to find that 41% of insolvency practitioners said that their own regulators did not deal effectively with rogues in the profession," Mr Stallibrass adds.

Vernon Soare, who speaks for the largest of the regulatory bodies, the Institute of Chartered Accountants in England and Wales, questions some of the methodology used for the OFT survey.

"Insolvency is an area where you will not satisfy everybody's expectations," he says.

"The OFT didn't come to us to see how any of the complaints were handled. A lot of the issues are a matter of judgement."

Lower valuation

While Mr Hunt has seen some extreme cases of criminal fraud, complaints also arise because of negligence and incompetence and the failure of insolvency practitioners to ensure all parties are treated fairly.

The OFT report found the group most vulnerable to unfairness was that comprising unsecured creditors, who have no automatic right of repayment.

In a landmark case in July, a judge decided to tear up an agreement put together by administrators involved in the case of the landlord of a boutique shopping centre in Liverpool.

It involved a fashion brand called Miss Sixty, which was run by a company called Sixty UK, pulling out of a long-term lease on two shops they rented at the city's Met Quarter precinct.

A court found the administrators had set aside guarantees drawn up between the landlord and Sixty UK's Italian parent company and put forward an offer for the surrender of the lease that was much lower than an independent valuation suggested.

The judge in the case said the documentary evidence put before him painted a "disquieting" picture of administrators who appeared to have, "abdicated their responsibilities as office holders".

"Insolvency practitioners have a duty of care, to treat all creditors fairly in the same way they have to follow the insolvency rules," the landlord's lawyer Caroline Howard points out. "They didn't appear to do any of that."

Ms Howard says it looks as though the administrators were simply following the instructions of the parent company in Italy, and that this resulted in an "unfair manipulation of the system".

The two insolvency practitioners who were the administrators in the Miss Sixty case say they had acted on legal advice throughout, but they were not prepared to comment further because of a preliminary investigation by their governing body.

The OFT has recommended far reaching reforms of the regulatory regime to the government, which is expected to respond by the end of the month.

To hear the full story listen to File on 4 on Radio 4 at 2000 today or listen again on iPlayer.

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