Insolvency Oracle

Developments in UK insolvency by Michelle Butler


by Leave a comment

Stepping up Scrutiny of ERA Claims

There’s no doubt that the RPBs have stepped up scrutiny of RP14/15 forms in recent months.  In this blog post, I explore what the Acts and Dear IP actually require when it comes to “verifying” RP14/15 data and the measures you can take to protect yourself from RPB criticism that you’re not doing enough.

An important resource on this subject is Dear IP chapter 11, found at: https://www.gov.uk/guidance/dear-insolvency-practitioner/11-employment-issues

What does the legislation require?

The Employment Rights Act 1996 and the Pension Schemes Act 1993 use similar language.  They require you to notify the RPS of the amount of debt that “appears” to be owed (S187(1) ERA96 and S125(3) PSA93).

However, the RP14/15 forms use much stronger language.

What do the RP forms require?

The RP14 form requires the office holder to make certain declarations including:

  • “This form and any attachments have been completed, and the information given is correct, to the best of my knowledge”

Wow: “best” is a high bar, isn’t it?  It doesn’t allow room even for inadvertent errors. 

The RP15 form includes a similar declaration:

  • “The information given in this form is correct and complete to the best of my knowledge.
  • “I have examined the claim, including the RP15A spreadsheet and the actuarial certificate if applicable, in accordance with section 125 of The Pension Schemes Act 1993”

The above reference to “examined… in accordance with section 125” seems odd, given that S125 includes the far woollier “appears to be” wording, but hey ho.

The RP14 warning

The RP14 form includes a warning that I guess the RPS is hoping will make IPs stop and think:

  • “NOTE: This information is required under section 190 of the Employment Rights Act 1996.
  • “Any refusal or wilful neglect to provide any information required by the Secretary of State, and any false statement made knowingly or recklessly in response to this requirement, may amount to a criminal offence under that section.”

Personally, I question whether this threat has any teeth. My reading of S190 is that the criminal offence can only be committed by “the employer” who provides false information or by anyone who does not cooperate in producing documents and, while S190 states that a director or similar officer can be culpable for a body corporate’s failure, it still seems to me a bit of a stretch to squeeze an office holder into this section.

But of course I would not want to chance it and in any event we don’t need the threat of a criminal conviction to persuade us to be diligent in our work, do we?  If nothing else, we need to comply with the Insolvency Code of Ethics’ fundamental principle of professional competence and due care.

RPB sanctions

Breach of this fundamental principle tends to be the primary allegation on which RPB disciplinary sanctions are made in this area.  Over the past 6 months, three relevant RPB sanctions have been published:

  • IPA (Aug-23)
    • Failed to ensure that a complete and accurate RP15 was submitted
    • Fined £2,000
  • ICAEW (Oct-23)
    • Failed to inform RPS that the IP had not verified employee claims (and other unrelated failures)
    • Fined £5,000
  • IPA (Nov-23)
    • Failed to take sufficient steps to verify employees’ claims and to carry out independent verification of information provided by directors before submitting RP14As and failed to raise any concerns with the RPS as to the veracity of the employees’ claims
    • Fined £10,000

Why has this become such a hot topic?

Protecting against fraudulent claims

All the way back in October 2008, Dear IP warned us to be on the look-out for fraudulent claims (chapter 11 article 27).  More recently, in December 2020, a more in-depth Dear IP was issued (chapter 11 article 70) flagging up the warning signs for potential fraud.  This article is well worth another read.

Alarmingly, it appears that some companies have been operated perhaps solely for the purpose of extracting fraudulent payments from the RPS.  Even some legitimately trading companies may have ghost employees on their books.  But also fraud can be at the lower level, where individuals’ rates of pay or outstanding holiday entitlements are exaggerated.

Not all the warning signs noted in the Dear IP will be spotted from a company’s records.  But what work are IPs expected to do?

Where does the “verification” requirement come from?

As we have seen, the need to “verify” information does not appear in the legislation or on the RP forms.  Where does this idea come from?

It seems to derive from Dear IP chapter 11 article 27, which states:

  • “RPS assumes that the information on the RP14a has been verified from the employer’s records before it is sent to the RPS.”

Thus, if you receive information from any source other than the employer’s records, the assumption is that this information has been verified against the employer’s records.  In my experience, the RPBs seem to have converted this into a requirement, with the IPA taking the strictest line.  Where I have referred in this article to the RPBs, generally I mean the IPA.

Are you expected to verify all data?

Interestingly, Dear IP chapter 11 article 70 suggests not necessarily:

  • “Insolvency Practitioners are reminded that they should make an assessment on a case-by-case basis to decide what reasonable checks are necessary to verify information or identities before submitting the RP14/14A to the RPS.”

Of course, you would need to have documented this assessment for the file – and it is open to an RPB to challenge such an assessment as falling short of showing professional competence or due care – but this Dear IP does appear to allow an IP to decide that verification of alldata may not be reasonable in every case.

However, in my experience, the RPBs appear to be starting from a default that all data – that is, every piece of data for each employee on the RP14A/15A – need to be verified if at all possible.  After all, isn’t that the only way you are going to be able to declare that the data is “correct to the best of my knowledge”?

A variety of data sources

Ok, so the ultimate data source is the employer’s records.  But sometimes the records just aren’t sufficient, are they?  For example, holiday entitlement data can be sketchy and sometimes non-existent in the records and many employees have a better grip on what overtime or commission they’re owed.

Are there any other acceptable sources of information?

Is it ok to use data on a spreadsheet completed by the director/employee?

It is fairly common practice to provide a pro forma spreadsheet to a director or payroll person, usually pre-appointment, and ask them to complete it with all the employee data. 

This may seem a practical way to compile data from a variety of company records that the director/employee knows inside-out.  However, going by the RPBs’ recent activity, this triggers the Dear IP need for you to “verify” the data against the company’s records.  This pretty-much defeats the object of getting someone else to complete the spreadsheet for you, doesn’t it?

Is it ok to rely on information from pension providers?

Again, this is a fairly common practice, not least as the RP15 form expects the RP15A to be completed by the pension provider.  However, the RPBs are expecting the RP15A data to be verified against the employer’s records.

Is it ok to rely on RP14As/15As drafted by employment specialists?

It appears not.  Even where the specialist has been instructed by the office holder to act as their agent, the RPBs appear to be expecting all data on the forms to be verified against the employer’s records.  The argument is: how else can the IP sign off the form as correct to the best of their knowledge?

In my mind, this seems a step too far.  Surely the RPB doesn’t expect an IP personally to cross-check all the data on an RP14A/15A form against the company’s records where one of their staff have completed the form, do they?  But how is this different from their agent, an external specialist, completing the form?

I asked an Insolvency Service person this question.  They maintained that, in order for the IP to make the declaration, the IP must have some basis on which to form an opinion that the data is correct, so this would require some cross-checking.  However, they did at least agree that it need not be all data.

Is it ok to ask the employee direct or to draw information from the RP1?

I’m sure you can guess my answer: nope, not without verifying the information against the company’s records.

However, Dear IP (chapter 11 article 70) does provide a precedent for this:

  • “Where there is insufficient evidence in the records, IPs should not use the RP1 data to complete the RP14A entry without contacting RPS first to discuss. In the absence of that discussion RPS will assume that there is evidence in the records to substantiate the RP14A”

There’s the instruction: if you have no alternative, then contact the RPS first and discuss with them the last resort of relying on the RP1 data.

What if the company’s records conflict with what an employee says they are owed?

I have heard stories of, not only employees, but also RPS staff badgering IP staff to submit an amended RP14A so that an employee’s claim can be processed.  Of course, while there may be legitimate reasons for amending an RP14A where you are satisfied that the RP14A is wrong, what if you’re simply being told by the employee that the company’s records are wrong or incomplete?

With all the emphasis on preventing fraud and relying on the company’s records, I wonder what would happen if you just said no, you’re not prepared to amend the RP14A. 

S187(2) ERA96 and S125(5) PSA93 empower the RPS to make a payment without the office holder’s “statement”, so you should not be held hostage with the threat that an amended RP14A is the only way the employee is going to get paid.  You will have submitted the original RP14A to the best of your knowledge, having verified the information as far as possible against the company’s records, so why change your mind on the employee’s say-so?

But what if you just don’t have sufficient company records?

Well, as mentioned above, if you are drawing information from an RP1, Dear IP instructs you to discuss this first with the RPS.

In all other scenarios where you use data other than that drawn directly from the employer’s records, I recommend that you notify the RPS of this action when you submit the RP14/15. 

In my mind, if you use data from another reasonable source, it could still be what “appears” to be owed and it could be “correct to the best of your knowledge”, provided that you truly do not have in your possession any other more reliable knowledge, e.g. from company bank statements, that you haven’t checked against.  The RPB sanctions above also illustrate that notifying the RPS of the limitations of your verification work is an acceptable step.

How exactly should you verify data?

As with all things in insolvency administration these days, I think it comes down to having an established procedure and checklist to document the work done and decisions made.  Here is my 6-step process.

1. Document the information you obtained, i.e. each item of data required by the RP14A or RP15A.  It would also be wise to follow Dear IP chapter 11 article 81, which sets out the RPS’ approach to directors’ claims: as the office holder signing off an RP14, you need to satisfy yourself that a director’s claims as an employee are substantiated and so it would seem reasonable to apply the same rationale as the RPS and to document your decision in this regard

2. Document the source(s) of each part of the information, i.e. if it were not all in the company’s records, how did you plug each gap?

3. Check information against the bank statements, e.g. who was paid by the company, what were they paid and when were they – and the pension scheme – last paid?

4. Note whether the company records support each item of data and, if not, what you are relying on

5. Note the bases for calculating the weekly pay and holiday rates for employees with variable rates of pay (see e.g. Dear IP chapter 11 article 72) and how you have calculated holiday entitlements

6. Tell the RPS everything, in particular the extent of your verification work and the source(s) of information where the employer’s records were insufficient

At the Compliance Alliance, we have created a checklist covering these steps and we recommend that the completed checklist be sent to the RPS at the time of submission of an RP14/15 form.

Finally also you need to keep abreast of the legislation.  For example, Dear IP chapter 11 article 82 noted several 2023 SIs that may affect the definition of “wages” or “weekly pay” and other Regulations will affect holiday pay calculations (Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023).  Alternatively, instruct employment specialists to assist.  This can take much of the pain out of the process.

That’s a crazy amount of work?!  Are the RPBs aware of how this impacts on time costs?

I asked an Insolvency Service person this question.  They appreciated that substantial time could be required to carry out this verification work.  They maintained that the RPS has a duty to ensure that payments from the NI Fund are accurate and they are therefore looking to IPs to help by providing accurate RP14/15 data.

The common theme in all this is: how else can you declare that the information you have provided on an RP14/15 is correct to the best of your knowledge?

I recently presented a webinar on this topic to clients of the Compliance Alliance.  You and all your colleagues can get access to a recording of this webinar, along with access to all the recorded webinars in our library and c.10 future webinars, for £350 + VAT for one year.  For enquiries, please email info@thecompliancealliance.co.uk.


by Leave a comment

Checking PSCs: is it Pretty Silly Compliance?

A lot later than I’d hoped, here’s an article on some of the changes in the Money Laundering Regs that took effect on 1 April 2023.  I’ve also covered some anomalies in the PSC regime when compared with AML Beneficial Owners that could trip up the unwary.

In brief, this article explores:

  • At what points are we now required to check the PSC register?
  • What records are we now required to keep?
  • Does the change to reporting only “material” PSC discrepancies now give us a reason for not reporting in many instances?
  • Do PSC discrepancy reports need to be repeated if the discrepancy has not been fixed?
  • Does an insolvency office holder become a PSC?
  • When a PSC is not the same as an AML beneficial owner: (i) when the shareholder is a UK-registered company
  • When a PSC is not the same as an AML beneficial owner: (ii) when the shareholder has died
  • When a PSC is not the same as an AML beneficial owner: (iii) when the person exercises “significant”, but not “ultimate”, control

The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 can be found at https://www.legislation.gov.uk/uksi/2022/860/contents/made

In this article, I refer to three useful pieces of Companies House guidance:

Reviewing PSCs as part of “ongoing monitoring”

When the MLR19 came out, several professional bodies queried the wording that appeared to suggest that a client’s PSCs were to be reviewed (and, if necessary, a PSC discrepancy report submitted) during the life of a business relationship.   It was felt that this put an unnecessary burden on AML-regulated businesses.  As a consequence and because it appeared that the MLR19 had gone further than had been originally planned, in 2020 the MLR17 were changed making it clear that a PSC review was required only when establishing the relationship at the start.

However, in 2021, HM Treasury consulted on the question: wouldn’t it be a good idea to review clients’ PSCs whenever ongoing monitoring is carried out during a relationship?

At that point of course, the fate was sealed.  So it came to pass: the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 reintroduced the need to review PSCs as part of ongoing monitoring.

How frequently should these reviews be carried out?

The MLR17 indicate that the primary purposes of “ongoing monitoring” are to examine whether a client’s activity is consistent with what the AML-regulated business expects it to be based on its knowledge and risk assessment and to ensure that the AML CDD measures remain up to date.

Neither the MLR17 nor the CCAB Guidance specify how frequently “ongoing monitoring” should be conducted.  As with most things AML, the MLR17 state that it needs to be done according to the assessed risk.  In a fairly recent ICAEW webinar directed at ICAEW members in general (c.1 hour into “Money Laundering Risks”, March 23), it was suggested that periodic routine ongoing monitoring might be done every year for high risk clients and every two or three years for low risk clients.

Of course, the mood music from the RPBs has been that insolvency is generally a high risk service, so IPs are unlikely to have any truly low risk clients when compared with accountants.  Therefore, in insolvencies, it seems to me sensible to tick the “ongoing monitoring” boxes at the time of each case review, but of course firms are free to establish policies setting out other timescales.

Do these reviews realistically achieve anything in insolvencies?

In almost all cases, I think not.  For example, you would not expect PSCs to change in a CVL.  The only cases where I can imagine a PSC ever changing are rescue Administrations or CVAs, but even then it would be very rare.  I guess potentially it could also happen in an MVL, although most shareholder-shifting occurs pre-liquidation.

I understand that part of the authorities’ concerns generally is that some fraudsters file director-appointment or PSC-registration documents on Companies House in order to build a false identity.  Although one would hope that directors would police their own company’s file at Companies House, AML-regulated businesses are also tasked with keeping the registers clean by means of these statutory PSC reviews and discrepancy reporting requirements.

But how likely is it that a fraudster is going to pick an insolvent company in order to build a false identity? 

Hopefully, the long-awaited Companies House reform measures via the Economic Crime and Corporate Transparency Bill, which is currently being considered by the House of Lords, will block the ability for fraudsters to abuse company files in this way in future.  But I suspect that this will not mean that the PSC requirements on professionals are lifted (sigh!).

HM Treasury micro-management: requirements on record-keeping

If the issue were just that we needed to check the PSC register at every ongoing monitoring point, I could just about live with that.  However, the amendments go further than this.  In a seemingly unprecedented demonstration of micro-management, we are now required to take a copy of the PSC register every time ongoing monitoring is carried out!

This is set out in new Regulation 30A(2A):

“When taking measures to fulfil the duties to carry out customer due diligence and ongoing monitoring of a business relationship.., a relevant person must also collect an excerpt of the register which contains full details of any information specified in paragraph (1A) which is held on the register at that time, or must establish from its inspection of the register that there is no such information held on the register at that time.”

But now we only need to report “material discrepancies”, right?

True, the regulators have highlighted this particular change as lessening the burden on us all.  But the small print suggests to me that little has changed in practice.

While the Regs have been changed so that only material discrepancies need to be reported, new Schedule 3AZA defines these as occurring where:

“… the discrepancy, by its nature, and having regard to all the circumstances, may reasonably be considered—

(a) to be linked to money laundering or terrorist financing; or

(b) to conceal details of the business of the customer.”

Companies House guidance on Reporting a Discrepancy points out that it is irrelevant whether there was an intention to conceal.

The Regs’ Schedule continues:

“Discrepancies listed in this paragraph are in the form of—

(a) a difference in name;

(b) an incorrect entry for nature of control;

(c) an incorrect entry for date of birth;

(d) an incorrect entry for nationality;

(e) an incorrect entry for correspondence address;

(f) a missing entry for a person of significant control or a registrable beneficial owner;

(g) an incorrect entry for the date the individual became a registrable person.”

In my experience, incorrect natures of control or entirely missing entries are the most obvious discrepancies, so these will continue to need to be reported. 

The Companies House guidance on Reporting a Discrepancy provides examples of discrepancies that would be considered “material” and it seems to me that only insignificant typos might not hit this threshold.  I guess, however, that we might also avoid reporting a discrepancy if someone is registered as a PSC when they are not one… although I wonder how the RPBs will view this.

What a faff!

What happens after a PSC discrepancy report is submitted?

Well, the Regs require Companies House to “take such action as [Companies House] considers appropriate to investigate and, if necessary, resolve the discrepancy in a timely manner” (MLR17 Reg 30A(5)).  In practice this appears to mean that they will email the insolvency office holder and ask them to amend the company’s register.  Personally, I cannot see that there is a positive duty on an insolvency office holder to fix the register and, in any event, the PSC discrepancy report is only submitted on the basis of the IP’s knowledge; in many cases, the true facts of the situation may be less than certain.

If the IP chooses not to amend the register, then the chances are that the discrepancy will remain.  I have seen that, in such cases, Companies House generally takes the view that they have taken the appropriate steps and so no more action is required.  Oh, the things we all do to comply with poorly thought-out legislation!

A welcome bit of pragmatism in the Companies House guidance

Of course, things tend to be different with a live client, such as those with accountants.  In those cases, when an accountant identifies a PSC discrepancy, it would be usual for them to get in touch with the client and encourage them to correct the discrepancy on the file.  Although this sometimes also happens pre-insolvency, in cases where the PSC discrepancy remains after the insolvency has begun, this gives rise to another issue when “ongoing monitoring” is carried out later.

Technically, the amended Regs don’t accommodate an uncorrected PSC discrepancy.  They would require you to submit a new PSC discrepancy report every time.

However, the Companies House guidance on Reporting a Discrepancy thankfully explains that they are not expecting a second discrepancy report if it has been reported previously.

Should the insolvency office holder be recorded as a PSC?

Interesting question, don’t you think?  Clearly, insolvency office holders exercise “significant influence or control”, so does this make them a PSC?  As their appointment doesn’t immediately affect the PSC register at Companies House, does this give rise to a material discrepancy to be reported during ongoing monitoring or a need to be registered as a PSC on appointment?

I strongly recommend the Companies House guidance on “Significant Influence or Control”.  It contains many nuggets helping to determine who might be a PSC.

It includes, at para 4.4, that anyone exercising a function under an enactment, e.g. “a Liquidator or receiver”, is not a PSC (provided that they only act in accordance with their statutory functions).

That’s one issue sorted, then.

When PSCs and Beneficial Owners differ

But there are other scenarios that can be confusing.  In most cases, identifying the PSCs is no different from identifying the beneficial owners for AML CDD purposes and this makes it relatively straightforward to spot any PSC discrepancies. 

But there are several situations in which the PSCs are not the same as the AML beneficial owners, so when staff are checking for PSC discrepancies it is valuable that they understand these anomalies.

When there is a UK-registered corporate shareholder

Sometimes, we come across the following scenario:

We’re probably all comfortable with the concept that the beneficial owners for AML CDD purposes are the two 50% shareholders at the top of the tree.  However, if the holding company is a UK-registered company, then the holding company is the one that should be registered as the operating company’s PSC.

There are other scenarios (i.e. not only UK-registered companies) where a 25%+ shareholder who is a legal entity should itself be registered as a PSC – see section 2.2. of the Companies House PSC guidance for companies.  But in other cases, the legal entity shareholder should not be registered as the PSC, but instead the individuals or entities up the shareholding tree need to be registered.

Where the shareholder has died

For AML CDD purposes, the MLR17 state (Reg 6(6)):

“In these Regulations, ‘beneficial owner’, in relation to an estate of a deceased person in the course of administration, means—

(a) in England and Wales and Northern Ireland, the executor, original or by representation, or administrator for the time being of a deceased person;

(b) in Scotland, the executor for the purposes of the Executors (Scotland) Act 1900”

However, the Companies House PSC guidance for companies states (para 7.7.1):

“In the unfortunate event that a PSC of your company is deceased, the PSC should remain on the PSC register until such time as their interest is formally transferred to its new owner. While an executor has fiduciary duties to the intended beneficiaries of the assets, the executor is are responsible for administering the estate according the wishes of the deceased. The deceased will therefore continue to be registrable until such time as the control passes to another person, such as an heir, who will exercise their influence and control over your company for themselves.”

In other words, for AML CDD purposes, the executor or administrator of a deceased person’s estate will be a beneficial owner, but for PSC purposes it will remain the deceased person.

The difference between “significant” and “ultimate” control

While we usually focus on the shareholders and directors when identifying the beneficial owners for AML CDD purposes, there is an additional woolly category (MLR17 Reg 5(1)(a)): those who “exercise ultimate control over the management” of the entity.

The PSC regime has a different measure.  As the name suggests, it is concerned with those who exercise significant, not ultimate, control.  I think that both the AML and PSC regimes require us to consider shadow directors, but other people may be a PSC but not a beneficial owner.

The Companies House guidance on “Significant Influence or Control” includes an interesting – and insolvency-relevant – example (para 4.10):

“Extra-ordinary functions of a person could result in them being considered to have significant influence or control:

A director who also owns important assets or has key relationships that are important to the running of the business (e.g. intellectual property rights), and uses this additional power to influence the outcome of decisions related to the running of the business of the company. This individual would not be able to rely on the excepted role of director to avoid being considered to exercise significant influence or control.”

This scenario – and indeed the existence of shadow directors – could make an IP’s life frustrating, I think.  Before appointment, you could identify someone exercising significant control in this way but who is not registered as a PSC at Companies House… so you submit a PSC discrepancy report.  Then, Companies House gets in touch with you after your appointment asking you to amend the register.  But at that point, the person no longer exercises significant control – ta daa!

Ok, I know, I would hope that the RPB would not take you to task for not submitting a PSC discrepancy report pre-appointment, but who knows?

The costs of compliance

IPs are well accustomed to investing time and effort in complying with what appear to be pointless requirements, so I’m sure that most will read this with a tired eye-rolling. 

Of course, all these additional duties need to be resourced and this costs firms – and therefore insolvent estates – more money.  However, it seems that the RPB/IS perceptions that some IPs charge excessive fees never change, regardless of the fact that year after year compliance duties increase.  This may only be another 10-minute task, but it all adds up, doesn’t it?


by Leave a comment

The Economic Crime Levy – a disaster averted

Regulations introduced last year appeared to make insolvency office holders personally liable for the new economic crime levy due from insolvent businesses, whether incurred pre- or post-appointment.  Was this another example of HMRC looking to jump the queue over ordinary unsecured creditors?

Fortunately, R3 took up the baton and, eventually, amendment regulations were created to curtail these effects.  Phew!

The original regulations, the Economic Crime (Anti-Money Laundering) Levy Regulations 2022 (“the Regs”), can be found at: https://www.legislation.gov.uk/uksi/2022/269/contents/made

The Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations 2023 (“the Amendment Regs”), are at: https://www.legislation.gov.uk/uksi/2023/369/contents/made

How does the levy work in general?

Don’t panic!  The charge is not levied on all businesses.  It is attracted only by businesses that carry out AML-regulated businesses… so banks, solicitors, accountants, art dealers, estate agents, casinos, insolvency practitioners…

IPs?! 

Honestly, there’s no need to panic… at least not this year.

Relating to the 2022/23 year, the levies are:

  • For small businesses (under £10.2m UK revenue): nil
  • For medium businesses (£10.2m – £36m): £10,000
  • For large businesses (£36m – £1bn): £36,000
  • For very large businesses (over £1bn): £250,000

The levy for the 2022/23 financial year becomes due on 30 September 2023.  The levy rates have been fixed by the Finance Act 2022, so it will be interesting to see if/when this changes in future and whether small businesses will be made to contribute.

What if the trader goes insolvent?

Regulation 15 of the Regs states:

  • (1) This regulation applies where a person liable to pay the levy—
  • (a) who is an individual—
  • (i) has died or become incapacitated; or
  • (ii) has become bankrupt; or
  • (b) is subject to winding-up, receivership, administration or an equivalent procedure.
  • (2) The person (“P”) who—
  • (a) in the case of an individual, carries on the regulated business on behalf of an individual who has died or become incapacitated; or
  • (b) acts as the liquidator, receiver or administrator in relation to the business of the person liable to pay the levy or acts in an equivalent capacity,
  • may be treated by the appropriate collection authority as the person liable to pay the levy and must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy.

And that was it!  There was nothing limiting the scope or slipping the levy into any insolvency order of priority: if the insolvent business couldn’t pay, then the levy could be charged to the office holder.

Disaster averted!

After I had realised the effect of this regulation (with the help of the R3 GTC chair), I raised it at an R3 General Technical Committee meeting and fortunately R3 – as well as, I think, the Insolvency Service (after all, Official Receivers could be liable too) – took up the issue with HMRC, as they are the “appropriate collection authority” in the majority of cases.

The Amendment Regs were made on 27 March 2023 and they insert the following:

  • (3) Any amount of levy which relates to UK revenue attributable to a period before the date when the winding-up, receivership, administration or other equivalent procedure takes effect is payable by the person subject to the winding-up, receivership, administration or an equivalent procedure, and not by the person treated as the person liable to pay the levy under paragraph (2).
  • (4) Any amount of levy which relates to UK revenue attributable to a period on or after the date when the winding-up, receivership, administration or other equivalent procedure takes effect is to be regarded as an expense of that winding-up, receivership, administration or equivalent procedure.

The effect of this amendment

In other words, if the levy relates to pre-appointment revenue, it will remain due and payable by the insolvent entity, i.e. it will be a normal unsecured claim.  It is only if the levy relates to post-appointment revenue that we will need to worry, because then it will be an expense.

The thought of trading-on an AML-regulated business probably sends shivers down most of our spines already.  Now, the attraction of an additional expense just adds another nail in the trading-on in insolvency coffin.

“Equivalent procedures”?

As you can see, the Regs specifically reach to liquidators, receivers, administrators and trustees in bankruptcy.  What about VA Nominees and Supervisors?  Personally, I can think of many arguments as to why a VA is not an equivalent procedure and moratorium monitors are even less likely to be caught, I think.  However, it may well be up to the courts to decide on those.

It’s not all good news: more work for office holders

Regulation 15 imposes more than a direct financial cost on insolvency office holders.  They also “must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy”.

This means that insolvency office holders will need to submit returns to HMRC (or the FCA or the Gambling Commission, depending on the type of business) for pre-appointment periods and probably also for the first post-appointment period to the end of the tax year unless the collection authorities introduce an end-of-trading return process.  I very much doubt that HMRC etc. will be able to accommodate office holders who want to submit returns offline – that will be interesting.

If there is no post-appointment trading and no prospect of an unsecured dividend, will office holders still be required to submit missing returns?  Let’s hope the collection authority doesn’t get all jobsworth over this requirement.

A new regime and a new registration process

Of course, we’ve only just got to the end of the first levy year and, although the Regs came into force on 1 April 2022, HMRC is not yet receiving registrations (see https://www.gov.uk/government/publications/prepare-for-the-economic-crime-levy/get-ready-for-the-economic-crime-levy#registering-for-the-ecl).  Therefore, office holders taking appointments of AML-regulated entities over the next few months may also need to do the work of registering the entity in the first place.

Is it all a conspiracy?

Actually, no, I don’t think HMRC tried to jump the queue by getting this levy some kind of super priority.  I think it was just poor drafting.  But, goodness, what poor drafting!

It goes to show that we all need to stay alert to new legislation: the more eyes on these things, the better.


by Leave a comment

The revised SIP3.1 (part 2): will it improve debtors’ experiences?

This is my second post on the changes introduced by the revised SIP3.1.  In this post, I examine how the SIP affects the IVA journey through the Nominee to Supervisor and on to closure.  I end with a quick summary of all the key document changes required by the revised SIP.

As mentioned in part 1, please bear in mind that these posts focus on the main changes.  Particularly depending on your own templates and procedures, the revisions may affect you in other ways.  This is no substitute for scrutinising the SIP for yourself.

The topics covered in this blog post are:

  • Elevating the need to communicate with affected third parties
  • Pre-IVA investigations relaxed?
  • Signposting creditors
  • Thirteen items added or changed on the Proposal wishlist
  • Additional steps for modifications
  • Six additions or changes to the Supervisor’s duties
  • Will all this help improve IVA standards and, importantly, the debtor’s experience?
  • Finally, a quick summary of document templates affected by the new SIP

Dealing with third parties

The SIP contains a couple of new requirements about how we should be dealing with third parties:

  • IPs need to maintain records of “considerations of the impact of the IVA on any third parties, including any joint creditors, guarantors or co-owners of property” at all stages of the IVA (para 15b)
  • IPs need procedures to ensure that “consent is obtained, where appropriate, from any third-party individuals whose income is to be shown as included in the income and expenditure statement or who have an interest in any assets included in the proposal” (para 16f)

In my experience, it has been rare (maybe too rare) for only one person in a couple to propose an IVA, but in those circumstances there is a need to communicate directly with the other party where they have interests in assets or the household income or they share liabilities.

The SIP also includes that “any third party contributor’s identity [should be] checked and verified and all evidence is kept on the file” (para 18f) – this was previously required by the RPBs, albeit only appearing in their AML “guidance”.  The SIP extends this requirement also to verifying the debtor’s identity, but as this is clearly required by the MLR17, I am not quite sure why it has been considered necessary for a SIP.

A relaxed requirement?

It is very unusual for a SIP to be revised to ease requirements.  This SIP3.1 appears to have done that as regards exploring the debtor’s assets, liabilities, income and expenditure:

  • The old SIP3.1 required “proportionate investigations into and verification of” these items
  • The new SIP3.1 merely requires “proportionate enquiries” to be undertaken and evidenced on the file (para 18f)

Duties to creditors

An IP’s procedures are required to ensure that:

  • “where creditors might need assistance in understanding the consequences of an IVA, the insolvency practitioner signposts sources of help” (para 18g)

While it might be useful to add to your initial letter to creditors something to achieve this, this paragraph actually appears under the heading, “Preparing for an IVA”, i.e. before issuing the Proposal, so it might be difficult to put safeguards into place to ensure this is met, as any pre-Proposal exchanges with creditors will be pretty bespoke.

Anyway, where would you send such creditors?  Who other than a solicitor would be well-placed to assist a creditor in understanding the consequences of an IVA?

Finally, the Proposal!

By the time we get to the SIP’s Proposal section, I think we all realise that the concept of SIPs being principles-based and not prescriptive has gone out of the window.

Here is a list of the main additions to the Proposal wishlist (para 21):

  • “the alternative options considered both outside and within formal insolvency procedures, with specific reasons for not adopting them”
    • This seems odd for an IVA Proposal – you wouldn’t put in a contract why the parties have decided not to contract with competitors – but hey ho.
  • “where relevant, information to support any profit and cash projections, subject to any commercial sensitivity”
  • “an explanation of the role and powers of the supervisor”
    • … in addition to “the functions of the supervisor” (R8.3k)..?
  • “details of any discussions which have taken place with key creditors”
  • “where it is proposed that certain creditors are to be treated differently, an explanation as to which creditors are affected, how and why, in a manner which aims to be clear and useful”
  • “an explanation of how debts are to be valued for voting purposes, in particular where the creditors include long-term or contingent liabilities”
    • More SIP3.2 spill-overs (sigh!)
  • “whether the source [of any referral of the debtor] undertook the regulated activity of debt counselling, and if so whether the source is FCA authorised or exempt in relation to debt counselling…”
    • As mentioned earlier, this seems to require IPs to have an in-depth knowledge of the FCA’s authorisation regime and regulations including its distinction between advice and information.  The PERG section of the FCA’s handbook has much to say on this topic.
  • “… and details of any prior relationship between the source and the debtor or the insolvency practitioner”
    • It seems odd that this was not extended to encompass the referrer’s relationship with the firm.
  • where any payment has been, or is proposed to be, made to the referrer, an explanation of “how it represents value for the work/services provided to the insolvency practitioner”
  • “details of any direct or indirect payments made, or to be made, to any third parties or associates in connection with the proposed IVA, together with a description of the goods or services provided and the reasons for all payments”
    • This is pretty-much the old SIP’s words but in a different order.  I think this is now clearer in requiring disclosure of payments from sources other than the IVA estate (e.g. from the IP’s firm), although I think it could be difficult to enforce.
  • “an explanation of how debts that are proposed to be compromised will be treated should the IVA fail”
  • “the circumstances in which the IVA might conclude or fail, including what might happen to the debtor in such circumstances”
    • I’m assuming they only mean what might happen to the debtor if the IVA fails, not if it concludes (successfully).  But even this is asking a lot, isn’t it?
  • “any specifically identifiable risks of failure applicable to the IVA”

If any of these new (or any other) items on the Proposal wishlist are “not detailed in full”, the SIP requires “adequate explanations” to be provided (para 21).  I am not sure how one measures what might be an adequate explanation!

As with the Initial Advice wishlist, although many of these may already be covered in your Proposal template, I think you would do well to double-check that the template hits the mark in all aspects.

In addition, the SIP states that, “if the IVA Protocol has been used to form the basis of an IVA proposal, any deviations from the Protocol should be explained in writing to the debtor and their creditors” (para 20), although this need not form part of the Proposal itself.

Handling modifications

The SIP has changed in respect of the Nominee’s duties on receiving creditors’ modifications (para 22):

  • when the Nominee seeks the debtor’s consent to any modifications, their explanation should “include the preparation of revised comparative outcome statements showing the effects of the modifications if agreement to them is a reasonable prospect and will change the outcome”
  • “where any conflicting modifications are proposed, the prevailing adaptations, i.e. those agreed by debtor and supported by a 75% majority of creditors, are identified and recorded by the nominee”
    • I thought I understood what was meant by “prevailing adaptations”, but the “i.e.” threw me.  The “i.e.” just means the mods agreed by debtors and creditors need to be recorded.  But “prevailing adaptations” where there are conflicting mods means much more, doesn’t it?  Doesn’t it mean that, if one creditor caps fees at £3,000 and another caps them at £2,000, and both mods are agreed by debtor/creditors, then the “prevailing adaptation” is that the fees are capped at £2,000?  Of course, that’s a straightforward clash of mods. There could be many complex conflicts presented by agreed mods and the “prevailing adaptations” could depend on one’s priorities, but I don’t think the SIP makes clear what is required.
  • “the debtor’s consent to agreed modifications is recorded and in the absence of the debtor’s consent, the IVA cannot proceed in a modified form”
    • The wording here is slightly changed from the previous SIP.  The change is rather subtle, but I think it means that the debtor’s agreement must be recorded by the start of the IVA – otherwise it cannot proceed – rather than staff contacting the debtor after the creditors’ decision has been made in order to record the debtor’s agreement.

Finally, the IVA!

The SIP contains a few more additions for Supervisors (para 23):

  • Supervisors should “obtain the debtor’s written consent to any variations to the original terms of the IVA proposal put forward by creditors”
    • This is odd: how many variations are “put forward by creditors”??
  • Reports must provide full disclosure of the IVA costs “including the cost of any work carried out by third parties and associates of the supervisor or their firm”
    • The revision removes the requirement to disclose also “any sources of income of the insolvency practitioner or the practice in relation to the case”.  But it should be remembered that, if the IP/firm/associate receives any referral fees or commission during the IVA, the Code of Ethics requires this to be paid into the estate and disclosed to creditors in any event.
  • Any increase in costs over previously reported estimates should be “explained and” reported at the next available opportunity “and in any event no later than six months after the end of the IVA”
    • Given that R8.31 requires a report within 28 days of any full implementation or termination of the IVA, I don’t understand the 6-month deadline here.  The only scenario I can think of is where the IP/firm did not realise that the IVA had expired due to the effluxion of time and so missed this statutory requirement, but does it help to add a SIP requirement seemingly allowing 6 months?
  • “Any completion certificate should be issued as soon as reasonably practicable and no later than six months after the final payment is made by the debtor, unless another requirement of the proposal makes this impossible”
  • “The effect of completion or failure should be reported to the debtor and their creditors”
  • “When the IVA concludes or fails, the supervisor should ensure that they act in accordance with the terms and conditions of the proposal”
    • Isn’t this like stating that an office holder needs to comply with the Act and Rules?  Then again, given that the IVA Standing Committee and the Insolvency Service published expectations during the pandemic that Supervisors would not act in accordance with IVA Proposals’ terms, maybe it did need saying!

Will the new SIP improve the delivery standards of IVAs?

My overriding feeling is that the RPBs have seen a number of practices that they don’t like and they have sought to outlaw them by means of this SIP.  The only problem is that, if you don’t know what the bad practices are, it can be difficult to discern exactly how the RPBs expect you to implement the changes. 

When I asked one RPB staff member to explain some elements of the SIP, their explanations often were: what we don’t want to see is […]  I haven’t repeated them here, as they are only one person’s point of view and I suspect that other RPB monitors will measure compliance success or failure differently in the future.  I’m not sure it would be appropriate to publish a list of bad practices and, having had to roll with the RPBs’ FAQs on the last revision of SIP9, I definitely don’t want to suggest that the RPBs follow up with additional guidance on how to implement SIP3.1.  But it doesn’t stop me feeling that the SIP has left plenty of room for goalposts to move in the future.

What about the debtor?

Finally, I think we should spare a thought for the person at the centre of IVAs: the debtor.  While I accept that there are poor practices out there, I am not persuaded that they will be eliminated by requiring IPs to throw yet more information to debtors. 

I am surprised that many of the known poor practices were not capable of being addressed with reference to the principles of the old SIP3.1 and the Code of Ethics.  And I am not convinced that the new SIP will silence those who believe that pre-IVA advice would be better regulated by the FCA.  I suspect this debate will run and run.

A list for compliance managers

To summarise my two blog posts, here’s a short list of documents that needed to be amended – or at the very least double-checked to ensure that you were ahead of the curve – in light of the revised SIP:

  • Initial meeting script/record
  • Initial advice letter / engagement letter
  • Internal docs to record SIP3.1 Assessments (both pre and post-approval of IVA)
  • Internal docs and processes to explore advice given by any referrer and their authority for giving the advice
  • Letters to third party contributors and other third parties affected
  • Letters to non-IVA partners where household income & expenditures are to be disclosed
  • Vulnerability checklists
  • Proposal doc
  • Nominee report (depending on the extent that the report explains the roles and the extent of investigations)
  • Letters to creditors (redefining the adviser’s role and signposting sources of help)
  • Communications with the debtor about proposed modifications
  • Progress reports
  • Final reports and any covering letters explaining the effects of the end of the IVA
  • Checklists (of course!)


by Leave a comment

The revised SIP3.1: is longer better?

The new SIP3.1 has c.1,300 more words than the old SIP.  That means it’s around 72% longer than its predecessor.  Inevitably, the new SIP involves additional prescriptive requirements on IPs and delivery of yet more words to debtors and creditors. 

Will the changes improve the standards of advice and IVAs?  How can you make sure that you’ve taken account of all the changes introduced by the revised SIP?

The revised SIP3.1, effective for IVAs where the nominee was appointed on or after 1 March 2023, is available from https://www.r3.org.uk/technical-library/england-wales/sips/more/29119/page/1/sip-3-voluntary-arrangements/

In this blog post, I look at:

  • A change in the role of adviser
  • Must all advice be tailored to the debtor?
  • The need to give more information on rejected options
  • Eleven new items added to the initial advice
  • How much time should debtors be given to absorb advice?
  • Vulnerability makes an appearance
  • A greater emphasis on documented assessments
  • What is an “in-person” meeting?
  • Substantial changes to processes where a debtor has been referred, especially where any advice has previously been given

In the next post, I will be working through the rest of the SIP, including new duties on Nominees and Supervisors.

Please note that, while I have attempted to cover the main changes in the SIP, there are several others not covered in my blogs – I think my posts are long enough already!  Therefore, you will need to scrutinise the SIP yourself to ensure that you have addressed all the requirements.

If you’d like to absorb all this in another medium, you might want to try out Jo Harris’ webinars on the subject.  Drop a line to info@thecompliancealliance.com to learn more.

Initial Advice

For whom is the IP acting?

I had always believed that, before acting as nominee, the firm’s primary role was to provide advice to the debtor.  The firm’s engagement is with the debtor and, I thought, the regulators were concerned to ensure that firms acted in the interests of debtors – the old SIP3.1 did state that this was the role of the adviser.

Para 16a of the new SIP redefines the role of the firm in the advice stage to:

  • “providing advice that strikes a fair balance between the interests of the debtor and their creditors”

Doesn’t this conflict with how the FCA would expect firms to deliver debt counselling to consumers?  For example, if a debtor would be better-off financially going bankrupt and in reality there are no real downsides for them in going bankrupt, is it appropriate for an adviser to say: ah yes, but if you paid into an IVA for 5 years, this would be fairer to your creditors, wouldn’t it?

Generic -v- specific information

The SIP states that IPs “should minimise generic explanations and instead provide bespoke advice tailored to the debtor’s circumstances” (para 11) but also that IPs “should avoid using generic advantages and disadvantages and should use the details provided by the debtor to provide bespoke information tailored to the debtor’s circumstances” (para 17).

So: minimise or avoid?

Many pros and cons of the options available apply in all circumstances.  For example, DROs and bankruptcies cost the same for everyone; a DMP can never be guaranteed to freeze all interest and charges; and no IVA will take effect unless 75% or more of creditors by value approves it.  Does this make the information generic?  Or does it just mean that no specific tailoring is required?

Of course, several other pros and cons do depend on the debtor’s circumstances, e.g. whether or not their occupation could be affected, how their home will be handled, whether an option can or will realistically deal with their debts and over what likely period. 

I think that most firms’ procedures were already designed to deal with the big debtor-specific issues.  However, in the past when advisers followed a script that rattled through each option, those details were often generic, including wriggle words such as: some occupations can be affected by bankruptcy.  Also, when that advice was put down in writing, it tended to be yet more generic, largely relying on standard guide attachments detailing all options.

Now this will not do.  Telephone/meeting advice must be specifically tailored so that pros and cons that do not apply to the debtor are omitted and so that the debtor can make realistic comparisons of their options.  The “bespoke information tailored to the debtor’s circumstances” must also be confirmed in writing (para 17).

All “available” or “potential” options?

In some respects, the SIP’s requirement to cover the options has not changed.  It still says that debtors must be “provided with an explanation of all the options available, the advantages and disadvantages of each, and the likely cost of each” (para 16g).  In the past, this has been interpreted to mean, e.g., that if a DRO is not available to the debtor because they do not meet the criteria, then no more information on DROs needs to be provided to the debtor.

However, this seems no longer to be the case.  Paras 4 and 5 require explanations to cover “all potential debt relief solutions” and under “Preparing for an IVA” the SIP states that the debtor needs to have had appropriate advice “including other options which have been discussed and discounted” (para 18a).  “Discount” is a peculiar word to use, but these paras suggest to me that all potential options available to debtors in general should be covered with specific information about why an option may not be open to the debtor in question.

Something that I have seen work quite well but is by no means universal is where the initial advice gives an estimate of the time it would take to discharge all debts via a DMP.  This is bespoke advice and usually helps to illustrate why the debtor has chosen not to pursue a DMP.  I think it is also “comprehensible to the debtor”, which is another new requirement of SIP3.1 (para 10).

New items to add to initial advice scripts and letters

There are a host of other new items for initial advice scripts and letters scattered through several paragraphs in the SIP.  Here are the main changes in paras 10, 15, 16 and 18:

  • “whether the debtor will require additional specialist assistance, which will not be provided by the supervisor appointed, including the likely cost of that additional assistance, if known”
    • Although the footnote to this requirement refers to “for example, support for a vulnerable individual”, the “specialist assistance” reference appears to have originated from the SIP3.2 (CVAs) changes.  Therefore, I think it could include instructing agents or solicitors to deal with asset realisations (if this is envisaged for the IVA) or known legal issues.  It should also add transparency to any firm that outsources work or introduces unusual tasks as routine on IVAs.
  • “how [the likely duration of the IVA] might be affected by any provisions concerning the family home contained in the arrangement” 
  • “any circumstances which might affect the duration of the IVA and the potential impacts of any delays, complications or changes to the original IVA terms”
    • This is slightly different from the old SIP3.1, which only required the potential delays or complications to be explained, not their potential impacts on the IVA and particularly on its anticipated duration.
  • “the likely costs of implementation and how realisations will be applied to them”
  • that the debtor is required to provide “full, accurate and proper disclosure”
  • “explanations of any areas of concern about what the debtor has reported…” – another matter requiring special case-by-case attention – “… and of the consequences if the debtor fails to comply with their obligations”
  • “an assessment of the risk of failure”
    • Before the Proposal has even been drafted, IPs are expected to assess the risk of its failure?!  It would be fair to inform debtors that there is always a risk that creditors reject an IVA Proposal, but this would not be a failure of the IVA.  If a debtor cannot meet their core obligations, there is always the option of asking creditors to approve a variation.  Ok, there is a risk that creditors would reject the variation, but how do we assess this risk at this early stage of providing initial advice?  I suppose also that the IVA could fail if a debtor provided seriously misleading information or simply refused to cooperate, but again how are IPs supposed to assess the risk of this happening?  An RPB staff member suggested this was intended to encompass obvious changes in the debtor’s circumstances that would lead to inabilities to meet terms, e.g. looming retirement or a serious illness.  But if an IVA is considered an option for anyone, its terms surely will accommodate such events where reasonably expected and the terms should always provide for variations for unexpected events, shouldn’t they?
  • the debtor’s “right to challenge a creditors’ decision and to make a complaint via the Insolvency Complaints Gateway”
  • the SIP’s new definition of the role of the adviser – “providing advice that strikes a fair balance between the interests of the debtor and their creditors, in the context of identifying an appropriate and workable solution” to their difficulties – must be disclosed to debtors (and creditors)
  • explaining that the debtor is obliged to cooperate and provide full “and accurate” disclosure “throughout the initial process and the duration of the IVA”
  • ensuring that the debtor understands that the IVA “will involve a lengthy professional relationship with the supervisor”

While many of these may already have been covered in firms’ scripts and/or letters of advice, it is worth double-checking that those docs tick off every item including the new nuances suggested by the revised wording.  In some respects, this could be like approaching a JIEB question: there are specific trigger words that some (i.e. RPB monitors) would expect to see in your docs and, if they’re there, you get the tick.  I appreciate this is not how the RPBs want firms to approach compliance with the SIP, but, really, it is difficult to see how we can deliver the enormous prescriptive list of information in a practical, useful, way to debtors.

Providing “adequate time”

The SIP has a new principle, that debtors should be given:

  • “adequate time to think about the consequences and alternatives before an IVA proposal is drawn up” (para 4)

How much time is adequate?  Do we only learn that the time given was inadequate when someone complains that they didn’t have enough time?

Does the rest of the SIP explain application of this principle?  The only other SIP reference to time is that the explanations of options’ pros and cons etc. “should be confirmed to the debtor in writing no later than the date on which an IVA proposal is issued” (para 17).  Which IP is sending out IVA Proposals before advice letters?!

Although compliant with para 17, I would not expect that sending advice letters and IVA Proposals at the same time would meet para 4’s requirement for adequate time.  So we are no further forward in determining this.

It seems likely to me that most debtors, having decided to go with an IVA, just want to get on with it asap.  I accept that many debtors do not give as much attention to their options as they should, but you can only lead a horse to water, can’t you?

Most IVA engagement letters acknowledge consumers’ rights to a 14-day cooling-off period and provide that the debtor can instruct the firm to start work immediately.  If the debtor signs the engagement letter, does this act as confirmation that they have had adequate time?  If an engagement letter makes clear that this is what the debtor is confirming, then would this satisfy the RPBs?

Vulnerable debtors

A common criticism of the old SIP was that it did not include any duties in dealing with vulnerable debtors.  Personally, I did not see that it needed to, as this is implicit in the Ethics Code’s principles of professional behaviour, integrity, professional competence and due care.  But evidently this was not enough.

The new SIP now contains three references to vulnerability.  As explained earlier, support for vulnerable persons should be mentioned at the advice stage where additional specialist assistance will be required.  The second reference is in the context of meetings (see below).

The other mention of vulnerability appears in the “Assessment” section:

  • “whether the debtor is subject to any factors that make them vulnerable and, if so, any necessary adjustments and, subject to the debtor’s consent, an accurate record of the vulnerabilities disclosed”

Most volume providers will already have procedures and staff training in place to address debtors’ vulnerability needs and it is about time that all other firms take these measures too.  After all, IPs and their staff can encounter vulnerable people in situations other than IVAs.

SIP3.1 assessments

In my experience, this has always been an area that has been poorly documented.  The old SIP3.1 required procedures to ensure that assessments of a list of six factors are made “at each stage of the process”, i.e. at assessing the options available, preparing the IVA and implementing the IVA.  I rarely saw formal documentation of these assessments and on cases where the goalposts were moved e.g. where some horse-trading with a creditor was necessary, I rarely saw that the old SIP’s assessments, e.g. the viability of the evolving IVA when compared with other available options, had been carried out.

In addition to the vulnerability point above, the list of factors for these assessments has changed:

  • “whether the debtor is being sufficiently cooperative” has been removed
  • “whether the debtor is likely to be able to fulfil their obligations under the terms of the arrangement for its duration” has been added
  • the IVA’s prospect of being improved and implemented has changed to “successfully” implemented
  • “whether a breathing space… is needed or available” has been added to the same considerations for an interim order

The old SIP did not state explicitly that these assessments had to be documented.  The new SIP does.  It also suggests that such assessments may be “conducted by way of a” call, in which case a call recording or note of the call should be retained.

Meetings in the 21st century

The old SIP wasn’t broken as regards meeting the debtor, but it was certainly dated.  It required IPs to assess at each stage of the process whether a face-to-face meeting with the debtor was required.

“Face-to-face” has been replaced with “in-person meeting (whether a physical meeting or using conferencing technology)” (para 13).  Is “in-person” any different from “face-to-face”?  Online dictionaries appear to define them the same, i.e. the attendees must be physically present in the same place, not via the internet or telephone.

Ok, so it’s clear that the SIP uses in-person in a different way to common dictionaries and it doesn’t limit in-person to physical meetings, but what does it mean by “conferencing technology”?  A conference can be conducted by telephone, can’t it?  So, for the SIP’s purposes, does a telephone conference of just the adviser and the debtor constitute an “in-person meeting”?

Does it matter?

No, not really.  If an in-person meeting is assessed as required – for example, per SIP3.1, based on the debtor’s understanding and vulnerability – then obviously the IP/staff should request one.  If in-person excludes a telephone call but the IP/staff considers that a telephone call would be sufficient for their purposes, then this still complies with the SIP, as it merely means that the IP/staff have assessed that an in-person facetime etc. is not required.

What is important is that “all these meeting considerations and arrangements should be evidenced, documented and retained on the file”.  Therefore, it is something to add to the SIP3.1 assessments form.

Where someone else does the advising

Another historically contentious topic has been the diligence measures expected of IPs who are introduced to potential IVAs by other parties.  It seemed to me that two practices became prevalent: either the IP firm would develop relationships with introducers who they could trust to provide appropriate advice, basing that trust on direct involvement with the introducers’ processes and/or quality control measures of sample testing and mystery shopping; or the IP firm would treat the debtor as having received no advice previously, so they would start from scratch working through the SIP3.1 initial advice with the debtor. 

The new SIP makes the former approach troublesome and effectively eliminates the latter approach. 

Firstly, SIP3.1 requires IPs to “undertake sufficient due diligence on any referrer to identify whether they have advised the debtor” (para 12).  I wonder if it is considered sufficient simply to ask them.

Then, where a referrer has provided advice, para 12 requires that:

  • Contractual arrangements between the IP and the referrer “should extend to the insolvency practitioner maintaining access to all the referrer’s communications with the debtor, including call recordings or detailed written notes where calls were not recorded and transcripts of webchats or other communications were undertaken”
    • How many IPs enter into contractual arrangements with referrers?  Aren’t contracts normally with the firm?
  • “Any shortcomings in the advice… should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • This seems to require the referrer’s advice in every case to be reviewed by the IP/firm.  This is a tall order, isn’t it?  Firms are going to have to devote significant staff resources to reviewing advice given, as this could take as much time as it would to give the advice in the first place.

But can’t an IP simply ignore any advice given by the referrer and start from scratch?  This does not seem possible under the SIP, as the above are required “where advice was given by the referrer”.  It does not seem to matter if the IP chooses to rely on that advice as discharging their SIP3.1 advice duties or not.

It will be interesting to see how the referral market changes as firms start implementing the new SIP.

UPDATE 21/07/2023: Having had some exchanges with an IPA regulation staff member, I feel I should add to my comments above.  The IPA staff member explained that they do not expect the advice of the previous person to be examined every time.  Rather, the IP should have an awareness of the previous person’s advice-giving practices and policies (as well as having access to records of the advice given in any one case).  They expect IPs to have a proportionate approach to monitoring compliance and a procedure for flagging up any issues if concerns are identified.  This expectation seems to be a reactive, rather than proactive, approach to examining previous advice, e.g. taking steps if complaints are received or if communication with a debtor suggests a misunderstanding.  If flaws are identified, the remedy could be to start from scratch in providing appropriate advice, but if this becomes commonplace where a particular introducer’s advice is encountered, then the expectation is that the IP would consider whether they should discontinue receiving introductions from that source.

What about referrers’ FCA authorisations?

Over the years, the RPBs have grappled with the question of whose responsibility it is to police the FCA authorisations of IVA referrers.  The Protocol (Aug 2021) dealt with the issue unsatisfactorily, directing that IPs “should take steps to ensure” that all referrers (i.e. debt packagers and lead generators) should be FCA authorised, but it then went on to state that, if they were not authorised, the IP could simply give the advice themselves. 

To a degree, I sympathised with this approach.  After all, why should a consumer be turned away simply because they had the misfortune to encounter an unregulated introducer?

In its April 2021 members’ newsletter, the IPA published an article by the then-CEO stating:

  • “Insolvency marketing… Any introducer, or lead generator, firm that is employed by a member should be FCA regulated. The reason why we have taken this step is to respond to some evidential unscrupulous introducer activity, not compliant with how insolvency advice and solutions should work for the consumer.”

I made enquiries of IPA staff: did they truly mean this for all insolvency appointments (even corporate cases??) of IPA members and how did they enshrine this new requirement into their regulatory framework?  I learned that this was a standard on their “volume providers” only.

So I was not surprised to see some new measures in the revised SIP (para 12):

  • Where a referrer has provided advice, the IP should identify “whether [the referrers] are required to be authorised by the… FCA for debt counselling or are able to rely on an exclusion or exemption in relation to the debt advice”
    • Are we all clear on when an exclusion or when an exemption applies?  What about the difference between giving information and giving advice?  This isn’t just an internal assessment; the new SIP means that we need to know in order to draft the Proposal (see later)
  • “The referrer’s authorisation status should be evidenced, or details sufficiently documented and retained in each case”
  • “Any shortcomings in the advice, including in relation to the referrer’s authorisation, should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • What does this mean practically where there are shortcomings in relation to the referrer’s authorisation?  Does it mean that whenever a referrer does not have the correct authorisation (or exclusion or exemption), the IP simply starts from scratch in providing advice?  This would make the need to review the advice pretty pointless, wouldn’t it?  …unless IPs are being expected to do something more, e.g. report the referrer for providing advice without authorisation?  Or should IPs do this in all cases anyway, irrespective of whether there were any shortcomings in the referrer’s advice?

There’s more

In my next post, I shall look at the other changes to the SIP, particularly those affecting the IVA Proposal and the Supervisor’s duties.


by 2 Comments

The Rules’ complexities: get used to them!

In their report on the 2016 Rules’ review, the Insolvency Service all but acknowledges that some of the Rules leave IPs playing Twister, being forced into shapes that just won’t fit.  However, there are few admissions that things need to change.  Generally, all we can hope for is a review-on-the-review, which will consider further what, if anything, should change.

In this article, I cover:

  • The CVL process – top of the InsS’ list for change
  • The InsS maintains a general reluctance to fix fees
  • The new decision processes – successful or too complicated?
  • The InsS sees few problems with committees, dividends, the lack of prescribed forms, SoAs and personal data
  • But there are a handful of odds-and-sods that the InsS intends to change

The InsS report on their review can be found at https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

My personal consultation response is at https://insolvencyoracle.com/consultation-responses/

CVLs to change

One area that the InsS does appear committed to change is the CVL process.  In scope for consideration are:

  • The fact that the Rules only empower an office holder, not a director (or an IP acting on their instructions), to deliver documents by website
  • The fact that, although the Temporary Insolvency Practice Direction allows remote statutory declarations, a more permanent change to verifying Statements of Affairs would be beneficial
  • The fact that the Rules do not provide for the liquidation estate to pay any non-R6.7 pre-appointment expenses, e.g. the costs of seeking the shareholders’ resolution to wind up
  • Some respondents’ requests for more time to consider S100 decisions and SoAs

I find the last point a irritating: the new Rules’ S100 process for commencing CVLs is already more creditor-friendly than the IR86’s S98.  Now, the Statement of Affairs must be received by creditors at the latest the business day before the decision date, whereas under the IR86 the SoA only needed to be provided to the meeting.  Also, the new Rules’ 3-business-days-between-delivery-and-the-decision-date means that the notice period is usually one day longer than it was under the IR86. 

True, few CVLs need to happen quickly, but an extension in the period really must be accompanied by wider scope for the advising IP’s costs, as well as those of agents and solicitors, to be paid from the estate where the work is done with a view to the CVL.

 

A lacklustre response on fees

It was disappointing to read the InsS’ opening comment on the general subject of fees that:

“It is not certain that the rules on a necessarily moderately complex topic can be made clearer”. 

Pah!  You’re just not thinking hard enough, guys.

But at least we have some comfort that the InsS has “particularly noted concerns around rules 18.24 to 18.27 on changes to the bases of remuneration”, a topic on which I have blogged on several occasions, and they propose to review these fees rules “at a future date”.

While the InsS notes “concerns that the new Rules are not effective for small cases, including the absence of the ability of remuneration in a CVL to default to Schedule 11 scales”, they stated that “stakeholders”suggested “that reintroducing this measure… would make the process more complicated”.  Strange, I’m not sure why anyone would be against this measure.

They also stated that it might make “the process burdensome and more expensive rather than more efficient” if the rules were to provide different fee criteria for small cases, although the report does not make clear to what suggestion this was alluding. 

In my consultation response, I had suggested a de minimis statutory fee (after all, the OR has a set fee of £6,000) in recognition of the basic statutory and regulatory requirements of all CVLs, BKYs and WUCs.  This IP statutory fee either could be granted as automatic or, if the InsS weren’t comfortable in taking off all the reins, could be approved using the deemed consent process.  Personally, I was not suggesting different fee criteria for small cases, I was suggesting that this could be the standard for all cases, leaving the office holder to seek approval in the usual way for any fees above this de minimis level. 

I’m not entirely surprised that they’ve ignored such a suggestion from little me.  However, to suggest that there is no process by which the Rules could be changed to help IPs avoid the burden and expense of seeking the court’s approval where creditors refuse to engage in a decision procedure on fees is disappointingly defeatist and, I suspect, reflects a persistent lack of understanding of the difficulties encountered by many IPs.

Not even fees estimates to change

The report also noted that several respondents had made suggestions to simplify the fees estimate requirements.  The InsS gave several reasons why they felt there should be no changes, including:

  • the fees estimate provisions align with the statutory objective that regulators ensure that IPs provide high quality services at a fair and reasonable cost (hmm… does spending truck-loads of time creating a fees estimate pack really achieve this?);
  • “the level of fees charged by officeholders have often been a cause of complaint amongst creditors and sanctions by their regulators” (“often”?  Really??  The InsS Regulatory Report for 2021 reported that 5 out of 423 complaints were about fees and only one of the 53 regulatory sanctions listed was about the level of fees); and
  • “amending the Rules in the ways that have been suggested would have the effect that creditors would once again find it difficult to scrutinise and challenge remuneration due to a lack of timely information”. 

It’s a shame that the InsS appears to view the time that IPs spend in complying with the copious information requirements as time – and cost to the estate – well spent.

The case for physical meetings

Before the new Rules came into force, I think that many of us thought that removing the power to convene a physical meeting and replacing this with a variety of decision processes was unhelpful and an unnecessary complication.  Although the InsS report indicates that these views have persisted, personally I think that 5 years of experience with the new decision processes, as well as the pandemic lockdowns, has led many of us to think that maybe this new normal of decision-making isn’t so disastrous after all. 

But I do struggle to accept the report’s contention that “there is some suggestion that the new processes have not been detrimental to creditor engagement”, unless by “engagement” they simply mean “voting”.  It seems the InsS is arguing that correspondence and deemed consent decision processes “may encourage creditor engagement precisely because they reduce the need to spend time and money actively interacting with officeholders in cases of lesser interest”.  Hmm… this might explain why it seems that some creditors lodge objections to deemed consents and then fail to engage when the IP is forced thereafter to convene another decision procedure. 

I also had to smile at the InsS’ suggestion that the increased number of creditor complaints over the complexity of the decision processes may actually reflect creditors’ increased interest in engaging!

Decisions, decisions…

Fundamentally, the InsS report concludes that the new processes require no material changes.  In particular:

  • The InsS is happy with the 11.59pm cut-off time;
  • The InsS is happy that non-meeting votes cannot be changed (R15.31(8)); they state that, to provide otherwise “would require a framework to govern exactly how and when that could happen” (Would it really?  It’s not as if we have a framework for changing a vote submitted by proxy, do we?)
  • The InsS is happy that there is no ability to adjourn a non-meeting process; they consider that “naturally officeholders would not use a non-meeting process where there was any indication that an adjournment might be needed”
  • The InsS is happy that their Dear IP 76 encouragement for IPs to take a pragmatic approach as regards the statutory timescales for delivering documents to overseas creditors is sufficient
  • In response to some comments that office holders would value the discretion to convene a physical meeting, the InsS believes that at present “the restriction on physical meetings is operating correctly, this does not rule out future changes in this area”

But the InsS has indicated that a couple of suggestions are worthy of further consideration:

  • That creditors with small debts should not be required to prove their debt in order to vote
  • Fixing the apparent inconsistency in requiring meetings, but not non-meeting decision procedures, to be gazetted

Information overload

The InsS report does acknowledge that “information overload” as regards creditors’ circulars for decisions is “a core concern”.  However, they suggest that this is in part because some IPs “are still in the process of determining how best to use and present the new decision-making options”.  Charming!  But, InsS, you cannot escape the truth that the new Rules require an extraordinary amount of information – R15.8 alone covers a page and a half of my Sealy & Milman!

Surely we can cut out some of the gumpf, can’t we?  For example, some people raised the point that R15.8(3)(g) requires pre-appointment notices to include statements regarding opted-out creditors even though no such creditors would exist at that stage.  The InsS suggests the solution lies in adding yet further information in such notices if IPs “think that reproducing the literal wording of the rules could cause confusion”. 

This implied confirmation that IPs do need to provide such irrelevant statements in notices is frustrating, given that the court had previously expressed the view (in re Caversham Finance Limited [2022] EWHC 789 (Ch)) concerning the similarly irrelevant requirement of R15.8(3)(f) for notices to refer to creditors will small debts:

“I think that Parliament cannot have intended that redundant information should be included on the notice”. 

Well, the InsS has spoken: they do require such redundant information.

Are decisions like dominoes?

I love it when the InsS writes something that makes me go “ooh!” 

The report describes the scenario where a decision procedure was convened to address several decisions, but then “a physical meeting is requested in one of those decisions but not the others”.  Someone had suggested that the physical meeting be convened to cover all the original proposed decisions or that the Rules make clear that the request applies only to one. 

The InsS has responded that they consider that:

“the Rules are clear that each decision is treated separately for the purposes of requests for physical meetings”. 

While I can see this from Ss 246ZE(3) and 379ZA(3) – these refer to creditors requesting that “the decision be made by a creditors’ meeting” – I have not seen this being applied in practice. 

So this means that every time a creditor asks for a physical meeting, it seems the director/office-holder should ask them what decision(s) they want proposed at the meeting and, if there are any decisions that they don’t list, then these decisions should be allowed to proceed to the original decision date.  Interesting.

What about concurrent decision processes?

The report noted comments that the Rules are unclear as to whether a decision procedure can run concurrently with a S100 deemed consent process in order to seek approval of pre-CVL expenses or the basis of the liquidator’s fees. 

The InsS’ reaction to this issue is curious.  The report merely flags the “risk” that the decision procedure on fees would be ineffective where the creditors nominate a different liquidator to that resolved by the company (would it?  Why??). 

So… does this mean that the InsS doesn’t see any technical block to these concurrent processes?  Are we any clearer on this debate that has been running since 2017?

What about the reduced scope for resolutions at S100 meetings?

The report notes that the new Rules have excluded the IR86’s provision that S98 meetings may consider “any other resolution which the chairman thinks it right to allow for special reasons”, which was previously used as the justification for S98 meetings also considering the approval of pre-CVL fees.  Does this omission affect the ability for fees/expenses decisions to be made at S100 meetings?

The InsS’ response to this one is equally cryptic.  They appear to be saying that, as “rule 6.7 now includes expenses that were omitted from the Insolvency Rules 1986”, the “any other resolution” provision is no longer necessary. 

I don’t get it: R6.7 is no wider in scope than the old Rs 4.38 and 4.62, so there’s no remedied omission as far as I can see.  The problem is that the new Rules still lack an explicit provision that the initial S100 meeting may consider other resolutions, such as approval of the R6.7 expenses and indeed the basis of the liquidator’s fees.  At least it’s nice to have the InsS’ view that there is no problem, I suppose!

Committee complexities

The InsS report does not pass comment on whether respondents’ questioning “the value of continually requesting that creditors decide whether to create a committee” was a good point worth taking forward.

The report does suggest that the InsS won’t be taking forward issues around the establishment of a committee where there are more than 5 nominations.  The InsS considers that the decision in Re Polly Peck International Plc (In Administration) (No. 1), [1991] BCC 503, “remains relevant”.  This decision concluded that, “where more nominations are received than available seats on the committee, that a simple election should be held with those nominees who receive the greatest number of votes (by value) filling the vacancies”.  Ah yes, the simple election – simples! 

The more recent decision, Re Patisserie Holdings Plc (In Liquidation) ([2021] EWHC 3205 (Ch)), suggests that even where fewer than 5 nominations are received, those nominations will only be decisive where they have been made by the majority creditors.  Therefore, it seems to me that we are still left with a cumbersome committee-formation process stretching over two decision processes.

No going back on prescribed forms

The InsS is of the view that the decision to abolish prescribed forms was the correct one.  The report states that there does not appear “to be truly widespread difficulty” and they maintain that their impact assessment had accommodated the familiarisation cost appropriately. 

Although I think this unfairly plays down the impact on small businesses, I do think the boat has sailed on this debate.  I would have loved the InsS to have provided optional templates to support the prescribed content rules, but given that even the InsS’ own proof of debt form does not help creditors to meet all the Rules’ requirements, it is probably safer that they did not.

No easy fixes for dividends

An age-old bugbear is the hassle for all parties where a dividend payment is paltry.  It does the profession no favours when office holders are required to post out cheques for sums smaller than the postage stamp. 

I understand that the InsS did consider the pre-IR16 request to provide a statutory threshold for dividend payments below which they need not be paid.  But I’d heard that this had been considered unconstitutional, as every creditor has the right to the dividend no matter how small.  Instead, the InsS gave us the “small debts” provisions, which I think do the opposite and only increase the likelihood that office holders will be sending small payments to creditors who consider it is just not worth their trouble. 

This time around, it was suggested to the InsS that creditors be entitled to waive their dividend rights in favour of a charity or that this process could be automatic for payments below a certain amount.  The InsS rejected this suggestion, citing that it would simply add a different administrative burden onto office holders and creation of an automatic process would impair creditors’ rights to repayment.

The report does a good job of explaining why a NoID for an ADM must be sent to all creditors, not just those who have not proved as in other cases.  This is because the ADM NoID triggers the set-off provisions of R14.24, so all creditors need to know about it.  So no change there either.

Some respondents commented on the generally unnecessary duplication of requiring employees to submit proofs even though the IP receives information about their claims sent to the RPO.  This is an area that the InsS has noted for future consideration.

SoAs and personal data

I’m sure we remember the kerfuffle created by Dear IP chapter 13 article 97, which seems (or attempts) to grant IPs the discretion to breach the Rules requiring the circulation to creditors of personal data in Statements of Affairs.  Well, it seems that the InsS has already forgotten it.

As regards suggestions that the Rules might restrict the circulation of the personal details of employee and consumer creditors, the report states that the InsS is:

“satisfied that the current balance struck by the Rules remains an appropriate one” 

Oh!  So does that mean they will be recalling the Dear IP article?

Respondents also raised other concerns regarding the disclosure of personal details:

  • the requirement for non-employee/consumer creditors’ details to be filed at Companies House, so this would include personal addresses of self-employed creditors etc.
  • the need to disclose an insolvent individual’s residential address on all notices
  • the fact that, if the InsS is truly concerned with creditors being able to contact each other, then wouldn’t email addresses be more relevant?

The report states that “these issues will remain under consideration for amendment in future updates to the Rules”.

The opt-out process: who cares?

In my view, far too much space in the report was devoted to explaining the feedback of the creditor opt-out process, with the conclusion that the InsS “will give further thought to whether there should be any changes to, or removal of, these provisions”. 

I was not surprised to read that few creditors – “less than 1%” (personally, I would put it at less than 0.1%) – have opted out.  One respondent had a good point: don’t the opt-out provisions give the impression “that information provided by officeholders has no value or interest”?  Even the report referred to creditors opting out of “unwanted correspondence”.  Doesn’t this suggest something more fundamental, that in many respects the Rules are overkill and that communications could be made far more cost-effective?

Odds-and-sods to fix

The report acknowledged the following deficiencies in the Rules… or in some cases the InsS admitted merely the potential for confusion:

  • ALL: the court’s ruling in Manolete Partners plc v Hayward and Barrett Holdings Limited & Ors ([2021] EWHC 1481 (Ch)), which highlighted the limited scope of “insolvency applications” in R1.35 leading to additional costs – this issue has been singled out by the InsS as being one of the “most pressing” to resolve
  • ADM: the requirement for the notice of appointment of Administrators to state the date and time of their appointment – in view of the expansive comments by the courts on this topic, it is surprising the InsS only intends to “give further consideration to removing this requirement”
  • ADM/CVL/MVL/WUC: oddly, the report states that, as R18.3(1)(b) does not explicitly require a progress report to include details of the company (but just the bankrupt), this “gives the appearance of an error so may be confusing”.  However, R18.3(1)(a) states that reports need to identify “the proceedings”, which under R1.6 includes information identifying the company, so I don’t understand the problem.  In contrast with some of the items mentioned above, the InsS apparently thinks that this issue is of such significance that they “will look to rectify this in a future update to the Rules”.  Guys, where are your priorities?!
  • CVL: “The differing use of the word ‘between’ in rules 6.14(6)(a) and 15.4(b)” (i.e. in one case, the InsS believes it does not include the days either side of the “between”, but in the other case, I think they believe it does) – the InsS has set aside for further review whether the contexts make this inconsistency sufficiently clear
  • BKY: the fact that R10.87(3)(f) lists the contents of a notice being that the Trustee will vacate office once they have filed a final notice with the court, but the Act/Rules do not require the Trustee to file such a notice
  • BKY/WUC: the 5-day period in which to nominate a liquidator or trustee after the date of the OR’s notice – the InsS acknowledged that the short timescale has caused issues (indeed! Especially considering this seems to be the only Rules’ timescale that does not start on delivery of the notice, but rather on the date of the notice)
  • CVA/IVA: Rs 2.44(4) and 8.31(5) appear to have caused some confusion as they now state that a supervisor “must not” (previously: “shall not”) vacate office until the final filing requirements have been met
  • CVA: the fact that there is no provision to file at Companies House any notice of a change of supervisor – again, the InsS’ response is surprisingly non-committal; they will merely “consider whether this justifies creating an additional filing requirement for officeholders”
  • IVA: R8.24 was overlooked in the EU Exit changes and still reflects the wording required when the UK was part of the EU

So much to do, so little opportunity

This article demonstrates the Insolvency Service’s long to-do list.  And this is only the Rules’ review.  Last month, the InsS issued a call for evidence on the personal insolvency framework and they will have a fundamental role in the statutory debt repayment plan process expected to be rolled by the end of this year… and of course no doubt behind the scenes they are working on the response to the proposed single regulator consultation. 

With such high profile projects, when on earth are they going to find the time to get back to the Rules?!


by Leave a comment

HMRC guidance note on S100 notices: what exactly does it mean?

I’m sure you have all seen the HMRC guidance note, “Deemed Consent Procedures”, but what does it actually mean?  I have asked HMRC and received some answers.

The guidance note can be found at: https://www.icaew.com/-/media/corporate/files/regulations/regulatory-news/april-2022-deemed-consent-procedures-update.ashx (amongst other places).

“Deemed Consent Procedures” only?

R3 notified members of the guidance note under the heading, “HMRC Insolvency Guidance – Deemed consent procedures”.  Similarly, the IPA piece read: “HMRC update: we draw your attention to an update from HMRC on deemed consent procedures” and the ICAEW news heading was “April 2022: Deemed consent procedures update”.  The emphasis on the deemed consent process in the R3/RPB emails was not surprising given the title of the HMRC note, but does this reflect HMRC’s message?

Firstly of course I think it can be assumed that HMRC was not writing about all deemed consent process notices, e.g. notices proposing to extend an administration.  The note’s contents make clear that it applies only to “initial notification of a CVL”, by which I assume they mean the pre-CVL S100 notice, not the initial notification after the CVL has begun.

But did HMRC intend the change to affect only S100 deemed consent notices?  Nowhere in the HMRC note was any mention made of virtual or physical meeting notices.

A changed email address?

The original Dear IP article (chapter 8 article 26) and corresponding R3/RPB bulletins that notified us of the HMRC request to email S100 notices gave an email address of notifications.hmrccvl@hmrc.gsi.gov.uk, whereas the latest guidance note gives a different address: hmrccvlnotifications@hmrc.gov.uk (and incorrectly states that this was the email address that was given in January 2018).

Has HMRC got the email address in its new guidance note wrong?  Or have they changed the email address?  At present, the old one works.

HMRC’s response

After a couple of attempts, HMRC responded to my queries as follows:

Our recent comms note should have reflected the same instruction as the Dear IP article, with the only difference being that we now want IPs to stop using the mailbox where there is a compliance interest (as defined in our recent comms note). HMRC would like all S100 notices to be delivered in the same manner and to a compliance caseworker or the mailbox where there is no active interest.

Thank you.  So we can ignore the misleading title of the HMRC guidance note: all S100 notices – for virtual or physical meetings and for deemed consent processes – should be emailed to their mailbox or, where there is a compliance matter, delivered to the HMRC caseworker.  I also gather from this response that the email address is the one described in the Dear IP article.

What is the practical effect of the change?

Ok, setting aside my gripes about the wording of the note, what change is HMRC looking for? 

With effect from 1 June 2022, as quoted above, on prospective CVLs where there is an HMRC compliance interest, HMRC would like the S100 notice to be sent to the compliance caseworker, not emailed to their mailbox.

This will mean some more diligence when preparing for a S100 to establish whether there is a compliance interest and, if so, to get the details of the HMRC caseworker. 

The HMRC note states that a compliance matter “could be an ongoing compliance check or other correspondence regarding determination of the amount of any of the company’s tax liabilities”.  The words “could be” suggest to me that this is not an all-encompassing definition, but it seems to me that you could use this wording as a prompt in any questionnaire to directors to supply details of the caseworker where such a matter exists.

What if you don’t get full information from the directors?  Surely, all you can do is ask.

Will there be an update to Dear IP?

At present, the original Jan-18 HMRC request remains in the online Dear IP bank, at https://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26.  I asked HMRC if they would please publish an update to this article (and/or withdraw this obsolete article) also via Dear IP, preferably making absolutely clear what HMRC now wishes.

What about a central bank for HMRC guidance notes?

While we’re on the subject, do you find it as frustrating as I do that there is no central bank for all these HMRC guidance notes?  I now have a folder dedicated to all these missives, which seem quite randomly produced on all sorts of subjects.  HMRC also appears to rely on the RPBs and R3 to notify members of new notes, who then often need to relay these to staff members to action. 

Wouldn’t it be better if there were a dedicated free-access web space for all these notes especially for future reference, much like Dear IP?


by Leave a comment

A tale of two views: is a paid creditor still a creditor?

The Insolvency Service’s report on the 2016 Rules review contains some interesting gems.  It’s a detailed report, which demonstrates they have scrutinised the consultation responses.  The result is a list of proposed fixes to the Rules – most are welcomed, a few are alarming.

In this blog, I describe what I found was the most surprising and alarming statement in the report.  It relates to the age-old question: is a paid creditor still a creditor?  The report’s statement is surprising, as it is the polar opposite of a comment published by the Insolvency Service 5 years’ ago.  And it is alarming because the report states merely that the Rules need to be made “clearer”, which suggests that we have all been misinterpreting the Rules over the past 5 years.  But hey ho, we’re only talking about fee-approval and Admin extensions!

The Insolvency Service’s report is available at: https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

Is a paid creditor still a creditor?

If a creditor’s claim is discharged (and not subrogated to the payer) after the start of an insolvency proceeding, should that creditor still be treated as a creditor for decision procedures and report deliveries?

Before I left the IPA in 2012, the question began to be discussed at the JIC.  It turned out to be a hotly debated topic and I never did learn the conclusion.  I’d always hoped that there would be a Dear IP on the subject to settle the matter once and for all (subject to the court deciding otherwise, of course).  It was such a live topic at that time that surely the 2016 Rules were drafted clearly, weren’t they?

The general principle?

I had heard a rumour long ago that the Insolvency Service’s view was once-a-creditor-always-a-creditor.  I understood that the basis for this view was that creditors are generally defined as entities who have a claim as at the relevant date, so the fact that the creditor’s claim may have been discharged later does not change their status as a creditor.

Of course, this doesn’t work if, after the insolvency commences, the creditor sells their debt (or it is otherwise discharged by a third party): the purchaser/settlor tends to acquire the creditor’s rights, so the original creditor would no longer be entitled to a dividend or to engage in decision procedures – there are Rules and precedents to address these scenarios.

I can see where this view might come in handy, e.g. where an office holder had already paid creditors in full and only afterward realises that creditors have not yet approved their fees.

However, this view always seemed illogical to me: why should a paid creditor be entitled to decide matters that no longer affect them, e.g. the office holder’s fees or the extension of an Administration?  Indeed, some paid lenders refuse to engage where their debt has already been discharged, even though an Administrator may need all secured creditors’ consents to move forward.

Setting aside this issue, it could be argued that in some respects the 2016 Rules support a once-a-creditor-always-a-creditor view.  For example, R15.31(1)(c) states that in CVLs, WUCs and BKYs, a creditor’s vote is calculated on the basis of their claim “as set out in the creditor’s proof to the extent that it has been admitted”, which could indicate that post-commencement payments are ignored for voting purposes. 

But then what about R14.4(1)(d), which states that a proof must:

“state the total amount of the creditor’s claim… as at the relevant date, less any payments made after that date in relation to the claim… and any adjustment by way of set-off in accordance with rules 14.24 and 14.25”? 

Is the “claim” the original sum or the adjusted sum?  If, for the purposes of identifying the “claim” for voting purposes, conveners are supposed to ignore post-commencement payments made, then doesn’t R14.4(1)(d) (and R15.31(1) – see below) mean that they should also ignore any set-off adjustment?  That doesn’t make sense, does it?

Administrations are always “special”, aren’t they?!

R15.31(1)(a) provides that creditors’ claims for voting purposes are calculated differently for ADM decision procedures.  It states that in ADMs creditors’ votes are calculated:

“as at the date on which the company entered administration, less (i) any payments that have been made to the creditor after that date in respect of the claim, and (ii) any adjustment by way of set-off…”.

This seems pretty unequivocal, doesn’t it?  A paid creditor would have no voting power in an ADM decision procedure.

It is not surprising therefore that R15.11(1) provides that notices of ADM decision procedures must be delivered to:

“the creditors who had claims against the company at the date when the company entered administration (except for those who have subsequently been paid in full)”.

So the natural meaning of these Rules seems to be that paid creditors have no voting power and therefore do not need to be included in notices of decision procedures.  This seems logical, doesn’t it?

What about prefs-only decision procedures?

These Rules led me to ask the Insolvency Service via their 2016 Rules blog: what is the position where an Administrator is seeking a decision only from the prefs, especially where those creditors also have non-pref unsecured claims?  Do the Rules mean that, where a pref creditor’s claim has been paid in full, the pref creditor is ignored for the prefs-only decision procedure? 

Or does the fact that the creditor hasn’t actually been “paid in full” because they have a non-pref element mean they should still be included in the prefs-only process?  And does that mean that, per R15.31(1)(a), they would be able to vote in relation to their non-pref claim? 

Yes, I know this would seem a perverse interpretation, but it seemed to me the natural meaning of rules that were not designed to apply to a prefs-only process.

The Insolvency Service’s view in 2017

The Insolvency Service’s response on 21 April 2017 (available at https://theinsolvencyrules2016.wordpress.com/2016/11/30/any-questions/comment-page-1/#comments – a forum on which the Service aimed to “provide clarity on the policy behind the rules”) was:

“Our interpretation is that 15.3(1)(a) (sic) would lead an administrator to consider the value of outstanding preferential claims at the date that the vote takes place. This would only include the preferential element of claims, and if these had been paid in full then the administrator would not be expected to seek a decision from those creditors.”

Now: the Government’s “long-standing view”

However, the Insolvency Service’s Rules Review report (5 April 2022) states:

“Several respondents asked for clarification on the position of secured and preferential creditors that had received payment in full. It has been the Government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the Government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditors.”

Wow!  If only the Insolvency Service had published the Government’s long-standing view 5 years’ ago, before all those fees had been considered approved by only unpaid prefs or secureds!

Is it only a R15.11(1) issue?

The Service’s report makes no mention of the voting rights of paid prefs.  So does this mean that paid prefs should receive notice of decision procedures, but, in line with the Service’s statement in 2017, they have no voting rights?  Or do they think that R15.31(1)(a) also needs to be changed?

And what about paid secured creditors?  They’re not involved in decision procedures at all, so R15.11 is irrelevant where an Administrator is seeking a secured creditor’s approval or consent. 

What is a “secured creditor”?

A secured creditor is defined in S248 of the Act as a creditor “who holds in respect of his debt a security over property of the company”.  “Holds” = present tense.  If a secured creditor no longer holds security over the company’s property at the time when an Administrator seeks approval/consent, are they in fact a secured creditor?

It seems to me that, if the Service wishes to amend the Rules to make them clearer as regards the Government’s position, they may need to look at amending the Act too.

The consequence of a clarification of the Rules

If the report had stated that the Service intended to change the Rules to give effect to the Government’s view, I would not have been so alarmed – that would be a problem for the future.  But they have said that they want to make the Rules “clearer”.  This suggests that they believe the existing Rules could be interpreted to give effect to the Government’s view.  In that case, are we expected to apply the existing Rules in the way that this report describes?

And what about all the earlier cases in which paid secured or pref creditors’ approvals were not sought?  What effect does this have on previously-deemed approved fees, extended Administrations and discharged Administrators?

And what does this approach achieve?  Are IPs really expected to seek approvals/consents from paid creditors, most of whom have no theoretic, or even real, interest in the process?  Why should paid prefs get to decide, even if they have non-pref unsecured claims, when no other unsecured creditors have this opportunity?

Are the ADM Para 52(1)(b) Rules fit for purpose?

I have often blogged that I think the Rules around the consequences for Para 52(1)(b) ADMs are confused and illogical.  The Insolvency Service acknowledged some issues in the Rules Review report:

“Some respondents raised issues related to administration cases where statements had been made pursuant to paragraph 52(1)(b) of Schedule B1 to the Insolvency Act 1986, highlighting the difficulties that can sometimes occur when only secured and/or preferential creditors need to be consulted on certain matters under the Rules. It is clear that in some cases engagement with this smaller group of creditors can be difficult. However, we consider that the overall efficiencies provided for by the Insolvency Act and Rules across all such cases outweigh the difficulties that can occur in a minority of them.”

“The overall efficiencies”?  Is the Insolvency Service saying that, because it is useful in many cases not to have to bother with non-pref unsecureds, this outweighs the issues arising in a minority of cases?  If that’s true, then why not roll out this alleged more efficient process across all insolvency case types..?

The advantage of HMRC pref status?

Ok, a silent secured creditor can be a real headache and a silent paid secured creditor is going to be particularly reluctant to lift a finger.  But now that HMRC is a secondary pref creditor in most cases, at least this eases the problem of getting a decision from the prefs, doesn’t it?

I understand that HMRC is still acting stony in the face of many decision procedures.  Oh come on, guys!  If you want IPs to waste estate funds applying to court, you’re going the right way about it.

Other issues with the Rules Review report

This is only one of a number of issues I have with statements in the report.  In the next article, I will cover some others as well as highlight some items of good news for a change.

And apologies for my silence over the past months: an extremely busy working season and an unexpected health issue sapped me of my time and energy.  Last August, I had planned on covering other effects of the IVA Protocol – this will emerge one day.


by 3 Comments

New IVA Protocol: what has changed for the Proposal and Conditions?

The new IVA Protocol is half a world away from its predecessor.  In most respects, the changes are welcome.  While Dear IP highlighted the main changes, many more adjustments are hidden away in the detail.  The new template Annexes have also added lots more items worthy of a blog post.

In this post, I’ll explain the changes to the Proposals themselves and the Standard Terms and Conditions (“STC”).  In the next blog, I’ll look at the other Protocol changes around dealing with debtors and introducers etc. and how to administer the IVA.

In this post, I look at:

  • What changes from the April 2021 version were slipped in on 2 August 2021
  • The ambiguities around the new home equity provisions
  • Inconsistencies between the Proposal template annex and the Protocol/STC
  • A host of small, but not inconsequential, changes in the STC

I am sorry for the length of this post! I didn’t want to miss anything out that could trip you up.

The new Protocol and associated docs are available from: https://www.gov.uk/government/publications/individual-voluntary-arrangement-iva-protocol

Where did the April-21 versions go?

The new Protocol and STC were originally released on the .gov.uk website on 29 April 2021.  Dear IP 126 announced that the new Protocol etc. could be used immediately and that they would become mandatory for all new Protocol-compliant Proposals issued to creditors after 1 August 2021.

Then, on 2 August 2021, the April Protocol and STC were replaced on the .gov.uk website by amended versions.

In some respects, this was welcome – the InsS managed to fix some inconsistencies that I was trying to find the time to write to them about.  However, what I cannot fathom is why they removed the April 21 STCs.

The many Covid-19 changes to existing IVAs announced by the IVA Standing Committee give me the impression that the Committee considers STCs to be moving feasts in any event, able to be changed unilaterally simply by saying it is so, much like a bank announces changes to the terms of its products.  Guys, I don’t think that’s how it works.  Surely an IVA must be administered according to the terms agreed by the debtor and the creditors; you cannot sneak in changes to the STCs without approval of the parties.

The new STCs are whizzy, containing hyperlinks that take you to other relevant clauses.  Therefore, I wonder what firms did when they issued IVA Proposals in May, June and July.  Did they reproduce the April 21 STCs on their own websites and/or circulate them to the debtors and creditors… or did they simply provide a link to the .gov.uk version?  If they did the latter, then it will not be easy to track what STCs had been incorporated into which IVAs.

Given that it is evident the Insolvency Service has no qualms about slipping in changes to the STC published on https://www.gov.uk/government/publications/individual-voluntary-arrangement-iva-protocol/iva-protocol-2021-annex-1-standard-terms-and-conditions, it seems essential that IP firms reproduce the STC on their own website so that they – and the debtors and creditors – can have some certainty about which terms apply in each case.

Were the changes to the 2 August version material?

Well firstly, the Protocol itself doesn’t form a part of the IVA, so the changes there have no effect on IVAs proposed.

The STC changes were, as Dear IP 133 had announced:

  • “Some minor amendments have been made to clarify the provisions on equity to reflect the position of the IVA standing committee”

The April-21 version stated that “if a re-mortgage can be obtained, the agreement will be automatically be (sic.) reduced to 60 months”.  The Aug-21 version now reads: “if a re-mortgage cannot be obtained, the agreement will remain at 72 months.  If equity is released the term will be reduced to 60 months”. 

So yes, the Aug-21 version is certainly tighter – at least now the IVA duration won’t change just because a re-mortgage can be obtained – but I think it still leaves wriggle room as regards the amount of equity that must be released in order to cut 12 months off the IVA.  Although the STC explain further what “equity to be released” means, I think a debtor could argue that they had met the terms simply by releasing some of the equity.

  • “the redundancy clause in the protocol… has been updated to make it easier to interpret and understand”

Actually, this part of the Protocol has not changed, but the STC have.  Now, the STC contain a detailed redundancy pay clause, which does not appear to change the debtor’s obligations from the April-21 version.

A change that is not listed in Dear IP 133 is the addition to the STC of:

  • “You will be required to increase your monthly contribution by 50% of any increase in disposable income one month following such review”.

Unless this was included in the Proposal itself (and it is not included in the Protocol’s Annex 4, Proposal template), any PCIVAs issued with the April-21 STCs do not contain this requirement or anything like it.  That could make for some interesting debates with debtors!

Material changes to home equity treatment

The changes between the 2016 and the Apr-21 STC are vast.  The most material relate to the structure of IVAs where there is a property. 

There are now three alternatives:

  1. Where the “available equity is below the de minimis amount”, the IVA will be drafted for a 60-month term and the equity effectively will be excluded from the IVA.
  2. Where the “available equity is above the de minimis amount but does not meet the current lending criteria for a potential re-mortgage as set out in annex 5 of this protocol”, the IVA will be drafted for a 72-month term and the equity effectively will be excluded from the IVA.
  3. Otherwise, the IVA will be drafted for a 72-month term; there will be a revaluation at month 54; and “if the second valuation confirms the equity position in the proposal” and if “equity is released”, then the term will reduce to 60 months.

The Protocol actually provides a fourth option:

  • If option 3 is followed but equity release is not possible, then a third party may contribute a lump sum equivalent to 12 monthly payments and then the IVA can be concluded early.  Unfortunately, however, this option is not covered in the STC, so unless IPs provide for this in the Proposal (and the Protocol’s Proposal template does not mention it), this approach will require a formal variation to be proposed to creditors.

What is the de minimis amount?

This isn’t defined in the STC.  Personally, I think it should be: after all, what will happen if a future Protocol revision changes the amount? 

The Protocol sets the de minimis at £5,000 (or £10,000 for a property jointly owned by two people proposing interlocking IVAs).

What is “available equity”?

Again, this is not defined in the STC.  The Protocol states: “The value of the consumer’s equity will be considered de minimis if it is £5,000 or less when valued before the IVA proposal is put to creditors.  The calculation should be based on 85% of the value of the property less any secured borrowings (e.g. mortgage).  This means that the consumer will retain at least a 15% financial interest in the value of the property in all cases.”

Mmm… so “equity” doesn’t mean equity then.  It means 85% of the equity.

Annex 5 of the Protocol also describes “anticipated equity”, which involves projecting both the property value (“using the simple interest formula at the date of the review”) and the mortgage position at month 54.  It is not clear to me what should be done with this “anticipated equity” figure: I don’t think it is meant to determine whether the equity is above or below the de minimis, but is it intended to be the figure that the debtor must introduce to the IVA from month 54 if their IVA is to drop to 60 months’ long?  Annex 7, the EOS template, doesn’t mention anything about projected equity values, so I really don’t know!

To be honest, although the STC include lots of statements about the upper limits of re-mortgage (e.g. a re-mortgage would bring the amount secured to no more than 85% of the total value of the property), I found it very difficult to identify what minimum payment would satisfy the “available equity” release condition.

What if the second valuation doesn’t “confirm the equity position”?

It isn’t clear what “confirm the equity position” means.  How different from the equity position presented in the Proposal can it be before it is no longer “confirmed”?  If it is way different, then can the IVA end at month 60 if nevertheless the available equity is released? 

Presumably, this provision is meant to address situations where the equity turns out to be less than the de minimis at month 54.  In this case, I would expect the IVA to drop to 60 months, but neither the STC nor the Protocol make this point.

At least the debtor should have a better idea of what is expected of them

The Protocol requires that “a copy of the calculations” – i.e. how the equity is proposed to be dealt with in the IVA – “should be provided to the consumer and also to all their creditors within the scope of the IVA proposal”.

Is the equity treatment clear in the Proposal template?

I have real problems with the Proposal template, which is provided as Annex 4 to the Protocol.  As regards the equity treatment, the Proposal template gives me the following concerns:

  • Para 6.2 states that the property will be valued in month 48, whereas the Protocol envisages month 54
  • Para 6.3 states that the debtor “will make reasonable endeavours to introduce this sum into the arrangement” – it is by no means clear what “this sum” is
  • Para 6.4 states: “Should I be unable to re-mortgage, I will continue to pay my IVA for the full 72 months, if I am successfully (sic.) and introduce equity my IVA will complete at month 60” – again, what amount of “equity” needs to be introduced (and of course the IVA won’t complete at month 60 unless the supervisor can wrap everything up immediately)?

Can the property be sold?

The Proposal template contains an interesting scenario.  Para 6.5 states that, in the event that the debtor sells their home at any time in the IVA and pays in the sale proceeds less costs, “the additional remaining payments will no longer be payable into my IVA” even if the funds are insufficient to clear the debts and costs.  So… a debtor with minimal equity sells their home early on in the IVA, pays in the small amount of sale proceeds… and then they are not required to pay in any more income-related contributions?!

I cannot see that this is an expectation of the Protocol.  All it states is that, if a property is sold, then the proceeds of sale to the extent of settling the costs and debts in full – excluding statutory interest – shall be paid into the IVA.

Is statutory interest not payable for early completion?

Yep, that’s what the STC say.  However, Para 5.1 of the Proposal template states: “The IVA will finish when the agreed level of payments have been made or I have paid creditors together with the costs of the IVA in full and with statutory interest”.

Are there other issues with the Proposal template?

Yep.  I have lots of minor gripes (like reference to an irrelevant “3.1”), but some other material ones are:

  • While it is reasonably complete as regards ticking off SIP3.1 and Rules’ matters, it does not flag up the SIP3.1 requirements to disclose the referrer, their relationship/connection to the debtor, or any payments to the referrer made or proposed, amounts and reasons.
  • No monthly contribution amount is specified.  It simply states (Para 5.1): “I will make monthly payments of my surplus income estimated at £X”.  Odd!
  • Para 7.3 strangely provides for a trust “in favour of the Supervisor” and states that the trust will end when the notice of termination is filed with the SoS.  The STC state the trust will end earlier, i.e. when the certificate of termination is issued or, as regards assets not realised, when a bankruptcy order is granted.
  • Para 7.11 states that late-proving creditors “will not be entitled to disturb dividends already paid but will be entitled to participate in future dividends”.  The STC state that they will also be entitled to catch-up dividends.

Do these inconsistencies matter?

The STC state that, “in the event of any ambiguity or conflict between the terms and conditions and the proposal and any modifications to it, then the proposals (as modified) shall prevail”.  So, yes, as always the Proposal takes precedence. 

So, if the Proposal reverses or negates the apparent intended effect of the STC, can the Proposal be called Protocol-compliant?  Surely not… except if the Proposal simply follows the Protocol’s Proposal template annex, then presumably it’s ok..?

Are IPs obliged to use the Proposal template?

It is not at all clear.  The 2021 Protocol repeats the previous Protocol’s introduction that “Where a protocol IVA is proposed and agreed, insolvency practitioners and creditors agree to follow the processes and agreed documentation”.  But, apart from the contents list, there is no specific mention in the Protocol to the Proposal template.  Contrast this with specific reference to Annex 6, which gives examples of how an IP might comply with the Protocol’s new requirement to “set out details of how the funds received… will be allocated towards the costs of the IVA, together with a timetable and schedule of expected payments to creditors” (which interestingly is a document that is not mentioned in the Proposal template!).

So is the Proposal template intended to be just for guidance?  Given its departures from the Protocol and STC, it cannot be intended to over-ride it all, can it?

What about the other templates?

The Proposal template states that attached is a “combined outcome and Statement of Affairs”.  Annex 7 is clearly solely an estimated outcome statement, not a SoA. 

Annex 3, which is an “example” letter to send to the debtor along with the draft Proposal, does not mention that a SoA (i.e. one that complies with the Act/Rules) is enclosed and there is no reference to a Statement of Truth, which the debtor is required to provide to the IP per R8.5(5).  The letter also contains the old pre-29 June DRO thresholds.

Again, it is not clear whether IPs must use these templates.  I also appreciate that it will be difficult to maintain templates to deal with changes in legislation or SIPs… but, hey, that’s what we all have to do, isn’t it?

Some things never change

One of the obvious changes needed to the STC was to bring it into line with the 2016 Rules as regards the various decision procedures.  Way back in April 2017, Dear IP 76 had expressed the Insolvency Service’s expectation that supervisors “take advantage of the new and varied decision making procedures that are available under the Act as amended and the 2016 Rules”.

Did someone forget this expectation?  The new STC still refer solely to “meetings of creditors” that may be called during the course of the IVA.  As the STC state that they be called “in accordance with the Act and the Rules”, we are talking about only virtual meetings here.  What is evident, however, is that it does not include electronic or correspondence votes.

Other STC changes

There are some relatively minor changes introduced by the new STC – I would love to give you paragraph references, but crazily the STC no longer have para numbers!

  • Unsurprisingly, the old STC that supervisors can make a reasonable charge for variations has gone.
  • The STC state that a completion certificate “will be issued within 28 days of all payments and obligations being satisfied”, although the Protocol states that the completion certificate should be issued within 3 months.  Both the STC and Protocol provide a long-stop date of 6 months.
  • The concept of a completion certificate where there has been substantial compliance has been ditched.
  • The liabilities can now be up to 25% more than those estimated in the Proposal before it is considered a breach (the old STC provided for a 15% limit).
  • A Notice of Breach will now always provide a timescale of one month to remedy and/or explain a breach (the old STC allowed the supervisor’s discretion to set a timescale of between one and three months).  Now, a remedy can include proposing “a reasonable plan to remedy” the breach, which may be useful, although of course some proposals will still need to be varied formally.
  • All trusts will end on issuing a certificate of termination or completion (the old STC were silent).
  • A variation to reduce contributions can only be proposed in the first 2 years of the IVA “if evidence can be provided to creditors that the supervisor could not have reasonably foreseen such a change in circumstances at the start”.
  • Interestingly, “if you cannot reach agreement with the supervisor in respect of your obligation to contribute additional income, then the supervisor has the discretion to issue a notice of breach”… or not.
  • Oddly, the STC no longer describe any means for changing supervisors except by a block transfer order (or removal by a creditors’ decision).  Presumably, though, a switch may still be proposed by variation.  Para 2.8 of the Proposal template, however, does provide a simple: any “vacancy may be filled by an employee of the same firm who is qualified” as an IP, although I’m not sure if this over-rides the requirement for a court order or creditor decision appointing them. 
  • The requirement to register a restriction on a property has been removed from the STC.  It is, however, still required under the Protocol, so you will need to make sure that it is included in your Proposal template (it is in the Annex 4 template).
  • Creditors now only have 2 months to submit a claim, rather than the old 4 months.
  • The supervisor now has discretion to admit claims of £2,000 (up from £1,000) without a PoD or claims that do not exceed 125% (up from 110%) of the amount listed in the Proposal without additional verification… with the new condition that this cannot “result in a substantial additional debt being admitted” – I’m not sure how this would be measured.
  • Although both old and new STC state that all payments into the IVA “are intended to be used to pay dividends” and costs, now there is no limit on the surplus funds at the end of the IVA that will be returned to the debtor (it used to be £200 max.).
  • I’m confused about the HMRC-specific requirements: they state that HMRC’s claim will include self-assessment tax arising in the tax year in which the IVA is approved (less payments on account), but then they state that the debtor “will be responsible for payment of self-assessment/NIC on any source of income that begins after the date of approval”, but then also that any “monthly charge for income tax/NIC as it appears in the income and expenditure statement” must be paid into the IVA for the rest of the tax year after approval of the IVA.

The consequences

All these intricate changes will complicate systems and procedures, as you will need to be alert to which terms apply to which IVAs you’re administering.  As you can see, it would also be valuable to refresh your Proposal template to ensure that it corresponds with the new STC, plugs the gaps and eliminates ambiguities. 

If you do choose to use the Protocol’s Proposal template, I recommend that you give it some tweaks to make sure it is SIP3.1-compliant (as well as tailored to your own practices, as some clauses are quite bespoke) and that it does not stray far from the new Protocol and STC.

More changes

These are only Protocol changes affecting the Proposal and STC.  In the next blog, I’ll look at the other changes including new requirements as regards advising debtors and liaising with introducers.


by Leave a comment

Revised SIP16 and SIP13 affect more than Administrations

30 April 2021: Connected Persons Disposal Regs, InsS Guidance, SIP13, SIP16, new IVA Protocol (with eight annexes), SIP9 FAQs from the RPBs and Dear IP 126 – wow!  Even Usain Bolt would struggle to keep up with the pace of regulatory change right now!

Firstly, I’ll look at the SIPs. 

“No changes have been made to the SIPs other than those required by the change in the law”

stated some of the RPB/R3 releases.  Well, that’s not quite true…

 

What needs changing?

In summary, solely to deal with the SIPs (i.e. not including the Connected Persons Disposal Regs at all), I think the following needs to be done:

  • Ensure that all staff know the widened scope of SIP13 – i.e. affecting all corporate insolvencies – and consider including prompts within checklists, progress reports etc. to ensure that any sales to less directly connected parties are picked up
  • In the pre-ADM letter template to connected parties (and letter of engagement, where relevant), replace the old Pre-Pack Pool reference with the new evaluator’s report requirement… and repeat the letter template (tweaked) for any post-appointment substantial disposals
  • Ensure that pre-pack connected parties that are not also connected persons are notified of the potential benefits of a viability statement
  • Tweak the SIP16 statement to remove references to the Pre-Pack Pool and viability statement, except where a viability statement has been provided, and add reference to enclosing any evaluator’s report with an explanation if it has been redacted

 

SIP13’s scope enlarged…

The old SIP13 affected sales to parties connected to the insolvent debtor or company by reason of S249 and S435 (but excluding certain secured creditors).  Now, SIP13 defines a connected party as:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”

If SIP13 had been changed solely to reflect the new regulations, why has the reach of SIP13 been expanded far wider than the regulations’ scope?  And what does “any connection” mean exactly?  Are we talking friendships?  Even if “any connection” is still intended to mean something approaching the statutory definition, including connections with the associates of directors, shareholders – and secured creditors – wraps in a whole host of business and familial relationships that were not captured by S249, S435 or Para 60A(3) Sch B1.

…but also narrowed..?

There is a curious omission from the above definition: reference to any connections with the debtor.  Presumably this is an error, as the SIP still states that it “applies to both personal and corporate insolvency appointments”.  Oops!

 

Connected person communications

The above definition is of a connected party, but both SIPs also refer to connected persons.  These are the statutorily-defined connected persons caught by the new regulations, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, as defined by Para 60A(3) of Schedule B1.  Of course, it is sensible for IPs to ensure that any connected person considering a regulations-caught disposal is aware of the requirement to obtain a qualifying evaluator’s report to enable the disposal to be completed without creditor approval.  This is now also a SIP requirement.

Because SIP16 is concerned only with pre-packs, the requirement appears also in SIP13 in order to capture substantial disposals in Administrations that are not pre-packs.  In my mind, this means substantial disposals that occur in the first 8 weeks of an Admin where there have been no pre-appointment negotiations (and, I guess, the odd “hiring out” or non-sale “disposal” of all or a substantial part of the business/assets), i.e. truly post-appointment sales.  Indeed, the R3/RPB releases explained that the 8-week time frame of the new regulations led to the changes in SIP13.

However, the changes are odd.  SIP13 requires the “insolvency practitioner” to ensure that the connected person is made aware of the regulations, but SIP13 states that:

“for the purposes of this Statement of Insolvency Practice only, the role of ‘insolvency practitioner’ is to be read as relating to the advisory engagement that an insolvency practitioner or their firm and or/any (sic.) associates may have in the period prior to commencement of the insolvency process.  The role of ‘office holder’ is to be read as the formal appointment as an office holder”. 

So the new SIP13 requirement for connected person communications applies to IPs acting pre-appointment, not to office holders post-appointment.  Given we are talking about non pre-pack disposals here, would it not have made more sense for the SIP13 requirement to be on office holders?

But don’t worry RPBs, I am sure that no Administrator is going to spend time negotiating a deal with a connected person without ensuring that they are in a position to complete.  They hardly need a SIP to tell them to warn a relevant purchaser that they’ll need a qualifying evaluator’s report where necessary.

 

Viability Statements’ appearance narrowed…

I reported at https://insolvencyoracle.com/2020/10/30/pre-pack_reforms/ that the Insolvency Service’s report that led to the regulations had noted the government’s plan to “work with stakeholders to encourage greater use” of viability statements.  I was most surprised, therefore, to see viability statements take a step further into the shadows in the revised SIP16.

The old SIP16 required Administrators to report to creditors on the existence or otherwise of a viability statement and, if there were none, on the fact that the Administrators had at least asked for one.  Now, the only appearance of reference to a viability statement in a SIP16 statement is where one exists, in which case it should be attached.

…but also enlarged!

But we cannot ignore viability statements entirely: the new SIP16 has retained the need to make certain purchasers “aware of the potential for enhanced stakeholder confidence in preparing a viability statement”.  You might think: well, that’s fine, it had been in my letters to connected purchasers when I told them about the Pre-Pack Pool, so now I’ll leave in the viability statement bit and just tweak those letters to include the bit about the evaluator’s report instead.

Ah, if only it were that simple!  Now this requirement applies “where the purchaser is connected to the insolvent entity”… and this time, “connected” means:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”. 

So, if you are contemplating a pre-pack to someone who isn’t connected to such an extent that the new regulations apply, but they still have some kind of connection, you will need to write to them solely to tell them about the “potential for enhanced stakeholder confidence” of a viability statement.  What is the point?!

 

Copy evaluator’s report in SIP16 statement

Unsurprisingly, the new SIP16 requires a copy of any qualifying evaluator’s report to be included with the SIP16 statement circular (whether or not this is at the same time as the Proposals). 

The SIP does not mirror the regulations’ provision that the copy qualifying report (when included with the Proposals) may exclude any information that the Administrator considers is confidential or commercially sensitive, but presumably this would be acceptable provided that, as per SIP16 para 19, the Administrator explains why the report in full is not being provided.

 

More changes to come?

Yes, I’m afraid so.  Dear IP 126 states that:

“SIP16 will be reviewed and amended further during the next 6 to 12 months”. 

I shall be interested to see the trend of Administrations in the future.  I suspect that it is not so much the evaluator’s report that will discourage pre-packs but rather the endless tinkering!