NB: the post below was published on 8 October 2012, however on 19 April 2013 the RPBs issued guidance on PPI mis-selling claims. Please refer to the RPB guidance (the ICAEW’s copy can be found at: http://www.icaew.com/~/media/Files/Technical/Insolvency/helpsheets-and-checklists/personal-insolvency/guidance-note-on-payment-protection-insurance-claims.pdf) and not to my personal views below. Nevertheless, I have added notes to my original post below to identify material areas where the RPBs’ guidance appears to me to take a different approach.
In its August 2012 newsletter, the IPA referred to a number of questions on the subject of mis-sold PPI policies, which, having spoken to a few IPs, only scratch the surface of the PPI refund minefield.
As with the Paymex VAT decision, the absence of guidance from the RPBs/Insolvency Service (I appreciate that the Service has published something on PPI refunds in bankruptcy, but again that does not really begin to get to grips with the issues) will only lead, at best, to each IP seeking his/her own independent legal advice, or at worst, it may mean that some IPs fail to face the issues head-on, prepared to face (or perhaps oblivious to) the risks of challenge down the line.
I sense that the regulators have a difficult job, however, as of course many issues in IVAs turn on their particular terms and thus any guidance either will have to cover a variety of situations or will be so generic as to be well-nigh useless. However, I do not believe that this means that it is futile or unnecessary to point out the pitfalls or questions that each IP should be asking him/herself. Of course, I come at this from a purely theoretical perspective and thus I am grateful to the IPs, particularly Sue Clay and Melanie Giles, who have helped me to appreciate the practical issues and get me up to speed with what is going on out there.
What are PPI refunds – assets, windfalls or after-acquired assets?
The Insolvency Service takes the view that a PPI claim is a bankruptcy asset (http://www.bis.gov.uk/insolvency/personal-insolvency/ppi-mis-selling-claims-and-bankruptcy), however CCCSVA suggests it is caught by the windfall clause in their IVA Proposals (http://moneyaware.co.uk/2012/05/can-i-reclaim-ppi-while-on-an-iva/) – and well it might be, as IVA Proposals* can define terms as the drafter sees fit and can “deem” one thing to be another. This demonstrates the need to scrutinise the terms of each IVA Proposal (or at least each template used by the IP) to see where a PPI claim falls and thus whether it is caught by the terms of the IVA.
Proposal definitions aside, my instinct is to consider the PPI claim to be an asset, but it does not necessarily follow that it is due to be paid into the Arrangement. This will depend on the wording of the Proposal. Does the Proposal provide that all assets, apart from those expressly excluded, are available for the Arrangement? Or does the Proposal define included assets as those specified, resulting in any others (including any undisclosed) being excluded?
Could the PPI claim be an after-acquired asset? The Protocol Standard Terms & Conditions (“STC”) define “after-acquired assets” as “any asset, windfall or inheritance with a value of more than £500, other than excluded assets that you acquire or receive between the date the arrangement starts and the date it ends or is completed, if this asset could have been an asset of the arrangement had it belonged to or been vested in you at the start of the arrangement” (R3’s STC use similar wording at clause 27). Could the PPI claim have been an asset at the start of the arrangement or was it an asset at that time? My instinct is that the PPI claim existed at the start of the IVA; I do not believe that the asset was created when it was established that the policy was mis-sold, but the asset was created when mis-selling of the policy took place. In that event, it would not be an after-acquired asset. However, I am no lawyer, so I would welcome an authoritative answer.
Is the Supervisor obliged to pursue a PPI refund?
If it is an asset caught in the IVA, then I believe the Supervisor is so obliged (subject to the usual commercial question of whether the realisation will exceed the allowable costs to recover). However, what if it is likely that the creditor will seek to set off the claim against an existing debt? Ah, the thorny problem of set-off! Let me start with the definitions in widely-used STCs.
Set-off and the Protocol STC
Clause 17(6) of the Protocol STC states: “where any creditor agrees, for whatever reason, to make a repayment to the debtor during the continuance of the arrangement, then that payment shall be used solely in reduction of that creditor’s claim in the first instance. If such repayment results in the creditor’s claim being entirely extinguished (after the application of set off) any surplus will be treated as an after acquired asset and offered to the Supervisor for the benefit of the arrangement”. I understand that proceeds of PPI claims can comprise: (i) return of premium paid; (ii) historic interest on the premium paid; and (iii) compensatory interest/payment. Are the proceeds of a PPI claim a “repayment”? To my mind, something can only be a repayment, if it were paid over (or charged to an account) in the first place. If this is the case, then I suggest that it follows that only the return of the premium and any interest paid is a “repayment” and thus available under the Protocol STC to the creditor for set-off. I do not believe that the creditor can claim – at least not under the Protocol STC – to set off any compensatory payment against any monies owed to it. NOTE: the RPBs’ April 2013 guidance acknowledges that this is one of a number of possible interpretations of clause 17(6) and states: “consequently, pending such clarification by the court, office holders may wish to consider taking legal advice where they feel it would be proportionate to do so”.
Set-off and the R3 STC
Interestingly, R3 STC’s clause 79 is comparable to the Protocol STC’s clause 17(6), but it restricts set-off only for repayments due to HMRC. Thus, that clause is not relevant for PPI claims. However, R3’s STC apply S324 of the Insolvency Act 1986 to IVAs at clause 7. It appears to me that this clause gives creditors a strong argument for setting off PPI refunds against any outstanding IVA debt, although the application of, and case law surrounding, the statutory set-off rules make me sufficiently nervous to suggest a “seek legal advice” approach.
What if it is likely that there will be no surplus after set-off?
Even if set-off is likely, I struggle to see how a Supervisor can adjudicate on claims without taking the possibility of mis-sold PPI into consideration. Of course, not all PPI policies have been mis-sold and I believe it would be professional of an IP to make enquiries of the debtor and take a balanced and reasonable view on the evidence as to whether the policy was mis-sold and thus whether it would be time well-spent to pursue a claim.
Does the IP need to go through the process of lodging a complaint with the PPI provider to agree the claim? If the Supervisor is satisfied that the PPI adjustment will not generate an actual realisation for the IVA, might it be possible for the Supervisor simply to adjudicate on the claim, take account of the apparent mis-sold PPI policy, admit only the remainder of the claim, and deal with any appeal from the creditor in the usual manner? That might be a risky approach and I appreciate that the calculation of a PPI refund is complex, but the alternative approach – incurring costs to agree a PPI refund that generates no real cash for the estate – seems to me to give rise to other considerations.
Adjudicating claims is a clear responsibility of Supervisors and other insolvency office-holders where a dividend is intended. It is generally acceptable to incur costs, payable from the insolvent estate, in this exercise. True, discharging costs of the adjudication process will reduce the “pot” available for dividend, but it likely will also reduce the total creditors’ claims ranking for dividend and, more importantly I think, it results in a fair dividend. I understand that some PPI refunds can be substantial sums, so the resultant percentage charge of any claims management company in pursuing large claims will be significant and payable in full from the IVA funds. Whilst I do not believe that this downside calls into question the appropriateness of properly adjudicating claims, I suspect that it may create a perception with some that IVA funds are being used unnecessarily. I believe therefore that IPs would be wise to reflect on the Insolvency Ethics Code’s principles on obtaining specialist advice and services (paragraphs 53 to 56) and they may want to add some explanation to reports of the justification for such costs.
What happens to the tax liability arising from the interest payment?
If the PPI refund includes compensatory interest, this may give rise to a tax liability, depending on whether the PPI provider has deducted tax and/or depending on whether the debtor is a basic or higher rate tax-payer.
The Protocol STC cover “tax liabilities arising on realisations” at clause 28 (and R3 STC’s clause 82 has similar wording): “if you have taxation liabilities arising on the sale or other realisation of any asset subject to the arrangement, you must meet them out of the proceeds of that sale, as far as those proceeds are sufficient”. The STC refer to proceeds of sale, which seems to me to be a drafting error (it is obvious what scenarios the drafter had in mind) – whether this can be relied upon to enable the Supervisor to pass to the debtor sufficient funds to discharge the tax liability on the compensatory interest, I cannot say, but I get the sense that the major creditors/agents in consumer IVAs are taking a fair and reasonable approach to PPI refunds, so I would be surprised if they would challenge this… but I think it would be very useful to IPs in general if they issued something in writing on this.
However, as I see it, it is likely that the compensatory interest will fall into two categories: interest relating to the period pre-IVA and that post-IVA. Therefore, I would have thought that a portion of the tax liability arising from the compensatory interest is likely to fall as HMRC’s claim in the IVA (note: Protocol and R3 STCs include in HMRC’s IVA claim the tax relating to the tax year in which the IVA was approved). But does clause 28 override this so that all the tax liability, pre- and post-IVA, is discharged from the realisation? It seems so to me (provided the drafting error is not fatal).
I would hope that a sense of fairness would prevail so that, whatever happens, the debtor is not left with a tax liability (and for that matter, the charges of any claims management company, provided the debtor has not seriously gone out on a limb) to be paid outside of the Arrangement where the benefit of the PPI refund has been passed on solely to the IVA.
Could the debtor or IP (as advising member) be considered at fault for not disclosing the PPI claim as an asset in the Proposal?
Before the mis-sold PPI story broke, I do not believe that anyone could be blamed for assuming that PPI premiums had been charged appropriately. However, I would hope that IPs are now wise to the situation and take the possibility of mis-sold PPI policies into consideration when advising debtors and preparing IVA documents.
How far does a debtor/IP need to go in establishing a claim at this stage? SIP3 paragraph 4(b) states that “the member should take steps to satisfy himself that the value of the assets is appropriately reflected in the statement of affairs. Where the value of an asset is material to the outcome of the arrangement consideration should be given to obtaining corroborative evidence as to its value”. Of course, the application of SIPs rests with the IP’s authorising body, but I suggest that we have all lived with the concept of estimated asset realisations for long enough to be able to provide sufficient information in Statements of Affairs or similar to enable readers to understand the position reasonably. NOTE: the RPBs’ April 2013 guidance simply states: “debtors should be asked at an early stage about possible claims in connected with PPI mis-selling and appropriate enquiries made… IVA proposals or Nominees’ reports should explain how potential PPI mis-selling claims are dealt with”.
I should reiterate that the above are my own opinions, albeit that I have been helped in reasoning on this by a number of IPs. Therefore, readers should not rely on any of the above, but should consider seeking their own legal advice. However, I do hope that this helps to highlight some of the issues and perhaps move the arguments on.
Although it would be a challenge for the regulators/R3 to issue guidance on this topic, the Paymex VAT decision experience proves that it can work, but that it is really only useful if the guidance is issued quickly.
In the meantime, IPs will have to make their own decisions. I have heard stories of debtors handing over surprise cheques to Supervisors, having pursued a PPI refund on their own. I believe that this does not mean that Supervisors need not check that the monies are due to the IVA – if it is not an included asset, then the debtor could use it to propose a full and final settlement variation – nor should they disregard the effects of any recovery costs or tax liability arising for the debtor. Ethically, IPs should act with integrity and professionalism, but they will also wish to act prudently to avoid complaints or challenges down the line.
I now wonder whether this has been of any help at all! My aim is simply to attempt to move the story along a little – it is clear that there are still many uncertainties – and I hope that I have not written anything misleading; I will attempt to keep my ear to the ground and report any updates/changes. If anyone would like to email to me their thoughts (rather than make them public here), please feel free at firstname.lastname@example.org.
* “Proposal” in this article may include any terms and conditions associated with the Proposal.