Insolvency Fraud And Asset Recovery

When businesses get into difficulties and face bankruptcy the time is ripe for fraud. Assets are carefully hidden so that when the company goes bust, there is nothing left for the creditors. And yet a lot of the insolvency fraud can be traced to the professional practitioners and not just the business owners or directors who are trying to keep the remaining wealth for themselves.

The Times reported today in its ongoing story regarding the P&A Partnership, high profile insolvency practitioners based in Sheffield. The firm has been bought out of receivership by leading business recovery specialists Begbies Traynor, but former P&A partners are still facing allegations of “time dumping” leading to inflated fees for them but reduced repayments for creditors including HMRC who are often owed the most in taxes when a company goes bust. Partners were charging time to jobs when on holiday or on the golf course!

I have worked for insolvency practitioners within some of the largest high street accountancy practices. This has brought me into contact with a large number of other insolvency practitioners, both in law firms and in other business recovery firms. I have seen indications that time dumping, to a lesser or greater degree, might be commonplace in some firms. At the very least, I suspect that the hourly charge levied by staff and partners in many firms does not offer good value to the end user – the disadvantaged creditors.

You would have thought that charging £300, £400, £500 and more in the Capital per hour, that an insolvency practitioner would offer an hour’s work. But there is the argument that the high fees are to cover not only the ongoing risk involved, but also the assignments that produce a loss, or no fees at all.

The insolvency field is necessarily hard nosed. Tough decisions need to be made involving the future of businesses and very often the livelihood of large numbers of employees. It is not a career for the faint hearted! Plus, there is the fact that often assignments are taken on where there are insufficient funds available to pay the practitioners, let alone repay their staff. These cases are normally handled by the Official Receiver who will be paid no matter what – being public servants. However, some impoverished cases are taken on by private sector practitioners who see the chance for hidden assets to be traced and recovered. Practitioners who have spent a significant amount of time investigating an insolvent estate clearly hope to be paid, and this can lead to aggressive asset recovery which can sometimes be over zealous and lacking the support of reasonable evidence. This is where the targeted director or bankrupt needs his own professional advice. Unfortunately he or she is often in the position of having a dearth of funds available to pursue a defence and may need to pursue the possibility of hiring a forensic accountant who can provide some investigation services on a contingency basis (NB – if acting as an expert witness, the forensic accountant would be unable to carry out this part of the work on a contingent basis).

While there may be opportunities fee massaging in every profession, insolvency is also open to another worrying abuse. When managing the insolvency of a business, the practitioner is in the position where he is responsible for the disposal of some very valuable assets, including properties or whole businesses, in order to recoup value for the unpaid creditors. I have come across criminal cases where fraudulent practitioners have used this process to ensure connected parties are able to buy assets at knock down prices. The worry is that this practice might be more prevalent in a less severe form. Take for example the “Prepack” administration. This is advertised by practitioner firms in glowing terms such as a “fast, legal way to freeze creditors and restart a business”. Why should a professional firm have to suggest that their services are legal? Probably because they are so controversial!

So if you get your company in a mess, you pay the insolvency firm to take over. Part of the arrangement is that you can buy back the business yourself. So you can walk away from all your creditors, including minority shareholders and HMRC. Debt free, you can buy your business back, likely for a very good price. While the theory behind this practice is sound, allowing for the best possible outcome in many cases, it is open to abuse.

Mark Jenner has acted as a private sector independent investigator for the Insolvency Service (Companies Investigation Branch) being issued with authorities under S447 on over 30 occasions. He has worked for insolvency practitioners in the private sector as a principal asset tracing and recovery expert. Currently cases are also undertaken assisting directors and bankrupts who have been targeted by these regulators for recovery of assets.


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