Rescue mechanisms: UK insolvency law and practice

My name's Keith Pond. I've been working in the area of insolvency both as a banker and an academic for over 40 years. Then this lecture is about the UK insolvency systems rescue mechanisms.

My interest was first peaked in this subject by being a member of a small team in Midland Bank the forerunner of HSBC in the early '80s where we were looking after the credit corporate casualties of the recession of the late '70s. But since then the law has changed, and this lecture in fact, has been the basis of much of my teaching at these other institutions that are on the slide there. The lecture is about the rescue mechanisms that the UK Insolvency Act in 1986 brought along.

The objectives for this lecture are here on the screen. There is some information that you'll be receiving some facts and figures. But really what I want to do is to be able to get an understanding of the thrust, the main purpose of the different rescue mechanisms, and perhaps try and explore why they work and why they might not work in certain cases.

There's a logic to rescuing companies even if they are insolvent, even if they have fallen and have problems. The very first part of the Insolvency Act 1986 seminal legislation in the UK setting, the first major reforming of insolvency law since 1948. Then we look back to the 1880s before that to when we changed our laws. So it's a really important part of our legislation dealing with not only failing corporates, insolvent corporate, but also insolvent individuals. The 1986 Insolvency Act followed a long report from Sir Kenneth Cork, The Cork Report published in 1982. Sir Kenneth Cork was a senior insolvency practitioner, and he was asked by the government to chair a committee over four years to update and future proof insolvency law in the UK to make it fit for modern society, and what he called the casualties of credit. We now live in a credit-based society both as individuals and companies, and there will be casualties. Some of Corks main point says we really need to make sure entrepreneur and risk aren't punished. Instead of liquidating your company and branding you as a pariah if your company fails, its actually says, "No, we can give you another chance, society wants to give you another chance." So the law was changed in a major way to allow rescue of companies where possible, rescue of businesses, and there's a big difference there. A company is a legal entity that might survive, but a business, and the business assets, and the jobs related to it, they can survive independently of the legal entity that is the company. But also there's problems here, before 1986, the profession of insolvency practitioner was not seen in a positive light. These were unlicensed, unregulated persons, typically trained accountants, but they didn't need to be, who were looking after failing companies, and extracting fees for doing that professional work. After 1986, a license has to be there, so that the officers in the administration or the voluntary arrangement, and these are two major regimes will be looking at, have to have a license. Then can lose that license should they fail to obey all of the rules, or they take too many risks, or they're downright fraudulent, and that can happen in these cases. The whole idea of rescuing companies though is focused on the returns. Is it a better deal to rescue a company for the creditors, for the shareholders, for the directors, for the employees, but mainly the creditors? Is it a better deal to rescue than to simply liquidate a company, selling off its assets at auction to the highest bidder, and closing the whole thing down? Well, clearly for society, rescue is important. Saving jobs, saving the economy in some places. Regional economies where large employers, if they can be rescued rather than closed down, they can have major effects on regional economies.