How to spot firms falsely offering a ‘legal alternative to using insolvency practitioners’

In its latest report, the Insolvency Service has warned of firms falsely offering a ‘legal alternative to using insolvency practitioners’, misleading directors and losing millions of pounds of assets in the process.

But how can small business leaders protect themselves against these firms when the stresses of business distress are leaving them vulnerable?

In recent years, we have seen a growing number of firms offering insolvency services they are not qualified to deliver, or making promises they cannot legally keep.

The Insolvency Service has acknowledged this issue by closing several such firms, and dedicating part of its annual report to showing how it is tightening its grip on them.

It is evident that these unlicensed firms are viewing the stressful experience of winding down a business as an opportunity. Many owners are seeking a way out and anyone offering a simple, quick and seemingly inexpensive solution will no doubt be welcome.

Yet, it is these promises that the Insolvency Service is warning against.

Challenging the firms themselves

A number of unlicensed corporate rescue firms have been identified as falsely claiming they can provide ‘a legal alternative to using insolvency practitioners’, misleading former directors by facilitating sham sales of their businesses and incorrectly advising directors they would have no further responsibility for their company or its debts.

A key director of one of these firms has been disqualified from acting as a director for nine years and the Insolvency Service is considering further actions against the directors of these firms.

In its investigations – which resulted in the closure of multiple unlicensed firms – the Insolvency Service found that:

• Genuine purchasers for the businesses did not exist. Instead, firms operated a scheme to help former directors and owners disassociate themselves from their company debts whist keeping any assets for themselves
• Former company assets worth in excess of £7million could not be accounted for or used to pay the companies’ debts
• Creditors with legitimate claims, including suppliers and consumers, were left out of pocket

The impact on directors using these firms

For directors that are victims of these unlicensed advisers the immediate risk is that they pay money under the impression their company distress or liquidation is going to be dealt with. Many of these firms simply ignore them once they have received payment.

Directors are then left out of pocket and unable to fund a proper Creditors’ Voluntary Liquidation.

And if creditors have not been dealt with properly then there remains the risk that directors are still open to a subsequent creditor-driven insolvency.

Finally, business leaders benefitting from the misleading advice of these unlicensed firms are being investigated by the Insolvency Service and more than sixty companies are currently being looked into.

What to look out for

It is important to note that only an Insolvency Practitioner can carry out insolvency work correctly and that many will give restructuring advice beforehand if your company can survive and does not need to enter an insolvency process.

When in financial distress there are a number of key areas to look out for when seeking rescue or restructuring advice.

Is the firm correctly regulated and licensed?

Insolvency Practitioners are regulated by the IPA, ICAEW or ICAS. If this is not clear, then they may be offering false help. Many firms that are not qualified will carefully omit the word ‘licensed’ from their services.

Does the firm have any other government accreditation that can be verified?

Many reputable firms in financial services have Government accreditation, such as Customer Service Excellence accreditation. Business owners can easily verify these on government websites.

Is this a company website or a lead generation site?

In recent years, we’ve seen unfortunate growth in websites posing as regulated firms with licensed insolvency practitioners that are merely lead generation sites acting as middlemen before passing your enquiry onto other ‘advisory’ firms without reputation or regulation.

Is the offer ‘too good to be true’?

Many of these firms offer cheap, up-front fixed fees.

These are increased at a later stage by adding hidden costs, billing for ‘time spent’ which doesn’t represent the amount of work carried out or having no communication after a fee had been paid.

Is the nature of the initial advice suspicious or unclear?

Clients have told us that these firms fail to explain how an overdrawn directors’ loan could affect an insolvency process, what the insolvency process means for employees and the steps to expect. They also give promises debts would be written off before understanding the company’s debt or personal guarantees attached to them as well as advice that errs on the side of potential tax avoidance that could trigger an HMRC investigation.

As the Insolvency Service issues its own warnings, business owners should be cautious particularly if they have an overdrawn directors’ loan account or significant personal assets. The result of taking advice from these unlicensed firms is, so often, that the directors in distress and seeking help are left in an even more precarious situation and may even be left with legal challenges of their own long after these advisers have left.

Shaun Barton is partner at Real Business Rescue, and Julie Palmer is regional managing partner at Begbies Traynor.

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