A Review of Company Rescue and Business Reconstruction Mechanisms

A Review of Company Rescue and Business Reconstruction Mechanisms
Department of Trade and Industry and HM Treasury May 2000

This booket was added in November 2000

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REPORTING/INVESTIGATING ACCOUNTANTS BEING APPOINTED ADMINISTRATIVE RECEIVERS

115. The thrust of this issue is that companies are placed unnecessarily or precipitately into receivership because of the self interest of insolvency practitioners, appointed to investigate those companies affairs, recommending their own appointment as administrative receivers because they wish to earn further fees for so acting. The consultation document set out the arguments for and against the practice and consultees were generally content that those arguments had been fully exposed. In presenting those arguments and in considering the substance of the issue, the Review has been able to draw extensively on recent empirical research conducted by Alan Katz and Michael Mumford of Lancaster University.9 A brief outline of the background to that research and its conclusions will demonstrate the basis for the Reviews conclusions in this regard.

116. In 1993 the Royal Bank of Scotland (RBS) announced a change of policy so that it would not, other than in exceptional circumstances, appoint insolvency practitioners who had carried out an investigation into a company as administrative receivers of that company. This was a result of concerns expressed during the recession of the early 1990s (administrative receivership appointments peaked in 1992) that many such appointments following investigations were due more to the desire of insolvency practitioners to earn further fees than to the need to protect and realise banks security.

117. Katz and Mumford studied the recommendations of investigating accountants and the decisions made on those recommendations by the RBS and 3 clearing banks which had not changed policy i.e. they were prepared to continue to appoint insolvency practitioners who had acted as investigating accountants to be administrative receivers of companies. Katz and Mumford found no significant difference in the recommendations made by insolvency practitioners acting as investigating accountants who in the light of RBSs policy had no expectation on being appointed administrative receiver where such a recommendation was made, and recommendations made to other banks.

118. The great majority of non-professional respondents to the consultation argued that the practice should be prohibited. A common argument was that, even if it were not in fact a problem, nonetheless the general perception of a conflict of interest was so strong as to mean that public confidence could never be likely to be engendered.

119. Whilst we recognise the force of that argument we are not persuaded that a legislative prohibition would be appropriate. The fact of the matter is that even RBS continues to appoint insolvency practitioners to be both investigating accountants and, subsequently, administrative receivers in exceptional cases. In those cases the justification is that the complexity of the companys affairs and the urgent necessity of protecting and realising its assets to best advantage (often through the medium of a sale of its business as a going concern) require such continuity. In our discussions with banks (principally the clearing banks) they have consistently asserted to us that where administrative receiverships follows an investigation of a companys affairs then, in the majority of cases, the directors are entirely content that there should be continuity as regard the investigating accountant/administrative receiver. Where the directors are not content either with the conclusions reached by the investigating accountant (i.e. that the company should be placed in administrative receivership) or that the investigating accountant be appointed administrative recei
ver, that point of view will be nearly always be accommodated either by the seeking of a second opinion or the appointment of an alternative administrative receiver. The exceptions to this rule would be the same as for the RBS. This option of an alternative administrative receiver is, we understand, already common practice and we recommend that it should be set out in the Statement of Principles, known as the Bankers Code.

120. On several occasions insolvency professionals indicated to us that they felt this was a problem for the banks to resolve. In our view that is to miss the point that it is the professions reputation which is undermined by the apparently wide-spread perception of abuse. Given that complaints as to conflict of interest are only likely to arise where the directors of a company disagree with the investigating accountants conclusion that an administrative receiver should be appointed or who should be appointed as a result of that decision, then if those cases are catered for under amendments to the Bankers Code and Insolvency Practitioner Ethical Guidance there should be no recurrence of them. The public perception of this as an ethical failure on the part of the profession could therefore be expected to diminish over time although this would not satisfy those who would see a legislative prohibition as the only way to prevent a conflict of interest arising.

121. We therefore recommend that the very real issue of the perception of conflict of interest be dealt with both by the banks, through an amendment to the Statement of Principles and by the profession in changes to its ethical guidance. We also believe that this is an area in which the newly formed Insolvency Practices Council could usefully provide a degree of informed public interest input.

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9 Should Investigating Accountants be allowed to become administrative receivers? The question of continuity ICAEW Discussion Document, September 1999.