The insolvency, restructuring and turnaround profession is a vital part of the UK economy and Insolvency Practitioners provide an essential role in the UK’s insolvency sector. If your company is experiencing financial difficulties or you are thinking about winding-up a solvent company or partnership, you may be considering the appointment of an Insolvency Practitioner.
So what is an Insolvency Practitioner and what do they do?
An Insolvency Practitioner or IP is a person who is authorised and licensed in the United Kingdom to act in relation to an insolvent individual, partnership or company. An IP may also act for solvent companies and partnerships for the purpose of a Members’ Voluntary Liquidation (“MVL”) (solvent liquidation).
Only an IP can be appointed in formal insolvency and MVL cases.
An IP must have the following:
- An appointment taking licence;
- Joint Insolvency Examination Board qualification;
- Gained the requisite experience in insolvency work;
- Completed the required Continuous Professional Development hours;
- Satisfied a recognised professional body that they are fit and proper to act as an IP;
- A general insurance bond to protect members and creditors’ interests.
IPs are officers of the court and have a wide range of duties. IPs are responsible for the administration of their cases and work to get the best possible outcome for creditors and where appropriate shareholders.
What is insolvency?
Section 123 of The Insolvency Act 1986 defines ‘insolvency’ as a company’s inability to pay debts. A company is deemed unable to pay its debts:
- if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; or
- if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
- if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due; or
- a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
If a company is unable to meet its liabilities as and when they fall due, then it is deemed cash flow insolvent. This is known as the cash flow test.
The balance sheet test is when a company’s liabilities exceed its assets, taking into account contingent and prospective liabilities.
Upon determining a company’s insolvency, a director has additional duties which he must comply with. Failure to do so could result in personal liability and prosecution. It is therefore essential that professional advice is obtained from a licensed Insolvency Practitioner immediately.
Is a Liquidator an Insolvency Practitioner?
Only an IP is authorised to act as a Liquidator of a company.
The different roles an IP can hold are:
- Nominee and Supervisor of a Company Voluntary Arrangement;
- Trustee in Bankruptcy;
- Nominee and Supervisor of an Individual Voluntary Arrangement.
Who appoints an Insolvency Practitioner?
IPs can be appointed by directors, creditors, shareholders, court and the Secretary of State. The appointor varies across different types of insolvency cases.
IPs carry out their work in accordance with the relevant law and best practice and are monitored and regulated by their licensing body.
An IP’s work involves dealing with many competing interests, but fundamentally their main duty when dealing with an insolvent client is to look after the interests of creditors. When dealing with an MVL, that duty is to shareholders or members.
IP’s functions are set out in law and best practice. Generally these are to:
- Realise company assets for best value;
- Carry out a statutory investigation regarding the conduct of the directors and report to the Insolvency Service’s Director Disqualification Unit;
- Identify and recover antecedent transactions;
- Discharge the costs of the insolvency process;
- Agree creditor claims and distribute surplus funds in accordance with the statutory order of priority;
- Where creditor claims are settled in full together with interest, distribute remaining funds to shareholders or members;
- Report to creditors and/or shareholders within 2 months of each anniversary on the progress of the case;
- Report to creditors and/or shareholders when the case is ready to be closed.
Upon the IP performing his functions, the administration of the case is concluded.
Who pays an Insolvency Practitioner?
Generally, the fees and expenses of an IP are paid out of the company’s funds. In some cases, where there are insufficient funds, these costs are paid by a third party. In an insolvent case, the basis of the IP’s fees is agreed by creditors. In an MVL, the IP’s fees are agreed by shareholders.
An IP’s fees can be charged in the following ways:
- As a percentage of the value of the property that the IP has to deal with;
- Based on the amount of time the IPs and their staff spend working on the case;
- A fixed amount; or
- A combination of the above.
Whilst the IP’s work is a necessary cost of the process, these costs will reduce funds available to creditors and shareholders. The IP’s fees should therefore be fair and reasonable and take into account the nature and complexity of the case.
Things to consider when choosing an Insolvency Practitioner
Are they licensed?
Insolvency Practitioners must be licensed in order to practice. It is important that the IP is licensed as only licensed IPs may be appointed in relation to formal insolvency procedures.
IPs can be licensed by the following recognised professional bodies:
- Insolvency Practitioners Association
- Association of Chartered Certified Accountants
- Institute of Chartered Accountants in England and Wales
- The Department of Enterprise Trade and Investment
- Solicitors Regulation Authority
Do they have sufficient experience?
Most Insolvency Practitioners offer an initial free no obligation consultation. When discussing your affairs with an IP, you should satisfy yourself that the IP has sufficient experience to deal with the matter.
Do they have the expertise you require?
As the insolvency market has evolved, some firms of Insolvency Practitioners now specialise in certain types of procedure. These can offer enhanced services and efficiencies. Be sure to satisfy yourself that the IP has the expertise you require.
Professional & Ethical Standards
An Insolvency Practitioner is required to comply with his Recognised Professional Body’s code of ethics and fundamental principles.
The fundamental principles are:
- Professional competence and due care;
- Professional behaviour.
Before instructing an IP, you should satisfy yourself that the IP complies with his professional and regulatory obligations.
Fees & Expenses
An Insolvency Practitioner’s fees will vary from firm to firm. Be clear on the scope of work that is required and obtain an estimate of the IP’s proposed fees, disbursements and expenses.
Referral & Introductory Fees
The special nature of insolvency appointments makes the payment or offer of any commission for or the furnishing of any valuable consideration towards the introduction of insolvency appointments inappropriate.
Ensure the Insolvency Practitioner details all proposed fees and costs of the process. These should be clear and transparent.
Obtaining independent professional advice may help if your company is having financial problems. Having these discussions with an IP early may provide options which would enable the business to be rescued as a going concern and protect the positions of employees.
It is essential that the IP is authorised and licensed by a recognised professional body and has the expertise you require.
Many IPs offer a free initial consultation and Approved Recovery are no different.
Approved Recovery specialises in providing Members’ Voluntary Liquidations to small companies nationwide. We are a small business servicing small companies only. Contact us for a free no obligation consultation.