Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Monthly Archives: February 2014


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The Insolvency Rules “2015”: A Moveable Feast

Peru465

I realise that talk of the Insolvency Service’s IP fees consultation has pretty-much smothered the draft Rules consultation. However, I’ve yet to get to grips with that one, so here are my thoughts – and a copy of my response – on the (already superceded!) draft “2015” Rules.

The consultation closed on 24 January and it seemed to me that, despite the enormity of the task, many IPs and associates went to a lot of effort to make thorough responses. Regrettably, personally I only managed to review a few of the sections in detail – and only then did I look at the consultation questions (yes, I know, that was a pretty stupid way of doing things!). I attach my response here: MB response 24-01-14. The Government’s consultation homepage is: https://www.gov.uk/government/consultations/modernisation-of-the-rules-relating-to-insolvency-law.

This is not meant to be an overview of the proposed changes – I’ve not covered the non-controversial aspects (that would be too boring!) – but I consider (but I don’t really answer – sorry!) the following:

• Just how draft are the Draft Rules and are we going to get to see how current/future initiatives impact on them?
• How huge a task will it be to absorb the changes and is there anything that can be done to make the job easier?
• Does the Consultation Document cover all the changes or do we have to look closer at the detail?

The condition of the Draft Rules

The Insolvency Service is between a rock and a hard place, but personally I think they have made the right decision in releasing these draft Rules even whilst they are draft to a greater degree than we’re accustomed for statutory instruments opened to consultation.

The Service acknowledges that the draft is a work in progress document and that there are inconsistencies across the different insolvency processes. The Service did pre-empt the outcome of the Red Tape Challenge somewhat and included within the draft Rules some of the proposed measures, such as removing more statutory meetings (which seems very odd now in the context of the fees consultation) and enabling creditors to opt out of receiving communications, but other measures arising from the Red Tape Challenge exercise – such as avoiding the payment of small dividends and effectively communicating by website alone – are not reflected in the draft Rules. Given that the RTC outcome had not been revealed when this consultation commenced, this is not surprising, but it demonstrates the moveable feast of insolvency legislation and the difficulties in seeking to set in stone – at pretty-much any point in the next half-decade or so – a revised set of Rules.

In the face of this continually moving conveyor belt of legislative proposals, it is understandable that the Service does not wish to hold up the process of revising the Rules and, personally, I am pleased that we have been given this work-in-progress look at the draft. In reading the draft, I have suppressed any nagging concern that much of my effort has already been wasted in view of more recent proposals and yet more of the draft will be overtaken by future events, because the alternative – that we don’t get to see a draft until the last minute – doesn’t bear thinking about.

But what are the Insolvency Service’s plans now? Will they continue to work on the draft, absorbing the responses to this consultation, the further RTC outcomes, the IP fees conclusions, the fall-out from Teresa Graham’s review of pre-packs, perhaps the rules around the S233 changes (which are yet to be the subject of a consultation, right?), and give us little opportunity to review a further draft on the basis that we’ve had our chance? I hope not. I hope we get to have another opportunity to comment on a draft. Whilst matters of agreed policy may not be up for debate in the Rules arena, my review of only a few sections of these draft Rules has demonstrated to me the value of having others input on the practicalities of the processes set out.

The Big Picture

I pity the first JIEB students after the Rules are enforced, although it will be a fantastic opportunity to get ahead of the pack and become the go-to person in one’s practice. How us old’uns with our rubbery neurons are going to get the hang of it all, I don’t know!

I shudder to think about the amount of time – and (non-chargeable) money – that will be expended to get internal systems, diaries, and templates new Rules-compliant… and the inevitable mistakes that will be made; after all, templates always require a bit of fine-tuning after the first (second… third…) version, don’t they? One way that firms can cushion the blow right now is to future-proof standard documents, strip out all those Rules references: after all, do readers really need to know that something has been produced pursuant to Rule xxx?

The Consultation Document is silent on a key issue, I think: are the Rules going to apply to all cases existing as at R-Day or only to new appointments after the new Rules begin to take effect? I appreciate that it would be a rare thing for the new Rules to apply to all cases, rather than just new cases, but it is not entirely unheard-of, and think of the safeguards that would need to be put in place if a firm’s case-load were a mixture of pre- and post-new Rules cases. It’s been tough enough for practices to handle the complexities of running a portfolio of mixed pre/post-2009 and pre/post-2010 Rules cases, but these changes go so much further, it will make our heads spin!

Little has been said of making any changes to the Act. I am sure there is a reluctance to go there, given the more significant difficulties in seeking changes to primary legislation. However, I think it undermines some of the effort made to modernise the Rules, if we cannot fix the Act provisions at the same time. In particular, I think the practical difficulties arising from the Enterprise Act 2002 have now become evident and it seems a wasted opportunity not to tweak those whilst we’re at it. And aren’t there Act changes, such as extending the phoenix provisions to companies that don’t survive Administration, that have been given an airing but seem to have now gone quiet? It would also seem useful to wrap in some of the other statutory instruments that involve significant overlap with the Rules, such as the Insolvency Practitioners Regulations (which will need to be revisited in view of the RTC anyway) and what about Insolvent Partnerships? Then again, I guess the Service has enough on its plate already!

The Detail

Although pretty-much all of the Rules have been re-jigged, the Consultation questions focussed around some of the more fundamental changes, such as the overall structure, which is a massive change, but well worth doing, in my view.

They invited us to comment on the format of setting out in the Rules the prescribed content of notices, forms etc., rather than prescribing a statutory form, the suggestion being that this makes “it easier to enable documents to be delivered by electronic means, preparing the system for moving to electronic delivery of information when the forms would become redundant”. I appreciate that the aim is to future-proof the process, but I don’t think we have to accommodate any transmission process other than textual, do we? We’re not exactly future-proofing for Elysium-style neural downloads, are we? Therefore, I really don’t think that it helps to do away with prescribing forms, as it just means that someone else is going to have to create them (and get paid for it). Even if every IP in the country only goes to a handful of suppliers, that’s still an unnecessary amount of duplication in my books, and micro-businesses will be burdened with a disproportionate expense. Perhaps a middle-ground would be to provide forms, but prescribe only that the information set out in the forms need be delivered? Anyway, do we know whether Companies House will stomach just any old form..?

The Consultation Document lists ten “minor and technical changes” (paragraph 42) – and I think they’re right: they are pretty minor. However, what I think is a little disingenuous is the fact that, if you have the time and the determination to scrutinise the detail of the draft Rules, I’m sure you’ll find far more technical changes that aren’t quite so minor!

I knew there was no way I’d get through the complete draft Rules, so I decided to focus on the sections that will impact mostly on Administrations – Parts 3 and 17. I managed to shoe-horn my thoughts into the consultation’s question 20 (“Do you have any other suggestions or comments on the structure or the content of the rules?”). My full response (MB response 24-01-14) lists my observations, but here are a select few:

• The current R2.48 Conduct of Business by Correspondence for approval of the Administrator’s Proposals is to be replaced by a new correspondence-based process whereby creditors can lodge a “notice of objection” (the only other option appearing to be that they keep silent) and, if 10% or more of the creditors by number or value object, the Administrator “may convene a meeting of creditors to seek their approval or seek approval of a revised statement of proposals” (R3.37). My thoughts are: what is wrong with the current process? What if a creditor just wants to modify the Proposals? How is an IP supposed to calculate whether the 10% threshold has been over-reached? This 10% threshold – of creditors by value (and sometimes by number) of the total – is repeated throughout the Rules. Research has shown that lack of creditor engagement is a recurring problem, so why erode the process whereby creditors who actually make the effort to vote are most influential?

• The Service has made yet another attempt to tidy up the filing and reporting processes when a Paragraph 83 move from Administration to CVL form is filed. This time, they are suggesting a return to the issuing of a final report simultaneously with the ADM-CVL form. However, they have drafted a requirement that, “if anything happens between the sending of the notice to the registrar of companies and its registration which the administrator would have included in the report had it happened before then”, the (former) Administrator must file and circulate “a statement of appropriate amendments to the report”. My issue is that, technically, “anything” could include the crediting of additional bank interest or even the incurring of time costs, so this could result in IPs needing to issue – at some cost – pretty meaningless statements. Ideally, I would prefer the Act (if only!) to be amended so that the date when the ADM-CVL move takes effect is the date that the form is signed, not registered, so that we can escape all this nonsense. After all, I can think of no other event such as this where the timing is in the hands of Companies House. Alternatively, if we are stuck with Companies House controlling the conversion date, couldn’t the Liquidator report on “anything” that had happened in that small window when he issues his annual report?

• The Service has made a big deal about the savings that will be made from reducing the requirements to have creditors’ meetings – and indeed the draft Rules include a general process for conduct by correspondence (in addition to R3.37 for Administrators’ Proposals). However, this excludes fees decisions, which need to be dealt with either by a committee or resolution of creditors (apart from Para 52(1)(b) cases, the provisions for which, disappointingly, are left unchanged). Given that this is pretty-much the only matter to be addressed at creditors’ meetings, I cannot see that many meetings will be avoided, other than final ones (which, let’s face it, already are a complete non-event and cost nothing other than a Gazette fee, as all the expense arises from the need to issue a final report etc.). Of course, if the IP fees consultation proposals are taken forward, we may find IPs trying harder to generate creditor interest in meetings, which erodes to some extent the Service’s message that great savings will be made by these Rules/RTC measures.

These are just a few of the intriguing changes I’ve spotted. I do sympathise with those who have the job of revising these Rules. I’ve only had to deal with few-pager SIPs and the Ethics Code before and they were tough enough. In those cases, we certainly didn’t please all the people all of the time and I am sure the same will be true of the Rules. All that I ask is that we’re kept informed, so that we can manage the transition as best we can… and, if questions continue to be raised about whether IPs are giving “value for money”, that the critics remember that it’s the enormous costs associated with these kinds of changes that IPs have no choice but to pay.


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Two bankruptcy annulments, two council debts, and a decision “of potential interest to all insolvency practitioners”

1136 Swakop

Some questions answered by a few of the recent cases in the courts:

• Kaye v South Oxfordshire District Council – if an insolvency commences mid-year, how much of the year’s business rates rank as an unsecured claim?
• Yang v The Official Receiver – can a bankruptcy order be annulled if the petition debt is later set aside?
• Oraki & Oraki v Dean & Dean – on the annulment of a bankruptcy order, if the petitioning creditor cannot pay the Trustee’s costs, who pays?
• Bristol Alliance Nominee No 1 Limited v Bennett – can a company escape completion of a surrender agreement if the process is interrupted by an Administration?
• Rusant Limited v Traxys Far East Limited – is a “shadowy” defence sufficient to avoid a winding up petition in favour of arbitration?

A decision “of potential interest to all insolvency practitioners and billing authorities for business rates”

Kaye v South Oxfordshire District Council & Anor (6 December 2013) ([2013] EWHC 4165 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4165.html

HHJ Hodge QC started his judgment by stating that this decision is “of potential interest to all insolvency practitioners and billing authorities for business rates” (paragraph 1), as he disagreed with advice that appears to have been relied upon by billing authorities and Official Receivers for quite some time. This may affect CVAs, which were the subject of this decision, and all other insolvency procedures both corporate and personal.

The central issue was: how should business rates relating to a full year, e.g. from 1 April 2013 to 31 March 2014, be handled if an insolvency commences mid-year?

In this case, the council had lodged a proof of debt in a CVA for a claim calculated pro rata from 1 April to the date of the commencement of the CVA, but the Supervisor had observed to the council that he believed that the full year’s business rates ranked as an unsecured claim.

The council responded that the company had adopted the statutory instalment option (whereby the full year’s rates are paid in ten monthly instalments commencing on 1 April) and that, as this was still effective at the commencement of the CVA, the unsecured claim was limited to the unpaid daily accrued liability – with the consequence, of course, that the council expected to be paid ongoing rates by the company in CVA. The council stated that, had the right to pay by instalments been lost at the time of the CVA (by reason of the debtor’s failure to bring instalments up to date within seven days of a reminder notice), the whole year’s balance would have become due and this would have comprised the council’s claim. [This seems perverse to me: it would mean that companies would be better off postponing proposing a CVA until the business rates become well overdue, as the full year would then be an unsecured claim, rather than accruing as a post-CVA expense.] The Supervisor applied to the court for directions.

In support of the council’s view was advice (not directly related to this case) from the Insolvency Service of early 2010, which stated that, unless a bankrupt had failed to comply with a reminder notice, the Official Receiver would reject a claim for council tax for the portion of the year following a bankruptcy order. The council also provided what was said to be the current view of the Institute of Revenues and Valuation, which followed a similar approach in relation to a company’s non-domestic rates.

Hodge HHJ felt that the decision in Re Nolton Business Centres Limited [1996] was of no real assistance, because, although this had resulted in a liquidator being liable for rates falling due after appointment, he stated that it merely demonstrated the “liquidation expenses principle”: “the question was not whether the debt had been incurred before, or after, the commencement of the winding up, but whether the sums had become due after the commencement of the winding up in respect of property of which the liquidator had retained possession for the purposes of the company” (paragraph 38).

Although, in this case, the full year’s rates had not fallen due for payment by the time of the commencement of the insolvency, Hodge HHJ viewed it as “a ‘contingent liability’, to which the company was subject at the date of the [CVA]” (paragraph 54). Therefore, he felt that the full year’s non-domestic rates were “an existing liability incurred by reason of its occupation of the premises on 1st April 2013. It, therefore, seems to me that the liability does fall within Insolvency Rule 13.12” (paragraph 55) and, by reason of the CVA’s standard conditions, were provable. He also commented that it seemed that this would apply equally to liquidations and bankruptcies.

The judge decided that the council should be allowed to prove in the CVA for the full amount of unpaid rates and he felt that the company would have a good defence to the existing summons for non-payment of post-CVA rates.

My thanks to Jo Harris – I’d originally missed this case, but she’d mentioned it in her February technical update.

(UPDATE 22/07/2014: For an exploration of the application of this case to IVAs, take a look at my more recent post at http://wp.me/p2FU2Z-7y)

Absence of petition debt – council tax liability that was later set aside – was not a ground to annul bankruptcy order

Yang v The Official Receiver & Ors (1 October 2013) ([2013] EWHC 3577 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3577.html

Yang was made bankrupt on a petition by Manchester City Council for unpaid council tax of £1,103. After the bankruptcy order, Yang discharged the liability orders but also challenged the liability on the basis that the council had incorrectly classed the property as a house in multiple occupation. Subsequently, the valuation tribunal ordered the council to remove Yang from the liability.

Yang then sought to have the bankruptcy annulled, but the court ordered that the bankruptcy order be rescinded; the annulment was refused, as the court decided that there was no ground for the contention that, at the time the bankruptcy order was made, it ought not to have been: at that time, the multiple occupation assessment stood and Yang had not challenged it.

In considering Yang’s appeal, HHJ Hodge QC felt that the Council Tax (Administration and Enforcement) Regulations 1992 were relevant, which state that “the court shall make the [liability] order if it is satisfied that the sum has become payable by the defendant and has not been paid” (paragraph 20) and the court cannot look into the circumstances of how the debt arose, although the debtor is entitled to follow the statutory appeal mechanism. The judge stated: “It seems to me that the fact that a liability order is later set aside does afford grounds for saying that, at the time the bankruptcy order was made, there was no liability properly founding the relevant bankruptcy petition within the meaning of Section 282(1)(a) of the 1986 Act. But that does not mean that a bankruptcy order made on a petition founded upon such a liability order ‘ought not to have been made’” (paragraph 22) and therefore he was content that the bankruptcy order was rescinded, rather than annulled, although there remain three further grounds of the appeal to consider another day.

Innocence is relative

Oraki & Oraki v Dean & Dean & Anor (18 December 2013) ([2013] EWCA Civ 1629)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1629.html

After a long battle, the Orakis’ bankruptcies were annulled on the basis that the orders should not have been made: the petition debt related to fees charged by a man who was not a properly qualified solicitor and was not entitled to charge fees. At the same time, the judge ordered that the Trustee’s costs should be paid by the Orakis, although they were open to seek payment from the solicitor firm (Dean & Dean) and to challenge the level of the Trustee’s remuneration.

The Orakis appealed the order to pay the Trustee’s costs on the basis that they were completely innocent. Floyd LJ agreed that the Orakis were wholly innocent “as between Dean & Dean and the Orakis”, however “the confusion occurs if one seeks to carry those considerations across to the costs position as between the trustee and the Orakis. There is no clear disparity, at least at this stage, between the ‘innocence’ of the two parties” (paragraphs 36 and 37). He also stated that, whilst it was still open for the Orakis to challenge the level of costs, which appear to have increased by some £250,000 since 2008, it seemed to him to be unlikely that the Trustee would not be able to demonstrate that he is entitled to at least some costs.

Lady Justice Arden added her own comments: “the guiding principle, in my judgment, is that the proper expenses of the trustee should normally be paid or provided for before the assets are removed from him by an annulment order” (paragraph 63) and it was not clear that the Orakis’ estates would be sufficient to discharge the expenses in full, which, absent the order, would have left the Trustee with the burden of unpaid expenses. She noted that, usually, the petitioning creditor would be ordered to pay the Trustee’s costs where a bankruptcy order is annulled on the ground that it ought never to have been made. However, unusually, in this case the petitioning creditor could not pay and therefore the judge was entitled to order that the Orakis pay.

Landlord entitled to escrow monies held for part-completed surrender interrupted by Administration

Bristol Alliance Nominee No. 1 Limited & Ors v Bennett & Ors (18 December 2013) ([2013] EWCA Civ 1626)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1626.html

In 2010, A\Wear Limited (“the company”) entered into an ‘Agreement for surrender and deed of variation’ with the landlord (“Bristol”) of leased properties and £340,000 was held in escrow pending completion of the surrender and payment by the company of the VAT on the escrow amount. A similar arrangement was made in relation to another property with an escrow amount of £210,000. Shortly after the landlords served notice on the company requiring completion of the surrender, the company entered into administration and the company, acting by its administrators, refused to complete the surrender.

At first instance, the judge refused to make the order requested by the landlords for specific performance to enable the escrow amounts to be released to them, on the basis that it would have offended the principle of pari passu treatment of unsecured creditors. At the appeal, Rimer LJ disagreed: although the refusal of an order for specific performance would open up the possibility that the company’s contingent interest in the escrow monies might be realised, the monies were not part of the company’s assets and therefore ordering specific performance would not deprive the company of any assets then distributable to creditors. Rimer LJ stated that the effect of the refusal “was to promote the interests of the company’s creditors over those of Bristol in circumstances in which there was no sound basis for doing so”. “Prior to the administration, Bristol had a right, upon giving appropriate notice, as it did, to compel the company to complete the surrender. If such a claim had come before the court before the company’s entry into administration, there could have been no good reason for the court to refuse to make such an order; and the consequence of doing so would have been to entitle Bristol to the payment of the escrow money. It was manifestly the intention of the parties to the surrender agreement to achieve precisely such a commercial result. The company’s entry into administration cannot have resulted, and did not result, in any material change of circumstances. The principle underlying Bastable’s case shows that Bristol remained as much entitled to an order for specific performance as it had before” (paragraph 34). With the support of the other appeal court judges, the appeal was allowed.

Winding up petition “trumped” by arbitration agreement

Rusant Limited v Traxys Far East Limited (28 June 2013) ([2013] EWHC 4083 (Comm))

http://www.bailii.org/ew/cases/EWHC/Comm/2013/4083.html

Rusant Limited sought to restrain the presentation of a winding up petition against it by Traxys Far East Limited, which had issued a statutory demand for the repayment of a loan. However, the loan agreement included a term that “any dispute, controversy or claim… should be referred to and finally resolved by arbitration of a single arbitrator” and Rusant claimed that an extension to the loan repayments had been agreed.

Although Mr Justice Warren described Rusant’s defence as “shadowy” and stated that, apart from the arbitration agreement, he would not grant an injunction, “the arbitration agreement, it seems to me, trumps the decision which I would otherwise have made” (paragraph 33) and therefore, in consideration of the Arbitration Act 1996, he did not allow the petition to proceed.


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Re Parmeko Holdings Limited: when are administrators’ proposals “futile”?

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Re Parmeko Holdings Limited & Ors (In Administration) (6 September 2013) ([2013] EWHC B30 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/B30.html

Recipients of R3 Recovery News will have seen a report on this case by Amy Flavell of Squire Sanders. In her article, Amy referred to the fact that the judge passed comment on the proposals “casting doubt on the utility or effectiveness of a number of standard form proposals” used by many administrators. I’ll cover those comments here.

Background

Firstly, a summary of the case: the administrators sought direction as regards their proposals, which had attracted no response from any creditors at all. Cooke HHJ confirmed that, just as an administrator is entitled to exercise his statutory powers in such a manner as he considers best for fulfilling the purposes of administration before he puts his proposals to creditors, so too can he continue to use those powers in the event that creditors do not vote on his proposals. “If and when proposals are approved then he is required by paragraph 68 to manage the affairs of the Company in accordance with those proposals, but if no such proposals are approved then he is not so constrained and he must act in accordance with his own discretion” (paragraph 11).

This does not contradict with the earlier decision in Lavin v Swindell (http://wp.me/p2FU2Z-k), which involved administrators seeking the court’s direction because creditors had voted against their proposals and Cooke HHJ acknowledged that an administrator also may want to refer to the court in instances where “some specific question arises as to what he should do” (paragraph 13). However, the judge felt that this was not such a case, although he did acknowledge that the administrators required approval of the basis of their fees, which he granted with no particular comment.

The judge’s comments on the proposals

The judge stated that:

• No purpose is served in seeking sanction or direction to make payments, when and if available, to the secured and preferential creditors, as this is a statutory power (paragraph 16);

• He had “grave doubts as to the utility” of placing before creditors the proposals in relation to exit procedures. “The proposals as set out in this case do no more than set out the mechanisms provided by Sch B1 for exit, and leave it to the discretion of the administrator to make any choice between them that may be available in the circumstances as they transpire. That is not, in any positive sense, a proposal at all, nor does it in truth set out anything the administrator ‘envisages’” (paragraph 17);

• Stating that the administrators would become liquidators in any subsequent CVL is the default position unless the creditors nominate someone else, “so putting such a proposal to the creditors achieves little more than conveying information” (paragraph 18);

• Including a permissive proposal that the administrators may apply to court for sanction to pay a dividend to unsecured creditors simply provides “and indication to the creditors of an available option” (paragraph 19);

• “There must be some doubt as to the appropriateness of inviting the creditors at the commencement of the administration to agree a date upon which the administrators should be discharged from liability… It seems to me that the creditors can only sensibly consider this question when they know what the effect will be, which in turn means that they should be in a position to know what has gone on in the administration and form a view as to what if any potential claims might be affected by the release. They plainly cannot in most cases do this at the first meeting of creditors” (paragraph 20). The judge stated that “where as here the creditors have not fixed a discharge date, an application must be made to the court” (paragraph 21) at the appropriate stage.

• He also declined to comment on whether remuneration should be appropriately dealt with by way of proposal or by separate resolution, but he confirmed that the court could deal with it as a separate matter from the proposals.

Cooke HHJ finished by highlighting the need for administrators “to consider carefully what is the utility of an application to the court for directions” and, in his view, “it would be appropriate, if the administrator has to report to the court that his proposals have not been approved by the creditors, simply by virtue of what has been described as ‘creditor apathy’ in that the creditors did not express a view one way or the other, to say in that report whether he considers that anything useful would be served by seeking an order of the court pursuant to paragraph 55.2, and that if he does not, that he does not intend to make such an application” (paragraph 24). Personally, I think it would be a good start if the Notice of Result of Meeting of Creditors, Form 2.23B, provided for disclosure of unapproved proposals, as the current template only provides for approved or rejected outcomes, but this won’t be the first time that some fudging of a standard form has been necessary.

Comment

I think that this decision reveals a difficulty with the Rules around administrators’ proposals. Stepping back for a moment, I wonder if the drafter originally envisaged administrators’ proposals operating in a similar manner to VA proposals. It seems to me that R2.33 is a checklist of items to include in proposals resembling R1.3 and the idea in Para 53 is that the creditors would decide whether to reject or accept, with or without modifications, the administrators’ proposals… which reads very much like S4 regarding CVAs. It seems to me that the Act/Rules suggest a single statement of proposals from an administrator, which creditors are asked to reject, approve or modify as a whole, rather than the evolved practice of providing creditors with two parts: a report on the administration to date and a summary of points sometimes described as the administrators’ “formal” proposals on which creditors are asked to vote (which practice may have been a spin-off from the pre-Enterprise Act administration regime, where much of the detail was annexed to the administrator’s proposals).

However, I think there’s a key reason why this format – of creditors voting on a single statement of proposals – doesn’t really work for administrations: compared with VAs, the process, powers, and purposes of administration are far more well-defined by statute. This doesn’t seem to leave much for creditors to vote on and therefore, as Cooke HHJ observed, there is little point proposing matters to creditors which simply reflect statutory provisions. An example of this conflict arose a few years’ ago when HMRC was in the habit of seeking modifications to proposals that the administration would exit to CVL, but in some cases it was not statutorily possible for this to happen (at least not via Para 83), because the administrator did not think there would be a dividend. I understand that HMRC now seeks modifications that the exit be some form of liquidation, which gets around this problem, but I think it raises an issue: what exactly is up for modification?

The way the Rules are designed, it seems that we risk creditors trying to force administrators to act contrary to statute by seeking modifications to proposals, as statute seems designed so that the entire statement of proposals, covering all R2.33 items, is up for consideration, even though many items are merely for information purposes, either because they are statements of fact or because they simply describe what the administrator is bound to do by statute; I’m thinking, in particular, of Para 3 which describes the hierarchy of objectives, which the administrator must pursue. In some respects, ‘creditor apathy’ may have avoided more applications to court for directions.

Another issue identified by this decision is: what are administrators to do if their way is not clear at the time of issuing the proposals? For example, as Cooke HHJ observed, proposing to creditors that they approve a plan to leave the administrators with full discretion to decide the appropriate exit route is pretty futile. However, if the administrators truly do not know how best to exit when the proposals are due, what do the Act/Rules expect them to do: seek the court’s sanction to postpone their proposals until they are certain or perhaps plump for a sensible exit route and, if that later turns out to be inappropriate, ask creditors to approve revised proposals? Both these options seem a waste of time and expense to me and in conflict with the idea of being up-front and honest with creditors. So, given that R2.33 requires an administrator’s proposals to include “how it is proposed that the administration shall end”, it really does seem to me that the most sensible approach would be to make a best guess at the most likely appropriate exit route and seek to retain the discretion to choose an alternative route (but not exits that clearly will not be appropriate to the case in hand), if things change. I can see that this isn’t much of a proposal, but I suggest that, just as Cooke HHJ felt that creditors should not be asked to agree a discharge date at such an early stage in the administration, so too should administrators not be expected to identify, at the most 8 weeks into a case, the final exit route in all cases.

I wonder if the Rules could be revised so that they more clearly distinguish between what creditors are being asked to approve and what administrators are simply going to do in order to meet their statutory obligations, including importantly, I think, the hierarchy of objectives of administration. If only we could get back to non-prescriptive, non-checklisty Rules that focus on the purpose of reports, proposals, etc…


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Last Chance to Speak Up on Partial Licences

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In December, I reported on the current position of the Deregulation Bill (http://wp.me/p2FU2Z-4Z) and the Parliamentary Committee’s irritation at the apparent lack of formal consultation on the Insolvency Service’s plan to introduce partial licences for insolvency practitioners to take on either only personal or only corporate insolvency appointments.

I am sure that most of you will have become aware of the Insolvency Service’s letter, dated 23 January, inviting comments on the draft Bill, with a deadline of 21 February (http://www.bis.gov.uk/insolvency/news/news-stories/2014/Jan/Clause10).

Having exchanged views with my fellow R3 Smaller Practices Group Committee members, I had assumed that almost all IPs consider it essential to have the full spread of insolvency knowledge and preferably experience, so that they can react competently to whatever walks in through the door. Possible exceptions to this model would be the very few that really do live the life of a personal or corporate insolvency specialist, and it could be thought that even they may come a cropper when faced with an atypical client. I had assumed that the opinion of R3 vice-president, Giles Frampton (http://www.r3.org.uk/index.cfm?page=1114&element=19677), was pretty-much the norm, with others being even more vociferous, e.g. Frances Coulson’s “Don’t dumb down the profession” http://www.moonbeever.com/category-blog-entry/696-don-t-dumb-down-the-profession). However, other IPs on a Scottish Insolvency LinkedIn discussion seem to be far more in favour of the measure, seeing it as more realistic for the world we live in, so maybe it isn’t so black-and-white.

Given that Clause 10 is already in the Bill, which claims to be designed around the noble motive of reducing regulation, it is likely that those not in favour of the measure will need to generate quite a swell in order to turn the tide. Therefore, if you do feel strongly about this, I recommend that you make your views heard. You have just over two weeks!

The Insolvency Service’s View

The Insolvency Service’s letter highlights what they believe are three advantages of the change. They say it will:

• “reduce the barriers to entry to the IP market and thereby increase competition.

• “give rise to savings on training fees, which are likely to be of proportionally greater benefit to smaller firms of insolvency practitioners, including new entrants to the market

• “remove a burden from existing IPs who already choose to specialise in a particular area but are required to study areas that have little or no relevance to their work or benefit to their clients.”

“Reduce the barriers to entry to the IP market and thereby increase competition”

Personally, I don’t feel qualified to comment on the Service’s assumptions. I’m not in business as an appointment-taker and I only really witness the business end of insolvency from the side-lines. However, what I have seen in recent years are many more IPs and other insolvency professionals changing their LinkedIn profiles to “consultant” or “available”. I have also heard far more stories recently of cases being taken off the S98 floor and undercutting for MVLs than I have since the 1990s and I certainly don’t think that the IVA market is crying out for any fast-tracked personal insolvency specialists to compete for IPs’ meagre returns.

Does the profession really suffer from a lack of competition or is this an outdated view persisting from the OFT’s market study into corporate insolvency, which was generated from 2006 data when the world was a far different place?

“Give rise to savings on training fees, which are likely to be of proportionally greater benefit to smaller firms of insolvency practitioners, including new entrants to the market”

I assume that the Service’s thought-process is that there is likely to be a lower head-count of staff per IP in a smaller practice than in a large multi-national and therefore the smaller practice will gain a greater relative benefit from reduced training costs (on the assumption that it will cost less to train and qualify as a partial licence-holder).

However, has it not occurred to the Service that the smaller practice will have next to no use for a partial licence-holder? A key to most smaller practices’ success is that their doors are open to anyone in the locality in need of help whether they be individuals, business partners, or corporate entities. They are not regimented into “centres of excellence”, but have the breadth of knowledge and experience to deal with almost anything. Their case portfolios are, almost without exception, a mixture of corporate and personal insolvencies and usually their staff, some of whom will be the appointment-takers of the future, are exposed to a variety of insolvency types. Therefore, I cannot see why any smaller practice IP would want to take on a partial licence-holder or encourage their staff to study for such a licence.

The only profile of practice that might be a home for a partial licence-holder is the volume IVA provider or the corporate department of a large multi-national. Therefore, contrary to the Service’s view, I believe that the only beneficiaries of any reduced training fees may be large firms and that the corollary could be increased fees for those training for full licences, if demand for these drops, which would be felt disproportionately by smaller practices. This doesn’t sound like a sensible measure for a pro micro-business government to introduce.

“Remove a burden from existing IPs who already choose to specialise in a particular area but are required to study areas that have little or no relevance to their work or benefit to their clients”

This is an odd one?! Has the Insolvency Service not read its own Regulations regarding CPD for IPs authorised by the Secretary of State? Even they do not specify that CPD needs to cover the range of insolvencies; it is merely “any activities which relate to insolvency law or practice or the management of the practice of an insolvency practitioner” (IP Regs 2005) and I believe that most RPBs’ views of CPD/CPE are, in a nutshell, whatever would help the licence-holder practise better as an IP. Therefore, I cannot see that IPs at present are under any pressure to study areas that have little or no relevance to their work or benefit to their clients. Hence, I can see no advantage in providing partial licences and I very much doubt that any existing IPs will downgrade to a partial licence.

Consultation

There are many more arguments against partial licences, such as those described by Giles Frampton and Frances Coulson, and no doubt R3 will be responding loudly to the consultation.

I think it is very important that the smaller practices’ voices are heard, particularly as the Service has claimed support for its plan in the expected savings to be felt by this group. I would encourage you to respond to the consultation and to R3’s Smaller Practices Group’s imminent invitation to send in your views, so that you can contribute to R3’s own response.

(UPDATE 04/03/14: The ICAEW has submitted, in my view, a storming response to the consultation: http://www.icaew.com/~/media/Files/Technical/icaew-representations/2014/icaew-rep-36-14-partial-authorisation-of-insolvency-practitioners.pdf. It reads like a gentle sledgehammer, maintaining a sense of calm reason throughout. I particularly liked the reference to the Government’s recently-disclosed proposed objectives of insolvency regulation and how partial licences may act contrary to at least one of them. The ICAEW response is unequivocal in its conclusion: “We have received through our own consultation process no indications of support at all for the proposed partial qualification regime”.)