Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The Insolvency Rules 2016: One Year On

“Please don’t make the 2016 Rules any harder than they have to be.”

Since receiving this feedback on an R3 event last year, I’ve been left feeling nervous about how to present on this topic. I don’t mean to make the Rules complicated and I wish they were simpler. One year on, some fairly common confusing blind spots seem to be emerging. I hope this post helps to clear away some troublesome clouds.

In this post, I’ll be covering issues seen around:

  • the CVL Statement of Affairs
  • if/how/when to deliver the SoA and S100 report
  • incomplete – and sometimes completely missing – notices
  • information to creditors on opting out
  • deemed approval -v- deemed consent of Administrators’ Proposals

 

The S100 Perfect Storm

Many IPs have had to weather the perfect storm affecting their bread-and-butter work, the CVL: the 2016 Rules have clashed noisily against the revised SIP6 as regards information-delivery and against the 2015 Rules as regards fee-approval; and everything needs to be done in a short timescale with directors who, no longer facing the fear of attending a physical meeting, quickly become as disengaged from the process as most creditors. Add to this some surprising pronouncements from RPB monitors on pre-CVL fees, bounce-backs from an overflowing HMRC inbox, and requests from creditors for physical meetings that no one attends (not even the requesting creditor) and it’s no surprise that some cry: there must be an easier way to make a living!

What to deliver when and how?

Old habits die hard, so, because we had been accustomed to sending a S98 pack to creditors post-appointment, I think it has taken some time for the S100 and SIP6 requirements to settle in.

The Statement of Affairs

In brief, regarding the Estimated Statement of Affairs (“SoA”):

  • R6.14(7) states that creditors must receive a copy of the SoA required under S99 – so this must be a full copy of the director’s SoA verified by a statement of truth; a draft will not do
  • as it needs to be verified by the director, it is difficult to see how this can be a prospective SoA – it might be tempting to produce an SoA as it should look on the decision date, but this seems impossible;
  • so don’t produce it too early: R6.3 requires the SoA to show the position not more than 14 days before the winding-up resolution;
  • but it must be sent in sufficient time for creditors to receive it at the latest on the business day before the decision date; and
  • it must be sent to creditors – unless you can send this by email, it must be sent by post.

Pre-appointment deliveries

Why can’t you deliver the SoA by website? Because only an office-holder can make use of the rules on website-delivery (R1.49 and R1.50). Unless you’ve already been appointed liquidator by the members by the time you send the SoA – which of course may be the case in a Centrebind – you won’t be an office-holder… and in fact I still don’t think R1.49 can be used in a Centrebind, because it refers to a document that is required to be delivered by the office-holder but of course the requirement to deliver the SoA is on the directors… but oddly R1.50 is worded differently, so it might be possible for a Centrebind liquidator to help a director to deliver an SoA under R1.50.

So why can docs be delivered by email pre-appointment? R1.45 simply sets out the criteria for delivery by email; there are no restrictions on who may follow the rule or when. There is a the small wrinkle that “deemed consent” to email delivery (R1.45(4)) refers to delivery by an office-holder, but Dear IP 76 states that “the assumed consent provision applies to all senders”.

The SIP6 report

However, as regards the SIP6 information (which is still generally produced as a “report”):

  • this is not a Rules’ requirement, so the statutory delivery provisions do not apply; and
  • as the SIP6 states, this report only needs to be “made available on request… and may be made available via a website”.

This seems very odd to some: why put so much effort into producing the SIP6 report when probably no one is going to ask to see it? Well, if you want to seek a decision from creditors on your pre-CVL fees and/or your post-appointment fees, the SIP6 report may prove valuable in justifying the work done and setting out the work you propose to do, so you may well want to provide it to creditors anyway. I think that a significant proportion of IPs are sending out the SIP6 report, but I am also seeing a growing number deciding not to.

After the S100 decision process

What about after appointment? Should the SoA and the SIP6 report be sent out then? Of course, after appointment you can start using the Rules on website-delivery, so it all gets a lot less burdensome. Again, the SIP6 report may be useful if proposing fee decisions, but there is no strict requirement to deliver it.

The SoA is different: R6.15(1)(a) requires a copy or summary of the SoA to be delivered to “any contributory or creditor to whom the notice under rule 6.14 [i.e. notice of the S100 decision] was not delivered”. In many cases, not all members will have received the S100 decision notice. Therefore, to save you the trouble of having to determine whether you’re circulating to any previously-missed members or creditors and especially if you’re using website-delivery, why not include a copy of the SoA as routine in all cases?

 

A Flood of Notices!

When it comes to the 2016 Rules’ treatment of notices, I think the Insolvency Service have absolutely failed to meet their apparent objectives of creditor-engagement and reducing costs. There are many more notices required under the 2016 Rules and each notice requires more information.

I can truly see no advantage in these new requirements: no one wants to see all this extra gumpf, do they? Apparently not all the RPB monitors agree: we have even heard from one client that an RPB monitor has been asking for more items on certain notices, going over and above the statutory requirements. When will this madness end?!

More standard contents

Far from escaping the shackles of prescription, the 2016 Rules list detailed and sometimes puzzling “standard contents” for notices, some of which we might not have been accustomed to including previously. I have found that the following are sometimes overlooked from notices to creditors etc.:

  • the company number
  • the bankrupt’s address
  • the court reference
  • either an email address or a telephone number “through which the office-holder may be contacted”
  • the relevant section or rule reference

I would also ask that, if you are relying on an external provider’s notices and you wonder what on earth a certain statement is doing in the notice, please resist the urge to delete it. Although of course none of us are perfect, some required contents don’t make any sense – for example, reference in a S100 notice to the fact that opted-out creditors can still vote (i.e. before they’ve even been told about opting out).

Notices where none were needed before

A common notice to omit is a R15.8 Notice of Decision Procedure when proposing a vote by correspondence. In the old days, all we used to issue was a circular explaining the proposed resolution and enclosing a voting form, what could have been simpler? But now the circular needs to include a Notice of Decision Procedure – this isn’t a notice solely for meetings.

Notices Inviting a Committee

Where you are proposing a decision (including where you’re proposing it by deemed consent), you will also need to send a Notice Inviting a Committee in all the following cases:

  • CVLs, including pre-liquidation, when giving notice of the S100 process (R6.19 and as explained on the Insolvency Service’s Rules blog)
  • ADMs – even if your proposed decision cannot be affected by a Committee, e.g. when asking creditors to approve the timing of your discharge (R3.39)
  • BKYs (R10.76)
  • and MVL conversions (R6.19)

However, compulsory liquidations are different. You only need to invite creditors to form a Committee when you’re posing a decision on the appointment of a liquidator (which of course is going to be very rare for IPs already in office). But, where you’re appointed by the SoS, you still need to tell creditors in your first letter to them on appointment that they can form a Committee and how they go about that (S137(5)).

The 2016 Rules mentioned above make clear that you are “inviting [the creditors] to decide whether a [creditors’/liquidation] committee should be established”. Therefore, as a “decision” is mentioned, you need to ensure that you list on the other items in your pack – the R15.8 Notice of Decision Procedure (or R15.7 Notice seeking Deemed Consent) and the voting form or proxy form – a proposed decision on the establishment of a Committee.

You should also make sure that the R15.40 Record of Decision – your statutory internal record of the outcome of the decision process (which will be either minutes of a meeting or some other record in all non-meeting decisions, including decisions sought by deemed consent) – lists the proposed decision on the establishment of a Committee and the outcome.

The Opting-Out Notice?

It seems to have taken some time for the issuing of opting-out information, as required by R1.39, to have become embedded successfully in our practices.

R1.39(1) states that “the office holder must, in the first communication with a creditor, inform the creditor in writing that the creditor may elect to opt out of receiving further documents relating to the proceedings”. A few things are worthy to note:

  • The Rules do not call this a “notice” that we must “deliver”. Therefore, although it means that we don’t need to worry about ensuring the standard contents for notices are covered, it does mean that it is not something we can simply upload to a website and tell creditors where to find it.
  • The Rule states it must be “in the first communication”, so again uploading it to a website will not work.
  • “Communication” does not mean just by letter – if we are emailing a creditor on appointment (e.g. an MVL director owed a DLA balance), we need to ensure the information is “in” the email. Incidentally, personally I think that this Rule must only apply to written communication, not oral, as you cannot provide information “in writing” in your first telephone conversation.
  • The Rule refers to our first communication “with a creditor”, so we need to think wider than just the first on-appointment circular to creditors as a body – if any creditors emerge later, we need to provide the opt-out information in our first communication with each of them (arguably once we have established that they are – or perhaps may be – a creditor).

 

It’s Raining “Deemed”s

Even under the 1986 Rules, the Administration processes caused problems. Now – in a world where we deal both with “deemed consent” and “deemed approval” – confusion truly is raining down.

  1. Deemed Approval

The 1986 Rules’ deemed approval process has continued largely unaltered. Thus, if the Administrator’s Proposals contain a Para 52(1) Statement, you’re still looking at a “deemed approval” process:

  • The Administrator does not ask creditors to approve the Proposals.
  • Creditors are simply provided the Proposals and given 8 business days (from delivery, which is a change from the 1986 Rules) in which to request that a decision process be instigated.
  • If no (or insufficient) creditors respond within the time period, the Proposals are deemed approved.
  • This is not deemed consent.
  1. Deemed Consent

Deemed consent may be relevant where the Proposals do not include a Para 52(1) Statement.

In this case, the Administrator does ask creditors to approve the Proposals. This decision may be posed via a virtual meeting, correspondence (or electronic) vote, or by a Notice seeking Deemed Consent.

If we choose the deemed consent process, then we are asking creditors to make a decision “that the Administrator’s Proposals be approved”. Then, if no (or insufficient) creditors respond, the decision is made, i.e. the Proposals are actually approved – they’re not deemed approved, they are approved.

Does it matter?

Actually, probably not a great deal. A practical consequence is that different forms must be delivered to the Registrar of Companies:

  • If the Proposals have been “deemed approved”, you should use Form AM06, Notice of Approval (yep, that’s right: we were all accustomed to the Notice of Deemed Approval, but this no longer exists)
  • If the Proposals have actually been approved (by deemed consent or another decision process), you should use Form AM07, Notice of Creditor’s Decision (yep, the incorrect placing of the apostrophe gets under my skin too)

Interestingly, the case of Promontoria (Chestnut) Limited v Craig & Harold ([2017] EWHC 2405 (Ch)) (http://www.bailii.org/ew/cases/EWHC/Ch/2017/2405.html) illustrates that the confusion is far wider than just with some IPs. Para 46 of this judgement states that the Administrators’ Proposals in this case were approved by deemed consent. However, the very next para, which refers to proposals containing a Para 52(1) Statement, states that the Proposals were “deemed approved”, but then the rest of para 47 is an argument about the status of proposals approved by deemed consent. What a mess!

 

Eclipsing the 2015 Fees Rules

RPB monitors seem unanimous in their recent messages, with which I concur: all this focus on the 2016 Rules seems to have had a detrimental effect on the general standards of compliance with the fees rules that were introduced in October 2015.

Unfortunately of course, if we don’t meet the fees rules and the decision-making rules, there could be serious consequences. So, while you may discover that an ICR, self cert or monitoring visit reveals 101 things to fix, I think that realistically many of us would do well to prioritise our efforts to fix the fundamentals of fee-approval for some time to come. After all, the 21st century is all about risk management 😉

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Revised R3 IVA Standard Terms: Improving with Age..?

Finally, 10 months after the 2016 Rules came into force, R3 issued 2016 Rules-adapted revised Standard Terms for IVAs. In this blog, I summarise the key changes.

Having worked on the R3 group (an inevitable consequence of saying: the work must get done!), it is difficult for me to be critical of the result. But drafting-by-committee always involves some compromises (and soooo much time!), so don’t be surprised if I slip in the odd gripe below.

The revised IVA Terms are available from the R3 website but only to logged-in R3 members, which seems odd considering the drive to go paperless for insolvency proceedings. R3’s conditions of use state that R3 members may “use” the terms, so presumably as the 2016 Rules and the Terms themselves allow delivery by website, non-members should be able to access them from R3 members’ websites over time.

While I’m on the subject of websites…

 

Website Use

The new Terms provide that Rs1.49 to 1.51 shall apply. Did the Terms need to include this? Can’t Supervisors (and Nominees) already use the 2016 Rules to deliver documents by website?

Yes, these 2016 Rules do already work for IVAs… but only for documents required under the Act or the Rules (R1.36(1)). Therefore, whilst we’ve been able to send relevant notices to wrap in website-delivery for statutory documents including the Nominee’s notice of the decision procedure to approve the IVA, progress reports and implementation/termination notices, technically the 2016 Rules do not enable website-delivery of items arising only by reason of the IVA Proposal and Terms. In other words, the methods of delivery of proposed variation decisions and outcomes are determined by the IVA Terms, not by the 2016 Rules.

The previous R3 IVA terms allowed the 2009 Rules’ process for website-delivery, i.e. by posting out a one-pager each time that something new was uploaded. The revised Terms now also allow the R1.50 process so that the despatching of one notice will enable all future documents to be uploaded onto the website with no further notice. It is doubtful that this will help when seeking a variation, but it may help with the next – new – requirement…

 

Reporting Outcomes

Where a meeting was held during the period of an IVA, the old terms required a list of creditors voting to be sent with “the chairman’s report to Creditors, the Debtor and the Court”. This was a bit odd, because firstly of course there was no requirement to send any report on meetings during an IVA to the Court. But secondly, what was “the chairman’s report”? The rules defined a chairman’s report arising from the meeting to vote on the IVA Proposal, but there were no rules or terms to define such a report for meetings after approval. Another oddity of the old terms was that there was no requirement to report to creditors on the outcome of a postal resolution.

The revised Terms plug these gaps… although not in a low-cost way. Term 69 follows the 2016 Rules’ model of “records of decisions”, which for meetings are in the form of minutes and which show how creditors voted on the decisions. Separately, Term 69 requires a list of creditors who participated and the amounts of their claims. The revised Terms require the “record of decision” to be sent to the creditors and the debtor.

This seems a little onerous and a departure from the 2016 Rules as regards decisions taken during the course of an insolvency process, where rarely is a post-decision circulation required. Couldn’t the decision outcome be delivered by a simple one-liner? Is a copy of the full record of decision/minutes really necessary? Well, it would appear so if creditors are able to exercise their rights under the Terms to appeal a decision (Term 65) or to “complain” about being excluded from a virtual meeting, which is a new right transferred in from the 2016 Rules (Term 62(7)).

As mentioned above, though, at least Supervisors may now use websites to deliver such documents easily… and it has since been pointed out to me that there is no timescale on this delivery.

 

Decision Procedures

I joined the working group thinking that we had an opportunity to take the good bits from the 2016 Rules and leave the bad. This didn’t mean that I was keen on making life easy for IPs while running rough-shod over measures designed to improve matters for the debtors and creditors. It’s just that I think we all know what works in the 2016 Rules, what balances well the objectives of reducing costs and engaging stakeholders, so why could we not learn from our early experiences of the 2016 Rules and design new Terms to improve on them?

For example, if an IP feels that a physical meeting would be the best forum in a particular case, why can’t s/he decide to summon one? Even the Insolvency Service has suggested that for other insolvency proceedings IPs might ring around creditors before notices are sent and encourage them to ask for a physical meeting. So why not design the Terms so that we can avoid this charade?

Regrettably, I was outvoted on this point as well as some other 2016 Rules that found their way into the revised Terms.

The revised Terms incorporate the following now-familiar Rules:

  • A physical meeting may only be convened if 10/10/10 creditors ask for one (Term 61(2) and (3))
  • The 2016 Rules on the creditors’ power to requisition a decision (i.e. out of the blue) generally have been replicated (Term 61(4) and 63).
  • A notice of decision procedure compliant as far as applicable with R15.8 must be issued (Term 62(2)) – note: this must be sent even if it is a vote-by-correspondence (I have seen a number of IPs omit this notice in other insolvency proceedings)
  • Other 2016 Rules on the decision procedures should be followed, e.g. the timescale for convening a physical meeting after receiving requests (Term 62(2))
  • Once a vote has been cast in a non-meeting procedure, it cannot be changed (Term 64(4))
  • As mentioned above, the 2016 Rules on excluded persons apply (Term 62(7))

But on the other hand, some departures from the 2016 Rules have been made:

  • The deemed consent process has not been transported into the Terms – it was felt that, as an IVA is effectively an agreement between the debtor and their creditors, silence-means-approval was an inappropriate way to make changes to it
  • Meetings must still be held between 10am and 4pm on a business day (Term 62(4)) (personally, I thought that IPs could be trusted to convene meetings at a sensible time such that this prescription was unnecessary – oh well)

But I guess we should be grateful for small mercies: at least we don’t need to invite creditors to form a committee every time!

 

The Debtor’s Involvement

Some changes in the Terms regarding the level of involvement of the debtor in the process may come as a surprise:

  • Notice of a meeting is no longer required to be sent to the debtor (unlike in bankruptcy – R15.14(2)/(3))
  • Debtors may request a decision (Term 61(6)), but the Supervisor need only convene a decision procedure if s/he considers it is a reasonable request
  • The Terms no longer allow the debtor to inspect proofs (Term 36)

Despite these changes, of course it must be remembered that the debtor’s participation in the IVA process, which is intended to achieve a fair outcome for all, is fundamental and crucial.

 

The Trust Clause

We all know about the Green v Wright fun-and-games, which decided that, notwithstanding that a debtor had met all their obligations under the IVA that had concluded successfully, when an asset emerged later that would have been caught by the IVA had it been known about at the time, such an asset was caught by the enduring trust.

Is this practical for cases generally? For example, how do you revive cases long-ago completed? What if you’ve destroyed the file? What if the former Supervisor has left the firm? What if they are no longer licensed?

Is this fair for cases generally? It seems fair in a bankruptcy scenario, which was how the judge came to the decision, but in an IVA where an agreement is reached with creditors (provided of course that the debtor has been entirely open and honest in formulating the Proposal), the debtor meets their side of the bargain and the creditors get what they were expecting, shouldn’t that be the end of it?

As R3’s covering note explained, on consulting with major creditor groups, it seemed that they generally were comfortable with such finality. On the whole, avoiding Green v Wright trusts capturing unknown unknowns seemed like a popular idea.

The new Terms introduce the Trust Realisation Period. This period continues after the expiry, full implementation or termination of the IVA, if there remain (known) assets included in the IVA Proposal that remain to be realised and distributed. Therefore, in theory if unknown assets emerge before the Trust Realisation Period ends, they could be caught by the trust. However, the Terms are designed so that, once the Trust Realisation Period ends, the trusts end, so any unknown assets emerging after this point should not be caught by a trust.

The new Terms also change the position on the debtor’s bankruptcy. In this case, any assets already got in or realised by the Supervisor remain for distribution to the IVA creditors, but any other assets that were caught by the IVA are freed from the trust, so as not to disturb the vesting of the bankruptcy estate in the Trustee in Bankruptcy.

 

Other Good Bits

The new Terms improve on some other areas that previously didn’t quite work:

  • Previously, a meeting could be adjourned again and again (as long as there were no more than 21 days between adjournments). Now, adjournments have a long-stop date of 14 days from the original meeting date (Term 68(3))
  • The process for a Joint Supervisor to resign has been simplified: no longer does there need to be a meeting to seek creditors’ approval of the resignation, but now all that is needed is for the Joint Supervisor’s resignation to be notified to creditors in the next progress report (Term 18(3))
  • Debts of £1,000 or less may be admitted for a dividend without the delivery of a proof (Term 39(4)). The new Terms do not prescribe how Supervisors should deliver this message to such creditors, but it would seem sensible to me for the Supervisor to follow something akin to the 2016 Rules’ process of notifying such creditors when issuing the Notice of Intended Dividend so that these creditors know how much their claim is going to be admitted for absent a proof and the timescale for submitting a proof for a different amount, if they so wish. As in the 2016 Rules, this Term does not mean that Supervisors must admit small debts – they remain in full control of whether to exercise this power.

 

On the whole, I think the new Terms are an improvement, especially now that the 2016 Rules’ Decision Procedures have bedded in generally. Of course, the odd flaw or ambiguity will always take us by surprise. But hopefully Version 4 will serve us well for a few years yet.


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The revised SIP6: was it worth the wait?

With the benefit of 6 months of working under the clunky new rules, I’d expected (ok, I’d hoped) that the revised SIP6 would address some of the practical issues arising from the new rules and that we’d see clarity on some of the vague language of v1. The limited changes in v2 have done little to clear the fog. Did we miss the opportunity presented by the consultation to inform the regulators of our difficulties?

You can access a tracked-changes comparison of the revised with the original SIP6 at: SIP6 comparisons to 01-01-18

In brief, the changes introduced by the revised SIP6 were:

  • Clarification that the S100 information should ordinarily be made available “on request” and can be made available via a website;
  • Movement of information about the IP’s (or firm’s or associates’) prior involvement from the S100 information pack to the circular providing notice of the proposed S100 decision and an expansion of the explanation to include the ethical consequences of any prior involvement; and
  • Removal of the requirement to send notices convening a decision process to everyone on the same day.

My personal response to the SIP6 consultation is here: SIP_6_questionnaire_MB

 

Should the S100 information be sent to creditors?

The most material change is the method of disseminating the “key information likely to be of interest to prospective participants” in the S100 decision process. It was hinted at when the original SIP6 was released: the RPBs’ covering emails announcing the release on 10 March 2017 had indicated that the S100 information “should be available to creditors… where they request it”. However, this non-binding note sat uncomfortably next to the SIP itself, which simply stated that the information “should ordinarily be available”. The revised SIP6 now clarifies that the information “should ordinarily be available, on request”, adding that it may be made available via a website.

I find this approach odd. Does this mean that IPs no longer need to compile the information as a matter of routine? Or would an IP be criticised for not having the information ready notwithstanding the absence of any requests? Granted, it would be a very brave IP that gambled on the chances that no one would ask for the information in view of the time it takes to compile it… but if the only creditors are HMRC and a couple of connected parties..?

The flip-side is: if no one asks for the information, is it still a “reasonable and necessary” cost to compile it? As it seems that IPs are no longer strictly required to produce a report for every S100 – but only where a creditor requests it – I think it could be only a matter of time before part of an IP’s S100 fee is challenged as not reasonable and necessary and therefore not strictly an allowable expense of the liquidation (R6.7(2)). Thanks, RPBs, for putting IPs between a rock and a hard place.

Personally, I disliked the original SIP6’s hark-back to the S98 report. The Insolvency Service has given us a low-cost deemed consent route into liquidation. It seemed logical to me for SIP6 to follow through on this model. As we have broken away from physical S98 meetings, isn’t the time over for deficiency accounts and lame reasons for the company’s demise? Instead of putting the effort into providing creditors with information whilst operating under the company’s instruction pre-liquidation, wouldn’t it be more valuable to require the liquidator to provide such information once they’ve had an opportunity to investigate matters, as in Administrations? Wouldn’t this sit better with the image of the IP as office holder and help dispel the perception that they’re cosy with the director?

Of course, some S100s will attract attention and it is only right that, where a meeting has been convened, those attending the meeting receive some answers to their questions (and the S100 pack may go some way to explaining the quantum/basis of a prospective liquidator’s proposed fee). However, to produce the copious amount of information required to meet SIP6 on the off-chance that someone will ask for it seems insensible. The SIP doesn’t even require IPs to inform creditors that such information is available on request.

 

Elevating ethics

SIP6 (both original and revised) stipulates that the required information “facilitates the making of an informed decision” on the appointment of a liquidator. It had seemed to me that the only item in the original list of information that was truly relevant to this question was “details of any prior involvement with the company or its directors that could reasonably be perceived as presenting a threat to that insolvency practitioner’s objectivity”: if the advising IP had become too embroiled in material events just prior to the liquidation, then creditors may decide to look for an independent liquidator.

In view of the fact that the SIP6 report is only provided on request, I think it is only right that this requirement is shifted out of the SIP6 report and into documents that are issued to creditors. New paragraph 11 of SIP6 addresses this:

“An insolvency practitioner should disclose the extent of their (and that of their firm and/or associates) prior involvement with the company or its directors or shareholders, any threats identified to compliance with the fundamental principles of the Insolvency Code of Ethics, and the safeguards applied to mitigate those threats. This disclosure should be made with the notices convening the deemed consent or decision procedure.”

This is a positive change, I think, and I do like the wider scope of this disclosure, which requires IPs to examine and explain the ethical threats presented by any prior involvement. But unfortunately it does mean that there is a new lack of transparency over the IPs’/firms’/associates’ involvement after the notices have been sent.

 

Is that all?

The only other change (other than semantics) was to drop the requirement for the notices to be sent on the same business day to all known prospective participants in the decision process (old SIP6 paragraph 8).

The SIP6 consultation closed on 13 October 2017. Granted, two months is a short time in the world of committees. It takes time to draft, redraft, achieve in-principle agreement, and then drive documents through RPBs’ approval processes. I wonder if the emergent few changes have left those who worked on the project asking themselves if it was all worth the effort. Then again, perhaps the consultation responses gave them the feeling that we were all pretty-much happy with the SIP as it was.

 

A missed opportunity?

The SIP consultation had included some valuable questions exploring the difficulties encountered in applying the SIP and the new decision processes and asking where “the SIP fails to provide adequate direction”. We were also asked whether creditors had fed back anything about the value of the SIP6 S100 information. Surely, the RPBs have accumulated some valuable responses, haven’t they?

I accept that a SIP is not the place for guidance. It is there to address mischiefs and potential abuses. But, having asked the questions, I would hope that the RPBs received useful feedback, which could be used to help us make the new rules work for all.

My own thoughts on where the SIP was unclear on exactly what was expected of IPs were:

  • What measures are expected in order for IPs to “facilitate participation” (paragraph 3) in a decision process? As this is a fundamental SIP6 principle, presumably it relates to more than just the S100 information? Does it relate to the choice of decision process? For example, could IPs be clobbered for using an internet-based platform in an area with poor connectivity? Could it have application in cases with overseas creditors? What did the drafter have in mind?
  • What do “sufficient and proportionate safeguards against participation by persons who are not properly entitled to participate” (paragraph 8) look like? Is this referring to the level of diligence expected in reviewing proofs? Or is this about checking IDs before being allowed into a meeting? As this requirement was never in SIP8, perhaps the RPBs felt it was needed specifically to deal with virtual meetings, so does this indicate where the RPBs stand on the question of providing the full dial/login details for a virtual meeting upfront?
  • Personally, I’d appreciate a clear steer on what constitutes “an explanation of any material transactions conducted in the preceding 12 months” (paragraph 12 (iv)) that needs to be disclosed (on request) for S100s, as some IPs have expressed surprise at my view that this would cover the sale of the company’s remaining assets just before liquidation.

Unfortunately, I think that those ambiguities remain in SIP6 v2.

Some other new areas that might have usefully been covered in the SIP are:

  • What are creditors’ views of the absence of a statutory Gazette notice for deemed consent processes? Is there any expectation on IPs to Gazette except perhaps where they are very confident about the creditor list provided by the company? Seemingly not, but is this not open to abuse?
  • How do you allow creditors to inspect proofs at a virtual meeting?
  • When does healthy competition stray into actions bringing the profession into disrepute? Is it acceptable for an IP (or their staff or associates) to cast aspersions on the conduct of the members’ nominated liquidator?

But the opportunities for such clarity and guidance have passed. As with so many other aspects of the new rules and other legislation, we have to get up to speed damned fast, faster than it seems the SIPs can move. I have no doubt that the face of S100s will continue to change, but whether we can expect any SIP6 v3 is doubtful.

 

 


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The Regulators present a unified front on fees

 

In an unprecedented step, the IPA and the ICAEW have issued largely consistent articles on fees, SIP9 and reporting. I think some of the points are well worth repeating, not only because in the past few months, I’ve seen more IPs get into a fix over fees than anything else, the new rules having simply compounded the complexities, but also because the articles contain some important new messages.

In this post, I explore how you can make your fee proposals bullet-proof:

  • What pre-administration work is an allowable expense?
  • What pre-administration costs detail is often missing?
  • What pre-CVL work is allowable as an expense?
  • What Rules/SIP9 detail is commonly missing from fee proposals?
  • How do the monitors view Rules/SIP9 omissions?
  • What problems can arise when using percentage or mixed basis fees?

The articles can be found at:

The effort seems to have originated from a well-received presentation at the autumn’s R3 SPG Forum, given by the ICAEW’s Manager, Alison Morgan (nee Timperley) and the IPA’s Senior Monitoring Manager, Shelley Bullman.

As the ICAEW and the IPA monitor c.90% of all appointment-taking IPs, I think this is a fantastic demonstration of how the RPBs can get out to us useful guidance. Of course, such articles do not have the regulatory clout of SIPs or statute (see below). However, I believe it is an essential part of the RPBs’ role to reach out to members in this way in written form. Although roadshow presentations are valuable, they can only reach the ears of a proportion of those in need and the messages soon settle into a foggy memory (if you’re lucky!).

  • Do the articles represent the RPBs’ views?

The IPA article ends with a disclaimer that “IPA staff responses” cannot fetter the determinations of the IPA’s committees and the ICAEW article is clearly authored by Alison Morgan, rather than being something that can strictly be relied upon as representing the ICAEW’s views (for the sake of simplicity, I have referred throughout to the articles as written by “the monitors”).

That’s a shame, but I know only so well how extraordinarily troublesome it is to push anything through the impenetrable doors of an RPB – that’s why SIPs seem to emerge so often long after the horse has bolted… and I suspect why we are still waiting for an insolvency appendix to the new CCAB MLR guidance. However, at a time when the Insolvency Service’s mind is beginning to contemplate again the question of a single regulator, issuing prompt and authoritative guidance serves the RPBs’ purposes, not only ours.

 

Pre-Administration Costs

Over the past few years, I’ve seen an evolving approach from the RPBs. In the early days, the focus was on the process of getting pre-administration costs approved. The statutory requirement for pre-administration costs to be approved by a resolution separate from the Proposals has taken a while to sink in… and the fact that the two articles repeat this requirement suggests that it is still being overlooked on occasion.

Then, the focus turned to the fact that it was, not only pre-administration fees that required approval, but also other costs. I still see cases where IPs only seek approval of their own costs, apparently not recognising that, if the Administration estate is going to be paying, say, agents’ or solicitors’ costs incurred pre-administration, these also need to go through the approval process.

  • What pre-administration work is an allowable expense?

Now, it seems that the monitors’ focus has returned to the IP’s own fees. Their attention seems fixed on the definition of pre-administration costs being (R3.1):

“fees charged, and expenses incurred by the administrator, or another person qualified to act as an insolvency practitioner in relation to the company, before the company entered administration but with a view to it doing so.”

The IPA article states that this “would exclude any insolvency or other advice that may or may not lead directly to the administration appointment” and the ICAEW article states that it “would exclude any general insolvency or other advice”.

I do wonder at the fuzzy edges: if a secured creditor who is hovering over the administration red button asks an IP to speak with a director, doesn’t the IP’s meeting with the director fit the description? Or if an IP seeks the advice of an agent or solicitor about what might happen if an administration were pursued, wouldn’t this advice count? But nevertheless, the monitors do have a point. If a firm were originally instructed to conduct an IBR, this work would not appear to fall into the definition of pre-administration costs. Also, if an IP originally took steps to help a company into liquidation but then the QFCH decided to step in with an Administration, the pre-liquidation costs could not be paid from the Administration estate.

  • What pre-administration costs detail is often missing?

As mentioned above, the monitors remind us that pre-administration costs require a decision separate from any approval of the Proposals – there is no wriggle-room on this point and deemed consent will not work. The monitors also list other details required by statute that are sometimes missing, of which these are my own bugbears:

  • R3.35(10): a statement that the payment of any unpaid pre-administration costs as an expense of the Administration is subject to approval under R3.52 and is not part of the Proposals subject to approval under Para 53 of Schedule B1
  • R3.36(a): details of any agreement about pre-administration fees and/or expenses, including the parties to the agreement and the date of the agreement
  • R3.36(b): details of the work done
  • R3.36(c): an explanation of why the work was done before the company entered administration and how it had been intended to further the achievement of an Administration objective
  • R3.36(d) makes clear that details of paid pre-administration costs, as well as any that we don’t envisage paying from the Administration estate, should be provided
  • R3.36(e): the identities of anyone who has made a payment in respect of the pre-administration costs and which type(s) of costs they discharged
  • R3.36(g) although it will be a statement of the obvious if you have provided the above, you also need to detail the balance of unpaid costs (per category)

 

Pre-CVL Costs

Another example of an evolving approach relates to the scope of pre-CVL costs allowable for payment from the liquidation estate. Again, over recent years we have seen the RPB monitors get tougher on the fact that the rules (old and new) do not provide that the IP’s costs of advising the company can be charged to the liquidation estate. This has been repeated in the recent articles, but the IPA’s article chips away further still.

  • A new category of pre-CVL work that is not allowable as an expense?

R6.7 provides that the following may be paid from the company’s assets:

  • R6.7(1): “Any reasonable and necessary expenses of preparing the statement of affairs under Section 99” and
  • R6.7(2): “Any reasonable and necessary expenses of the decision procedure or deemed consent procedure to seek a decision from the creditors on the nomination of a liquidator under Rule 6.14”.

Consequently, the IPA article states that:

“Pre-appointment advice and costs for convening a general meeting of the company cannot be drawn from estate funds after the date of appointment, even if you have sought approval for them.”

So how do you protect yourself from tripping up on this?

If you’re seeking a fixed fee for the pre-CVL work, make sure that your paperwork reflects that the fee is to cover only the costs of the R6.7(1) and (2) work listed above. Of course, SIP9 also requires an explanation of why the fixed fee sought is expected to produce a fair and reasonable reflection of the R6.7(1)/(2) work undertaken. Does this mean that you should be setting the quantum lower than you would have done under the 1986 Rules, given that you should now exclude the costs of obtaining the members’ resolutions? Well, personally, I don’t see that the effort expended under the 2016 Rules is any less than it was before, even if you cut out the work in dealing with the members, but you will need to consider (and, at least in exceptional cases, document) how you assess that the quantum reflects the “reasonable and necessary” costs of dealing with the R6.7(1)/(2) work.

Alternatively, if you’re seeking pre-CVL fees on a time costs basis, make sure that you isolate the time spent in carrying out only the R6.7(1)/(2) work and that you don’t seek to bill anything else to the liquidation estate.

Although the articles don’t cover it, I think it’s also worth mentioning that, as liquidator, you need to take care when discharging any other party’s pre-CVL costs that they fall into the R6.7(1)/(2) work.

 

Proposing a Decision on Office Holders’ Fees

  • What Rules/SIP9 detail is commonly missing from fee proposals?

The articles list some relatively common shortcomings in fee proposals (whether involving time costs or otherwise):

  • lack of detail of anticipated work and why the work is necessary
  • no statement about whether the anticipated work will provide a financial benefit to creditors and, if so, what benefit
  • no indication of the likely return to creditors (SIP9 requires this “where it is practical to do so” – personally, I cannot see how it would be impractical if you’re providing an SoA/EOS and proposed fees/expenses)
  • generic listings of tasks to be undertaken that include items irrelevant to the case in question
  • last-minute delivery of information, resulting in the approving body having insufficient time to make an informed judgment

The IPA article states that “presenting the fee estimate to the meeting is not considered to be giving creditors as a body sufficient time to make a reasoned judgement”. Personally, I would go further and question whether giving the required information to only some of the creditors (i.e. only those attending a meeting) meets the requirement in R18.16(4) to “deliver [it] to the creditors”. At the R3 SPG Forum, one of the monitors also expressed the view that, if fee-related information is being delivered along with the Statement of Affairs at the one business day point for a S100 decision, this is “likely to be insufficient time”.

  • fee estimates not based on the information available or providing for alternative scenarios or bases

I wonder whether the monitors are referring primarily to the fairly common approaches to investigation work, where an IP might estimate the time costs where nothing of material concern is discovered and those that might arise where an action to be pursued is identified down the line. You might also be tempted to set out different scenarios when dealing with, say, a bankrupt’s property: will a straightforward deal be agreed or will you need to go the whole hog with an order for possession and sale?

Some IPs’ preference for seeking fee approval only once is understandable – it would save the costs of reverting to creditors and potentially of hassling them to extract a decision – but at the SPG Forum the monitors recommended a milestone approach to deal with such uncertainties: a fee estimate to deal with the initial assessment and later an “excess fee” request for anything over and above this once the position is clearer. This approach would often require a sensitive touch, as you would need to be careful how you presented your second request as regards the next steps you proposed to undertake to pursue a contentious recovery and the financial benefit you were hoping to achieve. But it better meets what is envisaged by SIP2 and would help to justify your decision either to pursue or to drop an action.

Alternatively, perhaps the monitors have in mind the fees proposed on the basis of only a Statement of Affairs containing a string of “uncertain”-valued assets. Depending on what other information you provide, it could be questioned whether creditors have sufficient information to make an informed judgment.

  • no disclosure of anticipated expenses

Under the Rules, this detail must be “deliver[ed] to the creditors” prior to the determination of the fee basis, whether time costs or otherwise, for all but MVLs and VAs… and SIP9 and SIPs3 require it in those other cases as well. It is important to remember also that this relates to all expenses, not simply Category 2 disbursements, and including those to be paid directly from the estate, e.g. to solicitors and agents.

  •  How do the monitors view Rules/SIP9 omissions?

At the R3 SPG Forum, one of the monitors stated that, if the Rules and SIP9 requirements are not strictly complied with, the RPB could ask the IP to revert to creditors with the omitted information in order to make sure that the creditors understood what they were approving and that this would be at the cost of the IP, not the estate. The IPA’s article states that “where a resolution for fees has been passed and insufficient information is provided we would recommend that the correct information is provided to creditors at the next available opportunity and ratification of the fee sought”. Logically, such a recommendation would depend on the materiality of the omission.

When considering the validity of any fee decision, personally I would put more weight on the Rules’ requirements, rather than SIP9 (nothing personal RPBs, but I believe the court would be more concerned with a breach of the Rules). For example, I would have serious concerns about the validity of a fees decision where no details of expenses are provided – minor technical breaches may not be fatal to a fees decision, but surely there comes a point where the breach kills the purported decision.

 

Fixed and Percentage Fees

  • How can you address the SIP9 “fair and reasonable” explanation?

It is evident that in some cases the SIP9 (paragraph 10) requirement for a “fair and reasonable” explanation for proposed fixed or % fees is not being met to the monitors’ expectations. The ICAEW article highlights the need to deal with this even for IVAs… which could be difficult, as I suspect that most IPs proposing an IVA would consider that the fee that would get past creditors is both unfair and unreasonable! MVL fixed fees also are usually modest sums in view of the work involved.

The articles don’t elaborate on what kind of explanation would pass the SIP9 test. Where the fee is modest, I would have thought that a simple explanation of the work proposed to be undertaken would demonstrate the reasonableness, but a sentence including words such as “I consider the proposed fee to be a fair and reasonable reflection of the work to be undertaken, because…” might help isolate the explanation from the surrounding gumpf. For IVAs, it might be appropriate to note how the proposed fee compares to the known expectations of what the major/common creditors believe to be fair and reasonable.

  • What is an acceptable percentage?

Soon after the new fees regime began, the RPB monitors started expressing concern about large percentage fees sought on simple assets, such as cash at bank. Their concerns have now crystallised into something that I think is sensible. Although a fee of 20% of cash at bank may seem alarming in view of the work involved in recovering those funds, very likely the fee is intended to cover other work, perhaps all other work involved in the case from cradle to grave. In addressing the fair and reasonable test, clearly it is necessary to explain what work will be covered by the proposed fee. Of course, if you were to seek 20% of a substantial bank balance simply to cover the work in recovering the cash, you can expect to be challenged!

Equally, it is important to be clear on what the proposed fee does not cover. For example, as mentioned above, the extent of investigation work and potential recoveries may be largely unknown when you seek fee approval. It may be wise to define to which assets a % fee relates and flag up to creditors the potential for other assets to come to light, which may involve other work excluded from the early-day proposed fee. The IPA article repeats the message that a fee cannot be proposed on unknown assets.

 

Mixed Fee Bases

It seems to me that it can be tricky enough to get correct the fee decision and billing of a single basis fee, without complicating things by looking for more than one basis! To my relief, personally I have seen few mixed fee bases being used.

  • How is mixing time costs with fixed/% viewed?

In particular, I think it is hazardous to seek a fee on time costs plus one other basis. Only where tasks are clearly defined – for example, a % on all work related to book debt collections and time costs on everything else – could I see this working reasonably successfully. The IPA article notes that:

  • when proposing fees, you need to state clearly to what work each basis relates; and
  • your time recording system must be “sufficiently robust to ensure the correct time is accurately recorded against the appropriate tasks”.
  • I would add a third: mistakes are almost inevitable, so I would recommend a review of the time costs incurred before billing – the narrative or staff members involved should help you spot mis-postings.

 

Of course, there are plenty of other Rules/SIP areas where mistakes are commonly made – for example, the two articles highlight some common issues with progress reports, which are well worth a read. However, few breaches of Rules or SIPs have the potential to be more damaging. Therefore, I welcome the RPB monitors’ efforts in highlighting the pitfalls around fees. Prevention is far better than cure.


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Emerging from the fog: some Amendment Rules

 

Long time, no see! Jo Harris has done a great job of keeping up with her monthly updates, whereas regrettably I have failed to blog throughout this crazy-busy time. But the release of new Amendment Rules is worthy of extra-special effort on my part.

The new statutory instruments, which (subject to Parliamentary scrutiny) will come into force on 8 December 2017, can be found at:

 

The Partnership Amendments

The bulk of the Partnership Amendments brings E&W LLPs and processes falling under the Insolvent Partnerships Order 1994 into line with the Insolvency (England & Wales) Rules 2016 (“2016 Rules”). Similarly, they also wrap the Administration of Insolvent Estates of Deceased Persons Order 1986 into the 2016 Rules regime.

They also add a positive duty on office holders of insolvent partnerships in Administration or Voluntary Liquidation to report on the conduct of officers of the partnership in the same manner as reports in corporate insolvencies, i.e. within 3 months of commencement. Officers of partnerships in liquidation can now also become subject to CDDA compensation orders.

The LLP changes are subject to transitional provisions similar to those that accompanied the 2016 Rules (e.g. where an old rules meeting has been convened before the relevant date, the meeting is concluded under the old rules) – of course with the relevant cut-off date being 8 December 2017.

  • Form 600 – Notice of the Liquidator’s Appointment

Unsurprisingly as it is governed by the Companies (Forms) (Amendment) Regulations 1987, changes to the Form 600 had not been wrapped in to the 2016 Rules changes. The Partnership Amendments replace the prescribed form with prescribed contents in the style of the 2016 Rules.

These changes to Form 600 have effect only in relation to liquidators appointed after 8 December 2017, so you should keep hold of the old Form 600 for a few more weeks. In any event, as far as I can see the new Form 600 has not been released yet on .gov.uk. Presumably, it will appear at https://www.gov.uk/government/collections/companies-house-forms-for-insolvency-rules-2016 soon.

 

The Amendment Rules

For me, this set of amendments is far more interesting. It has been badged by the InsS as making “minor corrections and clarifications which have been brought to our attention since the new insolvency rules came into force in April 2017”. But don’t get your hopes up. The Amendment Rules tackle a peculiar small cluster of rules.

  • Closing bankruptcies and compulsory liquidations

We all knew that the 1994 Regs that required Trustees and Liquidators to send to the InsS an R&P (aka Form 1) within 14 days of “the holding of a final general meeting of creditors” needed changing. However, I had assumed that all the InsS would do would be to drop the meeting reference so that the Form 1 would be sent on the IP vacating office – I think this is how most IPs have been fudging their way through the closure processes since April.

However, the Amendment Rules make a surprising change: from 8 December, submission of the Form 1 must occur within 14 days of sending the final account/report to the creditors. This means that the new closure process appears to be:

  1. The Liquidator/Trustee sends a notice that the administration has been fully wound up and the final account/report to creditors.
  2. Within 14 days of (1), the Liquidator/Trustee sends Form 1 to the InsS. The amended 1994 Regs continue to refer to the Form 1 as covering “the whole period of his office”, although as the IP will still be in office for another 6 weeks or more, it is difficult to see how this truly can be achieved.
  3. At least 21 days before the end of the 8-week period, the Liquidator/Trustee delivers notice of the intention to vacate office to the OR.
  4. 8 weeks (plus delivery time) after (1), provided that there are no outstanding challenges to fees/expenses etc.:
    • The Liquidator sends a copy of the notice under S146(4) to the SoS.  The notice is Form WU15 plus a copy of the final account that was sent to creditors under (1) above. These are also sent to the Registrar of Companies and the Court.
    • The Trustee sends a copy of the notice under S298(8) (which states whether any creditors objected to the Trustee’s release) to the SoS. We have learnt that the InsS also expects this notice to refer to R10.87 – without this reference, it seems that the InsS is rejecting the notice. R10.87(5) states that the notice must be accompanied by a copy of the final report, i.e. the report produced at (1) above. The notice and the final report are also sent to the Court.

The key point arising from the Amendment Rules is that in future the submission of Form 1 will occur at least 6 weeks before the IP vacates office. This reinforces the 2016 Rules’ approach that the account must be drawn down to nil with no remaining VAT issues etc. when the final account/report is issued at the start of the 8-week countdown.

In my autumn 2016 Rules’ presentations, I have been highlighting the issue of how to deal with any quarterly charge made on the IS account during the 8-week period. In the past, the InsS has expected IPs to leave £22 in the account in order to settle this, if the quarterly charge falls due in the 8-week period. It seems that, from 8 December 2017, the InsS may no longer charge to maintain the account after the Form 1 has been delivered to them. In effect, the Form 1 may be the trigger for the InsS to close the account.

In view of the significant changes to the required process made by this amendment that seemed at first glance quite insignificant, I am very pleased to have learnt that the InsS intends issuing guidance to IPs on what is required (and thank you, InsS, for dealing with my niggly queries).

  • Committees

This is something that was worth taking the trouble to fix: because of the 2016 Rules’ obsession with tagging everything to “delivery” (except of course when it involves the OR!), Liquidation/Creditors’ Committees never became established – and therefore could not act – until the notice had been “delivered” (R17.5(5)). Therefore, gone were the days when there could be a creditors’ meeting at which the newly-elected committee members were asked to stay behind after the meeting so that the office holder could hold the first committee meeting. Rather, the 2016 Rules required the newly-elected committee members to disperse for at least a few days until the office holder was certain that the notice of the committee’s establishment had been delivered and then the first committee meeting could be summoned.

The Amendment Rules return some sense to the process. Unfortunately, technically the notice still must be “sent” before the committee can act, but at least we no longer have to wait for “delivery”.

An odd wrinkle is that R17.29(3) remains untouched. Therefore, where an Administration is followed by a Compulsory Liquidation, the Liquidation Committee (i.e. the Creditors’ Committee that existed in the Administration) cannot act until the notice of continuance of the committee has been “delivered” to the Registrar. Never mind. I think we can live with this inconsistency.

  • Proxy forms

If you blinked, you will have missed it: the Amendment Rules swiftly return the 1986 Rules’ restriction on the content of proxy forms.

Personally, I thought that the 2016 Rules’ relaxation, which allowed proxy forms to display the name of the members’ nominated liquidator, was quite sensible – after all, don’t companies use such proxy forms all the time to appoint auditors? – provided of course that the form was also designed to enable a creditor easily to nominate a different IP.

However, the Amendment Rules again prohibit proxy forms from being sent out displaying the name of anyone as nominee for the office holder (as well as the name of anyone as proxy-holder, which has always been in the 2016 Rules).

  • S100 Reports

In my view, the 2016 Rules’ excessive use of “notices” with their copious prescriptive standard contents defeated the argument that an objective of the new rules was to reduce costs. Whereas under the 1986 Rules a simple one-page letter sufficed, in many cases the 2016 Rules require a long-winded notice. The circular produced after the S100 decision is one such example.

Whilst I accept that the grammar was questionable, I think that R6.15(1) could have been interpreted as requiring a “notice” providing a report on the S100 decision process to be issued. The Amendment Rules have changed this so that the “notice” is now “accompanied by a report”. Now that R6.15(1) presents us with only a list of accompaniments, I am left wondering what exactly our notice should state!

  • Other Corrections

To be fair, the Amendment Rules do fix some obvious errors, albeit that I think we have all managed to apply those particular 2016 Rules on the basis that we could see what they meant to say.

For example, paragraph 21 of Schedule 2 could have been interpreted as meaning exactly what it says: “the 1986 Rules apply” in certain pre-October 2015 cases – what, all of the 1986 Rules..? But I think we all realised that it meant that those pre-October cases did not need fee estimates etc. The Amendment Rules now specify which of the 2016 Rules do not apply.

I also couldn’t help but smile that the Amendment Rules finally correct the transitional provision on when the next progress report is required on an Administration that extended pre-April 2017… although of course all such Administrations are already 8 months older, so this argument has come and gone… but thanks, InsS, for listening 😉

Personally, I think there are other 2016 Rules that would benefit from further clarification (e.g. the inconsistent use of the word “between” and whether the Centrebind 14-day limit applies where a S100 decision date has been postponed because of requests for a physical meeting etc.), but every little helps.

It’s easy to forget the decades of debate and case law that went into refining our understanding of the 1986 Rules. Although in part the 2016 Rules are a product of our standing on the shoulders of giants, in many respects they venture into uncharted territory, which no doubt will generate decades more of furrowed brows.


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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.  (UPDATE 04/12/2017: the Amendment Rules that come into force on 8 December 2017 settle this matter once and for all.)

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.  (UPDATE 04/12/2017: the Amendment Rules that come into force on 8 December 2017 fix this issue… sort of.  See my explanation at https://insolvencyoracle.com/2017/12/04/emerging-from-the-fog-some-amendment-rules/)

 

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.