Blog: Accountant in Bankruptcy budget slashed by a third

The Scottish Budget for 2016-17, announced by John Swinney, contains a cut of a third in the Accountant in Bankruptcy budget.

David Menzies, director of insolvency at ICAS, examines how this will impact its services.

The Scottish Government draft budget for 2016-17 has been announced by Finance Secretary John Swinney. While many of the headlines will focus on the maintenance of the Scottish Rate of Income Tax and preservation of front line services, tucked away in the detailed budget documentation is the impact on other services.

Chapter 5 contains detail on Finance, Constitution and the Economy and the budgets for secondary Scottish Government Agencies. This reveals that the budget for the Accountant in Bankruptcy (AiB) is to be slashed by 1/3 in 2016-17 from £1.8m to £1.2m, a reduction of £600,000.

While the Agency has made great strides in recent years to achieve a balanced budget, the loss of a third of its budget is bound to have a dramatic impact.

The Agency has incurred significant cost in recent years developing new IT systems such as BASYS and ASTRA, and with legislative changes delivered in 2015 AiB Chief Executive Dr Richard Dennis said at the ICAS Insolvency and Restructuring Conference that he did not expect any significant new legislative changes in the foreseeable future. Some of the budget reduction will therefore no doubt be able to be absorbed through a reduction in capital expenditure.

The most recently published AiB accounts (2014-15) show an operating surplus for the year of just over £800,000. So should the budget cut should be entirely manageable?

Well perhaps not. The Agency has an ever increasing staff cost with headcount up from 137 to 151. The staff budget accounts for over a third of total operating costs. The Scottish Government has a policy of no statutory redundancies and therefore headcount reduction is difficult to achieve other than through natural wastage.

Personal insolvency numbers are at an historical low in recent years and that should mean less work (and cost) for the AiB. However, of course the reduction in work and costs takes time to flow through. The result is as well as the budget cut the AiB income is expected to decline at the same time – a double whammy.

Household debt continues to rise according to recent economic updates and therefore it could be reasonably expected that the number of insolvencies will finally take an upward direction in the foreseeable future.

The AiB workload has increased as a result of changes brought in through BADAS and with functions transferred from the Courts. While the AiB fees for that function were slightly lower than the equivalent court fees the question now is how long can that position be maintained.

Significant burden

In all likelihood it is expected that fees payable to the AiB by debtors and trustees will have to increase. A significant burden of that increase will of course end up on the insolvent estates and reduce returns to creditors, with a resultant impact on businesses and the economy.

We are already concerned about the 17.5 per cent AiB charges for auditing trustee remuneration. In many instances the cost to the insolvent estate simply does not reflect the time that the AiB will have spent carrying out the audit. Cases have been seen where the AiB audit charge is substantially higher than the fee the trustee gets for administering the whole sequestration. This needs to be urgently addressed by budget cuts will make this difficult for the AiB to address.

Perhaps now is the time to reconsider the AiB functions. The supervisory function of the AiB was enshrined in legislation prior to the modern insolvency licensing and regulatory model. It may be the case that now is the time to reappraise this. The UK has a world class regulatory function and it no longer seems necessary for the AiB to supervise trustees when this function is ably carried out by recognised professional bodies under the oversight of the Insolvency Service.

We look forward with interest to see how the AiB will seek to deal with the substantial reduction in budget.