- The amount of loss as a result of fraud or dishonesty plus interest.
- The additional costs of appointing a successor practitioner in the case of fraud or dishonesty.
- The costs of proving the claim, and the unavoidable parallel costs incurred by the successor practitioner.
The maximum that may be claimed against a particular IP is £25m, regardless of the level of insurance in place or the frauds that have occurred.
If a fraud occurs, the successor practitioner has 2 years from the date the delinquent practitioner was released from office to bring the claim. If the claim is successful then the bond company will take assignment of the claim against the IP and bring it against him personally. The bond is not an insurance that protects the IP but is intended for the protection of victims of any fraud.
In my view this system is not fit for purpose for the following reasons.
- The IP has effectively some discretion in the level of cover and it does not cover assets that do not appear in the Statement of Affairs. Therefore dishonesty such as selling the assets too cheaply are not properly covered by a bond. A dishonest pre-pack sale of the assets back to the directors would only be insured for the value of that sale, not its true value that might be later proved by a court.
- It is all too common for the IP to fail to obtain cover at all, especially if the process of his loss of licence is long and drawn out. The IP often loses interest in what he sees as petty compliance in the last days of licence holding and bonds are an expense that he may not want to bear.
- The cover is often the only asset available after an IP has lost his licence. He has often allowed his PII cover to lapse or the insurer seeks to void it on a number of grounds. The cover is too limited and does not pay for a simple clean up of the cases so that creditors do not have to bear the direct costs in a situation where no fraud has taken place. The successor practitioner must still conduct an investigation into the particular case and the creditors suffer the costs if there is insufficient evidence of fraud to make a successful claim.
- The level of general bond is simply far too low. It has been set at £250,000 since 1986 and is not large enough to fulfill its purpose of acting as a catch-all for the shortcomings in the specific bonds.
I would propose the following.
- Specific bonds should be set at the higher of the assets or the creditors. In the case of a CVL with £100k in assets and £1m in liabilities the cover would be for £1m. In an MVL with assets of £1m and liabilities of £100k, it would still be £1m. This level of cover would not greatly increase the premiums as the risk is the same and the level of assets that could be stolen are only marginally higher. What this would do is avoid the nonsensical situation where the level of insurance is a major issue in whether to investigate the case at all.
- The general bond should be increased to at least £5m. This could be a partial alternative to the above as increasing the specific bonds should reduce the chances of claims on the general bond. However, claims for fraud or dishonesty are not cheap to bring and it is possibly the case that interest and legal costs could still exceed the level of even an increased specific bond. As above, it ought not be the case that recovery for fraud is stifled by a systemic defect in the legal minimum level of cover.
- The bond should provide a wider range of cover. There is the need for funding of the general putting right of a distressed portfolio of insolvencies so that creditors of merely abandoned cases do not have to bear the costs of the insolvency profession putting it right. There should also be a fund available to recover the costs of the regulator intervening in the practice and investigating the misconduct. All of this would be a feature solely of the general bond so that it was funded by practitioners rather than creditors.
I have had some outline discussions with insurers and it appears that the costs of these reforms would not be too drastic. The most expensive would be the extension of the cover under the general bond to fund general investigations. The increase from £250k to £5m might raise the premium to £1,000 per year that the IP has to bear. Is that so much?