What Does an Insolvency Practitioner Do?October 19, 2018
A licensed insolvency practitioner (IP) is an individual authorised under the Insolvency Act 1986 to deal with personal and business insolvency. To become an insolvency practitioner, you must pass stringent exams and prove that you have suitable training and experience.
Unfortunately, the insolvency and business advice industries are also served by individuals who operate without formal qualifications and who are wholly unregulated. These people tend to survive through high advertising and marketing budgets rather than the quality of their work. I’ll deal with this point in more detail later on but it I'll quickly say that it's always important to check an individual or company has professional qualifications and has disclosed their regulator before appointing them.
While incredibly important, the insolvency sector is often overlooked or misunderstood by business owners and individuals — possibly until it's too late to help them. This creates some confusion over what insolvency practitioners actually do and how they can help you or your business.
In this article, I’ll explore the general and specific duties of an insolvency practitioner to help you understand our industry a little better.
What general duties does an insolvency practitioner have?
An insolvency practitioner is usually appointed by an individual or business when they are unable to cope with their debts or believe they will become unable to cope in the near future.
When you seek advice from a licenced insolvency practitioner, their duty is to you. However, once they have been formally appointed in an insolvency, an insolvency practitioner must act in your creditors’ best interests.
What specific roles do insolvency practitioners hold?
As you can see from the general duties discussed above, insolvency practitioners have a fairly very wide remit and can find themselves appointed to a wide range of roles.
In this section, I will discuss the three types of role insolvency practitioners commonly hold: advisor, formal appointment holder for companies and formal appointment holder for individuals or sole traders.
An advisory role is where an insolvency practitioner is engaged by a person, business or company to provide advice and assistance but it is not an insolvency appointment under the insolvency legislation.
Unlike an insolvency appointment, advisory roles are confidential. During advisory engagements, an insolvency practitioner will work with the person or business and will either advise about what will happen in an insolvency or, more hopefully, assist the business or person avoid insolvency altogether, helping save businesses, jobs and so on in the process.
Precisely what the insolvency practitioner will do depends on the individual circumstances of the case. For example, one business may require some simple internal changes and other may require radical restructuring.
In these situations, it’s best to find an insolvency practitioner who deals with businesses or situations like your own. For example, we focus on supporting smaller businesses and can deliver a much more cost-effective service compared to large firms that pass on the cost of expensive offices, salaries and overheads.
It’s also worth emphasising that appointing an insolvency practitioner doesn’t mean failure, especially if you appoint them early enough. While it’s not reported on much, insolvency practitioners save countless businesses every year, saving thousands of jobs in the process.
If a business cannot be turned around through an informal rescue, the insolvency practitioner may look to formal options like Company Voluntary Arrangements, Business Debt Arrangement Schemes, Administration and Liquidation.
Formal Appointment Holder (Companies)
Insolvency practitioners are most associated with struggling companies as this is what the public sees most. As you will see in the coming sections, IPs can be engaged by companies in a diverse range of ways, depending on the specific circumstances.
During administration, an insolvency practitioner takes over control of an insolvent company. Often, but not always, the purpose of the administration is to try and rescue the business by restructuring it and seeking a buyer for it. If that doesn’t work, the business will be closed and its assets sold off.
Company Voluntary Arrangement (CVA)
The main difference between a CVA and administration is that the directors retain control of the company and are assisted by (rather than replaced by) an insolvency practitioner.
The company puts a proposal to its creditors seeking their agreement to write off a proportion of their debts in return for implementing agreed business changes (often including the introduction of more funding and management changes) with the remaining debt being paid back over an agreed period.
The insolvency practitioner’s role is to first help prepare the proposals and then supervise their implementation once they are agreed by the creditors.
During a liquidation, an insolvency practitioner will take over control of an insolvent company. While liquidation will usually mean the closure of the business, this is not always the case.
Even in a liquidation, the insolvency practitioner may decide to continue to keep the business open if he or she thinks this will result in a better outcome for creditors. More often though, the decision will be made for the company to stop trading and its assets sold off.
Formal Appointment Holder (Personal)
Insolvency practitioners will also deal with personal insolvency. This includes dealing both individual and businesses run as sole traders or partnerships. In the next few sections, I will discuss some of the specific roles insolvency practitioners can hold when appointed in personal insolvency cases.
Debt Arrangement Scheme (DAS)
The Debt Arrangement Scheme is an alternative to insolvency, granting individuals time to repay all their debts whilst being protected from creditors taking any action against them.
DAS is a binding arrangement with your creditors to pay an agreed sum every month until you have repaid the full debt. In return, your creditors cannot take action nor continue to add interest to your debts.
An insolvency practitioner will assist an individual to prepare a proposal for their creditors and then oversee its implementation. This service is also provided by the likes of your local CAB, StepChange Debt Charity and public sector money advisors.
DAS is also available for businesses that are run by sole traders and partnerships, although only with the help of a licensed insolvency practitioner.
Bankruptcy and Protected Trust Deeds
Bankruptcy and Protected Trust Deeds are very similar forms of personal insolvency in Scotland. With both forms, an insolvency practitioner is appointed as trustee and it is their job to realise your assets and collect a payment from your surplus income after your essential expenditure. There are safeguards in place for family homes and it is exceptionally rare that a family home will ever have to be sold. This typically lasts no longer than four years, after which time all your debts are written off.
What should I look out for when selecting an insolvency practitioner?
Appointing an insolvency practitioner is an incredibly important decision for any individual or business.
As we wrote about this time last year, there is tremendous variation in the success rates between firms offering the 'same' service. For example, one firm failed 74% of their protected trust deed cases closed in 2017, which is significantly higher than the industry average of 15%.
To help you select the right insolvency practitioner, I have three pieces of advice.
- Licence: A licenced insolvency practitioner is a qualified professional and their industry is tightly regulated. Only licenced insolvency practitioners can undertake particular functions related to insolvency such as acting as the liquidator or administrator of a company. Unfortunately, as I mentioned earlier, the market is packed with unlicenced advisers, who are not regulated and have no qualifications. If their advice is wrong, you have no regulator to complain to.
- Experience: While all licenced insolvency practitioners meet a minimum standard of knowledge, I can’t overstate the advantage of experience. Don’t be afraid to ask your insolvency practitioner about their experience in similar cases. If you aren’t convinced they have suitable experience, it’s absolutely okay to walk away.
- Fees: While most insolvency practitioners will charge reasonable fees, there are some outliers who charge over the odds. I recommend you contact a number of insolvency practitioners to get a feel for how much they are charging for the work you require. Also, most reputable companies will offer a free initial consultation to discuss your situation and your requirements.
Are you struggling with debt?
Ultimately, the success of any business rescue or personal debt recovery will come down to the skill of the insolvency practitioner appointed. Choose the right person and you will stand the best chance possible to achieve a positive result.
Also, as I mentioned earlier, it’s essential that you seek advice as early as possible. The more time your insolvency practitioner has to work with, the more likely you are to achieve a successful outcome.
So, if you are struggling with debt, contact our team today for free, confidential and non-judgemental advice.