Lecture 7: The Historical Development of the Insolvency Profession

Question 1

What was the role of insolvency profession in the early development of the accountancy profession?

Answer 1

• Prior literature has emphasised the jurisdictional battles between accountants and lawyers
• Insolvency work played a crucial role in the development of the accounting profession, so much so that some commentators have described corporate failure as a “professional success for accountants” (Flood and Skordaki, 1995, p10)

Question 2

Why was the 19th century a critical period for the formation of the accountancy profession and the involvement of accountants in insolvency work?

Answer 2

• Limited liability companies and the growth of large scale organizations
  
  • The requirements for audit and company regulation
  • Growth in railway companies and subsequent rise in corporate failure
• Emergence of large public utilities and railway companies.
• Insolvencies peaked in the 1840s
• Winding up Acts
• By the late 19th century, auditing, bankruptcy and insolvency were major fields of work for accountants

Question 3

What was the relationship between accountants and solicitors?

Answer 3

• Prior literature has emphasised the jurisdictional battles between accountants and lawyers.

• By the late 19th century, auditing, bankruptcy and insolvency were major fields of work for accountants
• Solicitors were not particularly happy about this
• Accountants described as ‘folk devils’
• ‘the affairs of bankrupts now got into the hands of accountants, debt collectors, and others . . . That the whole affairs in bankruptcy should be taken out of the hands of solicitors-a respectable body, subject to the control of the court and handed over to an ignorant set of men called accountants, was one of the grossest abuses, in his opinion, ever introduced into the law’ (Mr Justice Quain)
However also some evidence of mutual dependency and collaboration

Question 4

Why did accountants dominate the insolvency profession over solicitors?

Answer 4

• Lawyers were satisfied with conveyancing work
• Lawyers were educated mainly in practice (rather than in universities)
• Apathy of lawyers towards bankruptcy work
• Lawyers’ incompetence at accounting
• Accountants were cheaper than lawyers
• Lawyers’ pursuit of an association with landed gentry
○ source: Sugarman, D. (1995)

Because lawyers were trained in practice, this made them less adaptive to the changing economic climate.

Question 5

Why was Scotland important for the development of accountants?

Answer 5

First societies of accountants in the world were formed in Scotland in 1853

Question 6

What is the argument for the reasoning behind the formation of the Edinburgh and Glasgow societies of accountants in 1853?

Answer 6

a response to a threat created by the London Committee of Merchants

Question 7

What was the threat from the London Committee of merchants?

Answer 7

• Members of the Committee were concerned about their “meagre dividends” and that the trustee’s fee amounted to 5% of the bankrupt’s estate
• The Committee recommended that the English process of bankruptcy be imposed upon Scotland
  
  • Based upon an ideology of free trade and assimilation of commercial laws
  • This would threaten Scottish accountants’ sources of income

The Edinburgh society recognised the need to organize themselves and respond quickly

Question 8

Why was the importance of the Bankruptcy and Insolvency (Scotland) Bill 1853?

Answer 8

• The First Reading of the Bankruptcy and Insolvency (Scotland) Bill 1853 prompted intense lobbying from accountants, lawyers and merchants
• After the First Reading, Glasgow accountants recognised the need to organize themselves and again reiterated the need for a “certified list of experienced trustees”
• Walker (1995) describes a rise in Scottish nationalism as a key force in defeating the Bill’s passage through Parliament
• And further that assimilation was eventually achieved through the adoption by English Law of Scottish insolvency practice via the Bankruptcy Act (1869)

Question 9

What was the effect of the English Bankruptcy acts (1831 and 1869)?

Answer 9

• The Bankruptcy Act 1831 enabled ‘official assignees’ to administer bankrupt estates
  
  • Appointed by the Lord Chancellor
  • This process was criticised for being too expensive and failing to allow creditors to take control of the bankrupt’s estate
• Bankruptcy Act 1869 abolished the ‘official assignee’ and introduced ‘trustees’
  
  • Trustee would manage and distribute the property of the debtor
  • An important development in this legislation however was that the Act did not specify the occupation of trustee
  • Should be left to creditors to decide

Question 10

What was the impact of the Bankruptcy Act 1869 on the relationship between accountants and lawyers?

Answer 10

• Conflicts between accountants and lawyers ensued
  
  • Accountants began to undertake ‘legal’ tasks that had traditionally fallen within the lawyers’ domain
  • And began to enjoy a prominent position in bankruptcy courts
  • “If an accountant were required, he would be found at the bar of the nearest tavern to the Bankruptcy Court” (see Flood & Skordaki, p10)
  • However the role of trustee typically required multi professional involvement and hence a clear jurisdiction was not established by either or any profession
• Lawyers engaged in a verbal assault on accountants
  
  • Emphasised their longer professional establishment
  • Complained of accountants’ high fees
  • However by 1874, lawyers conceded that accountants had monopolised bankruptcy and liquidation work

Question 11

What was the impact of mutual dependency in the development of the insolvency profession?

Answer 11

• Idea of mutual dependency between accountants and lawyers
  
  • Solicitors were the first point of contact but they then called upon accountants to prepare the accounts.
  • More complex bankruptcies called for further legal involvement
• Also idea of ‘jackal’ accountants and lower class attorneys collaborating for work and sharing of fees
• Very lucrative work for both but especially for lawyers
  
  • Direct costs of insolvency were an issue even in the late 19th century!
• Intellectual jurisdiction:
• The creation of the ‘solicitor to the trustee’ role
• Dependency of accountants upon trustees even in small, simple cases
• “the employment of a solicitor by an experienced trustee is unnecessary . . . the now almost invariable appointment of a ‘solicitor to the trustee, whether he is wanted or no, is in the majority of cases absolutely useless, except for the purpose of making costs” (The Comptroller, 1877, see Walker, p253).

Question 12

What were the actions of the Legal Practitioners Society (established in 1873) important?

Answer 12

• Sought statutory protection of their jurisdiction
• To protect solicitors from accountants and other professionals
• Accountants, debt collectors and mercantile agencies were described as “social pests” (see Walker, p256)
• Statutory protection was refused
○ Accountants deemed to be the more appropriate party to engage in bankruptcy work than solicitors

Question 13

What was the impact of the Bankruptcy Act 1883?

Answer 13

• The re-imposition of state control
• Bankrupt estates would be managed by officials from the Board of Trade
• Introduced the role of official receivers (dealt with very small cases)
• Occupation of official receiver left open and wide (included solicitors, accountants, town clerks, bank manager, surveyor of taxes and law union clerk)
• Furthermore trustee position still not awarded to one occupational group
○ Should be a ‘fit person’
• However in the larger cases, the creditors tended to choose an accountant to act as trustee

Question 14

What was the impact of the insolvency act 1986?

Answer 14

• Halliday and Carruthers (1996) emphasise the role of the market and the role of the state
• Both are problematic as demonstrated through stereotypical images
• The IA 86 represented a move by the Conservative Government to privatize state functions
• Move to privatization of insolvency practice
• But issues about market morality
• Therefore also needed to create a new occupational monopoly
○ The professionalisation of insolvency practitioners
• Prior to the 1986 Act, insolvency practice was unregulated

• Insolvency work was undertaken by a range of players
• Large accountancy firms were not heavily involved prior to the 1970s.
• Mainly specialty boutique firms
• But also some general practitioners
• And the cowboys or pariahs
• Guarantees of competence on the part of liquidators and receivers
Banks already had a reputation for expertise in corporate reconstruction, but needed some assurances from so called insolvency practitioners that they could handle reconstructions and were competent

• Private sector profession would help civil service
  
  • And with self regulation, civil service would not need to be involved in day to day surveillance of insolvency practitioners
• Government wished to remove ‘cowboy liquidators’
  
  • “receivers were so unregulated that they could be “convicted fraudsmen”, or a “deaf and dumb Patagonian fisherman”” (p403).

Question 15

What was the impact of the Insolvency Practitioners Association (IPA) establish in 1978?

Answer 15

• The Insolvency Practitioners Association (IPA) emerged in 1978
  
  • Complete with admission rules for individuals, code of ethics, disciplinary procedures
• The Government did not have adequate resources to control company directors.

Question 16

What is meant by professionals as agents of moral regulation?

Answer 16

• The state required agents to police compliance with new statutory provisions (e.g. on directors’ disqualification)

The state effectively delegates control (of market morality) to privatised professions (rather than do it themselves)

• Mandatory reporting on directors of insolvent companies
• Insolvency profession not keen to take on this extra responsibility
• New legislation created more work for accountants and lawyers in offering advice to company directors
• So pushed business much closer to accountancy (and to a lesser extent law)
  
  • Encouraged directors to consult insolvency practitioners or company doctors at an early stage

Question 17

What is the impact of professionals as agents of moral regulation?

Answer 17

Agents of moral control are seen as a “solution” to state problems (economic constraints, ideological preferences, administrative incapacities).
Solutions were sought in the private sector, for example, to improving market morality.
The state effectively delegates control (of market morality) to privatised professions (rather than do it themselves)
Creates a need for a professional body, that must have legitimacy in the eyes of the public
Would need to consider and discuss the state of British business in the 1980s (e.g. rising insolvency rates, large company failures, growing awareness of rogue directors)

The state needed professionals to implement the legislation.
Had to clean up the existing insolvency profession and formalise it
- e.g self regulation
- Exams
- Work experience
- Licensing
This enabled the State to claim that IPs were indeed agents of moral control, whilst simultaneously providing the state with a solution…

Question 18

Why was insolvency professionalised and what were the recommendations of the Cork Committee?

Answer 18

• Government did not wish to fund regulation of new insolvency laws itself but existing mass of insolvency practitioners was unregulated

• Thatcher solution: to create a formal insolvency profession
  
  • This would ensure a minimal level of competence
  • Self regulation of the profession
  • Detachment/ independence of professions
  • Plus ‘professions’ were in keeping with ‘English social life’

• Cork committee recommended
	• Admission by examination
	• Code of ethics
	• Disciplinary proceedings
Annually renewable practicing certificates

Question 19

What was the problem in professionalisation of insolvency?

Answer 19

• However further problem facing the Government was that insolvency work was already carried out by accountants, lawyers, surveyors and others not belonging to any established profession
  
  • The result was a hybrid profession
  • Comprising pre-existing accounting bodies, law societies, the insolvency practitioners association AND the government’s own department of trade and industry