Comments from ACCA to the Department for Business, Innovation and Skills (BIS), June 2010.
ACCA is pleased to respond to the consultation document on the above. The comments in this letter have been put together with the help of ACCA's Insolvency Committee. ACCA has considered the several options for change set out in the consultation document as well as other possible alternative courses of action.
In considering how best to resolve this matter we believe it is necessary above all to separate clearly the issue of perception from evidence of the effects that pre-pack arrangements actually have on the conduct of insolvency procedures and the interests of stakeholders. That issue, that the practice is perceived to be dubious, should not, in our view, determine the regulatory response on this matter.
It is understandable that many observers take the view that the involvement of practitioners in these arrangements at both the pre- and post-appointment stages raises such a perception of conflict of interest that that should in itself be sufficient to render the practitioner's continuing involvement inappropriate. But while this is a legitimate consideration, it needs to be balanced against, firstly, the fact that insolvency practitioners are obliged by their ethical code to weigh up potential threats to their objectivity before taking up appointments and, secondly, the evidence that the interests of creditors are actually subjected to detriment as a result of pre-packs.
With regard to the former, the ethical code, with which all insolvency practitioners are required to comply, says clearly that 'consideration should always be given to the perception of others when deciding whether or not to accept an insolvency appointment. Whilst an insolvency practitioner may regard a relationship as not being significant to the insolvency appointment, the perception of others may differ and this may in some circumstances be sufficient to make the relationship significant.' By virtue of this requirement, every practitioner who has the opportunity to take part in a pre-pack must look at the situation through the eyes of interested third parties and satisfy himself that he can justify his involvement on the grounds that he will take whatever steps are needed in order to guarantee his professional independence and objectivity. Any interested party who considers that the practitioner has not ensured his actual and perceived independence is, of course, free to register a complaint with that practitioner's licensing body. We believe that the rules on this matter are sufficiently clear, and the consequences for breach so obvious, as to ensure that practitioners do not lightly infringe them.
As regards the evidence of the effects of pre-packs on creditors, the document acknowledges the independent research which suggests that not only are pre-packs successful in terms of saving jobs, but they have a better track record in this respect than more orthodox administrations. Research has also suggested that, despite the complaints regularly made on behalf of unsecured creditors, those creditors actually receive better returns than do their counterparts in non-pre-pack sales. In this, it should be remembered that the administrator selling a business is always expected to try to achieve a result for the creditors as a whole, and not just secured creditors. Thus, the issue of perceived adverse treatment on the part of unsecured creditors does not appear to be borne out by actual experience, at least on a generalised basis.
With respect to the appropriate regulatory response to the Insolvency Service's monitoring of compliance with SIP 16, we would agree that the published results of this exercise appear to be disappointing. That being said, we would caution against drawing too obvious a message from this evidence. Any new standard needs time to bed in and practitioners need time to come to terms with its requirements: the rate of full technical 'compliance' with any new standard is likely, in our view, to fall below 100% although it should be expected to rise over time. It should also be remembered that the overriding requirement in the statement, prior to Dear IP 42, was written in quite broad terms and it may not have been obvious to all exactly what level of detail was being called for. Dear IP 42 has undoubtedly helped in terms of concentrating practitioners' minds on the level of detail that is now expected of them and we would hope and anticipate that standards of disclosure in respect of pre-packs will improve over time. We believe that if this happens, as we and the other RPBs expect, the concerns of stakeholders about the appropriateness of pre-packs, will to some extent subside.
Of the options for change set out in the document, we consider that the first option, reinforced by improved levels of compliance with SIP 16 and continuing efforts on the part of practitioners to secure tangible benefits in terms of saving jobs and making returns to unsecured creditors, is the best way forward. We do not consider that the interests of unsecured creditors, or other stakeholders, would necessarily be enhanced by the other options discussed.