Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Monthly Archives: December 2013


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Exercise of court’s discretion to allow creditor’s action to continue despite Interim Order and Other Judgments

1116 Sunset

Some recent court decisions:

• Dewji v Banwaitt – under what circumstances will the court allow a creditor’s action to continue despite an IVA Interim Order?
• Masters & Beighton v Furber – can a debtor be forced to hand over assets caught by IVA?
• Ward Brothers (Malton) Limited v Middleton & Ors – does an IP acting in an informal capacity avoid TUPE?
• O’Kane & O’Kane v Rooney – fixed charge receivers’ agents’ “worrying conduct” scuppers sale
• Re Hotel Company 42 The Calls Limited – will the court terminate an Administration and hand back the company to the directors despite the Administrators’ wishes for it to continue?
• Re ARM Asset Backed Securities SA – does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?
• Westshield Limited v Mr & Mrs Whitehouse – which takes precedence: a CVA term requiring a Supervisor to decide on set-offs or the enforcement of an Adjudicator’s decision?

Creditor’s interim charging orders made final despite IVA Interim Order

Dewji v Banwaitt (29 November 2013) ([2013] EWHC 3746 (QB))

http://www.bailii.org/ew/cases/EWHC/QB/2013/3746.html

Mr Banwaitt had obtained judgment in proceedings against Dr Dewji for fraudulent misrepresentation in relation to an agreement under which Mr Banwaitt had paid to Dr Dewji sums for the purchase of land in Cambodia. Mr Banwaitt then obtained interim charging orders over three properties, but before the charging orders were made final, Dr Dewji was granted an Interim Order. However, at the hearing on the charging orders, the Master granted leave under S252(2)(b) of the Insolvency Act 1986 for Mr Banwaitt’s action to continue and exercised his discretion in making the charging orders final.

Dr Dewji’s request for permission to appeal the charging orders was refused. Mrs Justice Andrews accepted that usually the overriding principle would be that all creditors of a single class should rank equally once a statutory scheme had got underway. However, she noted that “there may be situations in which, despite the Interim Order, the ‘first past the post’ approach is justifiable” (paragraph 45). She suggested some scenarios: where a judgment creditor were seeking to recover monies paid under a contract that had been rescinded for fraud, “the Court might take the view when exercising its discretion that it would not be in the interests of justice to allow the debtor’s other creditors to participate in that share of his estate that was increased at the expense of the party he deceived” (paragraph 29) or where “the asset against which the judgment creditor is seeking to execute judgment falls entirely outside the IVA, so that there is no question of it being shared between the general body of creditors. Another, quite independent, example would be where the IVA was bound to fail, either because the judgment creditor had sufficient voting power to block it by himself, or because the creditors as a whole or a majority of them were bound to regard it as unattractive” (paragraph 39).

What Dr Dewji had proposed for his IVA led the judge to conclude that the Master had been justified in exercising his discretion in favour of the creditor. “The question that the Master had to determine is not whether it would be unfair to let Mr Banwaitt have an advantage over the general body of creditors. It is whether it would be unfair to let Mr Banwaitt, (who, on the evidence before the Master, was the only Investor induced to part with his money for this project by deceit, and who alone has chosen to expend costs in pursuing its recovery from Dr Dewji) obtain final charging orders over property that was not going to be distributed between Dr Dewji’s creditors, but (in the case of one property only, Dale Street) utilised to raise money to pay foreign lawyers to try and recover a substantial sum of money that would then be shared equally between Dr Dewji himself and some of those creditors, including the judgment creditor” (paragraph 47).

IVA debtor was not free to resist realisation of assets

Masters & Beighton v Furber (30 August 2013) ([2013] EWHC 3023 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3023.html

The Joint Supervisors of Mr Furber’s IVA sought an order requiring Mr Furber to allow the collection of some of his vehicles that, in accordance with the terms of the IVA, had been sold. The Joint Supervisors had also been granted a power of attorney to enable them to deal with Mr Furber’s assets. Mr Furber refused to allow the vehicles to be collected, claiming that he entered the IVA under pressure and that the vehicles had been sold at an undervalue.

Purle HHJ acknowledged that, in one sense, Mr Furber could choose to default on the IVA, with a potential consequence of being made bankrupt. However, as counsel for the applicant put it, “unless the process of disposal of the vehicles is concluded, there is a risk that the successful bidders will withdraw their bids and thereafter demand return of all monies paid, as well as possibly seeking damages. Ironically, if, as Mr Furber says, the value of the vehicles was higher than the sum that has been achieved by the online auction process then there will be a claim for loss of bargain by the successful bidders” (paragraph 9). With the risk of increasing creditors’ claims in mind, the judge agreed to order the release of the vehicles: “In my judgment, requiring Mr Furber to comply with his obligations under the IVA and the power of attorney will be in the best interests of his creditors generally and maintain the authority of the supervisors who are effectively, if not in law, officers of the court” (paragraph 11).

IPs acting in an advisory capacity not sufficient to avoid TUPE

Ward Brothers (Malton) Limited v Middleton & Ors (16 October 2013) ([2013] UKEAT 0249)

http://www.bailii.org/uk/cases/UKEAT/2013/0249_13_1610.html

Bulmers Transport Limited ceased to trade on a Friday and on the following Monday Ward Brothers (Malton) Limited started to perform Bulmers’ major contracts using some of its former employees. Before Bulmers had ceased to trade, it had been presented with a winding up petition and had sought the advice of IPs. It seems that, although Administration had been contemplated, this was abandoned around the time that trading ceased. Some ten days later, different IPs were appointed Administrators by the QFCH.

The key question for the Appeal Tribunal was: did the involvement of IPs fit the TUPE exception, “where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner” (Regulation 8(7) of TUPE)?

The Appeal Tribunal supported the original Tribunal’s conclusion that the first set of IPs had been acting only in an advisory capacity and that Bulmers had not been under the supervision of an IP at the time of the transfer.

The Appeal Tribunal also appreciated that “it is regrettable that so much uncertainty exists” (paragraph 20) as regards the application of TUPE and acknowledged “the importance of establishing, if possible, a red line”. They felt that the principles in Slater v Secretary of State for Industry, whilst not formally binding, “command considerable respect; and we respectfully agree that what is there set out is an appropriate and sensible red line and is the correct principle to apply. It is consistent with section 388, which, as we have said, provides that a person acts as an insolvency practitioner in relation to a company by acting as its liquidator, provisional liquidator, administrator or administrative receiver; if not appointed as such, then a person is not acting as an insolvency practitioner” (paragraph 23).

In the summary to the decision, it states that “an appointment (formal or informal) was necessary before there could be said to be supervision by an insolvency practitioner”. Personally, I struggle to see how an IP can be informally appointed and acting in a S388 capacity. The body of the decision states: “Clearly, that red line is not an entirely straight line. There may be disputes, for example, as to whether an insolvency practitioner was on the facts, appointed before a formal letter of appointment was provided or even drafted” (paragraph 24), so perhaps that is what is meant by an “informal” appointment.

The consequence of this decision in this case was that the appeal was dismissed: there had been a transfer that was not subject to the TUPE exclusion as regards the transfer of employee claims to the transferor.

Fixed charge receivers’ sale process tainted by agents’ “worrying conduct”

O’Kane & O’Kane v Rooney (12 November 2013) ([2013] NIQB 114)

http://www.bailii.org/nie/cases/NIHC/QB/2013/114.html

The O’Kanes sought an injunction restraining the joint fixed charge receivers from selling a property.

The judge was presented with evidence, albeit most of it hearsay but nonetheless “very strong”, which the judge described as showing “worrying conduct”, “very curious behaviour indeed”, and even “bad faith” (paragraphs 8, 9, and 10). The criticisms were levelled at the joint receivers’ agents who seemed to have discouraged some parties from bidding, provided inaccurate information, and allegedly advised the highest bidder not to increase its bid during the open bidding process, stating that the bidder would win out at the lower figure.

Although the O’Kanes’ proposal was complex and it was argued to be unrealistic, the judge viewed the previous sealed bid process to be tainted. He granted an injunction restraining the sale and directed that the property should be remarketed and sold by way of private treaty, with a bidding book being maintained and exhibited to the court for its approval of the sale. He directed that there should be no involvement of the individuals named, although he did not go so far as to require a new firm of agents to be instructed.

Administration terminated and company handed back to directors despite outstanding fees and expenses

Re Hotel Company 42 The Calls Limited (18 September 2013) ([2013] EWHC 3925 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3925.html

Joint Administrators were appointed on the application of a creditor. All creditors’ claims were paid or waived, although no monies passed through the Joint Administrators’ hands, as they were dealt with by third parties.

The shareholder and director wanted the company returned to them and the administration terminated, given that its purpose had been achieved, but the Joint Administrators were reluctant to rely simply on their statutory charge as regards their unpaid remuneration and expenses as provided by Paragraph 99 of Schedule B1 of the Insolvency Act 1986, given that the appointing creditor had been “given the run around” by an associated company for many years. There was also a separate application ongoing by the shareholder and director under Paragraphs 74 and 75 under a claim that there had been unfair harm and misfeasance by, amongst other things, the charging of excessive remuneration.

Purle HHJ did not consider that the Joint Administrators’ fears were “sufficient to justify their continuing in office when, as they themselves recognise, there is no practical reason for them to do so, and, most importantly, the administration purpose has been achieved” (paragraph 21). It was also his view that the statutory charge, which could be supported by a restriction registered against the company’s property by means of filing an agreed notice with the Land Registry, was ample to protect them.

The judge refused the relief sought by the Joint Administrators to authorise them to grant a charge to themselves and he ordered the termination of the administration. He did not order that the Joint Administrators be discharged, as the misfeasance proceedings remained unresolved.

Does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?

Re ARM Asset Backed Securities SA (9 October 2013) ([2013] EWHC 3351 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3351.html

A Luxembourg-incorporated company applied for the appointment of provisional liquidators under a winding up petition presented on the grounds that it would be just and equitable to wind it up.

Mr Justice David Richards was satisfied that the evidence pointed to an England COMI: it was apparent that the decisions governing the Company’s administration and management were taken in London and that this was clear to third parties. However, as the petition was based on the just and equitable ground, rather than on the Company’s insolvency, the judge had to consider whether the EC Regulation on “Insolvency Proceedings” kicked in.

Rather than reach a conclusion on this question, the question of the Company’s solvency was addressed. The circumstances of this case were not cut and dried: although it was likely that there would be insufficient funds to service in full the Company’s issued bonds, the terms of the bonds provided that the holders were entitled to recover sums only to the extent that the Company had available to it certain sums. “As a matter of ordinary language, I would take the view that if a company has liabilities of a certain amount on bonds or other obligations which exceed the assets available to it to meet those obligations, the company is insolvent, even though the rights of the creditors to recover payment will be, as a matter of legal right as well as a practical reality, restricted to the available assets, and even though, as the bonds in this case provide, the obligations will be extinguished after the distribution of available funds. It seems to me it can properly be said in relation to this company that it is unable to pay its debts. A useful way of testing this is to consider the amounts for which bond holders would prove in a liquidation of the company. It seems to me clear that they would prove for the face value of their bonds and the interest payable on those bonds” (paragraphs 31 and 32).

Consequently, although David Richards J has left open the question of whether just-and-equitable petitions are caught by the EC Regulation, he was content that the Company could and should be wound up.

(UPDATE 16/03/14: I recommend a briefing by Tina Kyriakides of 11 Stone Buildings: http://www.11sb.com/pdf/insider-limited-recourse-agreement-march-2014.pdf?500%3bhttp%3a%2f%2fwww.11sb.com%3a80%2fhome%2fhome.asp. This briefing addresses the issue as regards the application of the EC Regulation, pointing out that the decision in Re Rodenstock GmbH held that the winding up of a solvent company is governed by the Judgments Regulation 44/2001 and not by the EC Regulation. More interestingly, this briefing deals with the issue about this case that had niggled me (but which I cowardly avoided): how can liabilities that are expressly restricted to the company’s funds topple the company into insolvency? Personally, I find the conclusions of this briefing far more satisfying.)

Supervisor required to consider effect of set-off despite Adjudicator’s decision

Westshield Limited v Mr & Mrs Whitehouse (18 November 2013) ([2013] EWHC 3576 (TCC))

http://www.bailii.org/ew/cases/EWHC/TCC/2013/3576.html

The Whitehouses had some work done on their house by Westshield prior to the company entering into a CVA in December 2010. After little exchange, Westshield served a Notice of Adjudication in relation to the work done. The Whitehouses raised the issue of a substantial counterclaim and referred to the terms of the CVA, which included that the Supervisor should address the extent of mutual dealings and consider set-off. The Adjudicator decided that the Whitehouses should pay Westshield c.£133,000, but did not consider the counterclaim. The Whitehouses submitted a claim to the Supervisor of c.£200,000, but the Supervisor was reluctant to deal with it given the Adjudicator’s involvement.

Westshield then issued proceedings seeking to enforce the Adjudicator’s decision, but the Whitehouses maintained that the Supervisor would need to deal with the counterclaim.

The judge believed that Westshield had been entitled to pursue the pre-CVA debt and that, had the cross-claim not intervened, the Adjudicator’s decision would have been enforceable. However, the Whitehouses had become bound by the CVA and therefore the CVA condition requiring an account to be taken of mutual dealings and set off to be applied could be carried out by the Supervisor. “Once that exercise is done, if it shows money due to Westshield, that can be paid subject to the right which the Whitehouses have to refer the matter to Court within a short time. The Court can then consider what effect (if any) the adjudication decision may have on its decision as to what should be done. If the accounting shows money due to the Whitehouses, they will get however many pennies in the pound as are available to creditors from the CVA” (paragraph 27).

Consequently, the judge dismissed the application for summary judgment, staying any further steps until the outcome of the Supervisor’s account was known.


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A Janus View of Developments in Insolvency Regulation

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I thought I would take a look at where we’ve got to on a few of the current developments in insolvency regulation:

• The Deregulation Bill: who says limited IP licences are a good idea?
• SIP3.2 (CVA): a preview of the final SIP3 (IVA) or an ethical minefield?
• The JIC Newsletter: grasping the nettle of the commissions issue
• Insolvency Service update to the BIS Committee: promises, promises!

It’s by no means a complete list, but it’s a start!

The Deregulation Bill: when is a consultation not a consultation?

The Joint Committee of the Houses of Lords and Commons published its report on the draft Deregulation Bill on 19 December 2013, available here: http://www.parliament.uk/business/committees/committees-a-z/joint-select/draft-deregulation-bill/news/draft-deregulation-bill-report/.

Insolvency features relatively insignificantly in the wide-ranging draft Deregulation Bill, the so-called Henry VIII Power attracting far more attention, so in some respects it is quite surprising that insolvency got a mention in the Committee report at all. However, the background to this report included oral evidence sessions, one of which was attended by Andrew Tate representing R3’s Small Practices Group. A recording of the session can be accessed at: http://www.parliamentlive.tv/Main/Player.aspx?meetingId=14073&player=windowsmedia – insolvency pops up at c.50 minutes.

Andrew had a chance to express concerns about the draft Bill’s introduction of IP licences limited to personal or corporate insolvency processes. He raised the concern, which I understand is shared by many IPs, that IPs need knowledge of, and access to, all the tools in the insolvency kit, so that they can help anyone seeking a solution, be they a company director, a practice partner, or an individual, and some situations require a combination of personal, corporate and/or partnership insolvency solutions.

What seemed to attract the attention of the Committee most, however, was learning that there had been no public consultation on the question. It’s worth hearing the nuanced evidence session, rather than reading the dead-pan transcript. It fell to Nick Howard, who was not a formal witness but presumably was sitting in the wings, to explain that there had been an “informal consultation”, which had revealed general support, and I thought it was a little unfair that a Committee member seemed sceptical of this on the basis that they had not heard from anyone expressing support: after all, I don’t think that people tend to spend time shouting about draft Bills with which they agree.

Personally, I do not share the same objections to limited licences, or at least not to the same degree. I see the value of all IPs having knowledge of both personal and corporate insolvency, but even now not all fully-licensed IPs have had experience in all fields, so some already start their licensed life ill-equipped to deal with all insolvency situations. I believe that there are more than a few IPs who have chosen a specialist route that really does mean that practically they do not need the in-depth knowledge of all insolvency areas, and, given that they will not have kept up their knowledge of, and they will have little, if any, useful experience in, insolvency processes outside their specialist field, does it really do the profession or the public any favours for them to be indistinguishable from an IP who has worked hard to maintain strong all-round knowledge and experience? Surely it would be more just and transparent for such specialists to hold limited licences, wouldn’t it?

From my perspective as a former IPA regulation manager, I believe that there would also be less risk in limited licences. As things currently stand, an IP could have passed the JIEB Administration paper years’ ago (even when it was better known as the Receivership paper) and never have touched an Administration in his life, but (Ethics Code principle of professional competence aside) tomorrow he could be talking to a board of directors about an Administration, pre-pack, or CVA. Personally, I would prefer it if IPs who specialise were clearly identified as such. Then, if they encountered a situation that exceeded their abilities, which they would be less likely to encounter because everyone could see that they had a limited licence, at least they would be prohibited from giving it a go.

Clearly, with so many facets to this issue, it is a good thing that the Committee has recommended that the clause proposing limited licences be the subject of further consultation!

The other insolvency-related clauses in the draft Bill have sat silently, but presumably if limited licences stall for further consultation, the other provisions – such as fixing the Administration provisions that gave rise to the Minmar/Virtualpurple confusion and modifying the bankruptcy after-acquired property provision, which allegedly is behind the banks’ reluctance to allow bankrupts to operate a bank account – will gather dust for some time to come.

SIP3.2 (CVA): a preview of the final SIP3 (IVA)?

I found the November consultation on a draft SIP3.2 for CVAs interesting, as I suspect that this gives us a preview of what the final SIP3 for IVAs will look like: the JIC’s winter 2013 newsletter explained that the working group had reviewed the SIP3 (IVA) consultation responses to see whether there should be any changes made to the working draft of SIP3 (CVA). Consequently, it seems that there will be few changes to the consultation draft of SIP3 (IVA)… although that hasn’t stopped me from drawing from my own consultation response to the draft SIP3 (IVA) and repeating some of those points in my consultation response to the draft SIP3 (CVA). I was pleased to see, however, that few of my issues with the IVA draft had been repeated in the CVA draft – it does pay to respond to consultations!

I’ve lurked around the LinkedIn discussions on the draft SIP3.2 and been a bit dismayed at the apparent differences of opinion about the role of the advising IP/nominee. Personally, I believe that the principles set out in the Insolvency Code of Ethics and the draft SIP3.2 handle it correctly and fairly clearly. In particular, I believe that an IP’s aim – to seek to ensure that the proposed CVA is achievable and strikes a fair balance between the interests of the company and the creditors – as described in Paragraph 6 of the draft SIP3.2 – is appropriate (even though, as often it will not be the IP’s Proposal, this may not always be the outcome). In my mind, this does not mean that the IP is aiming for some kind of mid-point between those interests, as the insolvent company’s interests at that time necessarily will have particular regard for the creditors’ interests, and so I do not believe that the SIP supports any perception that the advising IP/nominee sides inappropriately with the directors/company. However, given that apparently some have the perception that this state exists, perhaps it would be worthwhile for the working group to see whether it can come up with some wording that makes the position absolutely clear, so that there is no risk that readers might misinterpret the careful responsibility expected of the advising IP/nominee.

I would urge you to respond to the consultation, which closes on 7 January 2014.

The JIC Newsletter: all bark and no bite?

Well, what do you think of the JIC’s winter 2013 newsletter? I have to say that, having been involved in reviewing the fairly inconsequential reads of previous years whilst I was at the IPA, I was pleasantly surprised that at least this newsletter seemed to have something meaningful to say. Personally, I wish it had gone further – as really all it seems to be doing is reminding us of what the Ethics Code already states – but I am well aware of the difficulties of getting something even mildly controversial approved by the JIC members, their respective RPBs, and the Insolvency Service: it is not a forum that lends itself well to the task of enacting ground-breaking initiatives. And anyway, if there were something more than the Ethics Code or SIPs that needed to be said, a newsletter is not the place for it.

Nevertheless, I would still recommend a read: http://www.ion.icaew.com/insolvencyblog/post/Joint-Insolvency-Committee-winter-2013-newsletter (I’d love to be able to direct people to my former employer’s website, but unfortunately theirs requires member login).

Bill Burch quickly off the mark posted his thoughts on the Commissions article: http://complianceoncall.blogspot.co.uk/2013/12/dark-portents-from-jic-for-commissions.html, which pretty-much says it all. Personally, I hope that this signifies a “right, let’s get on and tackle this issue!” attitude of revived enthusiasm by the regulators, but similarly I fear that some offenders may just seem too heavy-weight to wrestle, at least publicly, although that does not mean that behaviours cannot be changed by stealth. Many would shout that this is unfair, but it has to be better than nothing, hasn’t it?

My main concern, however, is how do the regulators go about spotting this stuff? Unless a payment is made from an insolvent estate, it is unlikely to reach the eyes of the monitor on a routine visit. It’s all well and good asking an IP where he gets his work from, if/how he pays introducers, and reviewing agreements, but if someone were intent on covering their tracks..? I know for a fact that at least one of the examples described in the JIC newsletter was revealed via a complaint, so that would be my personal message: if you observe anyone playing fast and loose with the Ethics Code, please take it to the regulators, and if you don’t want to do that personally, then get in touch with R3 and they might help do it for you. If you don’t, then how really can you cry that the regulators aren’t doing enough to police your competitors?

However, the theoretic ease with which inappropriate commissions could be disguised and the multitude of relatively unregulated hangers-on to the insolvency profession, preying on the desire of some to get ahead and the fear of others of losing out to the competition, do make me wonder if this issue can ever be tackled successfully. But the JIC newsletter at least appears to more clearly define the battle-lines.

Insolvency Service Update to the BIS Committee: all good things come to those who wait

Jo Swinson’s response to the House of Commons’ Select Committee is available at: http://www.parliament.uk/documents/commons-committees/business-innovation-and-skills/20131030%20Letter%20from%20Jo%20Swinson%20-%20Insolvency%20Service%20update.pdf. It was issued on 30 October so by now many items have already moved on, but I wanted to use it as an opportunity to highlight some ongoing and future developments to look out for.

Regarding “continuation of supply”, which was included in the Enterprise and Regulatory Reform Act 2013 but which requires secondary legislation to bring it into effect, Ms Swinson stated: “We intend to consult later this year on how the secondary legislation should be framed”. I had assumed simply that the Insolvency Service’s timeline had slipped a bit – understandably so, as there has been plenty going on – but I became concerned when I read the interview with Nick Howard in R3’s winter 2013 Recovery magazine. He stated: “We are in the process of consulting on exactly how that [the supply of IT] works because the power in the Act is fairly broad and we want to ensure we achieve the desired effect”. Have I missed something, or perhaps there’s another “informal consultation” going on?

I’m guessing the Service’s timeline has slipped a bit in relation to considering Professor Kempson’s report on fees, however, as Ms Swinson had planned “to announce the way forward before the end of the year” in relation to “a number of possible options for addressing this fundamental issue [that “the market does not work sufficiently where unsecured creditors are left to ‘control’ IP fees”], by both legislative and non-legislative means. Still, I imagine this isn’t far away, albeit that Ms Swinson is now on maternity leave.

This might be old news to those with their ears to the ERA ground, but it was news to me that the Insolvency Service will be implementing the Government’s Digital by Default strategy in the RPO “with a digital approach to redundancy claims anticipated to be launched in the autumn of 2014”. My experience as an ERA administrator may date back to the 1990s when people were comforted more by the feel of paper in their hands, but I do wonder how well the news will go down with just-laid-off staff that they need to go away and lodge their claims online. A sign of the times, I guess…

Finally, don’t mention the Draft Insolvency Rules!

No summary of regulatory goings-on would be complete without referring to the draft Insolvency Rules, on which the consultation closes on 24 January 2014. And no, I’ve still not started to look at them properly; it feels a bit futile even to think about starting now. But then, if we don’t pipe up on them now, we won’t be able to complain about the result, even if that may be yet years’ away…


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Tomlinson: IPs caught in the cross-fire

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Banks have become the 21st century pariahs. It seems that they can do nothing right and they cannot afford to do anything wrong. Lawrence Tomlinson may have banks, and RBS in particular, sighted in his cross-hairs, but is there much in his report that should concern the IP regulators or may herald changes for IPs?

Tomlinson’s published report can be found at: http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf.

The IP’s role: pre-appointment

A large part of the report raises issues regarding companies’ routes into the RBS’ Global Restructuring Group and how, once there, companies find it almost impossible to escape it alive. IPs become wrapped into this argument via Tomlinson’s observations over the opaque nature of the Independent Business Review process: the bank selects the IP and usually only the bank sees the report. When you add to this the fact that the cost of the IBR is passed to the company, I can see how this may rankle, although I am not sure that this makes the whole process flawed.

Tomlinson raises the issue of conflict of interest: he states that “it is easy to see how these reports may be used to protect the bank’s interests at the expense of the business. Much of the high value work received by these firms comes from the banks so it is naturally in their interest to protect the bank’s financial position”. Inevitably, the work of the IBR IP is fraught – can they really act independently? But who really is expecting them to do so? The IP’s client is the bank, not the company, so, at a time when the bank’s and the company’s interests cease to be aligned, it would seem to me to be foolish to assume that the IP introduced by the bank is not advising first and foremost the bank on how to protect its interests. If the company wants its own advice, then it should instruct its own IP. Of course some do, although Tomlinson fails to mention the barriers to some companies and their instructed IPs working to find a solution acceptable to the bank.

The appointment of administrators

Tomlinson writes that there are many occasions when the IBR IP later is appointed administrator. This seems to be a general comment rather than RBS-targeted, which might have been difficult to make stack up, as I understand that it is RBS’ policy not to appoint the IBR IP as administrator, is it not?

It is also not clear whether the cases involving directors who feel mistreated by the banks are the same cases in which the IBR IP later became the administrator. I think this is important because, on its own, an IBR IP becoming administrator is not an heinous act. On the other hand, if we take one of Tomlinson’s worst case scenarios, where a business was only considered insolvent because of a property revaluation, the directors were frozen out of any opportunity to offer solutions, and they protested that the IBR leading to the bank’s decision to appoint an administrator was flawed, then one might expect the IP to decline the appointment.

The Insolvency Code of Ethics states: “Where such an investigation was conducted at the request of, or at the instigation of, a secured creditor who then requests an Insolvency Practitioner to accept an insolvency appointment as an administrator or administrative receiver, the Insolvency Practitioner should satisfy himself that the company, acting by its board of directors, does not object to him taking such an insolvency appointment. If the secured creditor does not give prior warning of the insolvency appointment to the company or if such warning is given and the company objects but the secured creditor still wishes to appoint the Insolvency Practitioner, he should consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles.” If an IP still decides to accept the appointment amidst protestations, clearly he should be prepared to encounter a complaint and perhaps worse.

Tomlinson makes the point that “once an administrator has been appointed, the directors lose their right to legal redress”. Whilst directors lose their management powers and the administrator acquires the power to bring any legal proceedings on behalf of the company – and I should point out that I’m not a solicitor – there is precedent for directors to take some actions, e.g. challenging the validity of the administrator’s appointment, as demonstrated in Closegate (http://wp.me/p2FU2Z-4I). Challenges may also be made to court by shareholders (or creditors) (Paragraph 74 of Schedule B1 of the Insolvency Act 1986) and courts can order the removal of administrators (Paragraph 88). Of course, these measures cost money and probably will not reverse any damage done.

The IP’s role: post-appointment

More to the point, I think, is the risk of conflict of interest for bank panel IPs generally. Tomlinson puts it this way: “The relationship between the bank, IPs, valuers and receivers should undergo careful analysis. The interdependency of these businesses on banks for generating custom establishes a natural loyalty and bend towards the interests of the banks. Often the bank recommends or instructs the IP directly, so their preferential treatment is critical to their clientele. Maintaining independence and a fair hand for all parties involved appears extremely difficult.”

We’ve seen this argument play out in the pre-pack arena: if directors are in control of appointing an IP as administrator, how can creditors be confident that the IP, on appointment, will be acting with due regard for their interests? Similarly, how can other stakeholders be confident that an IP will not be persuaded by this “natural loyalty” towards the bank controlling their appointment to act contrary to his duties as administrator? In a number of cases, I would suggest that it is academic: if the bank is the only party with any real interest – or it shares that with the unsecured creditors looking to a prescribed part – then any bias towards the bank will achieve the same result as if there were none… although this may overlook the first objective of an administration, which is to rescue the company as a going concern.

Tomlinson is right: maintaining the IP’s balance here is extremely difficult, although I would be inclined to take receivers out of the equation, as there is no real change of “hat” for IPs in those cases. Until now, we have depended on the professionalism of the parties and the legal and regulatory processes to wield a stick towards any who stray, but I guess that we live in an age when that is no longer seen as adequate.

Tomlinson highlights another risk of conflict of interest in relation to selling assets: “RBS is in a particularly precarious position given its West Registrar commercial portfolio under which it can make huge profits from the cheap purchase of assets from ‘distressed’ businesses… Others have stated that they believe their property was purposefully undervalued in order for the business to be distressed, enabling West Registrar to buy assets at a discount price.” This is a new one on me and I’m not aware of any other bank being in a similarly “precarious position”. Although I would have thought that there would be little criticism levelled against IPs selling to West Registrar where it represents the best deal – and Tomlinson does not appear to be suggesting transactions at an undervalue by administrators – as we all know, there is a risk of getting caught up in allegations of stitch-ups wherever there is a connected party sale, whether that involves a director’s purchase in a pre-pack or a party connected to an appointing creditor.

The Repercussions

The most IP-relevant solution suggested by Tomlinson is:

“It is also important that the wider potential conflicts of interest between the banks, IBRs, valuers, administrators, insolvency practitioners and receivers are given careful consideration. Where these conflicts occur, it does so at the expense of the business. If collusion did not happen between these parties and their relationships were more transparent, then better fairness between the parties could be ensured. This requires further investigation and consideration by the Government to ensure that the law is being upheld and these conflicts do not impact on the businesses ability to operate.”

As mentioned previously, the Insolvency Code of Ethics covers specifically the scenario of an IP carrying out an IBR then contemplating an insolvency appointment. Personally, I think it does this rather well – it addresses not only how to view an objection by the directors, but also how the IP has acted prior to the insolvency appointment, how he has interacted with the company, whether he made clear who his client was etc. However, there is no ultimate ban on the IP accepting the appointment; as with most ethical issues, it is left to the IP to consider whether the threats can be managed or they render his appointment inappropriate. I would not be surprised if, down the line, there were a call for there to be a ban that an IBR IP could not be appointed as administrator. If it were a legislative measure, we could have fun and games defining such items as what constitutes IBR work and for how long a subsequent appointment would be prohibited, but it could be done.

But would it have the desired effect? It would certainly increase the costs of some administrations, as the built-up knowledge and in many respects positive relationships of the IBR IP would be lost to the administrator. It might also have limited effect, as the “natural loyalty” could persist in any IP who has the prospect of more than one bank appointment, be it a case on which he carried out an IBR or a case on which he’d had no prior connection. I believe it is a natural tendency in all professions and trades to protect one’s clients and work sources and I do not believe it is something that can be avoided entirely.

As with pre-packs, I would prefer the solution to involve those who feel mistreated doing something about it, calling to account anyone who acted contrary to their duties, ethical or otherwise. As with pre-packs, however, the devil is in establishing a clear understanding of what is and what is not acceptable behaviour, rather than simply trusting a gut feeling. Tomlinson has aired a few relevant issues, but also some irrelevant ones, I think, which unfortunately cloud the picture.

But is anyone listening? The FT reported yesterday (http://www.ft.com/cms/s/0/550c5360-5c31-11e3-931e-00144feabdc0.html#ixzz2mVVnGjFz) that George Osborne has washed his hands of the report, although Mr Cable seems more convinced that there are genuine problems. However, whatever the conclusions of the FCA’s skilled person’s review, I am sure that insolvency regulators already are contemplating their next step. Some will see the Tomlinson report as an opportunity to renew calls for the end to bank panels of IPs. With a revision of the Insolvency Code of Ethics moving up the agenda of the Joint Insolvency Committee, I can see the ethics of the move from pre-appointment work to a subsequent appointment again being the subject of debate.

(01/02/14 UPDATE: BBC4’s File on Four programme, “Design by Default?”, can be accessed at http://www.bbc.co.uk/iplayer/episode/b03q8z4f/File_on_4_Default_by_Design/)