Last month, I conducted a webinar for R3 with Matthew Peat, senior compliance officer with ACCA, entitled Regulatory Hot Topics. The aim was to highlight some areas that we both had seen some IPs stumble over. I thought there might be value in summarising some of the issues we covered. In this post, I cover just the SIPs.
SIP2 – Investigations by Office Holders in Administrations and Insolvent Liquidations
Some firms are using checklists that are not well-designed for the task of carrying out a SIP2 investigation. In particular:
- Checklists should reflect the fundamental difference between a SIP2 investigation and considering matters of relevance for a D-report/return. SIP2 requires the administrator/liquidator to consider whether there may be any prospect of recovery in relation to antecedent transactions.
- Checklists should guide you through the SIP2 requirement of conducting an initial assessment on all cases and then moving on to making a decision on what further work, if any, is merited.
- Checklists should help you meet the SIP2 requirement to document findings, considerations and conclusions reached.
Other recommendations include:
- Make collection of books and records a priority in the early days of an appointment.
- SIP2 also requires the outcome of the initial assessment to be reported to creditors in the next progress report. Although there is an obvious tension between full disclosure and keeping one’s powder dry for progressing any claims, it is not sufficient to report in every case that all investigations are confidential, remembering that SIP2 is not referring to D-reporting matters. If nothing has been revealed that might lead to a potential recovery, this should be reported; if something has been identified, then some thought will need to be given as to what can be disclosed.
SIP3.1 & SIP3.2 – IVAs & CVAs
The “new” SIPs have been in force now for eight months, so all work should now have been done to adapt processes to the new requirements. In particular, the SIPs require “procedures in place to ensure”, which is achieved more often by clear and evidenced internal processes. It is also arguable that, even if particular problems have not appeared on the cases reviewed on a monitoring visit, you could still come in for criticism if the procedures themselves would not ensure that an issue were dealt with properly if it arose.
The SIPs require assessments to be made “at each stage of the process”, i.e. when acting as adviser, preparing the proposal, acting as Nominee, and acting as Supervisor. At each stage, files need to evidence consideration of questions such as:
- Is the VA still appropriate and viable?
- Can I believe what I am being told and is the debtor/director going to go through with this?
- Are necessary creditors going to support it?
- Do the business and assets need more protection up to the approval of the VA?
The SIPs elevate the need to keep generous notes on all discussions and, in addition to the old SIP3’s meeting notes, require that all discussions with creditors/ representatives be documented.
I would recommend taking a fresh look at advice letters to ensure that every detail of SIP3.1/3.2 is addressed. The following suggested ways of dealing with some of the SIP requirements are only indicators and do not represent a complete answer:
- “The advantages and disadvantages of each available option”
Personally, I think the Insolvency Service’s “In Debt – Dealing with your Creditors” makes a better job at covering this item than R3’s “Is a Voluntary Arrangement right for me?” booklet, although neither will be sufficient on its own: in your advice letter, you should make application to the debtor’s personal circumstances so that they clearly understand their options.
Similarly, you can create a generic summary of a company’s options, which would be a good accompaniment to your more specific advice letter for companies contemplating a CVA.
- “Any potential delays and complications”
This suggests to me that you should cover the possibilities of having to adjourn the meeting of creditors, if crucial modifications need to be considered.
- “The likely duration of the IVA (or CVA)”
Mention of the IVA indicates that a vague reference to 5 years as typical for IVAs will not work; the advice letter needs to reflect the debtor’s personal circumstances.
- “The rights of challenge to the VA and the potential consequences”
This appears to be referring to the rights under S6 and S262 regarding unfair prejudice and material irregularity. I cannot be certain, but it would seem unlikely that the regulators expect to see these provisions in detail, but rather a plain English reference to help impress on the debtor the seriousness of being honest in the Proposal.
- “The likely costs of each [option available] so that the solution best suited to the debtor’s circumstances can be identified”
This is a requirement only in relation to IVAs, not CVAs, and includes the provision of the likely costs of non-statutory solutions (depending, of course, on the debtor’s circumstances).
An Addendum: SIP3.3 – Trust Deeds
After the webinar, I received a question on whether similar points could be gleaned from SIP3.3, which made me feel somewhat ashamed that we’d not covered it at all. To be fair, neither Matthew nor I has had much experience reviewing Trust Deeds, so personally I don’t feel that I can contribute much to the understanding of people working in this field, but I thought I ought to do a bit of compare-and-contrast.
An obvious difference between SIP3.3 and the VA SIPs is that the former includes far more detail and prescription regarding consideration of the debtor’s assets (especially heritable property), fees, and ending the Trust Deed. However, setting those unique items aside, I was interested in the following comparisons:
- The stages and roles in the process
SIP3.3 identifies only two stages/roles: advice-provision and acting as Trustee. I appreciate that the statutory regime does involve the IP acting only in one capacity (as opposed to the two in VAs), but I am still a little surprised that there is no “right you’ve decided to enter into a Trust Deed, so now I will prepare one for you” stage.
SIP3.3 also omits reference to having procedures in place to ensure that, “at each stage of the process”, an assessment is made (SIP3.1 para 10). Rather, SIP3.3 requires only that an assessment is made “at an appropriate stage” (SIP3.3 para 18). Personally I prefer SIP3.3 in this regard, as I fear that SIP3.1/3.2’s stage-by-stage approach is too cumbersome and risks the assessment being rushed through by a bunch of tick-boxes, instead of considering the circumstances of each case more intelligently and purposefully.
- The options available
There are some differences as regards the provision of information and advice on the options available, but I am not sure if this is intended to be anything more than just stylistic differences.
For example, SIP3.1 prompts for the provision of information on the advantages and disadvantages of each available option at paras 8(a) (advice), 11(a) (documentation), and 12(e) (initial advice), but SIP3.3 refers to this information only at para 20(a) (documentation). Does this mean that IPs are not required to discuss advantages and disadvantages, but just hand over details to the debtor?
In addition, SIP3.3 does not specifically require “the likely costs of each [option]” (SIP3.1 para 12(e)). The assessment section also does not include “the solutions available and their viability” (SIP3.1 para 10(a)); I wonder if this is because there is less opportunity in a Trust Deed to revisit the decision to go ahead with it, whereas in VAs the Proposal-preparation/Nominee stage can be lengthy giving rise to a need to revisit the decision depending on how events unfold.
Having said that, I do like SIP3.3’s addition that the IP “should be satisfied that a debtor has had adequate time to think about the consequences and alternatives before signing a Trust Deed” (para 34).
- Additional requirements
Other items listed in SIP3.3 that an IP needs to deal with pre-Trust Deed (for which there appears to be no direct comparison with SIP3.1/3.2) include:
- Advise in the initial circular to creditors, the procedure for objections (para 9);
- Assess whether the debtor is being honest and open (para 18(a));
- Assess the attitude (as opposed to the likely attitude in SIP3.1/3.2) of any key creditors and of the general body of creditors (para 18(c));
- Maintain records of the way in which any issues raised have been resolved (para 20(d));
- Summaries of material discussions/information should be sent to the debtor (para 20) (in IVAs, this need be done only if the IP considers it appropriate); and
- Advise the debtor that it is an offence to make false representations or to conceal assets or to commit any other fraud for the purpose of obtaining creditor approval to the Trust Deed (para 24).
SIP9 – Payments to Insolvency Office Holders and their Associates
The SIP9 requirement to “provide an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed” fits in well with the statutory requirements governing most progress reports as regards reporting on progress in the review period. Thus, although it often will be appropriate to provide context by explaining some events that occurred before the review period, try to avoid regurgitating lots of historic information and make it clear what actually occurred in the review period.
In addition, in order to meet the SIP9 principle, it would be valuable to reflect on the time costs incurred and the narrative of any progress report. For example:
- If time costs totalling £30,000 have been incurred making book debt recoveries of £20,000, why is that? Are there some difficult debts still being pursued? Or perhaps you are prepared to take the hit on time costs. If these are the case, explain the position in the report.
- If the time costs for trading-on exceed any profit earned, explain the circumstances: perhaps the ongoing trading ensured that the business/asset realisations were far greater than would have been the case otherwise; or perhaps something unexpected scuppered ongoing trading, which had been projected to be more successful.
- If a large proportion of time costs is categorised under Admin & Planning, provide more information of the significant matters dealt with in this category, for example statutory reporting.
Other SIP9 reminders include:
- If you are directing creditors to Guides to Fees appearing online, make sure that the link has not become obsolete and that it relates directly to the Guide, rather than to a home or section page.
- Make sure that the Guide to Fees referenced (or enclosed) in a creditors’ circular is the appropriate one for the case type and the appointment date.
- Make sure that reference is made to the location of the Guide to Fees (or it is enclosed) in, not only the first communication with creditors, but also in all subsequent reports.
In future posts, I’ll cover some points on the Insolvency Code of Ethics, case progression, technical issues in Administrations, and some tips on how monitors might review time costs.