‘A very different approach’ to insolvency, regulation and oversight: the Pankhurst story

The story which is about to be unfolded involves a disregard for good regulatory practice and an oversight system which does not step in to take remedial action. The situation: where an insolvency practitioner loses their licence due to misconduct, case law and common sense dictates that the malfeasant insolvency practitioner should play no role in choosing their successor to take over their cases. The intended replacement should be completely independent from the outgoing officeholder.  This of course did not happen in this case. Read on…

A ‘very different approach’ to insolvency

Mr Pankhurst had been a licensed insolvency practitioner since 2008 operating from his own Solihull based insolvency practice, Cobalt Business Support and Restructuring. The company website records that the aim of the business was  

‘…to provide a very different approach to directors, owners and stakeholders of distressed businesses not being provided elsewhere in the market.’

It surely cannot have been envisaged by those using his services that, following the formal insolvency of some of their firms, this ‘different approach’ would involve Mr Pankhurst taking money out of estates for his own personal use.

Those involved with the business entities concerned, particularly the creditors, have suffered a double blow – the insolvency, and further potential loss of monies due to misappropriation. 

Loss of licence

The Membership and Authorisation Committee of the Insolvency Practitioners Association (the ‘IPA’), the body which licensed Mr Pankhurst, met on a number of occasions (2 December 2015, 13 January 2016, 16 February 2016 and 15 March 2016) to consider the conduct of Mr Pankhurst and the appropriate action to be taken.  It was chaired by Neil Bennett.

The Order of that Committee dated 17 March 2016 and the attached notice revealed the details of the conduct in question: 

‘a. It is a primary obligation of an Insolvency Practitioner, acting as an Office Holder only to draw monies from estate accounts which are properly payable and duly authorised. In this case you have drawn a substantial sum of money from numerous estates amounting to ￡156,341.20 (the ‘monies’) and applied these for personal use.

b. Furthermore you have acknowledged that at all relevant times you knew that the monies were neither properly payable nor duly authorised.’

In view of this serious misconduct, the Order stated:

‘1. Notice is hereby given that the removal of Mr Pankhurst’s licence to practice as an Insolvency Practitioner (the Licence”) shall take effect on 15 April 2016 (‘the Withdrawal Date’);’

This was clearly the right decision in the circumstances. The Order also referred to a Restriction Notice having been placed on Mr Pankhurst on 4 December 2015 until his cases had been transferred.

A ‘very different approach’ to regulation concerning the transfer of cases

The withdrawal of Mr Pankhurst's licence by the IPA necessitated a block transfer of his insolvency appointments. The aforementioned Order made by the Membership and Authorisation Committee of the IPA stated that Mr Pankhurst must:

 ‘1. Submit an application to a court of competent jurisdiction for the transfer of all appointments in his name within 14 days from the Order; and

2. serve a copy of the Transfer Application and the evidence in support on the Association;’

The IPA had therefore directed the malfeasant IP to choose his successor which he duly did by way of his portfolio of cases being transferred to Mr Alisdair Findlay on 11 April 2016. In such circumstances choosing your own successor would seem an abdication of a recognised professional body’s responsibility to ensure there is a truly independent replacement office holder. As mentioned in the beginning, it goes against case law and common sense.

As an aside, the evidence shows that Mr Pankhurst anticipated this outcome as he had been attempting to sell his cases for some time, approaching other practitioners through his solicitors Neil Davies & Partners. Mr Pankhurst met with Begbies on 10 and 11 February 2016 who did not wish to proceed. Mr Pankhust then negotiated with Wilson Field Limited but he felt their offer was too low to be “commercially acceptable”.  He also stated that there was no prospect for any of his staff to be employed as part of that sale. Lastly Mr Pankhurst details an offer from Greenfield Recovery Limited but they did not pursue it further.

There would of course be no issue transferring cases to non-independent successors  where an insolvency practitioner has retired, left a particular insolvency practice, or died and the outgoing and successor insolvency practitioners’ recognised professional body (‘RPB’) have determined that there are no major regulatory concerns on the part of either of the practitioners. This actually would accord with the Insolvency guidance paper on succession planning published on 7 April 2014.

For understandable reasons the position changes where there is a loss of licence, major regulatory issues or where third parties raise credible concerns of a serious nature about either practitioner. The case law which follows shortly encapsulates why. Put briefly, as an investigation will be required into  the previous officeholder and their cases to consider whether any misconduct goes beyond what has been discovered, there can be no questions surrounding the impartiality of the one responsible for carrying out this function - the successor.

Aggravating factors concerning lack of independence

A lack of independence is not solely demonstrated by Mr Pankhurst having been given the authority to transfer his own cases to his chosen successor. There are serious aggravating factors which betray the stance of those who make a claim that there is independence, or even the semblance of such. 

Prior to turning to these additional factors let’s bear in mind that what we have here is a man who took over ￡150,000 from insolvency estates. What happens next would be farcical if not so serious. Mr Pankhurst entered into a commercial agreement with his then intended successor (which was subject to the transfer order being granted). What little can be gleaned about the deal – as the precise details were not disclosed to court for commercially sensitive reasons – is that it involved the sale and purchase of the work in progress of Mr Pankhurst’s cases. Allied to this, was an arrangement whereby Mr Pankhurst would be employed by his successor in a consultancy capacity. In the words of Mr Findlay in his witness statement to court in support of the transfer:

‘This will ease the transition of the cases across and avoid any unnecessary increase in costs.’

How does this sit with Mr Findlay being required to investigate impartially the conduct of Mr Pankhurst in relation to the latter’s administration of the insolvency cases in question?  It is not possible to see how objectivity could be maintained when both parties have a financial interest in the work in progress and assistance was to be provided by an individual who had lost their licence due to misconduct.

The Institute of Chartered Accountants for England & Wales v Webb [2009] EWHC 3461 (Ch) is the leading case dealing with the necessity of choosing a successor seen as independent of the former officeholder and will be considered in more detail shortly but is mentioned now as the same  aggravating factors ‘were at play’.    Mr Justice Norris, the judge in that case, referred to the situation whereby a former insolvency practitioner wished to act as a consultant to the successor after the loss of their insolvency licence:

‘The insolvency licensing regulations make plain that a licence holder must take steps to prevent individuals who are not insolvency practitioners from being able to exert undue influence over the way an appointment is conducted and must establish and maintain procedures designed to ensure that anyone associated or employed in the office holder’s practice is a fit and proper person. Regrettably, the complete withdrawal of Mr Webb’s licence indicates that he would not fit be a fit and proper person to be employed by or associated with Mr Bowen, [the former licence holder’s ‘favoured candidate’] whether this is formal employment or in some consultant or assistant role. Mr Bowen’s appointment therefore suffers a severe demerit.’

It is difficult to envisage a more telling judgment on this point and it should have left the IPA in no doubt that this was another reason not to allow the transfer to take place.  

In turning to where the former officeholder seeks to obtain an income stream arising out of acting for the successor, this is what the same judge said in the case of Hunt & Anor and Hepworth & Anor:

‘In cases of block transfer there is a very strong temptation to regard the holding of an office as a form of income stream which can be assigned by one outgoing officeholder to another…

‘If it needs saying again, I will say it again…it is the interests of the creditors that must take priority over any interest, economic or otherwise, of the outgoing officeholder or the associates of the outgoing officeholder.’

In ICAEW v Webb, Mr Justice Norris made it very clear that the court would not consider a transfer to an insolvency practitioner who was in any way connected or even nominated by the outgoing office holder where the former had lost his licence due to disciplinary action. In his judgment Mr Justice Norris reconfirmed the principles established in HM Customs & Excise v Allen [2003] BPIR 830 namely that:

‘Where there is no suggestion that there has been no misconduct by the outgoing office holder or by anybody for which he works, and the body is a reputable body, the court can properly be satisfied that the appointment can be transferred to another insolvency practitioner within the organisation. However, where misconduct is raised, either on the part of the outgoing practitioner or the body for whom he works, as it is in the present case, the approach of the court should, in my view, be very different. The appointment is an appointment by the court and the court should be very vigilant to ensure, not only that any misconduct will be properly investigated, but that also that those whose responsibility it will be to consider whether there has been misconduct, and if so what steps should be taken to deal with the matter, are seen to be independent of the alleged wrongdoer. It is of the highest importance that the confidence should be maintained in the propriety of any appointment by the court.’

The judge further explained the need for an independent successor when referring to Mr Webb’s nominated successor Mr Bowen:

‘…There is no basis for suggesting that Mr Bowen is anything other than independent and a professional competent practitioner. But he will be seen as being the favoured candidate of the outgoing office holder whose licence has been withdrawn and who is in significant default. The incoming office holder will have to remedy the acknowledged defaults and consider what further steps ought to be taken in the interests of the creditors.’

‘A very different approach’ to oversight

The public pronouncements emanating from the Insolvency Service (acting on behalf of the Secretary of State) over recent years have largely been about taking a robust approach to oversight and ‘coming down hard’ on RPBs which do not appropriately authorise and regulate their insolvency practitioners. These views were solidified into black letter law when the Small Business, Enterprise and Employment Act 2015 provided for the Insolvency Service to be able to take action against an RPB, such as giving a direction, imposing a financial penalty or issuing a reprimand. These new powers came into force on 1 October 2015 prior to the transfer of Mr Pankhurst’s cases.

In the Insolvency Service publication, ‘Insolvency practitioner regulation – regulatory objectives and oversight powers’, published in December 2015 to assist with the interpretation of the new powers at its disposal, it referred to, and then commented on, one of the new regulatory objectives introduced which is pertinent to the issue at hand:

‘Encouraging an independent and competitive profession, which provides high quality services at fair and reasonable cost, acts transparently, with integrity and considers interests of all creditors in a particular case.

RPBs will be expected to act to promote an independent and competitive insolvency practitioner profession, free from inappropriate influences and which acts in the best interests of creditors in any particular case.’

The publication goes on to state that ‘Where an act or omission of a RPB (or series of acts or omissions) in discharging its regulatory functions has had, or is likely to have, an adverse impact on the achievement of one or more of the regulatory objectives, the Insolvency Service may direct the RPB to take steps to counter or prevent its occurrence or recurrence.’

There was no independence; a lack of transparency and integrity; and there were ‘inappropriate influences’ in relation to this transfer. In view of the inappropriate circumstances why did the Insolvency Service not use its new power to direct the IPA to stop the transfer rather than do nothing?

 When requested by this firm’s solicitors to explain why they allowed the transfer to proceed given the extremely concerning circumstances, they provided their written reply on 7 July 2016. In summary their position was one of non-interference except in clear cut situations:

 ‘Our role is to confirm that the authorising bodies of the outgoing and incoming office-holders are aware of the application and ask whether or not they have any regulatory or other concerns. Such concerns may include disciplinary findings against one of the practitioners involved or concerns about the capacity and experience of the incoming office-holder to deal with the type and volume of cases.’

So far so good, but then we get to the more problematic part of their response:

‘… the question, “why did the Secretary of State permit the appointment,” is founded on a false premise. It is not for the Secretary of state to permit or prohibit an appointment. It is our practice to confirm that no regulatory or disciplinary objection to the appointment exists. This practice is not borne out of any statutory requirement.’

‘We would further comment that case law is best raised by parties appearing before the Court. The parties to the application will be more familiar with the facts and may appear at an oral hearing.’

And finally:

‘We do not always attempt to advise the RPBs, the parties and the court of the appropriate outcome because it is frequently not clear what should be done. The case law you cite [ICAEW & Others –v- Webb] does not set out absolute restrictions. Norris J balances the “merits” and “demerits” of the respective proposed practitioners…So where the best outcome is unclear, we prefer not to take a partisan approach.’

This requires some unpicking.

It is of course correct, and no surprise, that there is not a statutory requirement for the Insolvency Service to intervene in the transfer of insolvency cases between insolvency practitioners authorised by the RPBs.  The Insolvency Act 1986, the Insolvency Practitioner Regulations 2005 and even the MOU are not so prescriptive as to detail individual scenarios setting out when and how they should intervene. 

Reliance on there being no statutory requirement and that of not wanting to be ‘partisan’ seem pretty lame reasons for non-intervention. The nature of a regulator and oversight regulator is at times to be ‘partisan’ in the interests of good regulation; to actually take a side in situations where not to do so would lead to the wrong decision or would create unacceptable risks.

What should also have been taken account of is the Regulators’ Code, the basis of which is to improve the way regulation is delivered. The updated version was published in April 2014 by the then named Department for Business Innovation & Skills. The Insolvency Service in their Annual Review of Insolvency Practitioner Regulation in that year stated that ‘they took immediate steps to ensure compliance with those revisions’ and the ‘implementation of the Code’. The relevant part is quoted below:

‘Regulators should base their regulatory activities on risk

‘Regulators should consider risk at every stage of their decision-making processes, including choosing the most appropriate type of intervention or way of working with those regulated…’

Well the serious risks have already been highlighted in this article but the parties involved decided not to heed these concerns.

The Insolvency Service’s interpretation of the Webb case

The Insolvency Service stated in their letter that ‘Norris J balances the “merits” and “demerits” of the respective proposed practitioners…’ in order to apparently suggest that the decision was finely balanced.  It was not, it was clear cut. Mr Justice Norris wholeheartedly rejected the ‘demerits’ proffered against the candidate not of Mr Webb’s choosing, such as his location being far away from the insolvent; his charge out fees; not being independent because he was supported by HMRC; and that the appointment would have a detrimental impact on Mr Webb’s appeal to the ICAEW against the withdrawal of his licence.

Turning to Mr Bowen as a possible successor, Mr Justice Norris said ‘there are significant problems concerning his appointment.’ He then listed these, including ‘he would hold office against the known preferences of significant creditors…’;  the problems of using the services of the former licence holder to assist on cases previously in his name; and that he was his ‘favoured candidate’.

How the Insolvency Service dealt with its own transfers of cases

When the Insolvency Service regulated insolvency practitioners on behalf of the Secretary of State its approach to finding a successor when someone had lost their licence is contained in Chapter 55 of their Technical Manual (the most relevant wording being highlighted):

‘It is possible, particularly where the practitioner has ceased to be qualified due to retirement or similar, that he/she will find his/her own successor to accept the appointment as liquidator/trustee and the transfer can be conducted by a meeting of creditors or application to court. 

There may, however, be problems where authorisation was withdrawn because the insolvency practitioner was considered not to be fit and proper since there may be inadequate records to assist with the realisation of assets. In these cases, where the practitioners had been authorised by the Secretary of State, IPU [the section of the Insolvency Service which deals with transfers] will take responsibility for ensuring a successor is appointed who has the relevant resources, experience and independence.’ 

From the above it is clear that the Insolvency Service had a different, but correct, approach to the appointment of an insolvency practitioner following a loss of licence. One that recognised the importance of independence and emphasised that -  through its specialist section – it would ‘take responsibility for ensuring a successor is appointed’

The court’s role

District Judge Salmon on 11 April 2016 made a block transfer order transferring Mr Pankhurst’s cases to Mr Findlay. Legitimate questions may be raised as to why the court sanctioned the transfer. The difficulty here is that the parties involved failed to bring the court’s attention to the case law referred to earlier. As a consequence, the court had exercised its discretion in a vacuum and was not in a position to make an order which could be considered more appropriate. 

Until the change in legislation on court bulk transfer orders brought about by amendments in 2010 to the Insolvency rules 1986, an RPB had the power to remove a licence but no power to appoint a replacement. The following change to Rule 7.10C(4)(e) provided that for the RPB being an applicant:

‘(e) the recognised professional body or recognised body by which the outgoing office-holder is or was authorised…’

Having now been provided with this power it should be incumbent on an RPB to make the application as this is one reason the whole process went wrong. An application to transfer cases is triggered by regulatory action which causes additional ethical factors to be part of the bulk transfer order process but without the RPB as applicant there is a strong risk that those considerations might be missed.

This approach has been adopted by other RPBs with them able to recover their costs thereby ensuring there is no financial detriment.

In ACCA v Koumettou & Morfakis, the court placed some reliance on the identity and status of the RPB as applicant. The court expressed the view that all things being equal the nominee of the RPB would take precedence over other candidates. Such an endorsement also reduces the likelihood of repeated challenge to the successor insolvency practitioner which is of course beneficial for the future conduct of the cases.

Issues post-appointment of Mr Findlay

The court application and accompanying documentation to transfer the cases to Mr Findlay and the Orders made against Mr Pankhurst do not identify from what insolvency estates misappropriation took place. This begs a number of questions. Was the replacement holder made privy to this information by the IPA? And if so, have appropriate investigations taken place to ensure there has been no other misappropriation which may have been missed in the portfolio of cases?

It is clearly in the public interest for a successor to be made aware of the cases affected, not least to see whether any appropriate bond or PII claims have, or should have, been made.

On a separate matter, in connected court proceedings some 2 months after the court transfer of cases, Mr Findlay resiled from the position of intending to employ Mr Pankhurst ‘as consultant’. This apparent volte-face was contained in a witness statement he made dated 29 June 2016.   He summarised Mr Pankhurst’s role:

‘16. I confirm that Mr Pankhurst’s role to date has been limited to assisting me with the hand over of the various insolvent estates…Mr Pankhurst has not been remunerated for such cooperation.’

I was later sent a copy of business card handed out by Mr Pankhurst on 8 September 2016 (some 2 months subsequent to the witness statement) which included his name and contained the logo of ‘findlayjames insolvency practitioners’’. I sent a copy of this to Mr Findlay and the court and soon after Mr Findlay acceded to my application whilst maintaining that Mr Pankhurst was not employed by his firm.

Conclusion

In allowing the transfer it did a disservice to those who had lost money at Mr Pankhurst’s hands, the creditors in general and tarnishes the reputation of the insolvency regulatory regime. This was a situation requiring a regulator to step up and comply with their primary duty, the protection of the public. In this instance the IPA failed abysmally.