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What is the role of an IP?

Date Added: 30/01/2014  

Insolvency practitioners (IPs) are appointed when formal insolvency procedures for an individual or a business have begun. Once they have been commissioned they advise on and undertake appointments in all formal insolvency procedures.

Although IPs serve an important purpose, their focus tends to be on the closure, rather than rescue of a business.

In 1982, the Cork Report spoke of a “rescue culture”, in which IPs could trade a company out of insolvency. As a consequence, administrations and company voluntary arrangements (CVAs)  were established in the 1986 Insolvency Act.

Struggling businesses should be encouraged to fix any cashflow problems they may be experiencing. Late payments from customers can cause cashflow issues and are one of the biggest problems SMEs experience.

Despite recommendations that floating charges should be restricted, administrative receiverships are still the preferred option for IPs and banks. 

IPs do trade insolvent companies in receivership, normally with the intention of selling them as a going concern. This practice is not aimed at embracing a “rescue culture”.

In 2002, the Enterprise Act was created with the aim of turning administration into a ‘trading’ procedure. However, this legislation is used to wrap up the sale of a company and its assets as a hybrid liquidation that does not involve an IP trading the business.

Writing in Insolvency News, Tony Groom, chief executive officer of K2 Business Rescue said that IPs have become more like process managers than business managers. 

He believes there is little incentive to rescue a company as IPs’ fees are linked to the realisation of assets rather than the ability to turn a business into a profitable trading entity. This means it is often more financially attractive to close a firm down than to save it.

The crux of the matter is that, although IPs are skilled in matters of insolvency, they do not have the required expertise to turnaround a business so it can keep trading.

Until legislation changes the focus will always be on business closures, rather than rescues.

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