In the coming weeks a discussion board will appear in this area. Professor David Graham Q.C. starts off the discussion with some recent thoughts. To comment on Professor Graham's views please email John Tribe quoting ICI.
- These notes are my first thoughts about the need for a radical reappraisal of insolvency law in England and Wales since my letter to The Times a year ago and the Report of a Justice committee on the subject which I chaired some ten years ago.
- Although since my retirement also about thirteen years ago I have made no effort to keep up with current detailed developments in insolvency law, I am I believe, still fairly familiar with the broad trends. This may in fact be an advantage in that I can perhaps survey the present scene more dispassionately than if I were still engaged in it on an active daily basis.
- My present approach to the subject is however heavily influenced by my experience for eight years as an independent member of the Insurance Ombudsman Bureau until its absorption by the FOS in 2000. I can also draw on my research (much of it published recently) into the history of insolvency law where the parallels with today’s problems are often quite striking. Above all I am still fascinated to discover how the principles of insolvency law which I helped to prepare for the Cork Committee in the late 1970’s have stood the test of time.
- The present insolvency system founded on the 1986 legislation is, I submit, imperfect, confusing and inefficient. It gives rise to expectations that are not and cannot be met in practice. A robust legal philosopher might well characterise the situation as ‘a statutory swindle’.
- The primary stakeholders in the system are the creditors, the debtor (corporate or individual) and the public interest. The needs of this group are merely served by such entities as the Insolvency Service, the ever-increasing body of practitioners (licensed or otherwise) and the vast army of those who feed off the system. The unacceptable consequence is that rights of the primary stakeholders are all to often sacrificed to the interests of those whose duty it is to serve the real beneficiaries. This fundamental principle needs to be reinvigorated.
- The traditional remedy of an aggrieved party in insolvency proceedings was in the last resort to apply to the court for relief. It has long been recognised before Cork that this was a costly and time consuming route to such an extent that alternative informal courses were occasionally used. Sir Kenneth Cork himself sometimes acted in this capacity, often at the joint request of a bank and the former managing director of a company in receivership where the conduct of the receiver was in question. Justice was frequently asked for help by disgruntled bankrupts or directors, as I know only too well; these cases were often meritous but by their very complex nature, but they taught me how easy it was for the insolvency system to produce injustice for the victims and their families.
- Cork as a whole appreciated the need for a satisfactory complaints system. Sadly the climate was not then right to address the issue head on and it has, I suspect, been sidetracked ever since for whatever reasons. The absence of such procedures I regard as a serious blot on English insolvency law. What then can now be done to improve matters, with or without parliamentary intervention?
- In theory at any rate the situation could be tolerated in the past by the fact that in a deserving case a legal aid certificate might be granted limited initially to obtaining specialist advice, followed if appropriate by a full certificate covering the cost of litigation. This approach is, I am pretty sure, no longer available so that the case for some non-court based mechanism becomes much stronger, if not imperative. Continued failure to tackle the problem can only bring the community of those holding themselves out as insolvency specialists, consultants and advisers into serious disrepute.
- The insurance industry faced a similar situation in the early 1980s. The solution was the establishment albeit on a voluntary basis of the IOB. A few organisations such as the Co-op and BUPA were unwilling to join but otherwise the scheme proved immensely useful and the model for FOS.
- With its confusing array of regulatory and other similar bodies the insolvency industry should be urgently persuaded to consider such a voluntary approach to complaints handling before Parliament is compelled to intervene. From the ashes of the IOB let a new, Insolvency Ombudsman Bureau arise!
- The proliferation of professional or quasi-professional insolvency bodies each with its own fiefdom is clearly a matter of growing public concern. This is a problem faced from time to time by most other expanding professions but can be acute if there are an appreciable manner of unqualified operators on the margins. This was also a major concern of Cork. Anecdotal and other evidence strongly suggest that today the problem may be, if anything, far more serious due to the activities of those who prey on the over-indebted consumer.
- The answer may be an accreditation system along the lines I believe to be under consideration in Scotland. However, the creation of yet another supervisory body, though useful in terms of cross border uniformity, needs to be regarded with care as population density; geographic and other factors in Scotland may indicate that their solution is not entirely appropriate down South. In any case the approach in other local jurisdictions needs to be taken into account, including Northern Ireland, the Isle of Man and the Channel Islands as well as counties in the Republic of Ireland and other European Union countries. Recent academic research does indeed suggest a multitude of different approaches, court based and otherwise, sometimes state-funded, sometimes not. A crucial issue for us may well be to what extent, if at all, our courts or the Insolvency Service have any role to play at any rate in relation to the affairs of insolvent consumer debtors. I do not know whether this issue has yet been seriously addressed in this country.
- Cork dealt at length with how best to deal with the consumer debtor though its recommendations (essentially court-based) were never taken up. They still have much to teach us today despite the vast changes in the consumer credit industry. The introduction of an enforcement restriction order in relation to judgment debts as envisaged by Cork, it is pleasing to note, once again receiving attention.
- It is certainly confusing and from an efficiency point both wasteful and inefficient that several regimes should exist for dealing with the affairs of insolvent consumers and giving them temporary, alternatively, permanent relief from their creditors or classes of creditors. Court-based bankruptcy on the one hand is apparently to be distinguished from County Court based administration proceedings, though I believe the latter cannot be triggered by the debtor as such but only by a judgment creditor. This anomaly is entirely due to an historical accident. To what extent the two regimes differ in practice or whether one is more or less favourable to the debtor are no doubt useful matters for research but in the final analysis there must be scope for rationalisation. Likewise as between IVAs and other essentially out of court arrangements a substantial degree of harmonisation can surely be achieved.
- The problems that have to be overcome involve difficult social issues in many cases striking at the heart of family life in our multi-ethnic community. They are complex but not, I believe, insuperable. Although the Cork recommendations (Chapters 5, 6, and 25) are perhaps no longer satisfactory they provide a useful basis for discussion. What type of consumer (non-trading) debtor should be entitled to relief otherwise than through strict bankruptcy? Who can initiate proceedings: the debtor, a creditor or perhaps an accredited representative? Which assets should be given exempt status in the light of contemporary social and economic conditions? Which debts should or should not be discharged? Should an arrangement require the assent of all unsecured or only a specified majority?
- The need for standardisation in all these areas and other connected matters is clearly important. How much of this could be contained in the subordinate legislation that could easily be amended in the light of changed circumstances is for debate. The merit of such an approach is its flexibility and ability to adapt guidance to take account of relevant judicial decisions or other factors.
- Finally a few thoughts about corporate insolvency. The operation of the recent Enterprise Act will of course require careful monitoring. Additionally it will be necessary to keep a close eye on the use or abuse of CVAs. As with the analogous individual proceedings, are they perhaps no more than simply a meal-ticket for the professionals and their cronies?
- In conclusion it may be helpful to recall very briefly something regarding the work methods of the Cork Committee (a more detailed account can be found in Rescuing business: the Making of corporate bankruptcy Law in England and the United States, by Bruce Carruthers and Terence Halliday, Clarendon Press, Oxford, 1998). We had no research assistants but relied on various sub-committees of experts to provide position papers for us: I am the last survivor from the group that dealt with the consumer debtor! Our Secretary obtained a mass of written submissions from the public and we held very useful formal sessions to hear evidence from selected witnesses. Acadmic input was extremely limited. We were all very proud that under KRC’s superb leadership our report was immediately recognised as a classic.
- These notes represent my own preliminary views in connection with a meeting on Thursday 26th August 2004 with the Insolvency Practices Council, at the Insolvency Service. ICI incidentally stands for Imperfect, Confused and Inefficient.
There are at least nine separate regulatory empires for the insolvency profession. Why? And is this in the public interest? Is it the case that there is no uniformity of approach in relation to each of their disciplinary powers and where does anybody find useful summaries of their decisions? Surely the time has come for regular updates about them aimed not only at practitioners but complainants as well. Incidentally, where are the statistics regarding the number of complaints about insolvency professionals each year?
Professor David Graham Q.C. - January 2009