08 Sep 2021

The insolvency industry: a case of bad apples amongst good eggs

By Roger Dugan

Roger Dugan, Business Development Director, argues that the role of insolvency practitioners is often misconceived, following allegations of a culture of misconduct within the insolvency sector.

Insolvency and restructuring professionals have recently suffered unduly negative press in the wake of various misconduct findings. While the instances of wrongdoing did indeed involve improper conduct, much of the resulting coverage failed to indicate just how rare misconduct is in the industry. Indeed, in my experience, the corporate rescue and recovery sector is, no different to most other professional sectors. There are of course a few bad apples but the vast majority of professionals, in what can be a highly-pressured, competitive industry where they often encounter challenging demands from different stakeholders, are highly ethical and conscientious.

Of course, it’s easy to see why the wrongdoing in question generated sensational headlines such as that in the Financial Times, which read “Misconduct cases bring UK insolvency ‘wild west’ into focus”. One case cited in the article involved grotesque misconduct relating to an insolvency, which attracted a “£13.5m fine announced this month for KPMG and one of its former partners for helping private equity group HIG force the insolvency of mattress company Silentnight, in order to jettison its £100m pension scheme burden before it bought the business.” Clearly, this is an instance of shocking impropriety. The other case mentioned in the article is one where “Deloitte and two of its former partners were fined a record £1m last year for failing to ensure there was no conflict of interest when they acted as administrators to collapsed electricals chain Comet Group.” Yet it is also important to note that the relevant enforcement mechanisms worked: the misconduct was detected and duly punished.

Yet the Financial Times article extrapolates from such isolated cases of misconduct unfounded concerns about the entire insolvency sector, which the article correctly says “includes an array of independent firms as well as the Big Four accounting groups and their smaller rivals”.  The article even quotes an unnamed “senior auditor” as saying that “In all of the accounting firms the restructuring teams are the wide boys and girls,” and that “auditors and accountants are saints by comparison.”

The tone of this article seems to me a one-sided over generalisation of the “bad apple” perspective. This jaundiced view seems to be based on isolated cases of misconduct and hearsay in the form of colourful statements. It is not a perspective that I think we should subscribe to. In my view, the proper role of restructuring and insolvency professionals is often misconceived, even within the wider accountancy and legal sectors.

It is important that people better understand the role and function of insolvency practitioners ahead of what is going to be a difficult couple of years. It is widely anticipated that we will probably soon see a wave of insolvencies as the government withdraws its Covid-19 support schemes. The pandemic saw a reduction in the number of insolvencies, as government support such as the Bounce Back and Coronavirus Business Interruption Loan Scheme loans were granted to businesses on a large scale.

The data shows that in 2020, the number of UK companies registered for insolvencies decreased by 27 percent when compared to 2019. This pattern is believed to have continued into 2021, as supports were extended. The government’s generous support often had the unintended effect of keeping businesses on the brink of insolvency in a state of suspended animation, the “zombie” company that may often hold back innovation and renewal. An artificially created backlog of insolvencies can therefore be expected to break in the near future.

It’s easy, of course, to crudely associate insolvency practitioners with companies in a state of financial disaster, around which rumours of misdeeds may swirl. Yet that is rather like blaming firefighters for house fires, on the basis that they always seem to be around when there is a fire. Of course, those working in the rescue and restructuring space are only called to the scene when serious problems have already emerged.

When wrongdoing has occurred, however, the phenomenon of guilt by association can arise. Absurdly, insolvency practitioners are often lumped in with other players who are rightly blamed by investors and stakeholders when a company collapses. Yet insolvency practitioners have of course merely “arrived at the scene of the accident” in order to rescue the business or minimise the damage. It is only with support from creditors and others, including funders, that they will be able to bring those who are truly culpable to account.

Media headlines surrounding insolvencies tend to focus only on newsworthy failures of large high street companies. This focus on high-profile business collapses overlooks the reality that the vast bulk of work done by insolvency practitioners involves providing turnaround advice when consulted early, thereby saving businesses and jobs. Even where a business must ultimately be wound up, insolvency practitioners can use their expertise to help salvage as much as possible, reducing losses, which is to the benefit of employees, shareholders and creditors. If UK insolvency is akin to the “wild west”, then I think it’s clear that insolvency and restructuring practitioners are staunchly on the side of law and order.