Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The stats of IP Regulation – Part 2: Monitoring

 

As promised, here are my thoughts on the RPBs’ 2017 monitoring activities, as reported by the Insolvency Service:

  • The InsS goes quiet on RPBs’ individual performances
  • Two RPBs appear to have drifted away from 3-yearly visits
  • The RPBs diverge in their use of different monitoring tools
  • On average, ICAEW visits were over three times more likely to result in a negative outcome than IPA visits
  • On average, every fourth visit resulted in one negative outcome
  • But averages can be deceptive…

As a reminder, the Insolvency Service’s report on 2017 monitoring can be found at: https://tinyurl.com/ycndjuxz

The picture becomes cloudy

As can be seen on the Insolvency Service’s dedicated RPB-monitoring web-page – https://www.gov.uk/government/collections/monitoring-activity-reports-of-insolvency-practitioner-authorising-bodies – their efforts to review systematically each RPB’s regulatory activities seemed to grind to a halt a year ago.  The Service did report last year that their “future monitoring schedule” would be “determined by risk assessment and desktop monitoring” and they gave the impression that their focus would shift from on-site visits to “themed reviews”.  Although their annual report indicates that such reviews have not always been confined to the desk-top, their comments are much more generic with no explanation as to how specific RPBs are performing – a step backwards, I think.

 

Themed review on fees

An example of this opacity is the Service’s account of their themed review “into the activities, and effectiveness, of the regulatory regime in monitoring fees charged by IPs”.

After gathering and reviewing information from the RPBs, the InsS reports: “RPBs responses indicate that they have provided guidance to members on fee matters and that through their regulatory monitoring; fee-related misconduct has been identified and reported for further consideration”.

For this project, the InsS also gathered information from the Complaints Gateway and has reported: “Initial findings indicate that fee related matters are being reported to the IP Complaints Gateway and, where appropriate, being referred to the RPBs”.

Ohhhkay, so that describes the “activities” of the regulatory regime (tell us something we don’t know!), but how exactly does the Service expect to review their effectiveness?  The report states that their work is ongoing.

Don’t get me wrong, it’s not that I necessarily want the Service to dig deeper.  For example, if the Service’s view is that successful regulation of pre-packs is achieved by scrutinising SIP16 Statements for technical compliance with the minutiae of the disclosure checklist, I dread to think how they envisage tackling any abusive fee-charging.  It’s just that, if the Service thinks that they are really getting under the skin of issues, personally I hope they are doing far more behind the scenes… especially as the Service is surely beginning to gather threads on the question of whether the world would be a better place with a single regulator.

So let’s look at the stats…

 

How frequently are you receiving monitoring visits?

There is a general feeling that every IP will receive a monitoring visit every three years.  But is this the reality?

This shows quite a variation, doesn’t it?  For two years in a row, significantly less than one third of all IPs were visited in the year.  Does this mean the RPBs have been slipping from the Principles for Monitoring’s 3-year norm?

The spiky CAI line in particular demonstrates how an RPB’s visiting cycle may mean that the number of visits per year can fluctuate wildly, but how nevertheless the CAI’s routine 3-yearly peaks and troughs suggest that in general that RPB is following a 3-yearly schedule.  So what picture do we see, if we iron out the annual fluctuations?

This looks more reasonable, doesn’t it?  As we would expect, most RPBs are visiting not-far-off 100% of their IPs over three years… with the clear exceptions of CAI, which seems to be oddly enthusiastic, and the ICAEW, which seems to be consistently ploughing its own furrow.  This may be the result of the ICAEW’s style of monitoring large firms with many IPs, where each year some IPs are the subject of a visit, but this may not mean that all IPs receive a visit in three years.  Alternatively, could it mean they are following a risk-based monitoring programme..?

There are benefits to routine, regular and relatively frequent monitoring visits for everyone, almost irrespective of the firm’s risk profile: it reduces the risk that a serious error may be repeated unwittingly (or even deliberately).  However, this model isn’t an indicator of Better Regulation (see, for example, the Regulators’ Compliance Code at https://www.gov.uk/government/publications/regulators-compliance-code-for-insolvency-practitioners).  With the InsS revisiting their MoU (and presumably also the Principles for Monitoring) with the RPBs, I wonder if we will see a change.

 

Focussing on the Low-Achievers?

The alternative to the one-visit-every-three-years-irrespective-of-your-risk-profile model is to take a more risk-based approach, to spend one’s monitoring efforts on those that appear to be the highest risk.  This makes sense to me: if a firm/IP has proven that they are more than capable of self-regulation – they keep up with legislative changes, keep informed even of the non-legislative twists and turns, and don’t leave it solely to the RPBs to examine whether their systems and processes are working, but they take steps quickly to resolve issues on specific cases and across entire portfolios and systems – why should licence fees be spent on 3-yearly RPB monitoring visits, which pick up non-material non-compliances at best?  Should not more effort go towards monitoring those who seem consistently and materially to fail to meet required standards or to adapt to new ones?

But perhaps that’s what being done already.  Are many targeted visits being carried out?

It seems that for several years few targeted visits have been conducted, although perhaps the tide is turning in Scotland and Ireland.  The ACCA also performed a number, although now that the IPA team is carrying out monitoring visits on ACCA-licensed IPs, I’m not surprised to see the number drop.

It seems that targeted visits have never really been the ICAEW’s weapon of choice.  At first glance, I was a little surprised at this, considering that their monitoring schedule seems less 3-yearly rigid than the other RPBs.  Aren’t targeted visits a good way to monitor progress outside the routine visit schedule?  Evidently, the ICAEW is not using targeted visits to focus effort on low-achievers.  Perhaps they are tackling them in another way…

 

Wielding Different Sticks

I think this demonstrates that the ICAEW isn’t lightening up: they may be carrying out less frequent monitoring visits on some IPs, but their post-visit actions are by no means infrequent.  So perhaps this indicates that the ICAEW is focusing its efforts on those seriously missing the mark.

The ICAEW’s preference seems to be in requiring their IPs to carry out ICRs.  Jo’s and my experiences are that the ICAEW often requires those ICRs to be carried out by an external reviewer and they require a copy of the reviewer’s report to be sent to the ICAEW.  They also make more use than the other RPBs of requiring IPs to undertake/confirm that action will be taken.  I suspect that these are often required in combination with ICR requests so that the ICAEW can monitor how the IP is measuring up to their commitments.

And in case you’re wondering, external ICRs cost less than an IPA targeted visit (well, the Compliance Alliance’s do, anyway) and I like to think that we hold generally to the same standards, so external ICRs are better for everyone.

In contrast, the IPA appears to prefer referring IPs for disciplinary consideration or for further investigation (the IPA’s constitution means that technically no penalties can arise from monitoring visits unless they are first referred to the IPA’s Investigation Committee).  However, the IPA makes comparatively fewer post-visit demands of its IPs.  But isn’t that an unfair comparison, because of course the ICAEW carried out more monitoring visits in 2017?  What’s the picture per visit?

 

No better and no worse?

Hmm… I’m not sure this graph helps us much.  Inevitably, the negative outcomes from monitoring visits are spiky.  We’re not talking about vast numbers of RPB slaps here (that’s why I’ve excluded the smaller RPBs – sorry guys, nothing personal!) and the “All” line (which does include the other RPBs) does illustrate a smoother line overall.   But the graph does suggest that ICAEW-licensed IPs are over three times as likely to receive a negative outcome from a monitoring visit than IPA-licensed IPs. 

Before you all get worried about your impending or just-gone RPB visit, you should remember that a single monitoring visit can lead to more than one negative outcome.  For example, as I mentioned above, the RPB could instruct an ICR or targeted visit as well as requiring the IP to make certain undertakings.  One would hope that much less than 25% of all IPs visited last year had a clean outcome!

This doubling-up of outcomes may be behind the disparity between the RPBs: perhaps the ICAEW is using multiple tools to address a single IP’s problems more often than the other two RPBs… although why should this be?  Alternatively, perhaps the ICAEW’s record again suggests that the ICAEW is focusing their efforts on the most wayward IPs.

 

Choose Your Poison

I observed in my last blog (https://tinyurl.com/y8b4cgp7) that the complaints outcomes indicated that the IPA was far more likely to sanction its IPs over complaints than the ICAEW was.  I suggested that maybe this was because the IPA licenses more than its fair share of IVA specialists.  Nevertheless, I find it interesting that the monitoring outcomes indicate the opposite: that the ICAEW is far more likely to sanction on the back of a visit than the IPA is.

Personally, I prefer a regime that focuses more heavily on monitoring than on complaints.  Complaints are too capricious: to a large extent, it is pot luck whether someone (a) spots misconduct and (b) takes the effort to complain.  As I mentioned in the previous blog, the subjects of some complaints decisions are technical breaches… and which IP can say hand-on-heart that they’ve never committed similar?

Also by their nature, complaints are historic – sometimes very historic – but it might not matter if an IP has since changed their ways or whether the issue was a one-off: if the complaint is founded, the decision will be made; the IP’s later actions may just help to reduce the penalty.

In my view, the monitoring regime is far more forward-looking and much fairer.  Monitors look at fresh material, they consider whether the problem was a one-off incident or systemic and whether the IP has since made changes.  The monitoring process also generally doesn’t penalise IPs for past actions, but rather what’s important are the steps an IP takes to rectify issues and to reduce the risks of recurrence.  The process enables the RPBs to keep an eye on if, when and how an IP makes systems- or culture-based changes, interests that are usually absent from the complaints process.

 

Next blog: SIP16, pre-packs and other RPB pointers.

 

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The stats of IP Regulation – Part 1: Complaints

My annual review of the Insolvency Service’s 2017 IP regulation report has thrown up the following:

  • The number of IPs drops again – the third year in a row
  • Good news: 2017 saw half as many complaints referred through the Gateway as 2015
  • This may be partly due to the Insolvency Service’s sifting process: almost half of all complaints put to the Gateway in 2017 were sifted out
  • Sadly, despite the overall reduction, there were more sifted-in complaints from creditors in 2017 than in the previous year
  • The RPBs seem to be generating more complaints sanctions: 10 years’ ago, 1 IP in 100 could receive a complaints sanction; now it is c.1 in 20

The Insolvency Service’s report can be found at: https://tinyurl.com/ycndjuxz

 

IPs leaving the profession

As the following graph shows, the number of appointment-taking IPs has fallen for the third year in a row:In ICAS’ 2017 monitoring report (https://www.icas.com/regulation/insolvency-monitoring-annual-reports), that RPB puts the decrease down to the number of IPs who have retired, which I suspect is probably the case across the board.  And we’re not seeing their number being replaced by new appointment-takers.  I can’t say I’m surprised at that either: regulatory burdens and personal risks continue to mushroom, formal insolvency cases (especially those with assets) appear more sparse and the media has nothing good to say about the profession.  Why would anyone starting out choose formal insolvency as their career choice?

Admittedly, it’s not an alarming fall… not yet… but one has to wonder how the Insolvency Service proposes to address this trend, given that one of their regulatory objectives introduced in 2015 was to encourage an independent and competitive profession.

But what is life like for current IPs?  Is there no good news?

 

Another dramatic fall in complaints

Much more striking is the fall in the numbers of complaints referred to the RPBs:No one – the Insolvency Service, RPBs or R3 – is shouting about this good news: the fact that the complaint number has halved since 2015, the first full year of the Complaints Gateway’s operation?  I would have thought that the InsS could have easily spun it into a story about the success of the Gateway or of their policing of insolvency regulation generally, no? 😉

 

Where are the rem and pre-pack complaints?

I wonder if the subject matter of the complaints is one reason why the InsS may not be keen to draw attention to complaints trends.

The following analyses the complaints put through the Gateway:If we were asked what areas of apparent misconduct we thought were the top of the InsS’s hit-list, I suspect most of us would answer: IP fees and pre-packs.  But, as you can see, these two topics have never featured large in complaints.

Despite the fees regime becoming more and more complex and involving the delivery of more information and rights to creditors to question or challenge fees, you can see that the complaints about fees have dropped: there were 19 in 2014 and only one last year.  And last year, there were no complaints about pre-packs.

This graph demonstrates what might be behind the drop in complaint numbers: there is a marked decrease in complaints about SIP3 and communication breakdowns.  I think that’s certainly good news to shout about.

So in what areas could we perhaps try harder to avoid attracting complaints?

 

Complaint danger zones?

The following analysis supports the perception that IVAs are attracting fewer complaints than in recent years, although IVAs are still number one.  In fact, it demonstrates that all insolvency proceedings are attracting fewer complaints.However, when looked at as a percentage of complaints received…… it would seem that complaints about ADMs and PTDs aren’t dropping quite as quickly as those for other processes.  Putting the two analyses together leads me to wonder whether ethics-related complaints involving ADMs now form a disproportionately large category of complaints, particularly in view of the relatively small number of ADMs compared with IVAs and LIQs.  Press coverage would also appear to support this area as a growing concern.

 

Creditors are lodging more complaints

The following graph gives us a little more insight into the origin of complaints:This shows that creditors are the only category of complainant that has seen an increase in the number of complaints lodged over the past year.  Could the profession do more to help creditors understand insolvency processes and especially ethics?

The Insolvency Service has reported for a few years now that the Insolvency Code of Ethics has been under review.  As we know, the JIC/RPBs launched a consultation on a draft Code last year – the consultation closure date has almost hit its anniversary!  The InsS 2017 review reported that a revised Insolvency Code of Ethics “is expected to be issued later this year”.  It seems to me that a fresh and clear revised Code could help us address the number of complaints lodged.

 

Not every complaint is a complaint

I highlighted last year that it seemed the InsS had been sifting out a greater number of complaints as not meeting the criteria for referring over to the relevant RPB.  This shows how that trend has developed:Wow!  So for the first time, the InsS rejected more complaints that it referred: almost half of all complaints were rejected (48%) and only 41% were referred.  Compare this to the first few months of the Gateway’s operation when only 25% were rejected and 72% were referred.  Nevertheless, setting aside the number of rejected complaints, it is good to see that even the trend for the number of complaints received is a nice downwards slope.  And in case you’re wondering, I suspect that the remaining 11% of complaints received are still being processed by the IS – a fair old number, but pleasingly a lot less than existed at the end of 2016.

Of course, the Gateway is still relatively young and it is good to read that the InsS is continually refining its sifting processes, as can be seen from the following graph:This indicates that a large part of the increase in rejected complaints is because more complainants have not responded to the Insolvency Service’s requests for further information.

For 2017, the Insolvency Service added a new category of rejections: complaints that were about the effect of an insolvency procedure.  Although there will always be some creditors and debtors who complain about the fairness of insolvency processes, perhaps an unintended benefit of the Complaints Gateway is that the InsS receives first-hand expressions of dissatisfaction about the design of the insolvency process… although let’s hope the InsS considers using such intelligence to amend legislation where sensible, rather than try to force IPs to fudge legislative flaws via Dear IPs and the like.

You might expect that, as the Insolvency Service rejects more complaints, so the percentage of sanctions arising from complaints that make it past the sifting process should increase.

 

Roughly one complaint out of every five results in a sanction

Well, you’d be right.The trendline here suggests that a complaint was twice as likely to end up in a sanction in 2017 as it was 10 years’ ago.

You might be wondering what is going on with ACCA-licensed IPs: how can over half of their complaints result in a sanction compared to an average elsewhere of around 10-20%?!

I agree that the figures are odd.  However, it should be remembered that complaints are not always closed in the year that they are opened.  And in this respect, the ACCA’s stats appear particularly odd.  For example, in last year’s InsS report, it was stated that the ACCA had only one 2013 complaint remaining open, but in this year’s report, apparently there are now thirteen 2013 open complaints against ACCA-licensed IPs!  The ACCA went through some enormous changes last year, as their complaints-handling and monitoring functions were taken over by the IPA with effect from 1 January 2017.  Could this structural change be behind the unusual stats?  Or perhaps the ACCA had been handling some particularly sticky complaints in 2014 and 2015, when their sanctions were low, and those investigations have now come to fruition.

The same effect of sanction clustering could be operating within the other RPBs in view of the spiky lines above.  Therefore, perhaps it would be wise to avoid drawing conclusions about apparent inconsistencies between RPBs’ complaints processes based on 2017’s figures alone.  However, averaging out the figures over the past three years, we can see that 23% of complaints against IPA-licensed IPs resulted in a sanction, whereas only 5% of complaints against ICAEW-licensed IPs did so.  I believe that the IPA licenses more than its fair share of IVA-specialists, so this might account for at least some of the difference.

 

Increased sanctions are not just a Gateway-sifting effect

But what about my suggestion above: that the increased number of sifted-out complaints has led to a larger proportion of complaints allowed through the Gateway leading to a sanction?

That’s not the whole story:This shows that the number of complaints sanctions per IP has also been on an upward trend: around 1 in 100 IPs received a sanction in 2008, whereas this figure was closer to 1 in 20 in 2017.

What is behind this trend?  I really don’t believe that it’s because more IPs now conduct themselves in ways meriting sanctions (or because there are a few IPs who behave badly more often).  And as we’ve seen, the number of complaints lodged doesn’t support a theory that more people complain now.

It must be because expectations have been raised, don’t you think?  Or perhaps because the increased prescription in rules and SIPs has led to more traps?

Hidden measuring-sticks?

For example, the InsS report describes one IP’s disciplinary order, stating that the IP had breached SIP16 “by failing to provide a statement as to whether the connected party had been made aware of their ability to approach the pre-pack pool and/or had approached the pre-pack pool and whether a viability statement had been requested from the connected party but not provided”.  Firstly, SIP16 doesn’t strictly require IPs to state whether connected parties have been made aware of the pool.  Secondly, SIP16 states that the SIP16 Statement should include “one of” two listed statements, only one being whether the pool had been approached.  Yes, I’ll accept that it seems the IP did not provide information on the existence of a viability statement, although I would have thought that, if a copy of a viability statement were not provided with the SIP16 Statement, then surely the likelihood is that the IP was not provided with one.  I appreciate I am splitting hairs here, but if a SIP is not crystal-clear on what is required of IPs, is it any wonder that slip-ups will be made?  And if a disciplinary consent order were generated every time an IP had omitted to meet every last letter of the SIPs and Rules, then I suspect no IP would be found entirely blameless.  Ok yes, there exists a mysterious fanaticism around SIP16 compliance and we would do well to check, check and check again that SIP16 Statements are complete (and hang the cost?).  However, I think this demonstrates how standards have changed: 10 years’ ago, would an IP have been fined £2,500 and have his name in lights for omitting one line from a report (hint: SIP16 began life in 2009)?

 

In my next blog, I’ll explore the RPB statistics on monitoring visits.


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GDPR: Ready or Not!

Compared to the Insolvency Rules, getting to grips with the GDPR has felt a lot more painful.  Personally, I have struggled with the GDPR for two reasons: (i) the position of an IP working within a practice and having control over insolvent entities is so clearly a square peg in the GDPR’s round hole; and (ii) for anyone who has been treating personal data with respect already, it seems to be just lots more hassle, simply more documentation of no interest to anyone except the regulators and those who look for causes to complain.

But, if I have not persuaded you already to go off and do something far more interesting instead, here is a summary of an IP’s GDPR to-do list (or, hopefully, a “done” list).  My special thanks go to Jo Harris, who has endured the pain to get the Compliance Alliance’s packs GDPR-ready and whose webinar has informed most of the content of this blog.

(UPDATE 22/05/2018: far more authoritative than my blog is a fantastic FAQs written by the ICAEW and R3 and released just yesterday: https://bit.ly/2x7HPm2.  I think that this article is pretty-much aligned with the FAQs, but the ICAEW does provide more information on their expectations, particularly when taking on an appointment and in notifying creditors of the necessaries.)

 

Privacy Notices

Privacy Notices are probably the most obvious sign that you have prepared for the GDPR world.

Data controllers must provide privacy information to individuals when they collect personal data from them or, if the data is from another source, no later than one month of receipt.  Although the GDPR prescribes a long list of information that must be given, it also states that privacy notices must be concise and easy to understand – if only the GDPR were written so!

To draft a GDPR-compliant privacy notice, you need to have a clear picture of what personal data you hold and what you do with it… in your role as a data controller.

 

Who is a data controller?

The GDPR defines a data controller as:

“the natural or legal person, public authority, agency or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data; where the purposes and means of such processing are determined by Union or Member State law, the controller or the specific criteria for its nomination may be provided for by Union or Member State law”

Where an IP processes data as an office holder, they are clearly in control.  An IP deals with personal data on creditors, employees, directors, shareholders, debtors (i.e. insolvent ones and those who owe the insolvent), probably also debtors’ family members…  And we’re not just talking about individual creditors etc.: you will also process personal data on staff working within corporate entities, e.g. emails containing names, email addresses and telephone numbers, sufficient to identify the individual.

What about the personal data contained in the insolvent’s books and records?  Does the IP become the data controller for those on appointment?  I have not attended a GDPR-for-IPs event without the case of Re Southern Pacific Personal Loans Limited ([2013] EWHC 2485 (Ch)) being mentioned.  Although of course this was a decision about the application of the Data Protection Act 1998, it has given many people comfort that at least a liquidator is not considered to be the data controller in relation to data processed by the company prior to liquidation.

So, for practical purposes (unless/until it is overturned), it is probably safe to draw a distinction between data processed by the IP and the insolvent’s data that just sits in a storage facility in case it is needed one day.  This fairly clean line probably doesn’t exist however for a trustee in bankruptcy, as the agency relationship is absent.  Also, at what stage does an IP begin “processing” data in their own right: what if you only review some company records in your possession?  What if you hold electronic data on your system, but never use it?

These fuzzy lines aside, how does understanding when we are a data controller help us draft our privacy notices?

 

The legal basis for processing

For the most part, privacy notices are pretty standard text.  But you do need to hang your flag on a mast when it comes to describing your legal basis/bases for processing the data.

Here are the options:

  • the data subject’s consent – not something that we associate with being in office
  • necessary to perform a contract – again, not something for an office holder, but it may be relevant for work we do (i.e. personal data we process) outside a formal appointment
  • necessary for compliance with a legal obligation – yep, this one is clearly relevant to office holders
  • necessary to protect individuals’ vital interests – nope
  • necessary to perform a task in the public interest – I have heard some say this is relevant for office holders, but it seems to have fallen out of favour more recently
  • necessary for legitimate interests – creditors and others have a legitimate interest in keeping informed and engaging in an insolvency process, so this is relevant

So there are at least two legal bases that are relevant to IPs’ work.

 

The purposes of the processing

Your privacy notice also needs to describe the purposes for which you will be processing data.  It is worth remembering that an insolvency practice will process data for a wide range of purposes: not only formal appointments, but also to deliver other services to clients, and you will also hold data for marketing purposes, for running your business…

Therefore, you might want to consider: should you have one privacy notice covering every purpose or do you want several privacy notices?  A third way, which I’ve seen work well for a particularly large accountancy/insolvency practice, is a single privacy notice with links leading to the descriptions of their processing activities relating to different groups of data subjects.

Taking a look at other firms’ privacy notices might also bring to mind other, less obvious, purposes for processing data, such as carrying out AML due diligence, detecting or preventing crime or fraud.

 

What do you do with the privacy notice?

As mentioned at the start, the GDPR puts data controllers under a requirement to provide the privacy information to all data subjects.  This can seem onerous for an IP: do we really need to send a copy of the privacy notice to all individuals whose data we hold and how can we comply with those timescales, especially on existing cases?

There are a couple of ways you can make life much easier for yourself:

  • Put your privacy notice on your website, preferably on a page with a very simple www address, because…
  • Then you can add the link/address to your email footers and letterhead, so that the next time you email or write to an individual, you have brought the privacy notice to their attention.

 

What about existing cases?

Does the GDPR mean that we must have notified every person whose data we hold of our privacy notice by 25 June?  I would like to think that the regulators – the RPBs and the ICO – might be prepared to give us some slack on this requirement.  Would a more manageable approach be to ensure that such notifications are made, say, at the time of the next progress report?

If this is acceptable, then how about the interaction with R1.50?  Where we have already issued to creditors (and members) a notice stating that every other document will be uploaded to our website without further written notice, would this suffice such that we only need to ensure that the website contains the privacy notice or a link to it?  Or, because R1.50 only provides website-only delivery for documents “required to be delivered in the insolvency proceedings”, does this mean that the privacy notice required to be delivered under the GDPR cannot be delivered by website?

Of course, the requirement stretches further than creditors and members.  For some people, you might like to make an extra-special effort to contact them asap to prove compliance with the GDPR, perhaps those who are most likely to complain – bankrupts and other individual debtors, perhaps.

 

What about closed cases?

Under the GDPR, “storage” is a form of processing.  Therefore, IPs will be continuing to “process” personal data long after a case has closed.  Do we need to contact individuals on closed cases?  Isn’t this taking things too far?!

The new Data Protection Act (currently still a Bill) may help us (thanks, JN, for highlighting this).  S93(4)(b) states that we need not notify data subjects where it “would be impossible or involve disproportionate effort”.  This must apply to closed cases, surely!

 

Privacy notices: is there more?

Oh yes, indeed!

Another meaty requirement of the GDPR is that data processors’ work must be governed by a contract with the data controller.  What data processors does an IP instruct?  And if someone is instructing an IP, does this need to be governed by a contract?

 

Who is a data processor?

The GDPR’s definition of a data processor is someone who “processes personal data on behalf of the controller”.  But a data processor’s activities may mean that they become a controller in their own right.  As I set out above, according to the GDPR’s definition, a data controller determines the purposes and means of processing data.  So logically, if someone has no control over either the purposes and/or the means of processing the data, they must be a processor, right?  For example, you instruct a debt collector to use debtors’ personal data solely to pursue debts – this sounds like a data processor, doesn’t it?

So who might an IP instruct that is not a data processor?  Surely every instruction defines at least the purposes of processing data, doesn’t it?

The ICO has provided guidance on the distinction between processors and controllers (https://ico.org.uk/media/for-organisations/documents/1546/data-controllers-and-data-processors-dp-guidance.pdf), which, although it was seemingly published in 2014, we understand is still considered relevant by the ICO for the post-GDPR world.

Paragraph 45 is interesting: “Where specialist service providers are processing data in accordance with their own professional obligations they will always be acting as the data controller”.  This is written in the context of an accountant, who will have obligations on detecting malpractice.  The guidance similarly singles out solicitors who “determine the manner in which the personal data obtained from the [client] will be processed” (paragraph 44).

 

And IPs?

Of course, I wouldn’t expect the ICO to mention IPs in their guidance (they don’t).  But I think the ICO’s guidance leads to the logical conclusion that usually IPs/insolvency practices will become data controllers in their own right when processing data on behalf of a client, e.g. when they’re instructed to help put a company into CVL.

 

Controller-processor contracts

But for anyone whom we instruct who is a data processor, we need to ensure that a GDPR-compliant contract is in place with them.  And even though you may personally be acting as agent of a company that continues to trade post-appointment, you will want to ensure that the company trades in a compliant fashion with appropriate contracts in place with their suppliers/service-providers… although remember that it’s only where the supplier/service-provider is processing personal data.

The GDPR sets out what must be included in such a contract and model clauses are widely available (although of course you may like to engage a solicitor to help).

 

Data sharing agreements

Although not mandatory, you may want to consider entering into data sharing agreements with parties who you instruct who are data controllers in their own right – the ICO guidance recommends this where you are sharing large-scale or particularly risky data.

As an IP receiving instructions, you are unlikely to want to volunteer a data sharing agreement.  However, you should amend your engagement letters, not only to refer to your privacy notice, but also to confirm your position as a data controller and remind the client of the need to comply with the GDPR and DPA.  ICAS has suggested some appropriate wording at: https://www.icas.com/regulation/preparing-for-gdpr

 

Fuzzy lines

I confess to remaining confused about the boundary between controllers and processors.  After all, wouldn’t following the GDPR definitions and ICO guidance lead us to a different conclusion from that arising from Re Southern Pacific Personal Loans Limited?  Doesn’t an IP store company records in accordance with their own obligations and doesn’t the IP decide the purposes and means of processing that data?  If so, why are they considered only a data processor?

In addition, different instructions may lead to different levels of control by the third party.  For example, on one case we may ask an agent simply to help us return items to their owners, but on another case the agent may be managing a marketing and sale process, dealing with RoT claims, wiping hardware clean…

Where these fuzzy lines exist, would it be an idea to engage with third parties via a catch-all controller-processor/data-sharing agreement?

 

Managing instructions

If you haven’t already set up a system, perhaps you might start a central register to help you record who has signed up an agreement.  Then, whenever you come to instruct a third party who will be processing personal data provided by you, you can check whether they have already signed up and, if not, you can set the ball rolling.

 

Ok, is that everything?

Nope.  There’s a whole host of additional items on the to-do list, including:

  • If you haven’t already got them, generate policies and procedures to cover areas such as data security, retention, dealing with breaches and subject access requests;
  • Before processing data on a new engagement/appointment, assess the risks associated with the proposed processing, and keep it under review during the engagement (yep, another checklist!); and
  • For each engagement/appointment, document the data held and the reasons why it is held – the ICO has produced 30-column wide spreadsheet for each data controller (and another one for a processor), so admittedly it is stupidly cumbersome for each case, but once completed for one case, there will be little variation needed for the next. But of course, it is worth giving every case a bit of thought, just in case there are some unusual considerations arising from, e.g., a novel business or an entity holding data in different countries.

Certain other aspects of our insolvency work require careful attention:

  • On (or preferably before) appointment, we will need to gather information on what data the insolvent holds and where/how it is stored and accessed;
  • If we are contemplating trading-on, we will need to review carefully the business’ data processing practices and documentation and identify whether any changes need to be made to bring them into line with the GDPR;
  • We should perhaps take more care in deciding what data we need to collect post-appointment and what happens to any data that we choose not to collect (also having regard, of course, to the recent Dear IP on collecting books and records);
  • Although generally databases and customer lists can continue to be sold in an insolvency process, we can expect to be asked more questions by potential purchasers about the insolvent’s data processing (will sale prices decrease and will sales to unconnected parties be less common as a consequence?) and some additional clauses will be required in agreements; and
  • We will want to have a good understanding – and ensure that staff have also – of our obligations on identifying a data breach.

 

Will it all become second nature?

It is a shame that the regulatory current seems to flow to ever more requirements for documentation and disclosure.  The regulatory burden never seems to lighten up, but personally I struggle to see how business or the economy is any better for it.

There remain a number of unanswered questions, some of which I’ve mentioned above, about how the GDPR works practically for IPs.  I’m sure that over time most of these will be resolved, hopefully with pragmatic solutions acceptable to the regulators.  One day, perhaps GDPR-compliance will become second nature.

 

 

 


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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.