This account was opened under the Insolvency Services (Accounting and Investment) Act 1970 as part of a rationalization of the machinery for handling funds arising from bankruptcies and company liquidations. Previously, the Treasury invested surplus funds relating to the two forms of insolvency.
Investment powers permit investment in UK Government-backed deposits and/or both Government and Local Authority securities. The investment policy is to protect the Fund's capital, to provide for client liquidity needs and, consistent with that, to earn sufficient interest to cover interest paid to liquidators.
A consequence of the Enterprise Act 2002 was that, from 1st April 2004, voluntary liquidators were given the choice of whether or not to pay their funds into the Insolvency Services Account (ISA). Under the old regime, when voluntary liquidators were obliged to pay monies into the ISA, it was possible to invest funds in gilts with a term that approximately matched the length of time that monies were to be held by liquidators. This could be done in the knowledge that the Fund size was stable and with the general expectation that large amounts of money would not be taken from the Fund without warning.
Under the new regime, voluntary liquidators now are able to invest and disinvest at will and this has fundamentally changed the assumption about the Fund's stability. In those circumstances, continuing to invest in gilts would have given rise to a significant liquidity risk factor.
To reflect this change in circumstances, it was therefore agreed with the Insolvency Service to modify the investment profile of the Fund. Accordingly, the Fund's gilt holdings were disposed of during February 2004 and the proceeds of the sales were placed as short-term deposits with the Debt Management Account Deposit Facility. As a consequence the income earned by the Fund (and thus the interest rate that the Fund can afford to pay to liquidators) is now more closely related to prevailing short-term interest rate levels.