The Insolvency Practitioner recruitment crisis: will this lead to more claims?

The UK insolvency sector is at a crossroads, facing a growing recruitment and retention crisis. The demand for skilled Insolvency Practitioners (IPs) is increasing, yet firms are struggling to attract and retain talent. Staff shortages and high turnover rates are placing immense pressure on existing professionals, potentially leading to increased workloads, reduced service quality, and consequently a heightened risk of professional negligence claims. 

This article will focus on the staffing challenges facing the sector and the potential negligence claims arising from these challenges.

The recruitment crisis in a nutshell

The insolvency sector plays a crucial role in managing business failures, restructuring debt, and ensuring fair outcomes for creditors. However, in recent years, recruitment and staff retention have become major concerns for the sector. Challenges include:

• High turnover rates: Burnout and high-pressure workloads are driving many experienced professionals out of the industry.
• Talent shortages: A lack of new entrants into the profession is making it difficult for firms to replace departing staff.
• Increased caseloads: Economic fluctuations and corporate distress have raised demand for insolvency services, placing greater strain on existing practitioners.

According to a leading insolvency recruitment specialist, firms are struggling to find and retain talent, causing operational disruptions and a decline in overall efficiency.

Reasons for talent shortage

There are several contributing factors to the insolvency sector's recruitment challenges:

Economic fluctuations

• Insolvency work is cyclical, with fluctuating demand based on economic conditions.
• Periods of low insolvency rates lead to reduced hiring, followed by sudden spikes in demand when financial downturns occur, making workforce planning difficult.

Perception of the profession?

• Many young professionals associate insolvency work solely with business failures, rather than seeing its role in business rescue and financial restructuring.
• The profession lacks visibility compared to other areas of finance and law, making it less attractive to graduates, with entry routes into the profession less well known.

Changing workforce expectations

• Generation Z and Millennials prioritise work-life balance, flexibility, inclusivity, mental health support, and purpose driven careers.
• There is data to suggest that traditional insolvency firms have rigid structures and high workloads, which may deter younger professionals from entering the industry.

The impact of recruitment issues on Insolvency firms

The inability to attract and retain insolvency professionals has several direct consequences:

• Increased workloads: Existing staff must take on more cases, leading to potential burnout and further attrition.
• Reduced service quality: Fewer experienced practitioners is likely to result in delays and errors in insolvency processes.
• Reputational risks and commercial impact: Firms unable to maintain a skilled workforce may struggle to secure high-value cases and retain clients.

According to case studies from leading insolvency firms, understaffing is one of the biggest operational risks facing the sector today.

Could the recruitment crisis lead to more professional negligence claims?

One of the most concerning consequences of the Insolvency recruitment crisis is the potential increase in professional negligence claims against the firm. A shortage of skilled staff will result in mistakes, oversights, or delays that negatively impact creditors, directors, and stakeholders.

Some possible claims would include:

1. The Failure to properly investigate and realise assets

• Inexperienced or overworked IPs may fail to identify and recover all assets.
• Creditors could claim financial losses due to undervaluation or mismanagement.

2. Breach of fiduciary duty due to administrative errors

• Late filings or incorrect submissions due to excessive workloads.
• Possible claims from creditors or directors for financial losses caused by administrative mistakes.

3. Negligent conduct in employee redundancies

• Mishandling redundancies due to lack of staff or expertise.
• Employees could bring legal action for failure to comply with redundancy laws.

4. Failure to prevent misfeasance and wrongful trading claims against directors

• Poor investigations into directors’ conduct before insolvency.
• Creditors may sue for failure to take action against wrongful trading.

5. Mishandling of Creditor distributions

• Errors in fund distribution leading to some creditors being underpaid.
• Potential claims from creditors alleging financial mismanagement.

6.  Regulatory referrals

• Firms are increasingly likely to face regulatory referrals for breaches, either alongside legal claims or independently.
• These referrals may stem from alleged violations of ethical principles (such as integrity, objectivity, and confidentiality), case mismanagement, conflicts of interest, lack of independence, or failure to uphold professional competence and due care.

Professional negligence claims can have serious legal and reputational consequences for IPs and their firms, making it essential to address the root causes of staffing shortages.

Written by

Jack Bailey, Claims Executive, Financial Lines Group