06/07/2010
After a seven-month study the Office of Fair Trading has delivered some worrying news for small businesses. They found that during the insolvency process, unsecured creditors such as customers, small businesses and the HMRC are at the bottom of the hierarchy for payouts for things such as trade receivables, according to The Telegraph.
In over a third of cases where there was plenty of cash recovered from the insolvent business, these unsecured creditors were less likely to get their money back because insolvency practitioners (IP's) were charging, on average, 9% more in fees.
In fact, one of the only ways small businesses can protect themselves from bad debt is with the help of services such as debtor protection. This can protect your business for up to 90% of the value of bad debt suffered and allows a business' debt provisions to be reduced, replenishing the cash flow that would otherwise have been lost.
The Office of Fair Trading has now recommended a radical overhaul of the insolvency industry.
According to The Telegraph, the study found that, in the hierarchy of pay-outs during the insolvency process, it's IP's who get their money before all other creditors. It was then secured creditors, such as banks, who were next in line for money - they effectively appoint the IP's. When the banks have been paid, it's then the unsecured creditors who get their money back.
The hierarchy worked well in the 63% of cases where there was not enough money recovered from the insolvency process to pay the banks in full. It was an effective system because they kept an eye on the IP's fees in a bid to ensure the banks received the maximum sum, which led to more reasonable charges.
However, the OFT found that when banks had been paid in full, they didn't scrutinise the IP's so closely. In the 37% of cases where this happened, the unsecured creditors who have little influence over the IP, saw fees soar. The OFT report claims that in some cases, the fees charged by IPs increased by 9% - or 15 million - more on average.
According to The BBC, insolvency experts earn about 1 billion in fees each year for dealing with insolvent firms whose assets are worth 5 billion. What's worrying is that a report published by The BBC last month found that the number of bankruptcies is likely to keep on rising.
Laura Nineham