UK: Government Announces ‘Call For Evidence' Regarding Bonding Arrangements For Insolvency Practitioners

Last Updated: 29 November 2016
Article by Jameson Smith & Co

Too much red tape puts a regulatory burden on businesses – that’s the theme of the government’s Cutting Red Tape programme which is reviewing thousands of bureaucratic regulations and rules to see which ones might be reduced or scrapped altogether. First launched as the Red Tape Challenge Initiative in 2011, a consultation from 2013 collected evidence on three main areas affecting insolvency practitioners, which were:

  • Technical changes to regulations affecting IPs.
  • Changes to the law governing insolvency proceedings.
  • Proposals to change how IPs report director misconduct.

After discussions with industry body R3, the Recognised Professional Bodies (RPBs), the current bond providers, successor practitioners, and creditor representatives, the government also decided to consider changes to the bonding arrangements for insolvency practitioners.As of 15th September 2016, this has now resulted in a ‘Call to Evidence‘ by the Insolvency Service. The document released “seeks views on the current bonding arrangements and how any problems might be addressed in a future reform of the bonding requirements for insolvency practitioners in England, Wales and Scotland.”

What are Bonding Arrangements?

As far back as 1984, a White Paper called "A Revised Framework for Insolvency Law" laid out the need for regulating the insolvency industry. It’s basic hypothesis was that insolvency practitioners should be legally required required to take out insurance cover against losses caused by either negligence or dishonesty. Two years later, The Insolvency Act of 1986 and the supplementary Insolvency Practitioner Regulations made it a legal requirement for a person to be authorised by an RPB to act as an insolvency practitioner, and held practitioners liable for penalties of £250,000, limited to the value of the assets in the estate. By 1993, this had been increased to a maximum of £5,000,000 for the specific penalty sum, in addition to “extending the bond cover to losses caused by the fraud or dishonesty of the insolvency practitioner "in collusion with one or more persons" and "the fraud or dishonesty of any person committed with the connivance of the insolvency practitioner."

How does the Current Bonding System Work?

Current bonds must provide two elements of cover: the General Penalty Sum (GPS) commonly referred to as the enabling bond, and the Specific Penalty Sum (SPS). The GPS, which is in force for one year, provides a fixed amount of £250,000 cover across all appointments. The additional SPS indemnifies creditors against any losses causes by fraudulent insolvency practice, and must be for the level of assets available to preferential and unsecured creditors, whether by way or otherwise, subject to a minimum of £5,000 and a maximum of £5m.

Drawbacks and Weaknesses of the Current Insolvency Bonding System

As per the government’s consultation, the current bonding system contains the following flaws:

  • Current statutory bond requirements are considered unclear, with burdensome cover schedules
  • Statutory cover limits are inadequate, having scarcely changed in 30 years
  • Bonds rely on the honesty of a potentially dishonest insolvency practitioner to obtain adequate cover
  • Proceeds of a bond claim are not ring fenced meaning creditors who may have been adversely affected by the fraud will receive no direct financial benefit from a successful bond claim.
  • Lack of provision/control over successor insolvency practitioner fees
  • No statutory requirement for professional indemnity insurance
  • The bond only covers fraud and dishonesty by or with the collusion of the
    insolvency practitioner

How can the Insolvency Bonding System be Reformed?

Under consideration are a variety of measures to improve the safety and the efficiency of the bonding system. Prospective non-legislative changes include:

  • A claims management protocol agreed by the insurers and RPBs
  • An approved panel of successor insolvency practitioners.
  • A duty that investigative costs must be proportionate to loss
  • Greater transparency over rates for investigation work

Likely legislative changes would

  • Amend the current prescribed terms of a bond
  • Provide that the proceeds of a claim for the benefit of creditors are ringfenced from the investigation costs
  • Provide for investigative costs as a prescribed requirement of a bond
  • Agree or legislate for a 'de minimis' maximum indemnity period
  • Remove requirements for monthly cover schedules and provide for an annual or global bond cover
  • Amend the existing monetary limits of the GPS/SPS
  • Introduce a duty that investigative costs must be proportionate to
    loss/cover
  • Protect estate from non-payment
    Include professional indemnity as a requirement for security, including
    run-off cover
    Agree or legislate for insolvency practitioner firms to hold fidelity
    guarantee or similar insurance to protect creditors from fraud by persons
    other that the insolvency practitioner

Whatever the changes, we’re hopeful that this Call For Evidence will result in a better regulated industry where practitioners respect their duty of care.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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