Small IP firms to be hit hardest by enabling bond changes
06 December 2024
Smaller IP firms will be hardest hit by increased costs after recently announced new rules on compulsory enabling bonds come into effect, it has been forecast.
Government changes to the enabling bond, sometimes known as the general bond, cover creditors of an insolvent estate in the event of fraud or dishonesty by the appointed insolvency practitioner.
The new rules on enabling bonds – brought into law on 1 December 2024 by The Insolvency Practitioners (Amendment and Transitional Provisions) Regulations 2024 – have had a mixed reception from IPs, with some supporting them, while others have expressed concerns about their impact on creditor returns.
The rules mean that the “general penalty sum” to be insured by enabling bonds has been increased from £250,000 to £750,000, the bonds must now include cover for the “reasonable costs and expenses” of the successor practitioner, have a two-year run-off period and provide a minimum of six years’ indemnity from the date of appointment.
Bond providers will also need to notify the IP and their authorising body 60 days before the indemnity is due to expire or is cancelled due to non-payment of a premium.
Enabling bonds must be paid by IP firms upfront and can cost larger firms as little as tens of pounds per IP compared with hundreds of pounds per IP for smaller practices. With the general penalty sum set to triple, it is feared that IPs may see large increases in premiums.
The new rules will be compulsory for all new policies taken out after 1 January 2026, but some bond providers will be implementing changes many months before that.
Andrew McIntosh, executive director for insolvency and restructuring at bond provider Aon, said that Aon was broadly supportive of the changes but that increased premiums are a legitimate concern for smaller practices, where increased costs can make a real difference to livelihoods.
“The difficulty [for insurers] with bond claims is that, while there aren't many of them, when they do occur they can be quite sizable and quite contentious. Many practitioners think about bonds as just administrative hygiene. There’s a perception that a claim will only be made if someone empties a bank account and runs off with the money, whereas the reality is it is usually a fraud around fees in terms of how many hours were actually worked and who worked them.
“There is also the problem that almost all the bond claims sit exclusively at [the small firms] end of the market. It’s usually smaller firms where the claims are made. Purely on a risk basis, larger firms are more likely to be insulated from increases. Smaller practitioners are also paying a lot more for their specific bonds.”
Specific bonds are insurance policies that must be taken out in respect of each individual appointment with the amount of cover scaled according to the estimated value of the assets in each insolvent estate, but with a minimum cover of at least £5,000 even where the value of the assets does not reach that sum.
There have not been any changes by the Government to the rules for these bonds but McIntosh said that “the Insolvency Service will, without a shadow of a doubt, add reasonable costs for professional fees and investigations from the successor IP to the specific bond in future”.
In respect of the changes to enabling bonds, Richard Rendle, director at IP firm Rendle and Co, said that the general penalty changes and two-year run-off seemed to be “practical”, but he said the new rules may lower returns to creditors because the increase in premiums will also feed through to IPs’ costs. “More and more new government regulations keep coming through, whether pure insolvency or affecting other areas of professional practice. The impact is often of little consequence to larger firms but can be felt by smaller practice IPs or sole practitioners.”
The changes were welcomed however by Tom Russell, director at James Cowper Kreston, who said that the increase to the general penalty sum in the enabling bond was a sensible change to an outdated level that had not kept pace with inflation.
“While there may be a modest increase in premiums because of the level of cover increasing, the changes provide for greater recoveries on the occasions when a bond is called and should give creditors enhanced confidence in the profession.
“They've also increased the statutory requirements to include the payment of costs and expenses reasonably incurred by the successor insolvency practitioner, which I think is generally well received because those costs are not then coming out of returns to the creditors.”
The changes to bonding are largely in line with those proposed in the Government’s response to the consultation on the future of insolvency regulation, which ran between December 2021 and March 2022.
It is believed that this year’s changes to the bond are only a stop-gap measure before bigger changes are made by the government in future.
Russell added: “When reflecting on the initial consultation proposals, it’s worth noting what hasn’t been changed. There was a suggestion that the minimum specific case bonding would increase from £5,000, but this remains unchanged, which means that in cases where there are no assets immediately identifiable on appointment, the bond cost, which would be paid by the IP in these cases, remains as low as possible. This is helpful for speculative appointments with potential antecedent transactions requiring investigation, for example.”
Bond providers began sending messages to IPs to update them about the status of bonds shortly after the changes were announced at the beginning of November.
Mark Sanderson, managing director for insolvency and restructuring at Aon, said: “Smaller practices can help themselves when it comes time to renew the bond. There will be pressure on underwriters, so if smaller firms can be open to providing supporting information, such as sharing monitoring and compliance reports and up-to-date financial statements with their insurer, this will help us build a better story.
“It would be a useful exercise for IPs to engage early with their insurance brokers, ready for 1 January 2026.”
