Recently, I gave a presentation that covered, amongst other things, IPs’ bonding duties.  I thought it might be useful to repeat part of my presentation here.  Below is a list of assertions made by IPs over my years with the IPA – with perhaps a dash of poetic licence here and there – together with how I would answer (and have answered) them based largely on the Insolvency Practitioners Regulations 2005 (“IP Regs”).

I cannot stress enough that you should not rely on the views expressed below.  If you require clarification of your bonding duties under the IP Regs, you should seek legal advice and/or ask your authorising body.

I have thrown in a couple of controversial issues below, which I think demonstrate how following the strict wording of the IP Regs appears to result in an answer that seems insensible given the purpose of the specific penalty bond.  For example, if the bond is intended to make good losses resulting from an office-holder’s fraud or dishonesty for the benefit of unsecured creditors, why should a Nominee’s bond cover the debtor’s voluntary contributions for, say, five years into the future?  And if future contributions are appropriate for bonding in a VA (which I believe they are, but only when the Supervisor has control over them), why is the same principle not applied to Trust Deed appointments?  I have to admit that, when I used to help IPs and staff with bonding queries whilst at the IPA, I often found myself sympathising with those who sought to apply common sense to issues but I was forced to say: “unfortunately the Regs are the Regs”.  In many cases, I understand that bond insurers recognise the low (or possibly even zero) risk attached to some bond levels arising from a strict interpretation of the IP Regs and they are prepared to reduce bond premiums accordingly.

 

“I can ignore fixed charge assets, but I have to bond for floating charge assets”

• IP Reg 4, Sch 2: ignore assets “charged to a third party”, so ignore fixed, floating, and any other charged assets, but…
• IP Reg 4, Sch 2 continues: “to the extent of any amount which would be payable to that third party”, so bond needs to cover (i) fixed charge surplus, (ii) funds available to preferential creditors, and (iii) prescribed part (or floating charge surplus).

“I can bond as Nominee of a VA at the minimum level, because I am not in control of any assets at that stage”

• Per IP Reg 5 Sch 2: where an IP acts as Nominee or Supervisor, bond for assets subject to the terms of the Arrangement.  Can it be argued that, prior to approval, there is no “Arrangement”?  Safer to bond.

“I don’t have to bond for the assets in an MVL because the assets are going to be distributed in specie”

• IP Regs do not distinguish assets that are “handled” by IP; all must be bonded.

“For interlocking IVAs, I can arrange one bond to cover all assets”

• Interlocking (incorrectly aka joint) IVAs – there are two IVA cases, so two bonds must be arranged.  Where funds are pooled, technically both parties’ contributions are subject to the terms of each arrangement, so technically each bond should cover total pooled contributions (even though this means that each bond is covering the same assets).

“That asset is doubtful, so I can count it as valueless for bonding purposes”

• IP Regs: “value as estimated by the IP”; reasonable worst case scenario is generally acceptable, but IP should still make honest judgment.

“I don’t need to bond for VAT refunds”

• If it is a VAT refund due to the company at the date of appointment, it is an asset, thus should be bonded.

“I don’t need to bond for the funds expected to arise from that legal action until I see the money”

• Again, what estimated value would the IP put on it?  IP should make ongoing assessment, not wait until the action has completed nor wait until he has his hands on the cash.

“My agents are going to sell the assets and then deduct their fees direct, so I only need to bond for the anticipated net realisations”

• IP Regs require gross estimated realisations to be bonded, which makes sense as the IP could collude with the agents to deduct excessive fees.

“The only realisation in this case is the director’s contribution towards the costs of the Liquidation, but I need to bond for that”

• Whilst it may seem counter-intuitive, given that the IP Regs refer to bonding the insolvent’s assets (which would not include third party funds), Reg 1 of Schedule 2 of the IP Regs defines “insolvent’s assets” as “all assets comprised in the insolvent’s estate together with any monies provided by a third party for the payment of the insolvent’s debts or the costs and expenses of administering the insolvent’s estate”.  Therefore, this is correct: the calculation for the bond level does need to include a director’s contribution to costs.

 “Now that the company has moved from Administration to CVL, I can just roll over the bond”

• Each case must be bonded, so technically it is a separate bond.  Also, it is likely that the value of assets caught by the CVL will be much lower than those for the prior Administration (as most assets will have been realised and disbursed), so bond level likely will be much lower.

“Now that I have replaced my former colleague as Liquidator, I shall set my bond at the level it was for my predecessor”

• Predecessor will have realised assets and distributed proceeds – these do not need to be bonded by successor, only balance in hand plus any future realisations.

“I have been appointed Administrator of a bank with customer account balances, but as they are monies held in trust I do not need to bond them”

• IP Reg 4 Sch 2 does state that for bonding purposes IP ignores “assets held on trust by the insolvent to the extent that any beneficial interest in those assets does not belong to the insolvent”, so strictly speaking may be correct.  However, this seems counter-intuitive, as the customer account balances are probably one of the principal matters that the IP has been appointed to deal with.
• Recommend asking the bond insurer – if, due to theft of customer account monies, a bond claim were made, would it be covered by the bond?

“Although I have vacated office as Supervisor, I’m not releasing the bond until all the remaining dividend cheques have cleared”

• Bond applies to those acting as an IP in relation to a person (S390(3)), i.e. in office.  Once out of office, it is no longer necessary (or beneficial) to keep bond in place.