Insolvency Oracle

Developments in UK insolvency by Michelle Butler

New SIPs 3 – are you ready?

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5313 Sydney

As the new SIPs 3 come into effect in less than two weeks’ time, I’m guessing that few of you will be interested in reading my “yes, but what exactly does that mean?!” observations below. If VAs/Trust Deeds are your thing, you will have got going on bringing practices into line with the new SIPs (and you really won’t want to read any alternative interpretations). But it’s not all gripes; I have actually tried to include some points that may be of use!

SIP3.1 (IVAs) and SIP3.2 (CVAs)

Assuming that your practices already comply with (old) SIP3 and statute, what do you need to know to bring them in line with the new SIPs? I’m afraid I don’t think it’s about easy fixes. The new SIPs are so different from the 2007 SIP3 that I would recommend trying to take a fresh and objective look at the way VAs are conducted in the round in order to apply the new SIP principles and requirements.

The revised SIPs put great emphasis on there being “procedures in place to ensure…”, so it is not simply a case of getting standard templates compliant. In my view, the key seems to be more about making sure that tasks and considerations are prompted and carried out, not just marked “N/A” (or perhaps even “done”) on a checklist completed 6 months after the event. However, the vast majority of the steps required are not rocket-science and are probably being carried out already, so if any major changes are required, they will probably involve regularising processes and evidencing the steps taken.

Having said that, some obvious easy fixes may include:

• Ensure that letters to shareholders and creditors giving notice of the meetings explain the stages and roles associated with a VA (i.e. initial advice, assisting in preparing the proposal, acting as nominee, and acting as supervisor) – per the SIPs’ first principle.

• Ensure that initial advice includes explaining “the rights of challenge to the VA and the potential consequences of those challenges”.

• If you’re confident that there are systems in place to keep alert to signs that a meeting with an individual debtor is merited, SIP3.1 allows you to lighten up on SIP3’s requirement to meet with every “trading individual” (although a meeting needs to be offered in every case).

• Check that standard Proposals templates (and procedures/documents used in drafting Proposals) include all the items listed. Although the new SIPs are not as fulsome as the old SIP3, there are some curly additions, such as “the background and financial history of the directors, where relevant”.

• Ensure that post-approval circulars make clear the “final form of the accepted VA” where a proposal is modified, which to me suggests more than simply listing the approved modifications.

• Ensure that supervisors’ reports disclose fully the VA costs and “any other sources of income of the insolvency practitioner or the practice in relation to the case” (remembering that the Ethics Code prohibits referral fees or commissions benefitting the IP/firm as opposed to the estate) and any increases in costs, if these have increased beyond previously-reported estimates. Whilst the old SIP3 already requires disclosure of increases in the supervisor’s fees, “costs” of course are wider in scope and could include solicitors, agents etc.

Other fixes may not be so easy…

Huh? No. 1

For CVAs, “the initial meeting with the directors should always be face to face”.

But what is the initial meeting; is it the first meeting? What if progression towards a solution is an iterative process? And who are the directors? Does this mean that all the directors need to be present, even if someone is out of the country? And why face to face? Is this so that you can skype but a non-visible telephone conference won’t do; where’s the sense in that?

Yes, I know I’m being picky. Trying to look at this sensibly, presumably IPs are expected to ensure that the directors discuss face-to-face the information to enable them to decide on whether to propose a CVA and what that might look like. I could see that this discussion might occur after a period of information-gathering, so it may not actually be the very first meeting with the director/s. In addition, inevitably there will be occasions when it is difficult to meet physically with all the directors, so this might require some judgment on IPs’ parts as to whether the non-attendance “face-to-face” of a particular director falls foul of the need to meet with “the directors”.

Huh? No. 2

When preparing for a VA, the IP should have procedures in place to ensure that the directors/debtor have had, or receive, appropriate advice. “This should be confirmed in writing, if the insolvency practitioner or their firm has not done so before.” (This is repeated later in SIP3.1 where an IP first gets involved at the nominee stage, i.e. where someone else has helped to prepare the IVA Proposal.)

But what is “this” that should be confirmed in writing? Is it the appropriate advice itself or is it the fact that appropriate advice has been given? I assume this means that, if someone else has been involved in getting the directors/debtor to the point of deciding on a VA before introducing them to the IP, the IP needs to be satisfied that they have been properly advised previously and confirm in writing the advice behind the decision – not merely “I understand that you have received appropriate advice from X and consequently have decided to propose a VA” – but I could be wrong…

Huh? No. 3

In assessing the VA as a solution, the SIPs require IPs to obtain a variety of information, including: “the measures taken by the directors (debtor) or others to avoid recurrence of the company’s (their) financial difficulties, if any”.

Does the “if any” refer to financial difficulties or measures taken? Would there be any occasion to propose a VA where there are no financial difficulties (even if any current difficulties to pay debts had arisen from historic, now settled, events)? Consequently, I would have thought the SIPs refer to learning of any measures taken to avoid recurrence, rather than any financial difficulties, but that does not seem to be the case, as the SIPs state later that Proposals should contain information on “any other attempts that have been made to solve their financial difficulties, if there are any such difficulties”.

Huh? No. 4

The SIPs require procedures to ensure that the proposer’s consent is sought to any modifications put forward by creditors. The SIPs state that, where a modification is adopted, in the absence of consent (from the proposer and, if appropriate, the creditors), the VA “cannot proceed”. The proposer’s consent must be recorded.

Why seek the proposer’s consent to any modification, including those that will be voted out by the majority, especially if they run contrary to the wishes of the majority? I guess that this is only fair to the creditors, but it could be confusing especially to debtors faced with a whole host of potentially conflicting and futile modifications. And what would happen if a minority creditor, say, wanted the supervisor’s fees to be reduced below that required by the majority, and the proposer consented to the reduction? Where does that leave things?

And why state that a CVA cannot proceed in the absence of the proposer’s consent? As far as I am aware, the directors’ consent to modifications is not a statutory requirement (but obviously in certain circumstances this may be essential for the successful implementation of the CVA). I also wonder if, technically, an administrator or liquidator needs to consent to modifications to their Proposals…

How should a director’s/debtor’s consent be “recorded”? Will a telephone conversation note, or even merely minutes signed by the Chairman, suffice? Where ever possible, I would recommend continuing with the now-commonplace procedure of getting the proposer to sign contemporaneously a copy of the adopted modifications, but I do wonder whether the new SIPs are suggesting that a less robust record may suffice.

SIP3.3 (Trust Deeds)

I am in no position to pass comment on the technicalities of this new SIP – I did voice some “huh?”s whilst reading it, but I will resist the urge to put my foot in it!

Overall, I am heartened to see the lightening-up on much of the prescription and consequent rigidity of SIP3A. Personally, I do think the RPBs could have gone further, however, as there still seems to me to be a fair amount of unnecessary statutory, SIP9 and Ethics Code references. There also seems to be some particularly fruitless statements: my personal favourite is “Where the decision is to grant a Trust Deed and seek its protection, the insolvency practitioner will take the necessary steps” – duh!

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