Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Regulatory Hot Topics: (2) Administration Technicalities

Leave a comment

IMGP2906

I’m itching to blog about the new legislation, but that’s all a bit taxing so close to the Easter weekend.  Therefore, I’ll continue with my summary of points made in the R3 webinar.  This week: Administration Technicalities.

For my clients, this post may sound all very familiar, as I’ve pulled most of this from my last newsletter.  However, I’ve added some new points about the SBEE Act at the end of this post.

Matthew Peat and I agreed that failing to meet the statutory provisions for administrations is one of the most common issues identified on review visits.  I’m not at all surprised, as the legislation is extraordinarily (and in many respects, I think, unnecessarily) complicated… and it’s only going to get even more complicated with the Small Business, Enterprise & Employment Act and the Insolvency (Amendment) Rules 2015 (the IP fees rules) – but that’s for another day.

Areas that seem to cause difficulties include:

Pre-administration costs

It should be remembered that the requirement to disclose in the Proposals (and seek approval of any unpaid) pre-administration costs relates, not only to the charges of the IP, but to other costs incurred pre-appointment such as the solicitors’ or agents’ fees.

It is also evident that the RPBs do not believe that estimates of pre-administration costs comply with the Rules and they expect you to contact third parties and establish the quantum of their pre-administration costs in order to disclose them properly in the Proposals.  Also, if any payments from the estate to third parties exceed the (estimated) pre-administration costs as they appeared in the Proposals, do not be surprised if an RPB monitor suggests that the excess is unauthorised.

Most IPs have cottoned on by now that the Rules specifically state that approval of pre-administration costs does not form part of the Administrator’s Proposals (even though R2.33 requires that the Proposals include details of pre-administration costs).  However, there seem to be still the odd flawed template or two in circulation that do not present a separate specific resolution for the approval of pre-administration costs.

Statement of affairs

There have occasions when a statement of affairs (“SoA”) has not been submitted by the director(s), but the Proposals haven’t included the alternative required by R2.33(2)(g) of details of the financial position of the company (which usually takes the form of the Administrator’s own estimated SoA).

It is perhaps worth adding that this rule also requires a list of creditors (names, addresses, debts and any security) – whether or not the directors have submitted an SoA – and “an explanation as to why there is no statement of affairs” (although personally I cannot see that any explanation is going to be likely, other than “it has been requested but the director has not yet provided one”, particularly where Proposals have been issued swiftly after appointment).

How the purpose of the administration is to be achieved

If the Proposals explain that the Administrator thinks that the second administration objective is achievable, then the Proposals should explain why you believe that the result for creditors as a whole is going to be better than if the company were wound up (without first having been in administration).

Statement of expenses

Progress reports – not only in administrations, but in all other cases (apart from VAs and Receiverships) – all need to include a statement of the expenses incurred by the office holder during the period of the report, whether or not payment has been made in respect of them during the period.

It is important to remember that this includes more than simply the office holder’s time costs and disbursements, so this again means that solicitors, agents etc. need to be contacted to establish what is on their clocks.  Also, do not forget items such as insurance premiums and statutory advertising.  In addition, the Rules do not set a de minimis: all and any expenses incurred must be disclosed.  There have been some suggestions that the regulators might take a proportionate view of the disclosure of expenses, but personally I wouldn’t risk it.

Extensions

If seeking an extension via creditors’ consent, make sure that you approach the right creditors.

In every case, you will need to obtain the consent of all the secured creditors.

Whether you approach also the preferential or unsecured creditors as a whole will depend on what you wrote in the Proposals: per Para 78(2), if you have made a Para 52(1)(b) statement, you need to approach preferential creditors, if you think that a distribution to them will be made.  This is different from seeking approval to fees: in that case, under R2.106(5A) you need to seek preferential creditors’ approval to fees, not only if you intend paying a distribution, but also if you have paid a distribution.

However, events could have moved on since you issued the Proposals: by the time you contemplate an extension, the anticipated outcome might have changed.  What if your Proposals did not include a Para 52(1)(b) statement, but now you don’t think that a dividend will be paid to non-prefs?  Who do you approach for approval of an extension?

Assuming that your Proposals have accommodated alternative outcomes (such that you don’t believe you need to issue revised Proposals), Para 78 still indicates that whether you go to prefs or unsecureds in general depends on what you stated the anticipated outcome was in your Proposals.  However, to show consideration for the apparent spirit behind the provisions, it would seem prudent to consider also which creditors are in the frame at the time that you seek an extension, to ensure that you achieve the requisite majority from them too.

Extension Progress Reports

Whichever way you seek consent to an extension, you will need to issue a progress report (which is one reason why I am nervous about including in Proposals the power for the Administrator to extend without further recourse – because Proposals are not a progress report).  The usual one month deadline applies to these extension progress reports, so if you have only asked secureds/prefs to consent to the extension, make sure that you circulate the progress report to all other creditors – as well as send a copy to the Registrar for filing – within the month.

The same goes for court extensions: you will have produced a progress report to accompany your court application and, in the event that the court does not grant your extension before the month-end, you will need to send a copy of the report to all creditors and for filing and then send another circular (for the Notice of Extension) once you have received the order for the extension.

Finally, remember that the 6 month cycle for progress reports is counted from the period-end of the last report.  Therefore, where a progress report to accompany an extension request has been issued – which can be at any time – diaries will need changing so that the next progress report is 6 months after that report (i.e. no longer 6-monthly from the date of appointment).  This can prove a nightmare for automated diary systems… and, as you need to provide sufficient lead-time before any extension period ends in order to consider whether to apply for a further extension, make sure that you don’t leave diary prompts for progress reports too tight on the 6-month deadlines.

Exits

RPBs appear to be expecting decisions over exit routes to be clearly and contemporaneously evidenced.  This is also valuable in the event that things do not turn out the way you had hoped, e.g. where you moved to CVL because you had thought that there would be sufficient realisations to pay a dividend to unsecured creditors, but something happened later to scupper that outcome.

I also understand that it is generally accepted that Para 83’s reference to an Administrator thinking that a distribution will be made to unsecured creditors is a reference to non-preferential unsecured creditors only.  Thus, if you are nearing the end of the administration and you think that only a preferential distribution will be paid, you will need to seek an extension and pay it through the administration.  Alternatively – and if HMRC (or, of course, any other creditor) has modified the Proposals so that the exit must be by liquidation – you will need to seek a compulsory winding-up order.

Small Business, Enterprise & Employment Act 2015

I couldn’t resist one point on this new Act.  Although some items come into force on 26 May 2015, there are no transitional provisions (yet).  In other words, unless a new Order changes things, the provisions will apply to all existing insolvency appointments, not only future ones.

The Act amends Para 65 to the effect that, from 26 May 2015, administrators may pay a prescribed part dividend without the court’s permission.  However, the Act also amends Para 83 so that it will read that an administration may move to CVL only where the administrator thinks (“that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him” – no change there – and) “that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”, i.e. a prescribed part distribution.  In other words, from 26 May 2015, the Para 83 move to CVL cannot be used to pay a prescribed part dividend (unless you also think there is going to be a non-prescribed part dividend as well).

Thus I would strongly recommend that you revisit your standard Proposals template to make sure that they do not run contrary to the post-May position: you do not want to be stuck with approved Proposals requiring you to exit by CVL to pay a prescribed part dividend, when the Act won’t allow you to do it.  Having looked at some standard Proposals, I reckon many will have sufficient wriggle-room to avoid you having your hands tied, but it would be worth checking the Proposals of any cases where you anticipate a prescribed part dividend: you still have a month or so during which you can do a Para 83 move to CVL before the Act takes effect.

My thanks to Deborah Manzoori and Jo Harris for pointing out this issue to me.

My thoughts on more wrinkles in the new legislation will follow soon.  In the meantime, have a lovely long weekend.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s