Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Two old(ish) debates: S100 fees decisions and old rules IVAs

 

Firstly, I should warn you: if you find my singular views often wind you up, you might want to skip this post. Here, I air what I suspect are unpopular opinions about two New Rules issues that have been doing the rounds over the past few months: (1) can fees decisions be taken by means of a correspondence vote set to run concurrently with a S100 deemed consent decision; and (2) to what extent do the 2016 Rules apply to IVAs that were approved before 6 April 2017 or that have been approved since then but with terms that refer to 1986 Rules?


 

1. Correspondence votes running concurrently with S100 deemed consent decisions

The Problem with S100 Deemed Consent Decisions

As we know, the deemed consent process cannot be used “to make a decision about the remuneration of any person” and the Insolvency Service has confirmed on its Rules blog that this applies to decisions approving the payment of any SoA/S100 fee. Therefore, unless you are paid the SoA/S100 fee before the liquidation begins, at some stage you will need to instigate a qualifying decision procedure to seek approval and of course you will also want to seek approval of your fees as liquidator at some point.

If these decisions cannot be posed via the S100 deemed consent process, what do you do? Do you wait until after your appointment has been confirmed via the S100 process and then seek a decision, e.g. via a correspondence vote? Or can you instigate a correspondence vote before your appointment? After all, doesn’t R18.16(10) provide for a “proposed liquidator” in a CVL to deliver information on their fees to creditors and doesn’t the table at R15.11(1) refer to “decisions of creditors for appointment of liquidator (including any decision made at the same time on the liquidator’s remuneration)”?

 

The Problems with Pre-Appointment Correspondence Votes

  1. Signing the Notice of Decision Procedure

Can the proposed liquidator sign the notice convening the proposed decision by correspondence? I don’t see any rule empowering a proposed liquidator to act as “convener” of such a process.  Could a director sign the notice?  R6.14 empowers a director to sign a notice for a decision by deemed consent or virtual meeting, but that’s all.  The rules do not appear to empower a director to sign a notice for correspondence vote.

Do the rules need to empower someone to sign such a notice? Isn’t it sufficient that they don’t say that it cannot be done?

It is true that “convener” is defined as an office holder or other person who seeks a decision in accordance with Part 15 of the Rules… but that is simply a definition. To view this definition as giving free rein for any old decision under Part 15 seems a nonsense to me.  If a proposed liquidator or director (other than as provided for under R6.14) were entitled to convene any decision procedure they liked, then this entitlement could surely extend to any “other person”, e.g. a creditor, shareholder, company agent/adviser, receiver… Surely it cannot be open to just anyone to instigate a decision procedure on anything, can it?

Ok, what about if the members had already appointed a liquidator? Could the liquidator sign a notice of decision procedure if he had already been appointed in a Centrebind process? I think the difficulty here is S166(2), which restricts the liquidator’s powers before the S100 decision. The only powers the liquidator can exercise at this time are those in S166(3) and I do not think that instigating a decision procedure on fees falls into the categories of taking control of or protecting company property and disposing of perishable/diminishing-value goods.

  1. Clashing timelines (1)

Setting aside the issue above about who signs the notices, I think there are other reasons why the concurrent correspondence vote for fees pre-S100 does not work: the impossible statutory timelines governing these processes.

R15.11(1) sets the notice period of 3 business days for the S100 decision on the appointment of the liquidator and “any decision made at the same time on the liquidator’s remuneration”.  If the S100 decision is sought by deemed consent and a fees decision is sought by a correspondence vote, two processes are set in motion. That’s fine so far: you could set both processes going with the same decision date, say 14 September. With R15.11(1) in mind, let’s “deliver” the notices on 8 September, to give a clear 3 business days’ notice.

If a >10% creditor objects to the deemed consent decision, then that process terminates and the director must now convene a physical meeting for the purpose of seeking the S100 decision on the appointment of a liquidator. But what happens to the correspondence vote process? This is a different process altogether, so it seems to me that it keeps on going.

But does this create a problem? Yes, I think so. As I mentioned, R15.11(1) sets the notice period for a “decision made at the same time” as the S100 decision at 3 business days, but the correspondence vote decision has now deviated from the S100 decision; the decisions will no longer be made at the same time. However, the notice period for correspondence votes not made at the same time as a S100 decision is 14 days, so in hindsight the liquidator/director has failed to provide enough notice for the correspondence vote. Does this mean that the correspondence vote decision is invalid? Could you abandon the correspondence vote process? There doesn’t seem to be any power in the rules to postpone or cancel a correspondence vote process once started (unless it is terminated by reason of a physical meeting request).

Ok, so one solution might be to make sure that the correspondence vote is arranged with at least 14 days’ notice in any event, so that you don’t fall foul of the notice period if the two processes were to diverge. That may be so, but surely the fact that you could breach the statutory notice period in hindsight in this way is an indication that it was not envisaged that the rules would provide that two independent processes could run concurrently with a shorter notice period.

  1. Clashing timelines (2)

Returning to the example above: notices of a S100 deemed consent decision and a correspondence vote are delivered on 8 September with decision dates of 14 September. What happens if a >10% creditor submits a request for a physical meeting on 15 September? That’s a silly question, you may think, surely they are out of time as the decisions have been made.

I would agree that they out of time for the S100 decision, because R6.14(6)(a) states that “such a request may be made at any time between the delivery of the notice… and the decision date”. However, are they out of time for the correspondence vote? As the correspondence vote for fees is not provided for in R6.14, it would have a deadline for physical meeting requests of 5 business days from the date of delivery of the notice (R15.6(1)). Therefore, notwithstanding that the decision date had already passed, it seems that the creditor’s physical meeting request could impact the proposed fees decision. That’s nonsense, you say. I would agree, so I believe this is another reason why the rules could not have been intended to provide for a correspondence vote to run concurrently with a S100 deemed consent process.

Ok, what if you followed the same solution suggested above: convene the correspondence vote with at least 14 days’ notice? Wouldn’t this easily accommodate the 5 business days timescale for requesting a physical meeting? Yes, I suppose it could, but imagine then that you received a request for a physical meeting on business day 6. What would be the consequence: would you consider that the request only stopped the S100 liquidator decision, whereas the correspondence vote on fees could continue to its original decision date? Interesting… so the S100 physical meeting could decide on a different liquidator, who would take office with an already-approved fees decision in which he had taken no part. That would be odd!

 

So where does this leave correspondence votes running concurrently with a S100 deemed consent decision?

I think that, for these reasons, concurrent correspondence votes just do not work: the statutory timescales throw up all sorts of impossible or at least risky scenarios, but more fundamentally there is no one empowered by the rules to sign the notice of decision procedure.

 

But then why do the rules allow proposed liquidators to issue fees-related information?

I believe this is because a fees decision could be proposed pre-appointment: via a S100 virtual – or indeed, where required, a physical – meeting.

Such meetings do not suffer any of the problems described above:

  • the notice of the meeting decision procedure is signed by the director under R6.14;
  • the fees decision(s) can be proposed and made at the meeting “at the same time” as the S100 liquidator decision and therefore the fees decisions can be sought on 3 business days’ notice;
  • there is no possibility of the S100 liquidator decision and the fees decisions diverging, because a S100 virtual meeting can only be stalled by a physical meeting request (not also by a deemed consent objection) and this would terminate the virtual meeting process set up to consider all the decisions; and
  • as the fees decisions have been proposed via a notice of decision procedure issued under R6.14(2)(b), the deadline for requests for a physical meeting is set by R6.14(6), which would apply to all decisions proposed for consideration at the virtual meeting.
  • The possibility of proposing fees decisions via a S100 virtual/physical meeting also makes sense of R18.16(10), because in order for the creditors to consider a fees decision at the meeting, the proposed liquidator needs to send the fees-relevant information beforehand.

 

Haven’t we been here before?

I accept that my concerns above are purely technical. I am reminded that so too was the debate that arose in October 2015 about whether IPs could issue fee-related information before they were appointed liquidators so that fees resolutions could be considered at the S98 meetings. It seemed to me that the profession quickly became divided into two camps: those who took comfort in Dear IP 68 that stated that the intention was not to preclude pre-appointment fee estimates and those who, notwithstanding the clarification of such intention, chose to avoid falling foul of an apparent technicality in the rules by seeking fee approval only after appointment. The 2016 Rules – R18.16(10) referred to above – have resolved that old issue, but we now have a different set of technicalities affecting attempts to seek fee approval by S100-concurrent correspondence votes.

Can we expect the regulators to clarify their intentions and regulatory expectations on this question? We can only hope! However, if the answer were on the lines of Dear IP 68 (i.e. the rules might not exactly say this, but this is what we intended), then would this help or would we, without a legislative fix, still be left to choose between two camps? I hasten to add that I have no idea on which side of the fence the regulators might fall on this new question in any event.

 

Are the issues only about the technical?

In exploring the above issues with people at the Insolvency Service and the IPA, both have raised concerns – aside from the purely technical – about the appropriateness of proposing decisions on liquidators’ fees before appointment.

I understand that there are concerns about the huge amount of documentation – the Statement of Affairs, SIP6 information, fees and expenses related information – that creditors would be expected to absorb and vote on potentially in less than 3 business days. There seems to be slightly less concern attaching to fee-approval sought via a S100 virtual meeting, I think because this is seen to provide creditors with a forum in which to explore matters in an attempt to assess the reasonableness of fee requests. However, I believe there are also concerns about how IPs can put forward a reasoned and justifiable case for post-appointment fees before they have got stuck into the appointment.

There are clearly lots of factors to weigh up here, factors that may impact more than simply the rights and wrongs of correspondence votes running concurrently with S100 deemed consent decisions. In view of the serious ramifications of getting fees decisions wrong, I do hope that the regulators put their heads above the parapet and tell us all their views on these matters soon.


 

2. VAs incorporating 1986 Rules

The Problems with VAs based on 1986 Rules: the story so far

The issue I’ve blogged about before (https://insolvencyoracle.com/2017/05/02/new-rules-emerging-interpretations-part-1/) is: how far should you apply the 2016 Rules as regards VAs that incorporate 1986 Rules?

Dear IP 76 contains the following statements by the Insolvency Service:

  • the IVA Protocol’s Standard Terms’ reference to calling meetings “in accordance with the Act and the Rules” means the amended Act and the 2016 Rules;
  • the Act and 2016 Rules “remain silent on how decisions are taken” in VAs;
  • supervisors should not “feel restricted to only using a physical meeting”; and
  • the Insolvency Service “expect[s] supervisors to take advantage of the new and varied decision making procedures”.

I blogged my concerns about these statements:

  • If calling meetings “in accordance with the Act and the Rules” means the new provisions, which are indeed silent as regards meetings in approved VAs, then we must look to the statutory provisions for Trustees, because paragraph 4(3) of the Protocol Standard Terms states that supervisors should “apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications”. Therefore, does this mean that in fact a supervisor is prohibited from calling a physical meeting by reason of S379ZA(2) in the same way as a Trustee is?
  • How can a term stating that “a supervisor may… summon and conduct meetings” equate to “a supervisor may seek a decision by, say, an electronic vote”?
  • Dear IP focused on the wording of the IVA Protocol, whereas I believe that consideration of the R3 Standard Terms leads to very different conclusions, because the R3 Standard Terms are almost entirely independent from any Act and Rules provisions.

However, after I’d blogged, R3 issued its own statement, which included:

“The current R3 Standard Conditions refer to ‘meetings of creditors’ rather than making specific reference to the Rules. R3 is also of the opinion that IPs are not restricted to using physical meetings of creditors only when seeking the views of creditors and that the full range of decision making procedures introduced by the new Rules are available to the supervisor. It could also be argued that section 379ZA of the Act which prevents physical meetings being held except in limited, defined circumstances, applies to existing arrangements…

“We are of the opinion that the current version of the Standard Conditions continues to be relevant and supervisors using the current version of the Standard Conditions for arrangements approved post 6 April 2017 should apply the new Rules when seeking decisions of creditors. For the avoidance of doubt however nominees may wish to seek their own legal advice on the wording to be used when seeking variations of the arrangement and supervisors may wish to seek their own legal advice on the procedures to be followed for decisions of creditors to be taken on arrangements approved before the introduction of the new Rules.”

My problems with R3’s Statement

R3’s statement floored me. Not only did it repeat what I consider are the Insolvency Service’s flawed arguments, but in view of the wording of R3’s Standard Conditions for IVAs, it gave me even more reasons to disagree:

  • Again, how can the R3 Standard Conditions’ “meetings of creditors” be translated to mean “the full range of decision making procedures”, especially as the R3 Standard Conditions do not make specific reference to the Rules? That is, the R3 Standard Conditions contain the entire process of calling and holding a meeting, which is not dependent on any Rules, and so what entitles a supervisor of an IVA incorporating the R3 Conditions to walk away from those Conditions and decide to do something completely different contained in Rules, which are “silent” on VA processes?
  • I am doubtful that S379ZA “applies to existing arrangements” that incorporate the R3 Standard Conditions. The reason why I blogged that S379ZA(2) might apply to Protocol IVAs is because the Protocol Standard Terms refer to calling meetings “in accordance with the Act and the Rules”, but these words are missing from R3’s Standard Conditions. S379ZA(1) states that the section “applies where, for the purpose of this Group of Parts, a person seeks a decision from an individual’s creditors about any matter”. The “Group of Parts” comprises Ss251A to 385, but as we all know this Group of Parts does not refer to a decision to vary an IVA (it only speaks of approving the IVA). Therefore, how can S379ZA, which prevents physical meetings from being held unless requested by creditors, apply to already-approved IVAs incorporating R3’s Standard Conditions? I appreciate that R3 has only stated that “it could… be argued”, but is it responsible to give some weight to such a feather-light argument?
  • I am also not persuaded that “supervisors using the current version of the Standard Conditions for arrangements approved post 6 April 2017 should apply the new Rules when seeking decisions of creditors” because of the principles in the case set out below.
  • (And, if I wanted to be really picky, I’d question what “nominees” have to do with varying arrangements!)

 

William Hare Ltd v Shepherd Construction Ltd

In the case of in William Hare Ltd v Shepherd Construction Ltd [2009] EWHC 1603 (TCC) (25 June 2009), a subcontractor (“H”) was engaged in December 2008 to carry out some work for the main contractor (“S”). The sub-contract defined the employer’s insolvency with reference to: the appointment of an administrative receiver, insolvent liquidation, winding-up by court order and “an administration order made by the court”.

When the employer was placed into administration, S issued notices withholding payment. H argued that, because the employer had gone into administration via a directors’ appointment and not via a court administration order, the withholding notices were invalid, as the employer had not gone insolvent according to the sub-contract’s definition. S argued that it would be absurd for the sub-contract to be construed as ignoring the later amendments to the 1986 Act and that all routes to administration under the 1986 Act as amended were covered by the wording of the sub-contract.

The judge was “in no doubt” that H’s construction of the sub-contract was to be preferred and he held that the court should not rewrite the sub-contract to allow for the amendments to the 1986 Act. His reasons included the following:

  • The meaning of the words was plain and there was no reason to believe that the parties did not intend to use the words as they were written or that they had made a mistake in using the words. In contrast, S’s construction involved “a significant rewording of the clause”.
  • The sub-contract had been made long after the Act had been amended. In this case, the parties agreed that they must be deemed to have known about the amendments to the Act when they made the sub-contract. “In these circumstances it is appropriate to view the failure to amend clause 32 as a choice, as a deliberate decision to include one particular method of administration.”
  • If it were needed, the principle of contra proferentem – that, when there is doubt about the meaning of a contract term, the words may be construed against the person who put them forward – supported H’s construction.
  • Because the sub-contract was executed after the change in the legislation, sections 17 and 23 of the Interpretation Act 1978 (which incidentally are the provisions that Dear IP cited in support of the opinion that the 2016 Rules replaced the 1986 Rules in the Protocol Terms, because they refer to the 1986 Rules “as amended”) were not relevant.

 

The relevance of this case to New IVAs using Old Rules Terms

Say, you are a supervisor of an IVA that was approved last week and the IVA Proposal incorporates R3’s current Standard Terms (or indeed any Terms) that continue to refer throughout to the 1986 Rules.

Surely the principles in the case above cast serious doubt on whether you are free to translate those 1986 Rules into 2016 Rules, don’t they? You, as the debtor’s adviser, had deliberately put forward a Proposal that refers to 1986 Rules in the knowledge that the Rules have changed and it seems that the Interpretation Act 1978, which was the backbone of the Insolvency Service’s argument set out in Dear IP 76, is of no effect. Therefore, is there not a strong argument that you intended to incorporate 1986 Rules into the IVA?

I think also about the debtor and unsophisticated creditors: based on the Terms, they might expect a meeting of creditors in order to vary the Proposal, so what could their reaction be if they were to receive notice of a correspondence vote or perhaps even a notice seeking deemed consent? It seems to me that, if you were to say: “ah yes but the 2016 Rules changed things”, I might respond: “yes, but those changes happened in April, so why did you produce Terms after this that still referred to creditors’ meetings?”

 

Maybe I should accept that the Emperor is wearing clothes!

I have no doubt that the Insolvency Service and R3 have opinions backed up with legal advice. Of course, I am not suggesting for one moment that their statements should be ignored, but I feel I must say things as I see them. I am also not the only one who believes that the InsS and R3 have got this one wrong. I am not surprised therefore that R3 refers to seeking legal advice. No one can be certain how a challenge in court would pan out.

But in practice does the answer to this question really matter? If debtors, creditors and supervisors are happy to consider agreeing variations proposed in a manner that is not strictly according to the Terms, who is going to challenge it? Presumably also the RPBs aren’t going to take a different tack to that set out in Dear IP. And even if a debtor were to dispute the soundness, say, of a creditors’ decision to terminate an IVA, maybe the court would conclude that it was simply a technicality that has no real practical effect on the majority creditors’ wishes… but nevertheless it could make for an expensive debate.

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Money Laundering Regulations 2017 – part 2: Customer Due Diligence and more

The objective of the MLR17 is “to make the financial system a hostile environment for illicit finance while minimising the burden on legitimate businesses”. The impact assessment shows a net direct cost to businesses of £5.2m pa… so don’t expect the MLR17 burden to be any lighter than their predecessor’s.

In this blog post, I summarise the key changes in the MLR17 affecting day-to-day activities, including:

  • Focussing the customer due diligence (“CDD”) more squarely onto risks
  • A need to refresh the risk assessment process
  • More than ID checks are required to complete CDD
  • How the impacts of the enlarged definition of a PEP can be managed
  • A simultaneous easing and toughening of the reliance provisions
  • Necessary additions to engagement letters and other letters to insolvents

My earlier blog post reviewing the MLR17’s effects on firms’ systems and controls can be found at: https://insolvencyoracle.com/2017/07/22/mlr17-part-1/

 

Customer Due Diligence: a clearer objective?

For most intents and purposes, the MLR07 CDD requirements boiled down to identifying and verifying identities. Ok, there was also the need for a risk-based assessment, but it seemed that the objective of this was only really to determine the extent of checks employed in the CDD process.

I think the MLR17 provide a welcome adjustment in the emphasis. For example, in setting out the enhanced due diligence (“EDD”) process, Reg 33 puts the risk assessment in the following context:

“When assessing whether there is a high risk of money laundering or terrorist financing in a particular situation, and the extent of the measures which should be taken to manage and mitigate that risk…”

This thought – that the focus of the risk assessment is to consider the risk that “a particular situation” gives rise to a high risk of money laundering or terrorist financing – is repeated elsewhere and emphasises the need to manage and mitigate the risk e.g. of becoming an unwitting “enabler”. Realistically, how far does simply identifying who we’re dealing with get us in this process?

I do understand that money launderers generally want to work under a cloak of anonymity, so getting to the root of who really is behind a company and in the process showing customers that we’re serious when we carry out CDD help manage and mitigate the risks: money launderers may go looking for a less diligent professional. But what really are the risks of the particular situation of an insolvency?

If we’re being appointed over a dead company with few assets, what are the risks of money laundering or terrorist financing? If there have been any such activities, they will only be historic, won’t they? There will be negligible, if any, risk that any such activities will continue under our watch. So in what ways can – or should – any risks be managed or mitigated? Increasing the extent of identity checks we carry out surely won’t help; it may only give us more information to add to a SAR, if we develop suspicions about past events.

Although the new CDD requirements of the MLR17 will be a pain to complete, I do think they get closer to the nub of the issue: what does the customer do and what do they want us to do for them? In so doing, it seems that the flipside is that, if we have a defunct “customer” who isn’t asking us to do anything risky, then we might find the CDD simpler.

I hasten to add that this post describes purely my own interpretation of the MLR17 (plus some input from Jo Harris). I would be surprised if the RPBs see all the requirements in the same light. Regrettably, it may be a long time before we learn how they think the regulations should be applied, but until they make their expectations clear, I am not sure we can be heavily criticised for trying to do our best.

 

First things first: the risk assessment

Like its predecessor, the MLR17 state that the extent of CDD measures must reflect the level of risk assessed. However, I think the MLR17 far more clearly explain how this risk should be assessed.

For instance, Reg 28(12) states that there are two factors involved:

  • the Reg 18 risk assessment – this is the business-wide risk assessment, which I covered in my last blog; and
  • an “assessment of the level of risk arising in any particular case” – I think this finally answers unequivocally the question of whether a risk assessment needs to be done on court appointments: surely a case-specific risk assessment must be done each time.

Although I think we all developed passable approaches to risk assessments under MLR07, I think that the MLR17 help us much more. Reg 28(13) lists the factors to consider for the risk assessment, but in particular I found Reg 33(6) valuable. This regulation lists potential flags of higher risks, setting them out nicely into three categories:

  • customer risk factors, e.g. where the business is cash intensive;
  • product, service, transaction or delivery channel risk factors, e.g. where payments are received from unknown or unassociated third parties; and
  • geographical risk factors.

I found a useful exercise was to develop a list of questions that put many of the eighteen Reg 33(6) factors into a practical insolvency context. This generated several questions that were similar to the MLR07, but I discovered that the emphasis on whether ongoing insolvency engagements could lead to encounters with money launderers emerged strongly.

At the other end of the spectrum, Reg 37(3) is helpful in assessing cases for low risk. This regulation lists another fifteen indicators of potential low risk, categorised into the three headings above, some of which similarly can be converted into insolvency-relevant questions.

As the MLR17 are non-prescriptive however, the warning described at Regs 33(7) and 37(4) should be incorporated somewhere into the risk assessment:

“the presence of one or more risk factors may not always indicate that there is a high [or low] risk of money laundering or terrorist financing in a particular situation”

This will no doubt frustrate those that would much prefer a straightforward way to steer risk assessments to a definitive conclusion, but I think that this final sense-check is valuable, as it is impossible to squeeze all scenarios into a bundle of questions.

 

More steps in the process

The process no longer follows the formula: risk assessment + beneficial owner IDs = CDD. The MLR17 require other information to be examined. For example, Reg 28(3)(b) requires us to “take reasonable measures to determine and verify”:

  • “the law to which the body corporate is subject, and its constitution” (Reg 28(3)(b))
  • “the full names of the board of directors and the senior persons responsible for the operations of the body corporate” (Reg 28(3)(b))

Personally, I do wonder how these items can be “verified”, especially the full names of the senior persons – obtaining this information before engagement may be a struggle as it is.

The MLR17 also turn an eye toward a new person not covered by the MLR07: anyone who purports to act on behalf of the customer. Reg 28(10) requires that such a person be identified and their identity verified in all cases.

 

Enhanced Due Diligence

Continuing the theme of a better targeted approach, I like the way the EDD requirements no longer focus simply on increasing the extent of ID checks… although the downside is that the process has become more time-intensive for higher risk cases.

Reg 33(4) states that EDD measures must include:

  • “as far as reasonably possible, examining the background and purpose of the transaction, and
  • “increasing the degree and nature of monitoring of the business relationship in which the transaction is made to determine whether that transaction or that relationship appear to be suspicious.”

Also, Reg 33(5) states that EDD measures may include “among other things”:

  • “seeking additional independent, reliable sources to verify information provided or made available to the relevant person;
  • “taking additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction;
  • “taking further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship;
  • “increasing the monitoring of the business relationship, including greater scrutiny of transactions.”

In an insolvency context, I think much of this can be translated into asking oneself: why does this “customer” want to take this step, does it seem logical in the circumstances or could it be a cover for something more sinister?

 

PEPs: are they high risk?

Well of course, in this non-prescriptive world, the answer to this question is always going to be: it depends.

The MLR17 have widened the definition of a PEP to encompass UK PEPs. Therefore, something that for most of us was little more than theoretic under the MLR07, likely will become more of a reality in future. However, PEPs are still likely to pop up only once in a blue moon, which makes it tricky to design systems to accommodate them without overcomplicating processes for the 99.9% of cases.

  • Additional steps for PEPs and PEP connections

In all cases where a PEP or PEP connection (i.e. family member or “known close associate” of a PEP) has been spotted, the MLR17 require the following steps:

  • Assess the associated risk level and tailor the due diligence measures accordingly;
  • Obtain approval from “senior management” in establishing or continuing the business relationship;
  • “Take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transactions with that person”; and
  • Conduct enhanced ongoing monitoring of any business relationship.

So what do you do if the daughter of a domestic Supreme Court judge wants you to help wind up her insolvent company? Does she really present a high risk? Do you really need to go through all those steps?

  • FCA enlightenment on UK PEPs

The FCA has produced some useful guidance on dealing with PEPs: https://goo.gl/WW2WY1

Understandably, the FCA emphasises the value of the first step: the risk assessment. Helpfully, the guidance states:

“A PEP who is entrusted with a prominent public function in the UK should be treated as low risk, unless a firm has assessed that other risk factors not linked to their position as a PEP mean they pose a higher threat”

This demonstrates to me the pointlessness of this MLR17 change wrapping in domestic PEPs: it has added to the nonsensical bureaucracy, as we now need to (i) note UK PEPs; (ii) consider whether they are low risk; (iii) decide in most cases that they are low risk; (iv) but nevertheless work through the other steps listed above.

If a PEP is low risk, then how practically should we work through the other steps? The FCA suggests:

  • “Senior management” approval need not be at board level; it could be the MLRO.
  • “Take less intrusive and less exhaustive steps” to establish the sources of wealth and of funds; “only use information available to the institution… and do not make further inquiries of the individual unless anomalies arise”.
  • Ongoing monitoring could be, “for example, only where it is necessary to update customer due diligence information or where the customer requests a new service or product”.

Oh well, that’s alright then! Thank you FCA, for bringing a note of reasonableness to the proceedings.

Of course, if a PEP is considered high risk – based, as the FCA points out, on who they are, where they are, and what they want from you – it is only right that additional measures are applied. But, I think that, unless you work in a market that means you encounter PEPs relatively frequently, other than ensuring that staff are alert to the complications arising from PEPs and giving them a place to go when one is spotted, practically on a day-to-day basis there is little point in layering on procedures to deal with PEPs.

 

Reliance on other people’s due diligence: made easier or tougher?

On the one hand, relying on another MLR-regulated person’s customer due diligence checks has been made easier. There is no longer a two-tier supervisory body system, which under the MLR07 meant that an ICAEW-licensed IP could be relied upon, but an IPA-licensed IP could not. Now, the work of any MLR-regulated persons (e.g. including casinos), as well as some overseas equivalents, may be relied upon.

However, there is one new requirement that almost entirely negates this advantage: Reg 39(2) states that the person seeking to rely on another:

“must immediately obtain from the third party all the information needed to satisfy the requirements of regulation 28(2) to (6) and (10) in relation to the customer, customer’s beneficial owner, or any person acting on behalf of the customer”

In other words, you must obtain from the person on whom you are seeking to rely all the information that you would otherwise gather yourself to complete customer due diligence. It also doesn’t avoid the need to carry out a risk assessment or deal with ongoing monitoring. So what is the point of relying on someone else to do some of the work for you, especially when you remain liable for any failure of the relied-on person to conduct appropriate due diligence? You might as well collect the due diligence information yourself, mightn’t you?

 

Additions to engagement letters… and more?

Reg 41(4) states that;

“Relevant persons must provide new customers with the following information before establishing a business relationship or entering into an occasional transaction with the customer:

(a) the information specified in paragraph 2(3) in Part 2 of Schedule 1 to the Data Protection Act 1998 (interpretation of data protection principles);

(b) a statement that any personal data received from the customer will be processed only for the purposes of preventing money laundering or terrorist financing, or as permitted under paragraph (3).”

In other words, the required information is:

  • The identity of the data controller;
  • The identity of any representative nominated by the data controller; and
  • The purposes for which the data are intended to be processed (including the statement required by Reg 41(4)(b) above).

Complying with this requirement seems fairly straightforward when appointments are preceded with an engagement letter to the insolvent/MVL-seeker: the above information likely would feature in the engagement letter.

  • Is a bankrupt a “new customer”?

What if there is no engagement letter with the “customer”? Does this requirement still apply in bankruptcies, compulsory liquidations and creditor-led Administrations?

Who is the customer in a court or creditor-led process? The old CCAB guidance states: “In the context of insolvency work, the person or entity entering into the business relationship is considered to be the insolvent.” Although I think this was generally accepted and just-about manageable for the MLR07, the shoe-horning of regulations designed for a client-provider relationship into an insolvency context becomes a little more painful with the MLR17.

Are we really expected to view a bankrupt as a “new customer” for the purposes of Reg 41(4)? Do we really need to provide them with the above information? I guess we can add the information to our on-appointment letters to insolvents, but we cannot write to them before establishing the business relationship, i.e. before being appointed as office holder, can we?

Ah but doesn’t the CCAB Guidance give us a back-stop guide of 5 working days after appointment to complete the due diligence? This is true, but this provision related to the timescale for completing the CDD in view of the fact that the MLR07 had stated that in some circumstances the due diligence could be completed as soon as practicable after first contact – a concession that is repeated in the MLR17 – but we’re not talking about the due diligence process here. The MLR17 do not provide an asarp exception to providing the above information before establishing the business relationship, so I cannot see a practical way for us to comply with Reg 41(4) in most court or creditor-led appointments.

 

Not written with IPs in mind

The MLR17 repeat their predecessor’s deficiency in demonstrating ignorance of the mechanisms of the insolvency regime. I have always objected to the assumption that the insolvent is an IP’s “customer”, especially when I remember that technically under the MLR07/17 an IP is only carrying out regulated activities when s/he is formally appointed. Further questions about the drafter’s knowledge came to my mind when I read the new definition of an IP in the MLR17: not only an individual, but also “any firm… who acts as an insolvency practitioner within the meaning of section 388 of the Insolvency Act 1986” – that would be a clever trick!

In my view, the MLRs’ concept of a “business relationship” also has never really worked: what “business relationship” does the IP form with the insolvent when s/he takes office? And the suggestion that an IP engages in an “occasional transaction” when s/he sells an insolvent’s assets is another cruelty on the English language: is it the insolvent or the IP that is carrying out the transaction? An “occasional transaction” is defined as “a transaction which is not carried out as part of a business relationship”, but the IP is considered to have a “business relationship” with the insolvent, so where does the asset sale fit in?

Is there no useful guidance for IPs? In my view, the CCAB Guidance touches on insolvency far too lightly and the Insolvency Service’s and R3’s Guidance notes are showing their age; both have the air of guidance written when the MLR07 were little more than theory. Let’s hope that we will one day receive some authoritative guidance that demonstrates a proper and practical understanding of how the MLR17 should be applied to the insolvency regime.


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Money Laundering Regulations 2017 – Part 1: Infrastructure Changes

 

“For Insolvency Practitioners there is relatively little change” stated one RPB’s notice to members on the Money Laundering Regulations 2017, but another RPB stated that the new regs “will have wide-reaching changes for accountancy firms and IPs”.   If two RPBs have such polar views on the overall impact of the new regs, this doesn’t bode well for a common approach to compliance with the MLR17.

I have great sympathy for the RPBs, though. The final regulations were only released late on Thursday 22 June and they came into force on Monday 26 June. They also contained some well-hidden changes from the draft regulations and there was no quick way of understanding their consequences. I suspect I was not the only one who spent their weekend scrutinising 116 pages of new legislation and thinking: this is an impossible task for us all!

In this first post on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR17”), I review the regulations’ impact on the systems involved in managing an insolvency practice:

  • The different approaches expected of large and small firms
  • The appointment of a new person responsible for compliance
  • The need to screen relevant employees
  • The independent audit function
  • Drafting policies, controls and procedures
  • The expanded syllabus for staff training
  • Timely destruction of certain records
  • Drafting a firm-wide risk assessment
  • Seeking “approval” from your Supervisory Authority

The MLR17 can be found at: https://goo.gl/ei8ZB1

Some useful guides on the topic:

 

“Size and nature” matter

In six places, the MLR17 require relevant persons (i.e. those carrying out MLR17-regulated activities) to have regard to the size and nature of their business when seeking to comply with the regs. For example, Reg 19(2) requires relevant persons to adopt policies, controls and procedures that are “proportionate with regard to the size and nature of the relevant person’s business”.

Reg 21 states that, “where appropriate with regard to the size and nature of its business, a relevant person must:

  1. appoint one individual who is a member of the board of directors… or of its senior management as the officer responsible for the relevant person’s compliance with these Regulations;
  2. carry out screening of relevant employees..;
  3. establish an independent audit function…”

What are the RPBs’ expectations here? I cannot see any grey area in complying with Reg 21: either you endeavor to meet all (or some?) of these requirements or you determine that the measures are not appropriate having regard to the size and nature of your business. Where does the threshold between complying with Reg 21 and justifiably ignoring it lie?

I suspect that, at least in the short term, the regulators will say: you demonstrate to us how you’ve come to a conclusion. But they are the ones with the helicopter view of the profession(s) and they are the ones in direct contact with HM Treasury and all the other Supervisory Authorities. Can they not guide their regulated members?

To determine what is appropriate and proportionate, the MLR17 specifically refer to following guidance issued by the FCA or by any other Supervisory Authority or appropriate body and approved by HM Treasury. At present, all that IPs have is the 2008 CCAB Guidance, which I think is woefully inadequate in view of the shift from MLR07 to MLR17.

At the moment, different RPBs seem to be suggesting different expectations on compliance with Reg 21, which is not surprising given how swiftly the MLR17 were enacted. Whilst, understandably, the RPBs stick to the strict wording of Reg 21, they elaborate the idea with phrases such as:

  • IPA: “Large firms must…”
  • ICAS: “requirement for firms of a certain size…”
  • ICAS: “requirements don’t apply to sole practitioners with no staff and no subcontractors”
  • ICAEW: “Sole practitioners with no employees are exempt from this requirement”

Thus, it seems to me that all we can glean is that “large firms” definitely need to comply with these Reg 21 items, “sole practitioners with no employees” (and possibly no subcontractors either) do not, but everyone in between..? Your guess is as good as mine.

 

Reg 21: Infrastructure Changes

It is evident from the Reg 21 quote above that infrastructure changes are necessary for at least some firms:

  • Board/senior level appointment of someone responsible for compliance

All three RPBs have asked to be informed of the appointment of such a person, as is required under the MLR17. Reg 21 also requires firms to notify their RPB of the identity of the first-appointed MLRO (I have not seen any RPB ask for this, so I assume MLR17-appointed MLROs are viewed as simply carrying on from their MLR07 appointment) and any change in identity of the MLRO or other Reg 21 appointed person within 14 days of the change.

This may be, but does not have to be, the same person who acts as MLRO, a position that is repeated in the MLR17. ICAS is calling this person the BSMLP (board or senior management level person) and ICAEW is calling them the MLCP (money laundering compliance person). The IPA has not given them a name.

  • Employee-screening

“Relevant employees” are those involved in the firm’s compliance with the MLR17 as well as those “capable of contributing” to the identification, prevention, detection or risk-mitigation of money laundering or terrorist financing – so, for insolvency practices, I would think about all those working in compliance, cashiering, case administration and take-on. As employee-screening and staff-training are themselves MLR17 requirements, anyone involved in those activities would also be “relevant employees”.

The draft regs had included “agents” in this screening process, but “agents” were removed from the final version (which might explain why the IPA’s notice to members still referred, I think incorrectly, to screening agents).

“Screening” means “an assessment of the skills, knowledge and expertise of the individual to carry out their functions effectively and the conduct and integrity of the individual”. I suspect these items are generally covered in recruitment and appraisal processes, but they will need to be adequately documented in future specifically with the MLR17 in mind.

Reg 21 requires “relevant employees” to be screened, both before they are appointed and whilst so employed.

  • Independent audit function

Two questions came immediately to my mind: how independent is “independent” and what constitutes an “audit”?

  • What is an “audit”?

Reg 21 describes it as entailing the following:

  1. An examination and evaluation of the adequacy and effectiveness of the policies, controls and procedures adopted (see below)
  2. recommendations in relation to those policies, controls and procedures; and
  3. monitoring compliance with those recommendations.

This sounds very much like the process followed for the ICAEW’s Insolvency Compliance Reviews. Indeed, the ICAEW believes that firms’ money laundering compliance reviews, which they should already be performing, address the MLR17 requirement. ICAS is awaiting confirmation on how their current compliance review requirement stacks up against this audit requirement. The IPA has not made any comment, although I cannot see that the self certification process bears any resemblance to what is required here.

  • How independent is “independent”?

As far as I can see, the ICAEW is the only RPB that has made any comment: “you should make sure that your Money Laundering Compliance Principal is responsible for performing this review”. The Law Society explains: “the regulations do not state that the independent audit function has to be external to your firm, but it should be independent of the specific function being reviewed”. It seems to me, therefore, that if the “MLCP” is heavily involved in, say, the customer due diligence process, then they might not be the right person for the job.

 

Reg 19: Policies, Controls and Procedures

I’ll skip through this section quickly, not because it is unimportant – I accept that it is vital and I suspect it will feature heavily in monitoring visits – but because it is so dull! Sorry, it had to be said.

All firms will need to maintain written policies, controls and procedures covering pretty-much all relevant areas of compliance with the MLR17. I think that anyone drafting these would do well to tick off every Reg 19 item plus carry out an overall sense-check, much as we would double-check a SIP16 Statement.

These policies, controls and procedures must also:

  • be approved by the firm’s “senior management” (defined, I think quite widely, in Reg 3);
  • be regularly reviewed and updated, with all changes made being documented in writing; and
  • be communicated within the firm, with such steps taken (and steps to communicate any changes) being documented in writing.

Regs 19 and 20 adds further requirements for firms with overseas subsidiaries or branches.

 

Reg 24: Staff Training

Of course, the MLR07 required regular staff training, so have things changed under the MLR17?

Setting aside the vague “size and nature” references to what “appropriate measures” might look like, the material changes are that:

  • measures must include making relevant employees aware of, not only the usual MLR matters, but also of “the requirements of data protection, which are relevant to the implementation of these Regulations”

Data protection newly features elsewhere in the MLR17, most practically around record-keeping (see below) and in the client take-on process (which I will cover in a future blog), although it would also be relevant to make employees aware of the principles around handling personal data gathered for the purposes of complying with the MLR17 (Reg 41).

  • a written record must be maintained of the “measures taken” and “in particular, of the training given”.

I’m sure we’re used to documenting evidence that staff have completed regular MLR training, but the above quote indicates that we should document other measures taken to make staff aware, perhaps for example the receipt of induction training, staff handbooks and manuals.

 

Reg 40: Record-Keeping

Although the MLR17 have retained the MLR07’s basic standard of 5 years for record-keeping, there is a problematic change in emphasis.

Both MLRs require customer due diligence records to be retained for “at least” 5 years, but the MLR17 require any personal data contained in these records to be deleted after 5 years from the completion of an occasional transaction or the end of the business relationship. The MLR17 also put the same record-keeping requirements on documents to support transactions that are the subject of customer due diligence measures or ongoing monitoring.

Although there are some exceptions to this deletion requirement, e.g. where the records need to be retained for legal proceedings, this could add a burden to firms whose systems are set up to store records to a 6- or 10-year standard. To be fair though, the data protection principles have for a long time now included that personal data should not be kept for longer than is necessary, so the implementation of smarter archiving practices may be long overdue.

 

Reg 18: the Relevant Person’s Risk Assessment

Personally, I think this Reg may present the greatest challenge: a relevant person must “take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its business is subject”. This is not referring to the risk assessment carried out as part of the customer due diligence process. This is a risk assessment of the relevant person’s business, i.e. where do the risks lie in the work undertaken by the IP?

  • What is the purpose of this risk assessment?

It needs to feed into:

  • the design and maintenance of the policies, procedures and controls;
  • decisions regarding employee-screening and the independent audit function; and
  • the extent of customer due diligence measures taken in each case, including (but not only) whether enhanced or simplified due diligence should apply.

The MLR17 state that relevant persons must provide their risk assessment to their Supervisory Authority on request. Supervisory Authorities must review firms’ risks assessments (on a risk-based approach) and the IPA has stated that it will be reviewed as part of routine monitoring visits.

  • How do you write the risk assessment?

The IPA and the ICAEW direct members to the CCAB’s current Guidance: https://goo.gl/LBgRKX. It’s true, Section 4 of the Guidance provides some pointers, but personally I think the Guidance is showing its age, as the MLR17 add more to the statutory list of risk factors that you need to consider than are covered by the Guidance. Therefore, if you do refer to the Guidance, I would also recommend cross-checking against Reg 18 itself to make sure that you have captured everything relevant.

The Reg 18 risk factors that you need to consider (although there could be others) are:

  • your “customers”;
  • the countries or geographic areas in which you operate;
  • your products or services;
  • the transactions you engage in or handle; and
  • your delivery channels.

The task requires some lateral thinking to see these risk factors through an IP’s eyes, but I think it is a valuable exercise: one of the problems with MLR07 is that it all became process-driven, it soon boiled down to ticking boxes seemingly with the sole purpose of confirming identities. I think these new regs are an opportunity for us to take a fresh look at the risks: in what areas of our work are we most – and least – likely to encounter money laundering or terrorist financing? What services or transactions could be attractive – or prohibitive – to potential money launderers? Simply considering these questions could help us and staff to be more alert to strange potential clients, behaviours or requests.

Admittedly, this still doesn’t help much in drafting the risk assessment. If it is any consolation, the ICAEW has stated that, as the risk assessment will depend on the size and nature of your firm, the overall risk assessment of a small firm “may be quite succinct”.

 

Reg 26: Seeking the Approval of the Supervisory Authorities

The MLR17 give the Supervisory Authorities a great deal of new work to do. (I wonder how all this extra work is going to be paid for..?) For example, they need to conduct their own risk assessment and must create risk profiles of their members to inform their monitoring activities.

Reg 26 creates a whole new “approval” process, not only for licensed IPs, but also for firms’, beneficial owners, officers and managers (which include MLROs). The Supervisory Authority’s approval must be granted unless the person has been convicted of a “relevant offence” (Schedule 3 to the MLR17 lists 35 such offences).

  • What if we’re not yet “approved”?

Those requiring approval can act as IPs, beneficial owners, officers or managers of relevant firms provided that they apply for approval before 26 June 2018. Although Reg 26(4) states that “a relevant firm must take reasonable care to ensure that no-one is appointed, or continues to act, as an officer or manager of the firm unless they have been approved or have applied for approval and the application has not yet been determined”, my enquiries to the main RPBs suggest that they are not viewing this provision as being triggered until 26 June 2018 (and who can blame them, given the lack of notice we have all had?!), i.e. provided that we take steps before 26 June 2018 to become approved, there should be nothing to worry about.

Indications from the main RPBs are that the approval application process will become clear around licence-renewal time.

  • Who is my Supervisory Authority?

Under the MLR07, I think the answer to the above question gradually became clear. The MLR07 had stated that each professional body was the Supervisory Authority for relevant persons regulated by it. Therefore, for example, if I held my insolvency licence with the ICAEW, but I was also an ordinary member of the IPA, the ICAEW would be my Supervisory Authority, as ordinary membership of the IPA carries no real regulation with it (I just need to make sure I comply with the membership rules).

However, the MLR17 introduced a small but significant change. Reg 7(1)(b) states that:

“each of the professional bodies listed in Schedule 1 is the supervisory authority for relevant persons who are members of it, or regulated or supervised by it”.

Therefore, it seems to me that, under the above scenario, I would now have two Supervisory Authorities. I suspect there are lots of members of professional bodies who look to a different body to act as its regulator, especially considering the wide range of activities falling under the MLR17.

Whilst having two Supervisory Authorities is nothing new (as IPA-licensed IPs working in an accountancy practice know well), I think that these developments – the widened scope from solely regulated members to members generally, the introduction of new approval processes (which may require applications to more than one body?) and the additional expensive burdens falling on Supervisory Authorities – may lead members to question the value of paying annual subs to more than one body.

Alternatively, perhaps we will get some clarification on the interaction of multiple Supervisory Authorities. Both MLRs encourage cooperation between bodies so that regulatory efforts are not duplicated, but we have seen little such cooperation to date.

 

Your to-do list

In summary, I think you might tackle the practice-level changes brought about by the MLR17 as follows (depending, of course, on what is proportionate and appropriate with regard to the size and nature of the business):

  1. Document the appointment of a principal as the person responsible for the firm’s MLR17 compliance and inform your Supervisory Authority/Authorities of the appointment
  2. Create/refresh the firm-wide risk assessment based on Reg 18
  3. Create/revisit policies, controls and procedures for meeting all aspects of the MLR17 based on Reg 19 (including revised due diligence measures etc., which I have not covered above) and document their approval by the firm’s senior management
  4. Included in (3) should be incorporation of MLR-specific assessments in staff recruitment and appraisal processes per Reg 21
  5. Also included in (3) should be a revisit of the firm’s archiving processes to ensure that due diligence documentation is held in line with Reg 40
  6. Carry out a staff training session to communicate 2, 3, 4 and 5 above and retain evidence of who has received what training and what new documentation
  7. Schedule a review of the procedures etc. (the “independent audit”) for a few months after the new processes have been rolled out
  8. Ensure that the annual and induction MLR staff training provisions reflect the MLR17, including relevant data protection matters; if a suitable product is available (and if (6) above did not update staff on the MLR17 changes), consider running it early for existing staff

 

More Changes

Although this is a meaty to-do list already, I have not even started on the MLR17 changes impacting on our day-to-day business, such as the customer due diligence measures and ongoing monitoring.

In my next post, I will examine the changes from an engagement basis.


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SIP16 and the Pool: Great Expectations as yet Unrealised?

I think we’ve all shared in the pain of SIP16 compliance. We’ve tried really hard, haven’t we? So why is it that the wholly-compliant rate dropped from 87% in 2015 to 62% last year? Where are we going wrong?

In this blog, I air my suspicions about the stats, not only on SIP16 compliance, but also on the changing profile of pre-packs and the role of the Pool, as presented in the Insolvency Service’s and the Pre Pack Pool’s 2016 Reviews. Yes, I know I’m a little late on this story (I blame the 2016 Rules!).

The Insolvency Service’s 2016 Review of IP Regulation can be found at: https://goo.gl/Jkwz19

The Pre Pack Pool’s 2016 Review is at: https://goo.gl/fPEXTe

 

SIP16 Compliance Rates Fall Back to Square One

There has been a significant drop in the reported rate of SIP16 compliance – at 62% of 2016’s SIP16 statements considered wholly compliant, it is the lowest annual rate on record (note: several years are estimates because not all SIP16 statements received were compliance-reviewed):

Why is this? It’s true that it takes time to adapt to a new SIP and this is bound to hit compliance, but is this the whole story? Or has the shift of the job of reviewing SIP16s from the Insolvency Service to the RPBs introduced an element of inconsistency into the process?

Let’s drill down into the overall compliance rate of 62% to see how the rate varies from RPB to RPB:

As you can see, the rates range from ICAS’ 100% of SIP16 statements wholly compliant to the ICAEW’s 39%.

I consider it highly unlikely that ICAEW-licensed IPs are in reality far worse at complying with SIP16 than other IPs, so this indicates strongly to me that there is a great diversity in the standards being applied. Given that the ICAEW reviewed 54% of all SIP16s received last year, it’s not surprising that the overall compliance dropped from 2015’s 87% to 62%.

The Insolvency Service’s Review does not help us to understand what might be behind the non-compliances, although it gives us some comfort. It states: “for the vast majority of non-compliant statements, the breach was not deemed to be serious and was merely of a technical nature”.

The ICAEW has published some feedback on their reviewing (Feb 2017, available to their Insolvency & Restructuring Group members at https://goo.gl/YkExP7), which suggests that the following have been lacking in some cases:

  • An explanation of the pre- and post-appointment roles of the IP (the ICAEW acknowledges that SIP16 does not strictly require this explanation in the SIP16 Statement, but it needs to be delivered to creditors and directors somewhere);
  • An explanation of why no requests were made to potential funders to fund working capital (even if in some cases, it is obvious);
  • If the business has not been marketed on the internet, an explanation why not (even if the nature of the business makes this obvious);
  • An explanation of the reasons underpinning the marketing strategy (whereas some appear to have simply provided a list of what marketing has been done);
  • An explanation of the reasons behind the length of time of the marketing (even if there were obviously financial pressures that limited this);
  • The date of the initial introduction – not simply “in December 2016”;
  • An explanation of the rationale behind the basis/bases of valuations (helpfully, the ICAEW give a clear steer on what they expect: “where you have obtained going concern and forced sale valuations, tell [creditors] that you’ve obtained valuations on both bases as you’re seeking to understand whether realisations will be maximised by breaking up the business and selling the assets on a piecemeal basis or whether it’s better to try to find a buyer for the business as a going concern”);
  • If goodwill is valued, an explanation and basis for the valuation provided; and
  • An explanation of the method by which consideration was allocated to different asset classes.

Given the prevalence of some apparent failures to state the bleedin’ obvious, perhaps other RPB reviewers are measuring compliance against a different list of tick-boxes.

 

The Shifting Profile of Pre-Packs

Probably the main difference between the old and the new SIP16 was the introduction of the “marketing essentials”, with the clear message that an absence of marketing should most definitely be the exception. Has the new SIP16 pushed up the frequency of marketing?

I certainly think that the SIP16 pressure has influenced attitudes towards marketing, as this graph indicates. Even in cases where the offer on the table looks too good to beat, I suspect that many view some marketing effort as essential to shield one from criticism. I doubt that safety-blanket marketing in these cases increases realisations and it will increase costs, but if it answers the sceptics’ questions about possible undervalue sales, then it seems to have everyone’s blessing.

Then again, perhaps I am being unfair: is it merely coincidental that the graph above shows that, as the frequency of marketing has increased, the prevalence of connected party purchasers has taken a dive? Could it be that increased marketing has widened the pool of potential purchasers, resulting in more occasions when connected interested parties lose out to the competition?

I am surprised that no one (as far as I have seen) has connected these two trends with this simple cause-and-effect explanation. Rather, perhaps I am not the only person who suspects that the fall in the number of connected purchasers is more a consequence of the new SIP16 pressures on connected party pre-packs, including the pressure to apply to the pre-pack pool. As revealed in its 2016 Review, the Pre Pack Pool is evidently of this view:

“It may be that the introduction of the Pool and the wider post-Graham reforms have deterred some connected party pre-packs from being proposed in the first place.”

But what has replaced these pre-packs? Are connected party sales avoiding the SIP16 obstacles altogether?

Perhaps hurdles are being overcome by having connected party sales accompany liquidations instead of Administrations. Well, I was surprised to discover that the numbers of Gazette notices for S216 re-use of a prohibited name do not follow a trend suggesting more sales in liquidation:

So could it be that Administration sales are being shifted out of the pre-pack definition either by being completed before Administration or perhaps negotiations are not starting until after appointment? This doesn’t ring true either: SIP16 statements as a percentage of the total number of Administrations has been fairly steady since the introduction of the Pool (2015: 29%; 2016: 24%):

* The SIP16 review actually covered 14 months, but for the purpose of this graph the number has been pro rated for 12 months.

Although the number of Administrations continues to fall, I find this picture encouraging: at least the SIP16 and Pool pressure does not seem to be persuading people to find ways around the measures. Pre-packs have a role and it seems that IPs are sticking with them.

 

Is the Pre Pack Pool making its mark?

In light of the second-hand warnings I’ve heard over the past years about how strongly the Insolvency Service feels about the need for IPs to embrace the Pool, I found the Service’s annual review surprisingly dead-pan. In contrast, the ICAEW’s release on the subject stated that the number of referrals to the pool was “disappointingly low”.

However, the ICAEW was relatively subtle about IPs’ role in the referral process: “the aim of the pool is to increase transparency and confidence around prepacks and low level use of the pool is unlikely to achieve that. We know you can’t compel a connected party to approach the pool but encouraging them to do so supports the overall aim of the pool”. I found the Pre Pack Pool less subtle: “the insolvency profession and creditors have important roles to play in ensuring connected party purchasers are informed of the option to use the Pool and putting pressure on them to do so”. How does the Pool expect IPs to “put pressure” on potential purchasers, I wonder.

The Pool also acknowledges that “creditor awareness of the Pool has been low and few have taken the time to read through administrators’ reports”. On the other hand, they report that “those connected party purchasers who have used the Pool have said it has been an important step in building credibility and trust in the ‘NewCo’ among creditors”. The Pool’s Review does not elaborate, but there are some interesting quotes in an article written by Stuart Hopewell, director of Pre Pack Pool Limited, and David Kerr, IPA’s Chief Executive, for Credit Magazine in November 2016 (www.insolvency-practitioners.org.uk/download/documents/1467).

As shown on one of the graphs above, 13% of all pre-packs were referred to the Pool. This represents 28% of all connected party pre-packs. Personally, I’m surprised it was that many! My personal view is that those who find this uptake disappointingly low had unrealistic expectations.

 

The Performance of the Pool

Given that referral to the Pool is voluntary, personally I wasn’t expecting any negative decisions to emerge. After all, if you didn’t have to sit an exam, you wouldn’t do so unless you were certain of passing it, would you? I was wrong…

The breakdown of the Pool’s opinions over the 14 months to the end of 2016 is as follows:

  • 34 referrals: the case for the pre-pack is “not unreasonable”
  • 13 referrals: the case is “not unreasonable but there are minor limitations in the evidence provided”
  • 6 referrals (although 4 were a group of connected companies): the case for the pre-pack is “not made”

I appreciate that the Pool doesn’t want to give away its secrets, but unfortunately the Review gives nothing away about what factors tipped the balance or indeed how they measure a good pre-pack from the bad. The author ends the Review by stating that “hopefully referrals to the Pool will increase in 2017 as stakeholders become more familiar with the way it works and the reassurance it provides”, but without more feedback than simple statistics I cannot see this happening.

 

The Future of Pre-Packs

As we know, the Small Business Act included a reserve power to legislate the operation of pre-packs, with a sunset clause ending in May 2020. The Service’s Review continued its dead-pan mood, simply stating that they would carry out an evaluation “in due course”.

The Pool seemed barely more enthusiastic, simply stating in its Review that “it would be a shame to lose” pre-packs.

 

The Future of the Pool?

Back in May, the Times reported (https://goo.gl/QRcVZc) that Frank Field, Labour MP and Chair of the House of Commons’ Work & Pensions Select Committee, found the number of referrals to the Pool “deeply worrying” and he raised the prospect of the Committee scrutinising the Pool after the election. Sir Vince Cable also said that the number of referrals raised “worrying questions” and said that moves should be made towards making Pool referrals mandatory.

The Pre Pack Pool may be contemplating how to enlarge its role, but not necessarily with mandatory pre-pack referrals in mind. In the Credit Magazine article mentioned earlier (www.insolvency-practitioners.org.uk/download/documents/1467), Stuart Hopewell and David Kerr considered the extension of the Pool’s remit in the context of the revision of SIP13, suggesting “perhaps there is a role for the Pool to represent [creditors’] interests in all connected sale situations?” Although I continue to be concerned that much of the media outrage at connected party sales is levelled at the liquidation equivalents of pre-packs, surely the Pool must first provide convincing evidence that it is achieving the objective for which it was created before we seek to cast its net farther afield.

Are we to conclude that Hopewell/Kerr’s perception is that SIP13 sales to connected parties is an issue and having an independent review will regulate these sales?  I am not aware of any research into whether Liquidation connected party sales need regulating, so it would seem again that the tide is pulling us to tackle perceptions. Considering that the regulatory objectives include “promoting that maximisation of the value of returns to creditors” and encouraging IPs to provide “high quality services at a cost to the recipient which is fair and reasonable”, I struggle to see how these objectives are met by contributing further to this expensive over-regulated PR exercise.


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More little gems from the Insolvency Service’s blog

As promised in my last blog (but later than planned – sorry), here is my second selection of news from the Insolvency Service’s blog and Dear IP 76 that I think is worthy of spreading… with some further commentary from me, of course.

The questions fall into the following topics:

  • S100 Decisions
  • Other Decision Processes
  • Timing Issues

As I mentioned previously, I am very pleased that the Insolvency Service has shared their views on many issues and I do hope they will continue to be this open. I would also like to thank the technical and compliance managers and consultants with whom I have spent many hours debating the rules; without these valuable exchanges, many of the issues would not have occurred to me.

 

S100 Decisions

  • Can the Statement of Affairs and SIP6 Report be delivered by website?

As the director is responsible for delivering the Statement of Affairs, it is the Insolvency Service’s view that the Statement cannot be delivered by means of a website, as the rules governing website delivery – Rs 1.49 and 1.50 – only apply to office holders. Therefore, the Statement must be either posted or emailed to creditors.

Of course, delivery of the SIP6 report is not a statutory requirement and strictly-speaking SIP6 simply requires the report to “ordinarily be available”. I understand that at least one RPB is content for the SIP6 report to be made available via a website.

  • Does an invitation to decide on whether to form a committee need to be sent along with the S100 proposed decision notice?

The question arises because R6.19 requires such an invitation where any decision is sought from creditors in a CVL, whereas usually the company is not in CVL when the S100 proposed decision notice is signed.

The Insolvency Service has answered “yes”, the director needs to seek a decision from creditors on whether to form a committee when they propose the S100 appointment.

  • Can the SoA/S100 fee be approved via deemed consent?

In view of the Insolvency Service’s approach to IPs’ fees in general, the answer to this might seem an obvious “no”. However, the background to the query was that the rules require creditors to approve the payment of the fee, not its quantum, and therefore it is not quite so obviously “a decision about the remuneration of any person”, which the Act limits to decision procedures, i.e. not including the deemed consent process.

But unsurprisingly the Service answered: “no”.

This has led some people to rethink their process of getting paid the SoA/S100 fee. We have been receiving quite a few questions on whether such fees need approval if they are paid pre-appointment and/or by a third party.

The Insolvency Service has confirmed that R6.7(5) – which requires approval of payments made to the liquidator or an associate – applies to payments referred to in R6.7(4), i.e. those made by the liquidator. R6.7(3) provides that, where payment is made from the company’s assets before the winding-up resolution, the director must provide information on the payment along with the SoA, but they do not require creditor approval.

  • Does R15.11’s timescale for decisions on the liquidator’s remuneration (when made at the same time as the S100 decision on the liquidator) apply also to decisions on the SoA/S100 fee?

R15.11 provides that at least 3 business days’ notice must be given for S100 proposed decisions on the liquidator. This rule also provides that the same timescale applies to “any decision made at the same time on the liquidator’s remuneration”. It stands to reason that, if a virtual meeting were convened to consider a decision on the SoA/S100 fee at the same time as the decision on the liquidator, the same notice requirements would apply, but does the SoA/S100 fee strictly fall under “the liquidator’s remuneration”?

The Insolvency Service has stated that R15.11 should be taken to include the proposed pre-liquidation payments referred to in R6.7(5).

 

Other Decision Processes

  • What access information needs to be provided on a notice summoning a virtual meeting?

This question arises from the requirement of R15.5 that the notice to creditors must contain “any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”.

The Insolvency Service has answered: “we think that sending a contact number or email address for creditors to contact in order to obtain such details is also acceptable under this rule”.

Personally, I am pleased with this answer, as I think it makes the logistics of virtual meetings far more manageable. It almost eliminates the risk of unknown “excluded persons”, as you would know who is planning to attend. You could also set up ways of verifying who participants are; you could contact them beforehand, maybe send them agendas and meeting packs. Also during the meeting if they get cut off, you would have a ready alternative contact for them, and it would be easier to count votes or set participants up with electronic voting. I don’t think that some kind of pre-meeting contact is too much to ask from creditors; to illustrate, if I want to sign up to an open-access webinar, I think nothing of contacting the convener beforehand in order for a link to be sent to me.

  • Can creditors ask upfront for an Administrator’s Para 52(1) Proposals to be considered at a physical meeting?

As we know, when Administrators include a Para 52(1) Statement in their Proposals, they do not ask creditors to vote on whether to approve the Proposals, but they must start a decision process going if the requisite number of creditors ask for a decision within 8 business days of delivery of the Proposals. Para 52(2) makes it clear that the request from creditors is for a decision, not a meeting as was the case before the Small Business Act. However, R15.6(1) states that “a request for a physical meeting may be made before or after the notice of the decision procedure or deemed consent procedure has been delivered”. Therefore, if the consequence of creditors asking for a Para 52(2) decision is that the Administrator issues a notice of decision procedure (say, a correspondence vote on the Proposals), then this rule seems to allow creditors to ask for a physical meeting before this notice is delivered.

The Insolvency Service has confirmed that this is the case: “there is no reason that the requisitioning creditor should not at the same time request a physical meeting. We note your comment that the request for a physical meeting is being made here before a decision process has even commenced, but we think that is it reasonable to interpret the rules this way on this occasion because the request does clearly relate to a decision”.

  • Ok, so does a creditor asking for a physical meeting to consider the Para 52(1) Proposals need to pay a deposit to cover the costs of this meeting?

R15.6 sets out how creditors’ requests for a physical meeting should be handled. It includes no reference to paying a deposit to cover the costs of the meeting. Mention of paying a deposit appears at R15.18, which relates to requisitioning decisions.

Therefore, quite rightly (albeit unfairly) in my view, the Insolvency Service has stated that “it would follow that where costs of the decision are met by the requisitioning creditor then these would be for a decision which is not made by a physical meeting. Any costs of the physical meeting over and above the security paid by the creditor for a decision process would be an expense to the estate”.

Thus, it would seem that, on receiving sufficient requests for a physical meeting to be summoned to consider Para 52(1) Proposals, the Administrator would need to calculate hypothetically how much it would cost to organise this via a non-physical-meeting procedure and ask the requisitioning creditor for this sum. As the rules require “itemised details” of this sum to be delivered to the creditor, this would take some explaining in order to put the creditor’s mind at ease that we weren’t ignoring their request for a physical meeting even though we were asking them to pay the costs for conducting, say, a correspondence vote!

  • Does a creditor need to lodge a proof of debt in support of a request for a physical meeting?

The Insolvency Service’s simple answer is “no”. This is what I thought when I read the rules, but it does seem odd… and could lead to all sorts of controversy.

  • Can approval for an Administration extension be sought by deemed consent?

Understandably I think, the Insolvency Service has answered “yes”. It almost goes without saying, however, that seeking secured creditors’ consents is not a decision process; the positive approval of each and every secured creditor is required (just thought I’d mention it).

  • How do you deal with the need to invite creditors to make a decision on whether to form a committee when seeking a decision by deemed consent?

The Insolvency Service has confirmed that this committee decision can be posed by deemed consent.

Via Dear IP 76, the Service also endorses the format of a proposed decision in the negative, i.e. that a committee shall not be formed… although it adds a sticky proviso: “in this way, if creditors have already indicated a lack of desire to appoint a committee, the office holder could simply propose that no committee be formed”. How do creditors indicate a lack of desire? In S100 CVLs, this seems straightforward enough in view of the fact that, as mentioned above, the director will have needed to invite such a decision in the first place. However, whether an absence of anything but the usual creditor concerns in, say, the first few weeks of an Administration is sufficient to indicate a lack of desire to satisfy the Service, I don’t know.

What is the alternative: that a positive deemed consent decision be posed, i.e. that a committee will be formed? The problem here is that, unless creditors object, then this decision will be made by default. In the light of probable creditor apathy, this could be unhelpful. Therefore, if a positive deemed consent decision is posed, it would seem necessary to describe it something like “a committee will be formed if there are sufficient creditors nominated by [date] and willing to act as members”, which to be fair is almost the wording set out in the Rules (e.g. R10.76). In this way, if the invitation for nominations is similarly ignored, then the positive decision, even if technically made, is of no effect.

However, it’s all a bit of a faff, isn’t it? It hardly makes for a Plain English process. I also dislike the idea that an office holder must propose a decision that he/she may not support. It doesn’t sit right with me for an IP to invite creditors to approve a decision to form a committee when the IP does not see the need or advantage in having one on the case in hand.   However an IP words the proposed decision, creditors can take action to appoint a committee and, as the Rules do not prescribe a form of words, then surely office holders are free to propose a decision as they see fit.

  • If a Notice of General Use of Website has already been issued, what is the effect of Rs3.54(3/4), 2.25(6/7) and 8.22(4/5), which require additional wording about website-delivery in certain circumstances?

This question requires some explaining. As we know, R1.50 provides that the office holder can send one notice to creditors informing them that all future circulars (with a few statutory exceptions) will be posted onto a website with no further notice to them – this is what I mean by a Notice of General Use of Website. However, we also have R1.49, which repeats the 2010 provision that each new circular can be delivered by posting out a one-pager notifying creditors that the specific document has been uploaded to a website.

Things get complicated when looking at Rs3.54, 2.25 and 8.22. These rules govern how we invite creditors to decide on an Administration extension and a CVA/IVA Proposal. They state that the notice regarding such a decision may also state that the outcome of the decision will be made available for viewing and downloading on a website and that no other notice will be delivered to creditors and these rules go on to specify additional contents of such a notice, which draw from R1.49.

So the question arises: if you have already given notice under R1.50 to confirm that a website is going to be used for (almost) everything, do you need this extra gumpf?

The Insolvency Service has clarified that you don’t. If you have already followed (or are following simultaneously) the R1.50 process, then you need not worry about adding such references to your R3.54/2.25/8.22 notices; you can simply issue the notice via the website and then issue the outcome via the website also. Of course, given that you’re inviting creditors to consider an important decision, you might also want to post something out to them, but this does not appear necessary under the rules.

 

Timing Issues

  • If an Administration has already been extended pre-April 2017, when should I next produce a progress report?

As covered in a previous blog, the issue here is that, before April 2017, an extension would have resulted in the reporting schedule moving away from 6-monthly from the date of appointment and instead it will be 6-monthly from the date of the progress report that accompanied the request to approve the extension. As drafted, the 2016 Rules had not provided a carve-out for these cases, so it seemed that the reporting schedule for these extended Admins would be reset on 6 April back to 6-monthly from the date of appointment.

An attempt was made to fix this in the Amendment Rules, but in my view it was not wholly successful. They state: “Where rules 18.6, 18.7 or 18.8 prescribe the periods for which progress reports must be made but before the commencement date an office-holder has ceased to act resulting in a change in reporting period under 1986 rule 2.47(3A), 2.47(3B) 4.49B(5), 4.49C(3), or 6.78A(4), the period for which reports must be made is the period for which reports were required to be made under the 1986 Rules immediately before the commencement date.” The intention is clear: where the 1986 Rules have moved a reporting schedule away from the date of appointment, this adjusted schedule should continue. However, the reference to an IP ceasing to act is unfortunate, because in the scenario described above, this has not happened.

The Insolvency Service acknowledged that this rule “could perhaps have been more explicit” (ahem, I think the problem is that it was too explicit), but emphasised that the intention is clear. Presumably therefore the Registrar of Companies will not reject filings made on the extended 6-monthly schedule.

Also, just in case you haven’t already picked it up, I should mention that the Amendment Rules have most definitely fixed the issue I raised some months ago about the length of a month, so progress reporting now continues pretty-much in the pre-April way… although of course we now have to factor in the time taken to deliver reports.

  • Do Administrators’ Proposals really have to include a delivery date?

Sorry, this is more just me having a whinge: R3.35(1)(e) requires Administrators’ Proposals to state the date that the Proposals “are delivered” to creditors. When the Proposals are signed off, this will be a date in the future.

The Insolvency Service has confirmed that this is the case: they require the future “deemed” delivery date to be listed.

Of course, there are practical issues with this. If you deliver Proposals using more than one method, e.g. by R1.50 general website-delivery but also by post where some creditors have asked for hard copies (which admittedly will be rare), then you may well have more than one delivery date.

More practically, how will you/your staff complete this little nugget? It is commonplace for Proposals to go through lengthy drafting processes (despite some non-appointment taking IPs’ views that Proposals should be simple to produce in the first few days especially where there has been a pre-pack); drafts are turned over to several different people, being edited as they go. It is going to be a real faff to keep an eye on this insignificant date. My personal recommendation, if the issue date cannot be guaranteed at the outset, is to keep this delivery date coloured/highlighted on draft Proposals so that it is the very last item completed just before the Proposals are signed off.

  • Do you have to wait until the MVL final account has been delivered to members before submitting a copy to the Registrar of Companies?

When closing an MVL, the liquidator is required to confirm to the Registrar that s/he “has delivered” the final account to members (R5.10(3)).

The Insolvency Service does not believe that the liquidator has to wait until the final account has been “delivered” to members at this stage; it is sufficient that the liquidator has sent it. From what I can decipher, it seems they are viewing delivery here as “deemed” delivery, i.e. once it has left your office, it will end up being delivered a couple of days’ later (if sent by post).   Personally, I still think it is odd to confirm at this point that the final account has been delivered, but at least we have an answer for any pedant who wants to debate this.

  • Do you have to wait until the Notice of Establishment of the Committee is delivered to the Registrar/Court before holding the first Committee meeting?

Despite the paradoxical “no” for the previous question, the answer to this one is “yes”.

The issue arises because R17.5(5) states that “the committee is not established (and accordingly cannot act) until the office-holder has delivered a notice of its membership” to the Registrar/Court.   The Insolvency Service has confirmed that, yes, the notice must be delivered before the first meeting is held.

The frustration here, of course, is that we will no longer be able to hold the first committee meeting immediately after any meeting that establishes it, but because the rules require us to hold a first meeting (although this can be by remote attendance), we will have to call the committee members back again.

Personally, I wonder if practically it would still be valuable to hold an informal meeting with the (elected) committee members immediately – so that matters for investigation can be discussed and so that you can help them understand how committees work, maybe even discuss the office-holder’s fee proposal with a view to agreeing this later on – and then, hopefully, the actual first meeting will be little more than a formality.

 

The next instalment..?

As we apply the new rules in practice, I am sure that more issues and ambiguities will emerge. As I mentioned previously, I am grateful to the Insolvency Service for their openness.

Emerging interpretations and views force me to revisit my previous conclusions, which is a good thing, although I am very conscious that earlier blog posts and presentations quickly become out-of-date. Even my presentation for the R3 SPG Technical Review at the end of March needed an update and this is now available to Compliance Alliance webinar subscribers (drop me a line – info@thecompliancealliance.co.uk– if you want to know more 😉 ).

I am also looking forward (err… sort-of!) to presenting on the rules at other R3 events – 6 June SPG Technical Review in Leeds; 7 June Southern Region meeting in Reading; 28 June North East Region meeting; and 4 July SPG Technical Review in Bristol. I welcome your queries and quirky observations on the rules, which will help me to make my presentations useful to the audience. I’m sure there are many more gems to unearth.


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Emerging Interpretations of the New Rules – Part 1: the biggies

Along with Dear IP 76, the Insolvency Service’s Rules blog has been a fascinating read. If you don’t fancy trawling through all 148 comments, here are my personal favourites. There are too many to cover in one go, so I’ll start here with a handful of the more contentious:

  • How do the New Rules affect existing VAs?
  • What is the deadline for forcing a S100 physical meeting?
  • What happens if a Centrebind is longer than 14 days?
  • How should you handle decisions sought from preferential creditors alone?
  • How should creditors comply with the Rules when submitting notices and forms?

 

I’ll also take this opportunity to reflect on how these emerging interpretations and the Amendment Rules have impacted on my previous blog posts. I have tried to update old blog posts as time has moved on, but I cannot promise that old blog posts – or indeed this one – will remain current. Things are moving fast.

Dear IPs can be found at: https://goo.gl/wn8Vog (although no. 76 has yet to appear)

The Insolvency Service’s Rules blog is at: https://theinsolvencyrules2016.wordpress.com/

 

Can we rely on the Insolvency Service’s answers?

Nick Howard’s introduction to Dear IP 76 states candidly “While it is only a Court that can give a binding interpretation of the law, the enclosed article sets out the policy intentions and how we believe the Rules support those”. That’s understandable. Much as we thirst for a cut-and-dried answer, we cannot have it. Just like the 1986 Rules, it will take decades to establish robust interpretations and even then there will always be the Minmar-like decision that takes us by surprise.

  • What about the Rules blog?

To be fair, the Service provided it with the purpose “to offer users the chance to share their thoughts and experiences as they prepare for commencement” of the Rules. It was never meant to be an inquisition of the Insolvency Service, but it was inevitable that it would turn out that way and I am very grateful that the Service has grasped the nettle and been prepared to post their views publicly for the benefit of us all.

  • So what comfort can we draw from the answers?

At the very least, the Service’s explanations are extremely valuable in understanding how they meant the Rules to work and in giving us all a starting point. I wonder if it could be seen a bit like the new mantra, “comply or explain”: if we don’t trust an answer, we need to be certain that our reasons for departing from it are well-founded. And at the very best, the Service has provided explanations that make us say: “right, yes I can see that. Thanks, I’ll work on that basis”.

 

What are the New Rules’ Impacts on Existing VAs?

The difficulty for the Insolvency Service – and indeed for all of us – is that of course each VA is dependent on its own Proposals and Standard Terms & Conditions (“STC”), so expressing any opinion on the effect of the New Rules on VAs in general is going to be dangerous.

  • The difference between IVA Protocol and R3 STCs

The majority of IVAs use either the IVA Protocol or R3’s STC, so you might think it would be relatively straightforward at least to establish some ground rules for these two documents and then leave each IP to determine whether the Proposal itself has any overriding effect. Dear IP seems to have made a stab at this in relation to the IVA Protocol at least. However, I think it is important to bear in mind that Dear IP makes no mention of R3’s STCs and from what I can see there is a chasm of difference in how the two STCs have incorporated the 1986 Rules.

True, both STCs define the “Rules” as the Insolvency Rules 1986 as amended and the Service makes the case for equating this to the 2016 Rules. I have heard argument that the Service’s reliance on S17 of the Interpretation Act 1978 does not stack up: if a contract – which is what we’re talking about here – refers to Rx.xx of the Insolvency Act 1986 (as amended), does it not remain as such notwithstanding that the 1986 Rules have been revoked?

This takes me to the chasm between the two sets of STC: for example, the IVA Protocol STC state that “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules” (19(1)), whereas the R3 STC describe in detail how to convene meetings and conduct postal resolutions with no reference to the Act or Rules. Therefore, personally I am struggling to see how the 2016 Rules affect existing VAs’ methods of seeking creditors’ agreements where those VAs are based on the R3 STC. However, I also question whether the R3 STC restrict meetings to physical ones – when I read the STC cold, I’m not persuaded that they don’t also work for virtual meetings (but then again, don’t most meetings happen only on paper anyway?) – so it seems to me that the R3 STC may allow a variety of routes but, thankfully, without all the baggage that the 2016 Rules carry with them, which may load down Protocol IVAs in view of their vague reference to “in accordance with the Act and the Rules”.

  • Does Dear IP make the IVA Protocol position clear?

It’s Dear IP’s treatment of the Protocol STC’s wording, “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules”, that puzzles me. On the one hand, Dear IP acknowledges that the Act and Rules “remain silent on how decisions are taken once in (sic.) a voluntary arrangement is in place”… so they seem to be saying that the Act and Rules are irrelevant to a supervisor looking to call a meeting. But then Dear IP says: “we do not believe [supervisors] should feel restricted to only using a physical meeting. We expect supervisors to take advantage of the new and varied decision making procedures that are available under the Act as amended and the 2016 Rules”.

But how possibly can the phrase, “the supervisor may summon and conduct meetings of creditors”, morph into for example: “the supervisor may seek a decision by means of a correspondence vote”? This is too much of a stretch, isn’t it? Rather than be meant as a comment on the application of the 2016 Rules to existing VAs, perhaps the Service is simply stating that it would like IPs to incorporate the various processes in future VA Proposals and STC, don’t you think?

Because the Act and Rules in themselves do not empower supervisors to seek decisions, does this mean that the Protocol STC’s words “in accordance with the Act and the Rules” are redundant? Or are these words supposed to mean that the supervisor should “apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications”, as paragraph 4(3) of the Protocol STC states? Ok, if the latter is the case, then what is the effect of S379ZA(2), i.e. that a trustee cannot summon a physical meeting unless sufficient creditors request one? This would seem to take us far from the Dear IP position where supervisors should not “feel restricted to only using a physical meeting”.

For these reasons, I think the Dear IP is horribly muddled. Perhaps the IVA Standing Committee might like to clarify the position in relation to their STC..?

 

What is the deadline for forcing a physical meeting in a S100 scenario?

This is another area that seems to have got horribly muddled. It seems to me that much of the confusion over this arises because of the conflating of two potential creditor responses: (i) a creditor can object to a decision sought by deemed consent; or (ii) a creditor can request a physical meeting. It is true that, when a S100 decision on the liquidator is sought by deemed consent, the consequence of either response is the same: a physical meeting is summoned. However, the Rules around each response are different.

  • The deadline for objections

R15.7(2)(a) states that the notice seeking deemed consent must contain “a statement that in order to object to the proposed decision a creditor must have delivered a notice, stating that the creditor so objects, to the convener not later than the decision date”. “Not later than the decision date” must surely mean that objections delivered on the decision date are valid (note: although this rule only specifies what must appear in a notice, S246ZF(4) makes clear that “the procedure set out in the notice” is binding).

  • The deadline for physical meeting requests

For a S100 decision, R6.14(6)(a) states that “a request [for a physical meeting] may be made at any time between the delivery of the notice… and the decision date”. I have heard argument that “between” excludes the days at each end, which would mean that the deadline for requests would be the end of the day before the decision date. At first, I was persuaded by this interpretation, given that, if I were to count how many people in a queue were between me and the ticket office, I would not include myself in the number… but then someone asked me to pick a number between 1 and 10..!

This interpretation of “between” also makes little sense when considering R15.4(b), which states that an electronic voting system must be “capable of enabling a creditor to vote at any time between the notice being delivered and the decision date”… so the IP isn’t interested in votes cast on the decision date then..?

  • The Insolvency Service’s policy intentions

How does Dear IP pull these threads together? It states: “The policy intention (in all cases) is that a request for a physical meeting must arrive before the decision date. The policy intention with regard to electronic voting is that creditors may cast their votes up until the decision closes (i.e. 23:59 on the decision date). We believe that the 2016 Rules are capable of supporting both these policy intentions.”

The Insolvency Service appears blinkered in their statement that the 2016 Rules support the policy intention, because they simply focus on requests for a physical meeting. Irrespective of how “between” is interpreted, the fact is that a deemed consent can be objected to up to 23.59 on the decision date and such an objection would force a physical meeting. Therefore, a members’-appointed liquidator will still be left in the position of not knowing whether there will be a last-minute objection that will force an unexpected c.week-long Centrebind.

 

What happens if a Centrebind is longer than 14 days?

I feel I should apologise for wasting people’s time in explaining (via this blog (https://goo.gl/hikYKr), R3 presentations and our webinars) the risks that a Centrebind could last longer than 14 days if material transactions need to be reported or a physical meeting needs to be convened.

  • The Insolvency Service’s simple answer

The Insolvency Service gave the simple answer on their blog that “it is sufficient that the original decision date was within the required timescale”. In other words, provided that the convener fixed the decision date for the S100 deemed consent process or the virtual meeting not later than 14 days after the winding-up resolution, it is of no consequence that this decision date falls away because the date of a consequent physical meeting falls outside this timescale.

I find the Insolvency Service’s answer startling. Personally, I would expect the Rules to make explicit that it is the original S100 decision date that matters, in the same way as Para 51(2) uses the expression “initial decision date” when setting down the 10-week deadline for Administrators to seek approval of their proposals (i.e. Para 51(3) explicitly provides that Administrators do not get into a pickle if creditors reject a decision by deemed consent and then the Administrator convenes another decision process with this second decision date falling outside the 10 weeks).

  • Can this principle apply also to VA Proposal decision dates?

What about the other instance when an important decision date deadline must be met: the approval of an IVA Proposal? R8.22(7) states that this decision date must be not more than 28 days from the date on which the nominee received the Proposal (or when the nominee’s report was considered by the court). Given that 14 days’ notice is required, it would be very possible for a physical meeting decision date to be outside this timescale. Would it matter as long as the original decision date was inside it? The Rules do not address this point, but neither do they address the unintended Centrebind position.

Much as my heart’s cockles are warmed by the Insolvency Service’s answer, personally I would be nervous in relying on it.

 

How do you deal with preferential creditors’ decisions?

The Insolvency Service’s answers on this topic are eminently sensible and I am more than happy to live with them… but it’s just that I cannot help but continue to ask myself: “yes, but where does it say that?”

The questions surround the New Rules’ defined process for seeking prefs’ approval of matters such as the Administrators’ fees. Exactly how do you conduct a decision procedure of prefs alone?

Firstly, what do you do with pref creditors who have been paid in full? R18.18(4) states that pref creditors must make a decision on fees, if the Administrator “has made or intends to make a distribution” to prefs (in a Para 52(1)(b) case). This would seem to include prefs who have been paid in full, but R15.11 excludes them from receiving notice of the decision procedure.

But, actually, what do we mean when we refer to pref creditors being paid in full? Usually we mean that the pref element of their claim has been paid in full, but often they will still have a non-pref unsecured claim. How do you calculate a pref creditor’s value for voting purposes?

R15.31(1)(a) states that, in an administration, votes are calculated “according to the amount of each creditor’s claim as at the date on which the company entered administration, less any payments that have been made to the creditor after that date in respect of the claim”.

  • Another simple answer from the Insolvency Service

The Insolvency Service’s answer to these questions was: “Our interpretation is that [R15.31(1)(a)] 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.”

Personally, I don’t see that R15.31(1)(a) gets us anywhere: it doesn’t state that a creditor’s claim is only its preferential element when a decision procedure is only open to pref creditors and it doesn’t state that you do not need to seek a decision from pref creditors who have been paid their pref elements in full… but in all other respects I like the Service’s answers!

 

Do creditors need to get forms absolutely correct?

There is no denying that the 2016 Rules have placed a heavier burden on us all to get the details correct. Many things that we were used to doing in simple text form are now described as “notices” and every statutory notice must include “standard contents”, which often require the addition of new detail such as insolvents’ company registered numbers or residential addresses.

  • The validity of old proofs of debt

In many cases, creditors are not spared these requirements. For example, the prescriptive detail of proofs of debt – R14.4 – is quite different from the old requirements. If you are adjudicating on pre-April proofs, can you accept them for dividend purposes? Indeed, can you rely on a Notice of Intended Dividend process commenced before 6 April?

As regards the need for creditors to submit new proofs to meet the New Rules’ requirements, the Insolvency Service answered: “Section 16 of the Interpretation Act 1978 may be relied upon here, and proofs which have already been submitted do not become invalidated.”

Incidentally, S16 of the Interpretation Act 1978 states that a “repeal does not, unless the contrary intention appears… affect the previous operation of the enactment repealed or anything duly done or suffered under that enactment [or] affect any right, privilege, obligation or liability acquired, accrued or incurred under that enactment”, so does this help as regards NoIDs? Are IPs safe to rely on old NoIDs as protecting them from late creditors? This wasn’t the question put to the Service, but it would seem to me the only way the New Rules could possibly work.

However, I’m not quite sure how S16 helps IPs decide now whether to admit an old proof for dividend purposes, when surely they must measure proofs against the New Rules, mustn’t they? But, realistically, what could an old proof possibly be lacking that might struggle to get it admitted under the New Rules?

  • Providing the detail required for new proofs

I asked the Service about the requirement for a proof to be authenticated. R1.5(3) states that “if a document is authenticated by the signature of an individual on behalf of… a body corporate of which the individual is the sole member, the document must also state that fact”. If a creditor failed to state this on a proof, would it render the proof invalid? And, if so, does this obligate office holders to check this point?

Alternatively, does R1.9(1)(b) help us all out? This rule states that “where a rule sets out the required contents of a document, the document may depart from the required contents if… the departure (whether or not intentional) is immaterial”.

The Insolvency Service’s answer was: “The extent to which an office-holder could rely on rule 1.9(1)(b) here would be a matter for them to decide, possibly in liaison with their regulatory body.” I can understand why the Service was not tempted to put their neck on the block on this question, but it does demonstrate to me the nonsensical nature of the New Rules: they set out prescriptive detail of what must be provided… then add a rule that states it’s okay if a departure is “immaterial”. Why put prescriptive immaterial requirements in the Rules in the first place?!

  • Do creditors need to meet the notice requirements?

I felt a similar irritation when I read Dear IP’s article, “Do creditors’ notices have to comply with standard content”, for example when creditors object to a decision sought by deemed consent. The Service seems to be implying that the answer is no: “if it is clear what the creditor is seeking in their notice, it should be accepted”. Again, this leaves me wondering: if a creditor is free to run a red light, why put the lights up in the first place?

Having said that, R1.9(1)(b) might be a useful one to remember the next time the RPB monitors call… although we might expect some debating over what is “immaterial”.

  • The detail (not) required for proxy forms

I think it is also worth mentioning here the observation made on the Service’s blog at the lack of prescription when it comes to proxy forms. The Service explained that “the requirement to authenticate [a proxy form] was removed as a deregulatory measure, because authentication does not confer legitimacy. As long as the office-holder is satisfied that the proxy comes from the creditor then the requirements for submission are met.” So a creditor must sign a hard copy proof but need not sign a proxy form. Well, fancy that!

 

In my next post, I’ll set out some other nuggets gleaned from the Insolvency Service’s blog.


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Annual review: IPs, complaints and visits down, but sanctions up

The Insolvency Service’s 2016 Review of IP Regulation always makes for interesting reading. This year, the headlines include:

  • The number of IPs falls again
  • Regulatory sanctions generally increase and for one RPB in particular
  • Complaints handled by the RPBs drop by 28%… although 17% of all complaints seem to be held in the Gateway
  • Apparent missing of the mark for 3-yearly visits
  • Current regulatory priorities include IVAs and fees, whereas routine monitoring appears less popular

The report can be found at https://goo.gl/Jkwz19.

 

IP number falls again

The Review reveals another drop in the number of appointment-taking IPs. In fact, there was the same number on 1 January 2017 as there was on the same day in 2009: 1,303.

Is it a surprise that the number of appointment-taking IPs has dropped again? The 2016 insolvency statistics show modest increases in the numbers of CVLs and IVAs compared with 2015 and of course there was a bumper crop of MVLs in early 2016. Why is it that fewer IPs seem to be responsible for more cases?

My hunch is that the complexity of cases in general is decreasing and I suspect that the additional hurdles put in place as regards fees have encouraged IPs to look at efficiencies, to create slicker processes, and to be more risk-averse, less inclined to go out on a limb with the result that some cases are despatched more swiftly and require less IP input.

I also suspect the IP number for next January will show another drop. The expense and effort to adapt to the 2016 Rules will make some think again, won’t it?

Does the presence of the regulators breathing down one’s neck erode IPs’ keenness to remain in the profession? How worried should IPs be about the risk of a regulatory sanction?

 

Regulatory actions on the increase

The RPBs seem to have shown varying degrees of enthusiasm when it comes to taking regulatory action.

To me, this hints at regulatory scrutiny of a different kind. Is it coincidental that the ACCA issued proportionately far more sanctions than any other RPB last year? Could the Insolvency Service’s repeated monitoring visits to the ACCA over 2015 and 2016 have had anything to do with this spike?

What are behind these sanctions? Are they generated from the RPBs’ monitoring visits or from complaints?

 

Monitoring v complaints sanctions return to normality

Last year, I observed that for the first time RPBs’ investigations into complaints had generated more sanctions than their monitoring visits. Regulatory actions in 2016 returned to a more typical pattern.

Does this reflect a shifting RPB behaviour or is it more a result of the number of complaints received and/or the number of monitoring visits undertaken?

 

Dramatic fall in complaints

Well, no wonder there were fewer disciplinary actions on the back of complaints: the RPBs received 28% fewer complaints in 2016 than they did in 2015.

Why is this? Is it because fewer complaints were made? Undoubtedly, IVAs have generated a flood of complaints in recent years not least because of the issues surrounding ownership of PPI claims, but those issues were still live in 2016, weren’t they?

Perhaps we can explore this by looking at the complaint profile by case type:

Yes, it looks like IVAs continued to be contentious last year, although perhaps the worst is over. It seems, however, that the most significant drop has been felt in complaints relating to bankruptcies and liquidations. The reduction in bankruptcy complaints is understandable, as the numbers of bankruptcies have dropped enormously over the past few years, but liquidation numbers have kept reasonably steady, so I am not sure what is going on there.

But are fewer people really complaining or is there something else behind these figures?

 

An effective Complaints Gateway sift?

When the Complaints Gateway was set up in 2014, it was acknowledged that the Insolvency Service would ensure that complaints met some simple criteria before they were referred to the RPBs. There must be an indication of a breach of legislation, SIP or the Code of Ethics and the allegations should be capable of being supported with evidence. Where this is not immediately apparent, the Service seeks additional information from the complainant.

The graphs above are based on the complaints referred to the RPBs, so what is the picture as regards complaints received before the sifting process occurs?

This shows that the Complaints Gateway sifted out more complaints last year: the percentage rejected rose from 25% in 2014, to 27% in 2015, to 29% in 2016.

The Insolvency Service’s review explains that in 2016 a new criterion was added: “Complainants are now required in the vast majority of cases to have raised the matter of concern with the insolvency practitioner in the first instance before the complaint will be considered by the Gateway”. This is a welcome development, but it did not affect the numbers much: it resulted in only 13 complaints being turned away for this reason.

But this rejected pile is not the whole story. The graph also demonstrates that a significant number of complaints – 144 (17%) – were neither rejected nor referred last year, which is a much larger proportion than previous years.   Presumably these complaints are being held pending further exchanges between the Service and the complainant. Personally, I am comforted by this demonstration of the Service’s diligence in managing the Gateway, but I hope that this does not hint at a system that is beginning to get snarled up.

 

How many complaints led to sanctions?

When I looked at the Insolvency Service’s review last year, I noted that the IPA’s sanctions record appeared out of kilter to the other RPBs. It is interesting to note that 2016 appears to have been a more “normal” year for the IPA, but instead the ACCA seems to have had an exceptional year. As mentioned above, I wonder if the Insolvency Service’s focus on the ACCA has had anything to do with this unusual activity (I appreciate that 2010 was another exceptional year… and I wonder if the fact that 2010 was the year that the Insolvency Service got heavy with its SIP16-reviewing exercise had anything to do with that particular flurry).

The obvious conclusion to draw from this graph might be that an ACCA-licensed IP has a 1 in 3 chance that any complaint will result in a sanction. However, perhaps these IPs can rest a little easier, given that the ACCA’s complaints-handling is now being dealt with by the IPA.

What about sanctions arising from monitoring visits? How do the RPBs compare on that front?

 

All but one RPB reported an increase in monitoring sanctions

These percentages look rather spectacular, don’t they? It gives the impression that on average almost one third of all monitoring visits result in some kind of negative outcome… and it appears that 90% of all the CAI’s monitoring visits gave rise to a negative outcome! Well, not quite. It is likely that some monitoring visits led to more than one black mark, say a plan for improvement and a targeted visit to review how those plans had been implemented.

Nevertheless, it is interesting to note that almost all RPBs recorded increases in the number of negative outcomes from monitoring visits over the previous year. I am not sure why the IPA seems to have bucked the trend. It will be interesting to see how the populations of ACCA and IPA-licensed IPs fare this year, as they are now being monitored and judged by the same teams and Committees.

 

How frequently are visits being undertaken?

The Principles for Monitoring, which forms part of a memorandum of understanding (“MoU”) between the Insolvency Service and the RPBs, state that the period between monitoring visits “is not expected to significantly exceed three years but may, where satisfactory risk assessment measures are employed, extend to a period not exceeding six years”. However, most if not all the RPBs publicise that their monitoring programmes are generally on a 3-yearly cycle.

The following graph shows that the RPBs are not quite meeting this timescale:

If we look at each RPB’s visits for the past 3 years as a percentage of their appointment-taking licence-holders, how far off the 100% mark were they..?

ICAEW’s missing of the mark is not surprising, given that they publicise that their IPs in the larger practices are on 6-year cycles. At the other end of the spectrum is the ACCA, which managed to visit all their IPs over the past 3 years and then some. However, as we know, the ACCA has relinquished its monitoring function to the IPA, so it seems unlikely that this will continue.

 

What is the future for monitoring visits?

The Insolvency Service’s 2015 review hinted that the days of the MoU may have been numbered. Their 2016 review strengthens this message:

“We propose to withdraw the MoU as soon as is reasonably feasible, subject to working through some final details”.

The review goes on to explain that the Service will be adding to their existing guidance (https://goo.gl/wDHElg). As it currently stands, prescriptive requirements such as the frequency of monitoring visits is conspicuously absent from this guidance. Instead, it is largely outcomes-based and reflects the Regulator’s Code to which the Insolvency Service itself is subject and that emphasises the targeting of monitoring resources where they should be most effective at addressing priority risks. The Service itself seems to be lightening up on its own monitoring visits: the review states that, having completed their round of full monitoring visits to the RPBs, they are now moving towards a number of risk based themed reviews. If this approach filters through to the RPBs’ monitoring visits, will we see a removal of the 3-yearly standard cycle?

 

Current priorities for the regulators

Does the 2016 review reveal any priorities for this year?

Not unsurprisingly, given one particularly high profile failure, IVAs feature heavily. The review refers to “general concerns around the volume IVA business model and developments in practice” and continues:

“The Insolvency Service is working with the profession to tackle some of these concerns; for example, through changes to guidance on monitoring and protections for client funds, and also a review of insurance arrangements. We are also engaging with stakeholder groups to better understand their concerns and how these may be tackled. We expect that this will be a key focus of our work for the coming year.”

Other projects mentioned in the review include:

  • Possible legislative changes to the bonding regime – consultation later this year;
  • Progression of the Insolvency Service’s recommendation that the RPBs introduce a compensation mechanism for complainants who have suffered inconvenience, loss or distress;
  • Publication of the Insolvency Service’s review into the RPBs’ monitoring and regulation processes, including consistency of outcomes, the extent of independence between the membership and regulatory functions, and the RPBs’ financial capabilities – report to be released within 12 months;
  • Progress on a review into the RPBs’ approach to the regulatory objective to encourage a profession which delivers services at a fair and reasonable cost, including how they are assessing compliance with the Oct-15 fee estimate regime – report to be released by the end of the year; and
  • A consultation on revisions to the Code of Ethics – expected in the spring.

 


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Navigating Obstacles: S100s for Work-Winners

I suspect that many of you (like me) have heard plenty of theory on the New Rules’ decision-making changes. Maybe reading it from the practical perspective of the work-winner will give it a freshness.

Some non London-centric IPs who missed out on my recent presentation for R3 expressed disappointment, so I thought a blog post was warranted. Here I have concentrated only on the S100 process.

 

S100 CVLs: Deemed Consent or Virtual Meeting?

Before we start thinking about what we might discuss with directors, I think it’s worth weighing up the pros and cons of the two possible routes in to a CVL appointment… well, apart from a physical meeting, of course, but a physical meeting might be required whichever initial decision process we start with.

  • Material Transactions

The rules don’t define a material transaction, but they do say that (R6.17):

“where the statement of affairs sent to creditors… does not, or will not, state the company’s affairs at the creditors’ decision date, the directors must cause a report… to be made to the creditors… on any material transactions relating to the company occurring between the date of the making of the statement and the decision date”.

That sounds to me like it’s any transaction that changes the SoA, but the InsS people I’ve spoken to don’t see this as wrapping in, say, changes in asset class where book debts are converted into cash at bank or where a forgotten van pops up. They say they intended the rule to ensure that creditors learn of events that might impact on the independence of the proposed liquidator, i.e. things that happened with his involvement or since his appointment in Centrebind cases.

Personally, I found this interpretation most surprising, as it’s really not what the rules say – and I’d love to get this down in writing from the InsS, as I think it’ll make a huge difference to the frequency of material transactions.  (UPDATE 02/05/2017: Dear IP 76 simply states that a New Rules’ material transaction “is the same as 1986 rules 4.53B-CVL(1) and should be interpreted as such”… so we’re on our own on this one.)

So why should it matter?

Well, it won’t matter if you’re having a meeting, because you’d just report the material transaction to the meeting – it’s in our rules now, but it is never done (well I’ve never seen it done) because the SoA is usually signed off minutes before the meetings.

But it will matter if you’re working with the Deemed Consent process.

In this case, you must send out the report to creditors and if the report is delivered within 3 business days of the Decision Date, then the decision date moves to the end of 3 business days from delivery of the report.

This could leave you either in an unexpected Centrebind or needing to adjourn the members’ meeting.

  • Fees Decisions – who knows?!

I have put question marks on the table above, as the rules are very unclear when it comes to proposing fees decisions around the S100 time. That’s so helpful, isn’t it? It’s not as if fees is something we need to get absolutely spot-on, is it..?!

The only thing we do know for certain is that Deemed Consent cannot be used for “a decision about the remuneration of any person” (S246ZF(2)). The rest is unclear.

Can you propose a fees decision via a correspondence vote to run concurrently with the S100 Deemed Consent process? I struggle with this, as I cannot see who has authority under the rules to “convene” such a Decision Procedure. The IP isn’t in office (and if he is the members’ liquidator, his limited powers do not extend to seeking fee approval) and the director only has the power to convene a decision by Deemed Consent or by virtual meeting.

Can fees decisions be considered at a virtual meeting? There is nothing in the rules that expressly addresses this, but at least the director does have the power to convene the virtual meeting. Is it not arguable that tagging on (pre and post) fees decisions corresponds to what we do with S98s now (especially as the New Rules expressly provide for the “proposed liquidator” to circulate fees information – R18.16(10))?

I have received conflicting opinions on the routes available from reliable sources. As the consequences of getting this wrong are so serious, I’m very reluctant to pass further comment and I do hope that the powers-that-be will put us all out of misery and tell us categorically – and before 6 April! – how/whether fees decisions can be made at the same time as the S100 decision, as R15.11(1) seems to suggest is possible… somehow.

  • Timing

The deadline for the Deemed Consent process is 1 minute to midnight. The disadvantage here is that you won’t be certain on the decision until the next morning. I get the sense that most IPs are planning to hold their members’ meeting on the day of the Deemed Consent process, but this will still leave us with an inescapable Centrebind – it may be for only a few hours, but it’s worth thinking about it for insurance purposes at least.

On the other hand, virtual meetings can be held at anytime – the old between-10-and-4 rule has not been repeated in the New Rules. However, the convener still needs to “have regard to the convenience of those invited to participate when fixing the venue for a decision procedure” (R15.10), so the virtual meeting’s timing and “platform” (which has been added to the definition of “venue”) is still a factor to consider.

  • Excluded Persons

The rules describe an excluded person as (R15.36):

“someone who has taken all steps necessary [to attend the meeting virtually or remotely, but the arrangements] do not enable that person to attend the whole or part of that meeting.”

In other words, the technology or signal for the virtual meeting has failed.

If the chair becomes aware of an excluded person, he can continue the meeting, suspend it for up to an hour, or adjourn it. If the chair decides to continue the meeting, resolutions can be taken and these will be valid but they’re subject to complaints from the excluded person or from any other attendee who claims they were prejudiced by the exclusion.

The timescale for complaints is short – before 4pm on the next business day from the meeting or from receipt of an “indication” of what occurred at the meeting – but the consequences can be far-reaching. The chair could review the voting and conclude that the excluded person’s vote overturns resolutions that had been thought passed.

Practically, where would this leave a liquidator who thought they were free to publicise their appointment and perhaps also to complete asset sales? I am not certain that these actions would be covered by the S232 defects-deemed-valid provision.

Clearly it is vital that office holders know where they stand immediately after a meeting, but how would they know whether there were any excluded persons? They may know if someone drops out of contact mid-stream, but what if someone could not get online in the first place? Obviously, this is a risk if the notice of the virtual meeting includes all the information necessary to attend… but is this what the Rules require?

R15.5 states that the notice to creditors must provide:

“any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”

A couple of InsS people have told me that they believe that simply giving out a contact number so that creditors can ask for the login details before the meeting would satisfy this Rule – it is “necessary information”, after all. Clearly, this would be a great help in identifying excluded persons as well as going some way to “safeguard[ing] against participation by persons who are not properly entitled to participate” (SIP6) and helping to plan for sufficient access to a virtual meeting. Hopefully the InsS will confirm this in writing when they respond to a question about this on their blog.  (UPDATE 02/05/2017: Dear IP 76 describes the Insolvency Service’s view as explained here.)

 

S100 CVLs: What Directors Need to Know

Please bear in mind that it has been a loooong time since I worked on the frontline. I do not feel worthy of explaining to IPs what they should discuss with directors pre-appointment. However, with the New Rules – and new SIP6 – in mind, here are my suggestions:

  • S100/SoA fees

With the lack of clarity in the Rules, you’ll probably want to get your fees paid upfront. But what happens if you have to convene a physical meeting? Who is going to pay for that? It might be an idea to factor this in to your engagement letter: make sure that it’s clear what the fixed fee covers and what effect the cost of an additional physical meeting might make.

  • Quick information

You’ll want to line the director up to providing information very quickly, given the short timeframes for compiling the SoA and the SIP6 report (see below).

  • Post-SoA material transactions

It might be helpful to make the directors aware of the consequences of any material transactions occurring after the SoA is produced. The risk of a postponement in the Decision Date might help them to focus on giving you the whole story and avoid doing anything silly in the hiatus period.

  • Postponed decisions

Material transactions or the need for a physical meeting will delay the S100 decision. If these events happen early enough, there might be a chance to adjourn the members’ meeting. But of course, if this happens, then the directors will be in control of the company for longer. What effect will this have on the CVL strategy?

You might also want to warn the director that they may need to attend a physical meeting. And will you be around for the physical meeting? Fortunately, the new rules have been relaxed a bit so that the members’ liquidator need not attend the physical meeting, he can appoint someone else in his stead (another IP or an experienced staff member), but if a physical meeting has been requested, then you might want to make sure you’re there.

  • SIP6 additions to engagement letters

The new SIP6 states that the assisting IP should “take reasonable steps to ensure that the convener is made fully aware of their duties and responsibilities”, so you may need to beef up your engagement letter to set out the director’s duties to take appropriate action as regards objections, requests for a physical meeting, material transactions and excluded persons, all of which are the convener’s/chair’s responsibilities; and to provide the SoA/SIP6 required information swiftly.

SIP6 also requires “reasonable steps to ensure that… the instructions to the IP to assist are adequately recorded”. I’m not sure what the RPBs are getting at here, other than expecting a signed engagement letter. Do they want you to have set out whether your instructions are to proceed with the Deemed Consent or the virtual meeting route? And/or should you specify that you’ll be assisting with assessing objections and requests for physical meetings?

Connected with this is SIP6’s requirement to “take reasonable steps to ensure that the convener and/or chair is informed that it may be appropriate for them to obtain independent assistance in determining the authenticity of a prospective participant’s authority or entitlement to participate and the amount for which they are permitted to do so in the event these are called into question”. This isn’t surprising given that something similar is in SIP8 regarding the conflict risk when counting proxies, but it may be a good idea to put it in your engagement letter if it isn’t already.

  • Excluded persons

Given the risk of excluded persons changing the outcome of meetings, you might want to be careful about what you indicate to directors that you plan to do on the day of, and the day after, the meeting.

 

S100 CVLs: The Unintended Centrebind

So what does the new S100 process look like? What needs to happen when?

Here is a timeline for a no-complication Deemed Consent, demonstrating the shortest notice possible:

A virtual meeting timeline would work the same, but it would just mean that you’d be able to schedule the meeting on Business Day 7 for a sensible time instead of a minute to midnight.

In particular, note the time needed to send the SoA and SIP6 report in order to accommodate delivery in time.  (UPDATE 23/03/17: it has been pointed out to me that SIP6 only requires the report to be “made available”, so some are interpreting this to mean that it does not have to be delivered to creditors (although the SoA still does need to be).)

But what if creditors object to the Deemed Consent at the last minute (i.e. after the members’ meeting had been held on business day 7)?

(UPDATE 23/03/17: it has been pointed out to me that requests for a physical meeting must be received “between the delivery of the notice and the decision date” (R6.14(6)) and thus it has been suggested that a physical meeting request received on the decision date will be too late. (UPDATE2 02/05/2017: the Insolvency Service’s view, as set out in Dear IP 76, is explored further in my post, https://goo.gl/ygnWjg.)  The deadline for deemed consent objections, however, is “not later than the decision date” (R15.7(2)), so I believe the timelines above and below are still relevant.)

You could fit the physical meeting within the statutory 14 calendar day timescale, provided that you can get the director to move quickly to convene it, but it would leave you managing an unintended Centrebind.

The picture looks grimmer if a material transaction occurs:

 

As you can see, there isn’t enough time to deal with a material transaction and a physical meeting.  (UPDATE 02/05/2017: the Insolvency Service has expressed the view on its blog that “it is sufficient that the original decision date was within the required timescale”.)

Virtual meetings avoid this issue, as the report on the material transaction would occur at the virtual meeting. It’s not the whole answer to avoiding a Centrebind, as creditors could still request a physical meeting, but at least it could be held within the 14 days.

 

There’s More

As I mentioned at the start, I’ve limited this blog post to S100 decisions only – it’s long enough already.

If you want to listen to my whole presentation, you can purchase it via The Compliance Alliance (£250+VAT for firm-wide access to all our webinars for a year) – just drop a line to info@thecompliancealliance.co.uk.

Other topics covered include:

  • The timeline of an intended Centrebind
  • S100s for the IP acting for creditors
  • VAs: correspondence vote or virtual meeting?
  • Creditors’ powers and the process to seek an IP appointment in bankruptcies and compulsories
  • Administrations: the pros and cons of seeking approval of Proposals by Deemed Consent or a decision procedure
  • How creditors can stay in the loop on communications


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New Rules, Part 15: Decisions, Decisions!

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More than one IP has asked me: ok, I know the New Rules pretty-much remove creditors’ meetings, but what’s all the fuss about? It gets me every time! Not only are the changes far more widespread than this, but also this change is hardly simple. It sounds simple though, doesn’t it: just replace all creditors’ resolutions with some kind of postal vote?

From what I believe was a desire to provide options – to creditors mainly, but also to directors and IPs – has evolved a web of overlapping timescales and feedback mechanisms, not to mention reams more information to creditors, which cannot fail to bamboozle and further dissuade them from engaging.

 

Decision 1: what type of decision do you have?

The SBEEA15 introduced the idea of two tiers of decisions (by the way, in our new world, there are few resolutions anymore, just decisions… although some decisions are made by resolution, if considered at a meeting, whether physical or virtual). There are decisions that can be made by Deemed Consent and others that must be made by a Qualifying Decision Procedure (although the New Rules drop the “Qualifying” bit). In the latter category are:

  • any “decision about the remuneration of any person” (S246ZE(2)); and
  • the acceptance of IVA and CVA Proposals.

So what decisions might be dealt with by Deemed Consent? The biggie is the appointment of a CVL Liquidator (you might also have thought about the appointment of an IP in court cases, but this involves first the removal of the incumbent OR – aha, now the reason for the change so that the OR becomes Trustee immediately on the order becomes clear, doesn’t it..?). Other Deemed Consent decisions could include several ADM items, e.g. extensions, discharge and even the Proposals themselves. But other than these, Deemed Consent is unlikely to get out much.

I think the Insolvency Service saw Deemed Consent being useful to office holders in seeking creditors’ approval to certain strategies, e.g. to commence litigation. I agree that this is a possibility, however the abolition of the statutory requirement to seek sanction to exercise many old Schedule powers has meant that more often than not IPs feel empowered to take such decisions in the interests of creditors in any event.

 

Decision 2: should you use Deemed Consent?

The key point to note about Deemed Consent is that, unless more than 10% in value of creditors (entitled to vote) positively object to the decision, then it is approved as proposed. If this proportion of creditors objects, then the IP has another bite of the cherry by proposing the decision by one of the other decision processes (excluding a physical meeting unless the proposed decision is for your CVL appointment).

There is a wrinkle: creditors who meet different criteria can respond by asking for a physical meeting, rather than (or in addition to) objecting to the decision proposed by Deemed Consent. If this happens, then the Insolvency Service has stated that the Deemed Consent process is superseded and the decision must be considered at a physical meeting. Personally, I have failed to spot where this consequence is set out in the rules, so I have asked the Service for clarification.

The thresholds for seeking a physical meeting are either 10% in value of creditors, 10% in number, or 10 creditors (the “10/10/10” criteria). (UPDATE 23/03/17: recently-issued Amendment Rules affect this, although their application is unclear.  I have blogged a question on the Insolvency Service’s blog.) This time, the criteria relate to all creditors, not just those entitled to vote. Thus it seems to me more than just a theoretic possibility that a creditor/s might reach the threshold to seek a physical meeting but fall short of the threshold to object to a Deemed Consent decision… hence the need, I believe, for the rules to be clear on the consequences of a request for a physical meeting.  (UPDATE 02/05/2017: the Insolvency Service has blogged: “The intention here is that the creditors that have an interest in the decision being taken are the ones who determine whether the costs of holding a physical meeting should be incurred. Therefore the convener would consider the value of the potential vote of the creditor(s) making the request, and compare them to the total value of the potential vote.”  Got that? 😉 )

Whilst there are potential complications, I think the Deemed Consent advantages are clear, especially where you need to seek approval from uninterested creditors, e.g. the ADM extension and discharge questions (although if you need secured creditors’ approval, silence from the unsecureds is only half the battle won).

What if you are seeking a CVL appointment, should you go for Deemed Consent? Well, one downside is that you will need to add on another decision procedure if you want to get your fees, including your pre-appointment fee, approved. However, if another IP starts showing an interest, they will first have to object to the Deemed Consent process before the scene is re-set to count votes on nominations. Granted however, it may mean that you’re looking at an unexpected Centrebind.

Another strange characteristic of seeking a CVL appointment by Deemed Consent is that, if unopposed, there is no statutory requirement for any pre-appointment Gazette notice – how odd is that?!

 

Decision 3: which other Decision Procedure might you use?

How else might you seek a decision? In the order that I think they will be used, the methods are:

  • vote by correspondence (no longer a “meeting” by correspondence and not defined in the rules);
  • virtual meeting (yes, cumbersome and in some respects risky, but the only way effectively to negotiate decisions);
  • electronic voting (hmm… maybe not for some time yet);
  • only if sufficient creditors request it, a physical meeting;
  • and A N Other process that none of us has yet thought up.

Virtual meetings are prepared for pretty-much as physical meetings are now: they require Gazetting and they involve proxy forms, which can be delivered anytime up to the start of the meeting in any case, no longer just for VA meetings. Proofs of debt also need to be delivered and, although there is a deadline of 4pm the business day before the meeting, there is also provision for the chair to accept late proofs, if he is “content”.

Of course, the obvious difference is finding an appropriate virtual meeting resource. From those who I know have been exploring this, I understand that there is no clear winner. Issues include: being able to identify attendees, especially when they join and leave, and being able to block access to people not entitled to attend. The main risk in holding a virtual meeting is that an “excluded person” (i.e. someone who tried to participate but could not through no fault of their own; say, they just happen to live in an area of the UK with unreliable broadband connections) can influence the decision after the meeting (assuming you did not decide to adjourn it). They are given a very short window of opportunity to complain that, had they participated, they would have swung the vote, but this is clearly not an uncertainty you want to be left with after a decision on your appointment or on a VA Proposal. There is also the practical uncertainty in knowing how many people are likely to want to join in to a virtual meeting: multi-party conference calls are exasperating at the best of times and the prospects of being surprised by a virtual room full of fired-up creditors doesn’t bear thinking about.

So should you go for a correspondence vote? Well, if you’re looking for a CVL appointment, it’s worth clocking now that this is not an option: Deemed Consent and virtual meeting are your only options. It is also worth remembering that the deadline for correspondence votes (and other non-meeting processes, including Deemed Consent) is one minute to midnight on your chosen day (the “Decision Date”), so we will have to get used to not knowing the outcome of a proposed decision until the day after… which could prove challenging if you’re trying to coordinate it alongside a members’ meeting. Correspondence votes need to be supported by proofs of debt submitted by the Decision Date and importantly, once a vote has been lodged, it cannot be changed. This makes correspondence vote a risky choice for VA Proposals, I think. I also wonder where correspondence votes will get us on fee approvals: if there is no negotiating possible, then will it result in an increase in court applications?

As with Deemed Consent, on receiving an invitation to a virtual meeting or to vote by another means, a creditor may react by asking for a physical meeting. They have 5 business days after delivery of the notice of the decision procedure in which to have delivered a request (but see Timetables below) and the 10/10/10 thresholds apply.

There is also no ability to ask creditors for a deposit as security for the costs of convening a physical meeting on request… unless it is a requisitioned decision (yes, there is a difference!). The latter may arise for example as a consequence of issuing Para 52 Proposals, although the rules allow you only to ask for the costs of seeking a “decision”, not a physical meeting… however it is not clear whether creditors could ask explicitly for a physical meeting at this stage (that’s another question to the Insolvency Service).  (UPDATE 02/05/2017: the Insolvency Service has blogged that they think it is reasonable to interpret the rules as allowing the creditor to request a physical meeting at the same time as requisitioning a decision, although they have also confirmed that the deposit sought should only be for requesting a decision, not holding a physical meeting.)

 

Invitations to Form a Committee

In all cases (except, strangely, in Compulsory Liquidations unless the meeting is to appoint a liquidator), whenever a Deemed Consent or decision procedure notice is issued, creditors must be asked at the same time whether they wish to establish a Committee and to propose nominations. This requirement sits unhappily besides the other rules, especially the Deemed Consent process. For starters, how do you ask creditors “whether” they want something? You must propose it as a decision, e.g. I propose the decision that a Committee be established. But if you were to propose this as a Deemed Consent decision and received no objections, this would mean that the decision had been made and you would need to canvass for (more) nominations, thus postponing your original objective until the sorry “no we didn’t mean we wanted a Committee, we simply don’t care” response was made certain. Therefore, several have designed the proposed decision in the negative: I propose the decision that a Committee should not be established (which personally I think also sits better ethically where the IP does not believe a Committee is warranted: is it honest and straightforward for an IP to propose a decision he does not himself desire?). In this case, creditors’ silence works well.

But is it truly necessary to go through this rigmarole every time you propose a decision? Yes, it seems so. And of course we will need to highlight the SIP15 Committee Guidance… however I am puzzled by the SIP15 reference to highlighting it prior to inviting creditors for nominations: does this mean that we need to write to creditors separately before our first proposed decision? For once, this is not a question for the Insolvency Service!

 

Timetables

In most cases, notice of a decision – by Deemed Consent or other process – must be at least 14 days (plus delivery time). CVL appointment is the obvious exception: in this case, notice must be 3 business days after delivery, which including a weekend makes it very slightly shorter than the current requirement. Because of the short timescale in CVL appointments, requests for a physical meeting can be made at any time up to the Decision Date.  (UPDATE 02/05/2017: oops!  Sorry, the rules set the deadline as between the notice and the Decision Date and Dear IP 76 suggests that the Decision Date is not included in this period.  See https://goo.gl/ygnWjg for more analysis.)

 

There’s more

The rules contain prescriptive details about the content of notices and how to deal with “excluded persons”. In addition, the interaction of Deemed Consent/decision procedures with other requirements such as the need to send a Statement of Affairs before the CVL appointment Decision Date adds another layer of complexity to the work.

If you want to know more:

  • on the detail of decision processes especially in the context of CVL appointments, then access Jo Harris’ webinar, “New Rules: Decision Procedures and Changes on CVL Appointments” (mailto:info@thecompliancealliance.co.uk for details);
  • on the pros, cons and strategies of decision processes, then join me at the R3 breakfast seminar, The New Rules for Insolvency Work-Winners (16 March in London), or any of the three R3 SPG Technical Reviews (28 March in London, 6 June in Huddersfield, 4 July in Bristol)… and there are more Compliance Alliance webinars to come on these topics;

… or feel free to get in touch with me… but don’t expect many simple answers!


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The 2015 Fees Rules: One Year On

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In November last year, I gave a presentation at the R3 SPG Forum: a look back at one year under the new fees regime. Although I don’t have the benefit of my co-presenter, Maxine Reid, I thought I would set out some of my main points here, as well as some new and improved observations on Administrators’ Proposals:

  • Do more recent Proposals indicate a move away from time costs?
  • How are creditors voting now?
  • How do time costs incurred compare to fees estimates?
  • Are progress reports and excess fee requests compliant with the rules and SIP9?
  • Is the picture any clearer now on what the regulators’ expectations are on some of the finer points of the rules and SIP9?

Is there a move away from time costs?

My analysis of Proposals issued in early 2016 (https://goo.gl/bvebTz) showed that time costs was still the preferred choice: 75% of my sample (108 Proposals) had proposed fees based on time costs.

To see whether things had changed more recently, I reviewed another 67 Proposals issued between July and September 2016 (no more than two from each insolvency practice). This is how the fee bases proposed compared:

feebasis2

This suggests that not a lot has changed, which isn’t too surprising I guess as there are only a few months’ difference between the two sets of Proposals. I also suspect that, if I looked at CVLs, I’d see quite a different picture. There does seem to be a bit more experimenting going on though, especially involving percentage fees, which is a topic I’ll come back to later.

How are creditors voting?

The filing of progress reports on my early Administration sample enabled me to fill in the gaps regarding how secured creditors and committees had voted on fees:

feecaps

Although I accept that my sample is small, I think that this is interesting: the average reduction in fees approved is the same whether the decision was made by unsecured or secured creditors. I’d better explain the committee percentage: in these cases, the committees were approving fees only on the basis of time costs incurred, not on the estimated future time costs, which is also interesting: it isn’t what the fees rules envisaged, but I think it is how most committees are accustomed to vote on fees.

Have creditors’ decisions changed more recently?

As I only have the Results of Meeting to go on for the more recent cases, this is not a complete picture, but this is how the two samples compare:

  • Jan-Mar 2016 (67 Results of Meeting):
    • 11 modified; 1 rejected
    • 7 early liquidations; 4 independent Liquidators
    • 1 Administrator replaced
    • 6 fees modified (average reduction 29%)
  • Jul-Sept 2016 (55 Results of Meeting):
    • 5 modified
    • 2 early liquidations; no new IPs
    • 1 fee modified (reduction 48%)

Again, it’s only a small sample, but it seems to me that creditors’ enthusiasm to modify Proposals or cap fees has waned, although c.10% of Proposals were still modified, which is fairly substantial.

How have actual time costs compared to fees estimates?

With the filing of 6-monthly progress reports, I was able to compare time costs incurred with the fees estimates:

timecosts

Over the whole case sample, the mean average was 105%, i.e. after only 6 months of the Administration, on average time costs were 105% of the fees estimate included in the Proposals. This graph also shows that, on a couple of cases, the time costs incurred at 6 months were over 250% of the fees estimate, although to be fair a large number were somewhere between 50% and 100%, which is where I’d expect it to be given that Administration work tends to be front-loaded.

You can see that I’ve distinguished above between cases where unsecured creditors voted on the fees and the “para 52” cases where the secured (and possibly preferential) creditors voted. The graph appears to indicate that time costs exceeding the estimate is more marked in cases where unsecured creditors approve fees.

Of course, fees estimates and fees drawn are entirely different worlds, so the fact that time costs have exceeded estimates will be of no practical consequence – at least, not to creditors – where a case has insufficient assets to support the work. In around only half of the cases where time costs exceeded estimates did the progress report disclose that the Administrator was, or would be, seeking approval to excess fees. This suggests that in the other half of all cases the IPs were prepared to do the work necessary without being paid for it, which I think is a message that many insolvency onlookers (and the Insolvency Service) don’t fully appreciate.

How compliant are progress reports and excess fee requests?

Firstly, I think it’s worth summarising what the Oct-15 Rules and the revised SIP9 require when it comes to progress reports. The Rules require:

  • A statement setting out whether:
    • The remuneration anticipated to be charged is likely to exceed the fees estimate (or additional approval)
    • The expenses incurred or anticipated to be incurred are likely to exceed, or having exceeded, the details given to creditors
    • The reasons for that excess

SIP9 requires:

  • Information sufficient to help creditors in understanding “what was done, why it was done, and how much it costs”
  • “The actual costs of the work, including any expenses incurred, as against any estimate provided”
  • “The actual hours and average rate (or rates) of the costs charged for each part should be provided for comparison purposes”
  • “Figures for both the period being reported upon and on a cumulative basis”

It is clear from the above that the old-style time costs breakdown alone will not be sufficient. For one thing, some automatically-produced old-style breakdowns do not provide the average charge-out rate per work category. I also think that simply including a copy of the original fee estimate “for comparison purposes” falls short as well, especially where the fees estimate uses different categories or descriptions from the time costs breakdown.

What is required is some narrative to explain where more work was necessary than originally anticipated. The best examples I saw listed each work category (or at least those categories for which the time costs incurred exceeded the fees estimate) and gave case-specific explanations, such as that it had proven difficult to get the company records from the IT providers or that the initial investigations had revealed some questionable transactions that required further exploration.

I also saw some useful and clear tables comparing the fee estimates and actual time costs per work category. As mentioned above, in some cases, the progress reports were accompanied by a request for additional fees and in these cases the comparison tables also factored in the future anticipated time costs and there was some clear narrative that distinguished between work done and future work.

Reporting on expenses to meet the above requirements proved to be a challenge for some. Admittedly, the Rules are not ideal as they require fees estimates to provide “details of expenses” likely to be incurred and some IPs had interpreted this to require a description only of who would charge the expense and why, but it is only when you read the progress report requirements that you get the sense that the anticipated quantum of expenses was expected. For example, where an Administrators’ Proposals had stated simply that solicitors’ costs on a time costs basis were likely, it is not easy to produce a progress report that compares this with the actual costs or that states whether the actual expense had exceeded the details given previously.

What do the regulators expect?

A year ago, the regulators seemed sympathetic to IPs grappling with the new Rules and SIP9. Do they consider that a year is sufficient for us all to have worked out how to do it?

I get the sense that there may still be some forbearance when it comes to complying with every detail of the SIP, but understandably if there is a fundamental flaw in the way fees approval has been sought, it is not something on which the RPBs can – or indeed should – be light touch. Fees is Fees and the sooner we know our errors, the less disastrous it will be for us to fix them.

The S98 Fees Estimate question seems to have crystallised. There seems to be general consensus now amongst the regulators and their monitoring teams that, whilst there are risks in relying on a fees resolution passed at the S98 meeting on the basis of fees-related documentation issued prior to appointment as a liquidator, the regulators will not treat such a fees resolution as invalid on this basis alone. Fortunately, the 2016 Rules will settle this debate once and for all.

The trouble with percentage fees

From my conversations with a few monitors and from the ICAEW Roadshow last year, I get the feeling that the monitors are generally comfortable with time cost resolutions. There is a logical science behind time costs as well as often voluminous paper-trails, so the monitors feel relatively well-equipped to review them and express a view on their reasonableness. The same cannot always be said about fees based on a percentage – or indeed on a fixed sum – basis.

In her 2013 report, Professor Kempson expressed some doubts on the practicalities of percentage fees, observing that creditors could find it difficult to judge the reasonableness of a proposed percentage fee. When the Insolvency Service’s fees consultation was issued in 2014, R3 also remarked that fixed or percentage fees were not always compatible with unpredictable insolvencies and could result in unfair outcomes. The recent shift towards percentage fees, which appears more pronounced in CVLs, has put these concerns into the spot-light.

In the ICAEW Roadshow, Allison Broad expressed her concerns about fees proposed on the basis of (often quite substantial) percentages of unknown or undisclosed assets. I can see Allison’s point: how can creditors make “an informed judgment about the reasonableness of an office holder’s request” if they have no information?

Evidently, some IPs are proposing percentage fees as a kind of mopping-up strategy, so that they do not have to go to the expense of seeking creditors’ approval to fees later when they do have more information and they feel that creditors can take comfort in knowing that the IPs will not be drawing 100% of these later-materialised assets. Although a desire to avoid unnecessary costs is commendable, the message seems to be that compliance with SIP9 requires you to revert to creditors for fee-approval only when you can explain more clearly what work you intend to do and what financial benefit may be generated for creditors, e.g. what are the assets that you are pursuing or investigating.

Another difficulty with percentage fees is the quantum at which they are sometimes pitched. I have heard some stories of extraordinary percentages proposed, although I do wonder if, taken in context, some of these are justifiable, e.g. where the percentage is to cover the statutory work as well as asset realisations. Regardless of this, the message seems to be that some of us could improve on meeting SIP9’s requirement “to explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”… and you should not be lulled into a false sense of security that 15% of everything, which of course is what the OR can now draw with no justification (and indeed with no creditor approval), is always fair and reasonable.

Looking on the bright side

Although getting to grips with the Oct-15 Rules has not been easy, I guess we should count our blessings: at least we have had this past year to adapt to them before the whole world changes again. If there’s one thing we don’t want to get wrong, it is fee-approval, so at least we can face the April Rules changes feeling mildly confident that we have that one area sorted.

If you would like to hear and see more on this topic (including some names of Administration cases that I found had particularly good progress reports and excess fee requests registered at Companies House), I have recorded an updated version of my R3 SPG Forum presentation, which is now available for Compliance Alliance subscribers. For more information, email info@thecompliancealliance.co.uk.