The cost of new insolvency regulation proposed by Government will outweigh the benefits to business and reduce creditor returns, according to insolvency trade body R3.
Concern has prompted R3 and senior Insolvency Practitioners from the ‘Big Four' accountancy firms (Deloitte, PwC, KPMG and Ernst & Young) to write a joint letter to the Insolvency Minister, Ed Davey MP, requesting an urgent meeting.
R3 President Frances Coulson commented:
"There is a strong consensus that something is wrong here. We support measures to give unsecured creditors more of a say, but the degree of increased regulation proposed is disproportionate and counter to Government policy to reduce red tape. The proposals are likely to reduce returns for creditors, while undermining what is good and sensible in the current system."
R3 and the ‘Big Four' are concerned that the proposals will discourage creditors from engaging during the insolvency process, while inviting them to complain after a case finishes - at a cost to other creditors.
Frances Coulson continued:
"Under the new proposals, Insolvency Practitioner (IP) fees can be agreed by the majority of creditors but then challenged at the end by a minority creditor or angry director. The cost of making a complaint is free to the complainant, and if the complaint is not upheld it will be paid for out of the insolvent estate.These new proposals give the green light to malicious complainants to hold up the process and leave unsecured creditors with nothing."
R3 propose that unsecured creditors should be given greater powers over the choice of IP and that IPs should be forced to be more transparent about their fees. Fewer regulators and more independence and consistency in the regulatory regime are also supported by the profession.
Frances Coulson added:
"Some change would be beneficial, but it must be proportionate. The OFT report that prompted the Government to act found that the insolvency market and regulatory regime works well in the majority of cases but could work more effectively in a minority. The proportionate response would be to make improvements, rather than wholesale revision."
R3 also believes that government departments, including HMRC and the Insolvency Service's own Redundancy Payments Service, should use their huge bargaining power as repeat creditors, accounting for roughly a quarter of unsecured debt, to the benefit of the general body of unsecured creditors.
Coulson concluded: "It is within the Government's gift to harness the market power of unsecured creditors - not by legislating, but by doing their jobs as large and repeat unsecured creditors."
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