Having just returned from a fantastic trip to Vietnam and Cambodia, I have yet to catch up on domestic news, so I thought I’d plug the silence gap with some tips that I picked up from the RPBs’ autumn roadshows.
Ethical issues featured heavily at the ICAEW roadshow, whilst the IPA roadshow raised some controversial Administration points, and both RPBs had much to say about handling complaints in the wake of the Insolvency Service’s Complaints Gateway.
Ethical Issues (ICAEW Roadshow, Birmingham, 9 October 2014)
Allison Broad of the ICAEW described the following ethical dos and don’ts:
• In order to identify any prior relationships before deciding whether to take an appointment, do not rely solely on the company director signing off confirmation that s/he is not aware of any conflicts/relationships; internal checks are still required.
• Ensure that relationships are evaluated, not merely identified. Allison gave the example of an IP who had noted on his ethics checklist that the director of the prospective appointment had been a director of eight other companies that had gone insolvent with the IP acting, but the checklist evidenced no evaluation of the threat to the ethical principles that these prior relationships presented. Personally, I have also seen cases – although not quite as striking as this – where a prior relationship existed but it was not noted on the ethics checklist. Even though an IP may have concluded that a relationship is not sufficiently significant to require the introduction of safeguards or to raise concerns about the appropriateness of taking the appointment, files should disclose the relationship and evidence the IP’s consideration of its significance. In my view, failure to do so, not only could constitute a breach of the Ethics Code (paragraphs 74 and 75), but is also bound to raise suspicions that checklists are completed on auto-pilot and insufficient thought is given to ethics matters.
• Ensure that the IP signs off the ethics checklist, if not before the appointment, then as close to it as possible in order to demonstrate that consideration of ethical matters had been considered before appointment.
• Keep ethical threats under review throughout the life of the case, e.g. by including on case reviews a question – not a simple tick-box – as regards how any safeguards employed to manage a threat have been working.
• Review regular introducers’ websites prior to taking the first appointment from those sources and regularly thereafter, as website contents are frequently refreshed. Allison acknowledged that pre-packs and phoenix services may be covered on websites, but she urged caution when dealing with introducers who position these items at the top of their lists or prominently.
• If an IP feels that the quality of an introducer’s advice to directors/debtors is below par, it is not sufficient to allow the relationship to continue on the basis that at least the IP can ensure that s/he provides good advice. The ICAEW expects IPs to write to the introducer with any concerns and ask that changes be made to their websites and practices. They would then expect IPs to check whether these had been actioned and, if the introducer does not do so, the IPs should terminate the introduction relationship.
Administration Technicalities (IPA Roadshow, London, 22 October 2014)
Caroline Sumner of the IPA highlighted several issues identified on monitoring visits. However, I think I must have been in a particularly argumentative mood on the day, as my notes are fairly scant on Caroline’s comments about SIP16, SIP13, and the new SIPs 3 – from memory, I think that none of this was rocket science; Caroline just highlighted the need to get them right – but I went to town on some other points she made:
- Caroline described the Insolvency Service’s view that Administrators’ Proposals should describe only one of the Para 3 administration objectives that the Administrators propose to achieve.
I have a problem with this: firstly, in what respect is this reflected by the statutory requirements? R2.33(2)(m) requires Proposals to include “a statement of how it is envisaged the purpose of administration will be achieved”. An old Dear IP (chapter 1, article 5) referred to this and also to Para 111(1) of Schedule B1, which states “’the purpose of administration’ means an objective specified in paragraph 3”, leading to the Service’s conclusion that “administrators should not simply include all three objectives with no attempt to identify which is the relevant objective”. That’s all well and good – and I think that IPs have moved away from many early-style Proposals, which did reproduce Para 3 verbatim – but I do not see how these statutory provisions require an IP to pin to the mast only one Para 3 objective to endeavour to achieve.
Here’s an example: what would be wrong with an Administrator’s Proposals stating that the company in administration is continuing to trade with a view to completing a sale of the business as a going concern, which should generate a better result for creditors as a whole – and thus achieve administration objective (b) – but if a business sale is not possible, a break-up sale is likely to result only in a distribution to secured/preferential creditors – and thus achieve administration objective (c)? In my mind, this is the most transparent, comprehensive, and helpful explanation to creditors and certainly is far better than that which the Insolvency Service seems to expect IPs to deliver: for Proposals simply to state that a going concern sale is being pursued to achieve objective (b) is to provide only half the story and, I would argue, would not comply with R2.33(2)(m), as the Proposals would not be explaining “how it is envisaged the purpose of administration will be achieved” in the event that a business sale is not completed. Para 111(1) simply leads me to an interpretation that an Administration’s eventual outcome – not necessarily the Administrator’s prospective aim – is the achieving of a single objective, which is supported by the Act’s presentation of the objectives as an hierarchy notwithstanding that in practice it is easy to see how more than one objective might be achieved (e.g. rescue of the company and a better result for creditors as a whole).
At the roadshow, I asked Caroline whether she felt that, if the singly-selected objective turned out to be not achievable, the Administrator would need to go to the expense of issuing revised Proposals. She accepted that, of course, the IP would need to consider that requirement (although I wonder how the decision in Re Brilliant Independent Media Specialists (https://insolvencyoracle.com/2014/10/07/how-risky-is-it-to-act-contrary-to-a-creditors-committees-wishes-and-other-questions/) impacts on this). Is this really what the government intended? What happened to the drive to eliminate unnecessary costs?
Finally, I think that this view puts a new colour on the statutory requirement to issue Administrators’ Proposals as soon as reasonably practicable. Could it be argued that asarp is only reached once the Administrator is reasonably confident of the single objective that he/she envisages achieving? The RPBs have tried hard to promote the asarp requirement, rather than the 8-week back-stop, but insisting on a single objective in Proposals could encourage a turn in the tide.
I have asked Caroline to clarify the Insolvency Service’s view. However, if the Service does expect IPs to adopt this approach, I think they should set it down in a Dear IP – of course, assuming that my arguments hold no water – so that all IPs are forced to accept the same burdens.
- Caroline repeated the Dear IP article that extensions should be sought at the outset only in exceptional cases where it is clear that more than 12 months will be required to complete the Administration.
Although Caroline didn’t go into the technicalities of how an extension might be agreed at an early stage, it gave me cause to revisit the Dear IP article (chapter 1 article 12). It describes the “questionable” practice of seeking consent for an extension “with the administrator’s proposals including a conditional resolution regarding the extension of the administration, along the lines that if the administrator should think it desirable, then the administration would be extended by an additional six months”. Over the years I have seen this done, but I have not seen it done properly, i.e. compliant with the Rules.
R2.112(2) requires requests to be accompanied by a progress report, but Proposals are not a progress report. I guess that a Proposals circular could be fudged to fit the prescription for a progress report as set out in R2.47, but this would have consequences, such as the need to file the Proposals/report with a form 2.24B (as well as filing the Proposals individually) and the clock would be re-set so that the next progress report would be due 6 months afterwards. Also, how does an Administrator meet the statutory requirement to issue a notice of extension as soon as reasonably practicable after consent has been granted, if s/he has obtained such a “conditional” resolution?
My recommendation would be to avoid seeking extensions in the Proposals altogether, but instead leave them until the first progress report is due. Of course, if an Administrator has to convene a general meeting (or deal with business by correspondence) at a time other than the Para 51 meeting, this will attract some additional costs, but if the request is made at the time of the statutorily-required 6-month progress report, those additional costs are relatively small, aren’t they?
Complaints-handling was covered at both the ICAEW and the IPA roadshow, which I suspect has as much, if not more, to do with the likely pressure from the Insolvency Service on RPBs as it has with any perceived extent of failings on the part of IPs.
Both Allison and Caroline covered the need to explain how complaints can be made to the Complaints Gateway, although I do feel that generally RPBs have not done much to publicise their “requirements”. The only guidance I’ve seen is on the ICAEW’s blog – http://www.ion.icaew.com/insolvencyblog/post/Launch-of-the-insolvency-complaints-gateway – that refers to the need to disclose the Gateway to anyone who wants to complain and in engagement terms, if they refer to the firm’s complaints procedure. This blog also stated that there was no need to inform creditors of existing cases, which leaves me wondering what the expectation is to communicate with creditors generally on post-Gateway cases. Given the Insolvency Service’s emphasis on the Gateway, I am a little surprised that the RPBs seem to be relying on some kind of process of osmosis to get the message of their expectations out to IPs.
From the two roadshows that I attended, I sense that there is a general expectation that IPs’ websites will display details of the Gateway (although I hope that the RPBs will take a proportionate approach, given that some smaller practices’ websites are little more than a homepage). I do not get the sense that the RPBs expect the Gateway’s details to be added to circulars to creditors generally, but only that they should be included in any correspondence with (potential) complainants.
Allison also highlighted that, whilst the ICAEW’s bye-laws (paragraph 1.2 at http://goo.gl/1frWQo) include a requirement that all new clients be informed of their right to complain to the ICAEW and be provided with the name of the firm’s principal to whom they should complain, when writing as an insolvency office-holder the need to refer parties to the Complaints Gateway takes precedence over this requirement.
Caroline commented that IPA monitoring visits will include a review of the practice’s internal complaints process to see how these are handled before the complainant resorts to the Gateway. If complaints are not handled by the IP, the monitors will also be exploring how the IP is confident that complaints are dealt with appropriately.
Why Attend the Roadshows?
I hope that the above illustrates the value of attending an RPB roadshow. However, I think it also illustrates the risk that we learn about previously unknown and not altogether satisfying views on regulatory matters. I realise that I am not blameless in this regard: when I worked at the IPA, I also used the roadshows as a medium to convey my thoughts on issues identified in visits and self certifications, so I should not be surprised that this practice is continuing (or indeed that others hold views different to my own!). I and many of my colleagues were ever conscious that there was no other medium for Regulation Teams to deliver such messages and forewarn IPs of hot topics and evolving regulatory expectations. Dear IP was the only other method that came close, but as this is controlled by the Insolvency Service, I could only hope that the RPB perspective would not become lost in translation.
The Advantage of Written Guidance?
I hope that, if I’ve got the wrong end of any stick waved at either of the two roadshows, someone will shout – please? Given the limited audience at roadshows and the risk of Chinese Whispers, it must be better for the RPBs to convey their messages in written form, mustn’t it?
“The 18 month Rule”
A recent example, however, illustrates that even written communications can be unsettling. At http://www.ion.icaew.com/insolvencyblog/post/The-18-month-rule—it-s-for-real, a QAD reviewer’s blog starts by stating that “there is a suggestion from some compliance providers and trainers that the 18 month rule for fixing fees may not be definitive, and that you still have the option of applying to creditors after the expiry of the 18 month period”. I shall start by confessing that it’s not me, honest: I’ve never had cause to scrutinise these provisions. However, now that I do, I have to say that I am struggling to see how the Rules can be interpreted in the way that the Service and the ICAEW are promulgating.
The blog states: “Our interpretation is that if fees haven’t been fixed within 18 months it will be scale rate in bankruptcies or compulsories or a court application. We recently raised the issue with the Insolvency Service and their view is: ‘. . . after 18 months the liquidator is only entitled to fix fees in accordance with rule 4.127(6) unless the stated exceptions apply’. Clearly this relates to liquidators in compulsory liquidations, but the principal extends.”
I have long thought that this indeed was what the Service had intended by the Rules amendments, but on closer inspection I’m afraid I really can’t see that this is what the Rules state. R4.127(6) states: “Where the liquidator is not the official receiver and the basis of his remuneration is not fixed as above within 18 months… the liquidator shall be entitled to remuneration fixed in accordance with the provisions of Rule 4.127A.”
“Shall be entitled…” When I reach state-pensioner age, I shall be entitled to travel on buses free of charge, but that does not mean that the only way I will be able to get to town is by taking a bus. Similarly, after 18 months, the liquidator shall be entitled to remuneration on the scale rate, but does this mean that the liquidator is only entitled to fees on this basis? What statutory provision actually prohibits the liquidator from seeking creditors’ approval of fees on another R4.127(2) basis after 18 months?
And how do the Rules “extend” this compulsory liquidation principle to CVLs? R4.127(7-CVL) states: “If not fixed as above, the basis of the liquidator’s remuneration shall… be fixed by the court… but such an application may not be made by the liquidator unless the liquidator has first sought fixing of the basis in accordance with paragraph (3C) or (5) and in any event may not be made more than 18 months after the date of the liquidator’s appointment.” Given that the construction of this rule is so different from R4.127(6), it is difficult to see how both rules can be considered as reflecting the same principle. And in any event, this simply states that a court application may not be made after 18 months (which seems to be precisely the opposite of the ICAEW’s blog post!). How can this rule be interpreted to the effect that the liquidator cannot seek creditors’ approval for fees after 18 months? The Rule starts: “If not fixed as above…”, so the rest of the Rule is irrelevant if the fees are fixed as above, e.g. as specified in R4.127(5) by a resolution of a meeting of creditors; I see no provision “above” prohibiting the seeking of a creditors’ resolution after 18 months.
I shall be interested to see how this matter gets handled in a future Dear IP. In the meantime, what should IPs do? I reckon that the only certain approach is: seek approval for fees before the 18 months are ended!
(UPDATE 12/01/2015: for another view of the 18-month rule, take a look at Bill Burch’s blog, which to be fair pre-dated mine by some months: http://goo.gl/4ucKaF. Bill posted another article today at http://goo.gl/jL3WNu, reminding IPs that the wisest course is to seek early fee approval whether or not we agree with the regulators’ interpretation.)
This blog illustrates to me that there must be a better way for the regulatory bodies to convey – considered and sound – explanations of certain Rules and their expectations to IPs. As a compliance consultant, I suffer many a sleepless night worrying about whether my interpretation and understanding of current regulatory standards are aligned with my clients’ authorising bodies’ stance. I do value my former colleagues’ openness and I do try to keep my ear to the ground with many of the authorising bodies – I’ll take this opportunity to make a quick plug for the R3 webinar on regulatory hot topics that I shall be presenting with Matthew Peat of ACCA in February 2015. However, I believe there is a need and a desire in all quarters for the creation of a better kind of forum/medium for ensuring that we all – regulators, IPs, and compliance specialists – are singing from the same hymn sheet.
Have a lovely long break from work, everyone. I’ll catch up again in the New Year.
December 19, 2014 at 4:28 pm
Some very good points Michelle. If I can expand on the issue you mention regarding administrators’ proposals containing only one para 3 objective, it’s worth bearing in mind that due to defective drafting of para 54, where proposals have been deemed approved it requires a court application to revise them. The Insolvency Service have been aware of this issue for years, but as it is primary legislation it apparently will not change. In view of this, a pragmatic approach to objective setting seems sensible. And it would be nice to have some concerted written guidance.
January 8, 2015 at 4:41 pm
Wow, thanks Jeff, I didn’t know that! Oh dear, just another Act defect that is too difficult to fix… As you say, that makes it doubly frustrating if the regulators insist on a rigid approach to the R2.33 prescription. The only response that I’ve had so far from Caroline on the opinion of putting all one’s eggs in one Admin objective basket is that “we will have to agree to differ”. So much expense (and less money for creditors) for so little gain!