Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Ethics hits the headlines again: should we be worried?

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The big story of last week was the disciplinary sanction ordered to an EY IP for breaches of the Ethics Code.  But I think this is just one more straw on the camel’s back.  Every new criticism of apparent poor ethical standards that is added to the pile increases the risk of a regulatory reaction that would be counter-productive to the effective and ethical work of the majority.

 

Journalistic fog

Plenty has been said about the “noise” around pre-packs.  Therefore, I was not entirely surprised – but I was disappointed and frustrated – to read that the latest sanction had been twisted to fit one journalist’s evident attempt to keep shouting: “It was the classic cosy insolvency I wrote about last month: a company calls in insolvency advisers who conduct an ‘independent business review’, take the job of administrator and act on the sale as well.  On Wind Hellas, the creditors could not see how Ernst & Young could take both appointments without compromising their integrity. Six-and-a-half years later, the professional body has at last agreed with them.” (http://goo.gl/aIY9rU)

Actually, a look at the ICAEW notice (https://goo.gl/H7jUov) suggests that they did nothing of the sort.  The relationship that got the IP into hot water related to the fact that an associated company, Ernst & Young Societe Anonyme, had carried on audit related work during the three years before the IP took the appointment as Joint Administrator of the company.

It is unfortunate that a failure to join the ethical dots between a potential insolvency appointment and the firm’s audit-related connection with the company has been used to pick at the pre-pack wound that we might have hoped was on the way to being healed.

 

Speed of complaints-handling

Is the journalist’s reference to 6½ years another distortion of the facts?  I was surprised to read an article in the Telegraph from February 2011 (http://goo.gl/8902YO).  Apparently, the ICAEW’s investigation manager wrote to the IP way back then, saying that “the threat to Ms Mills’ objectivity ‘should have caused you to decline, or resign, from that appointment’”.  Given that that conclusion had been drawn back in 2011, it does seem odd that it took a further four years for the ICAEW to issue the reprimand (plus a fine of £250,000 to the firm and £15,000 to the IP).  Perhaps the recouping of £95,000 of costs is some indication of why it took four years to conclude.

I found it a little surprising to read in the Insolvency Service’s monitoring report in June 2015 (https://goo.gl/Lm5vdU) that the Service considers the that ICAEW operates a “strong control environment” for handling complaints, although it did refer to some “relatively isolated and historical incidents” as regards delays in complaint-processing (well, they would be historic, wouldn’t they?). In addition, in its 2014 annual review (https://goo.gl/MZHeHK), the Service reported that two of the other RPBs evidenced “significant delays” in the progression of three complaints referred to the Service.

Although I do understand the complexities and the need for due process, I do worry that the regulators risk looking impotent if they are not seen to deal swiftly with complaints.  I also know that not a few IPs are frustrated and saddened by the length of time it takes for complaints to be closed, whilst in the meantime they live under a Damocles Sword.

 

Ethics Code under review

In each of the Insolvency Service’s annual reviews for the last three years (maybe longer, I didn’t care to check), the Service has highlighted ethical issues – and conflicts of interest in particular – as one of its focal points for the future.  In its latest review, it mentions participating in “a JIC working group that has been formed to consider amendments to the Code”.

Ethical issues still feature heavily in the complaints statistics… although they have fallen from 35% of all complaints in 2013 to 21% in 2014 (SIP3 and communication breakdown/failure accounted for the largest proportions at 27% apiece).  Almost one third of the 2014 ethics-based complaints related to conflicts of interest.

The Service still continues to receive high profile complaints of this nature: its review refers to the Comet complaint, which appears to be as much about the “potential conflict of interest” in relation to the pre-administration advice to the company and connected parties and the subsequent appointment as it has to do with apparent insufficient redundancy consultation.

I suspect that the question of how much pre-appointment work is too much will be one of the debates for the JIC working group.  Personally, I think that the current Ethics Code raises sufficient questions probing the significance of prior relationships to help IPs work this out for themselves… but this does require IPs to step away and reflect dispassionately on the facts as well as try to put themselves in the shoes of “a reasonable and informed third party, having knowledge of all relevant information” to discern whether they would conclude the threat to objectivity to be acceptable.

It is evident that there exists a swell of opinion outside the profession that any pre-appointment work is too much.  Thus, at the very least, perhaps more can be done to help people understand the necessary work that an IP does prior to a formal appointment and how this work takes full account of the future office-holder’s responsibilities and concerns.  Are Administrators’ Proposals doing this part of the job justice?

 

Criticisms of Disciplinary Sanctions

Taking centre stage in the Insolvency Service’s 2014 review are the Service’s plans “to ensure that the sanctions applied where misconduct is identified are consistent and sufficient, not only to deal with that misconduct, but also to provide reassurance to the wider public”.

Regrettably, the body of the review does not elaborate on this subject except to explain the plan to “attempt to create a common panel [of reviewers for complaints] across all of the authorising bodies”.  I am sure the Service is pleased to be able to line up for next year’s review that, with the departure of the Law Society/SRA from IP-licensing, the Complaints Gateway will cover all but one appointment-taking IP across the whole of the UK.

But these are just cosmetic changes, aren’t they?  Has there been any real progress in improving consistency across the RPBs?  It is perhaps too early to judge: the Common Sanctions Guidance and all that went with it were rolled out only in June 2013.  Over 2014, there were only 19 sanctions (excluding warnings and cautions) and seven have been published on the .gov.uk website (https://goo.gl/F3PaHj) this year.

A closer look at 2014’s sanctions hints at what might be behind the Service’s comment: 15 of the 19 sanctions were delivered by the IPA; and 20 of the 24 warnings/cautions were from the IPA too.  To license 34% of all appointment-taking IPs but to be responsible for over 80% of all sanctions: something has got to be wrong somewhere, hasn’t it?

The ICAEW has aired its own opinion on the Common Sanctions Guidance: its response to the Insolvency Service’s recommendation from its monitoring visit that the ICAEW “should ensure that sanctions relating to insolvency matters are applied in line with the Common Sanctions Guidelines” was to state amongst other things that the Guidance should be subject to a further review (cheeky?!).

 

Other Rumbles of Discontent

All this “noise” reminded me of the House of Commons’ (then) BIS Select Committee inquiry into insolvency that received oral evidence in March 2015 (http://goo.gl/CCmfQp).  There were some telling questions regarding the risks of conflicts of interest arising from pre-appointment work, although most of them were directed at Julian Healy, NARA’s chief executive officer.  Interestingly, the Select Committee also appeared alarmed to learn that not all fixed charge receivers are Registered Property Receivers under the RICS/IPA scheme.  Although it seems contrary to the de-regulation agenda, I would not be surprised to see some future pressure for mandatory regulation of all fixed charge receivers.

The source of potential conflicts that concerned the Select Committee was the seconding of IPs and staff to banks.  I thought that the witnesses side-stepped the issue quite adeptly by saying in effect, of course the IP/receiver who takes the appointment would never be the same IP/receiver who was sitting in the bank’s offices; that would be clearly unacceptable!  It was a shame that the Committee seemed to accept this simple explanation.  But then perhaps, when it comes to secondments, the primary issue is more about the ethical risk of exchanging consideration for insolvency appointments, rather than the risk that a seconded IP/staff member would influence events on a particular case to their firm’s advantage.

Bob Pinder, ICAEW, told the Committee: “It used to be quite prevalent that there were secondments, but he [a Big Four partner] was saying that that is becoming less so these days because of the perception of conflict… There is a stepping away from secondments generally”, so I wonder whether there might not be so much resistance now if the JIC were to look more closely at the subject of secondments when reconsidering the Ethics Code.

The FCA’s review of RBS’ Global Restructuring Group, which was prompted by the Tomlinson report (and which clearly was behind much of the Committee’s excitement), is expected to be released this summer (http://goo.gl/l96vtl).  When it does, I can see us reeling from a new/revived set of criticisms – one more straw for the camel’s back.

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A Call to shout about the obstacles to employee consultations

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As the deadline for the Call for Evidence comes to a close, do we have any hint of what might come of it?  Can we grab this opportunity to rescue the rescue process?

Rob Haynes, in ICAEW’s economia, summarises the key issue perfectly: how does government expect IPs (and insolvent businesses pre-appointment) to meet the statutory employee consultation burdens when they must act in the best interests of creditors?  Haynes’ article ends depressingly with thoughts that the EU might influence the protection pendulum to swing even further towards employees.

As I haven’t worked on the front-line for several years, I confess that my point of view is fairly theoretic.  But if we are to persuade government to make the legislation work better for this country’s insolvencies, we need to respond to the Call and I would urge those of you with current experience to put pen to paper, please?

The Insolvency Service’s Call for Evidence, “Collective Redundancy Consultation for Employers Facing Insolvency”, which closes on 12 June, can be found at: https://goo.gl/PW2AOa.

The economia article can be found at: http://goo.gl/Jfp8CX.

 

Answering the Call

As you know, this is all about the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”), which requires employers to consult with employee representatives where they are proposing to make redundant 20 or more employees at an establishment.

Personally, I’ve always wondered what government hopes the employee consultation requirements will achieve, especially in insolvency situations.  The foreword to the Call states:

“The intention of this legislation is to ensure that unnecessary redundancies are avoided and to mitigate the effects of redundancies where they do unfortunately need to occur.”

Setting aside for now the realities of whether this can be achieved, if this is the intention, why does TULRCA tie in only establishments where 20 or more redundancies are proposed?  Aren’t these intentions just as valid for smaller businesses?  Does this threshold seek to recognise micro-businesses?  Maybe, although it also lets off large businesses where a relatively small number of redundancies are proposed, which bearing in mind the intention seems illogical to me.

Assuming that the threshold is intended to avoid micro-businesses carrying the cost burden of complying with consultation requirements, then this does seem to acknowledge that, in some cases, the cost to the employer is a step too far.

But who carries the cost burden in insolvency situations?  At present, the NI Fund.  If the government were to act on calls to elevate the priority of these claims, it would impact on the recoveries of creditors, or perhaps even the Administrators’ pockets if it were made an Administration expense.  Would that persuade insolvent companies/IPs to continue trading in order to consult, even if there were no realistic alternative to redundancy?  Even if trading-on were possible, it still doesn’t make it right to continue trading at a loss simply to meet the consultation requirements.

And would a change in protective award priority achieve the intention described above?  Would it avoid unnecessary redundancies or result in more redundancies, as IPs run shy of taking appointments where their options boil down to: achieve a going concern sale with most of the employees intact (but we’d rather you didn’t do a pre-pack to a connected party without an independent review) or you don’t get paid at all?  And where does this leave the skills of IPs to effect rescue and restructuring strategies?

 

City Link Stokes the Fire

The House of Commons’ Committees’ report, “Impact of the closure of City Link on Employment”, just pre-dated the Service’s Call for Evidence.  Although the subject had been bubbling away for many years, this case may have been the light on the blue touch paper leading to the Call.

The report – at http://goo.gl/BNx5MH – covers much more ground than just TULRCA, but here are some quotes on this subject:

“It is clearly in the financial interest of a company to break the law and dispense with the statutory redundancy consultation period if the fine for doing so is less than the cost of continuing to trade for the consultation period and this fine is paid by the taxpayer…

“We are greatly concerned that the existing system incentivises companies to break the law on consultation with employees.”

These reflect comments by the RMT (City Link went into Administration on 24 December):

“They… were preparing contingency plans from November. Surely at that point they should either have made the thing public, in which case it would have given more prospective buyers time to come forward, or at least given the Government bodies and the union time to consult properly with their members and represent their interests. None of this was done.”

“they deliberately flouted that [the consultation period]. They can do that, because you and I as taxpayers pick up the tab for the Insolvency Service. It is absolutely disgraceful.”

But Jon Moulton’s comment was:

“The purpose of the consultation period was consultation. These are circumstances where no consultation is reasonably possible.”

Fortunately, the Committees acknowledged the position of Administrators:

“Once a company has gone into administration, it is likely to be the case that they will be, or will be about to become, insolvent and the administrator will not have the option to allow the company to continue to trade for the consultation period.”

The Committees’ conclusion was:

“When considering the consultation period in relation to a redundancy, company directors may feel they have competing duties. We recommend that the Government review and clarify the requirements for consultation on redundancies during an administration so that employees understand what they can expect and company directors and insolvency professionals have a clear understanding of their responsibility to employees.”

Does this conclusion suggest that the Committees were swayed by the RMT’s argument, that, although directors may feel they have competing duties, in fact their duties are aligned as there may be advantages in coming out with the news earlier?  The Committees also seem to be questioning IPs’ levels of understanding of their responsibility to employees.  Although they seem to recognise an Administrator’s limited options, they also believe that the system incentivises curtailed consultation, rather than seeing it as entirely impractical.

I hope that sufficient responses to the Call for Evidence address these misconceptions.  If they don’t, responses in the vein of the RMT’s comments may monopolise ministers’ ears.

 

The Call’s Questions

Here are some of the more spicy questions in the Call for Evidence:

  1. How does meaningful consultation with a ‘view to reaching agreement’ work in practice?
  2. What do you understand to be the benefits of consultation and notification where an employer is facing, or has become insolvent?
  3. In practice, what role do employees and employee representatives play in considering options to rescue the business and to help reduce and mitigate the impact of redundancies?
  1. What factors, where present, act as inhibitors to starting consultation or notifying the Secretary when an employer is imminently facing, or has moved into an insolvency process?
  1. What factors, where present, negatively impact upon the quality and effectiveness of consultation when an employer is facing insolvency, or has become insolvent?
  2. Are advisors (accountants, HR professionals, or where an insolvency practitioner is acting as an advisor pre-insolvency) informing directors of their need to start consultation when there is the prospect of collective redundancies? How do directors respond to such advice?
  3. Are directors facing insolvency starting consultation, and notifying the Secretary of State, as soon as collective redundancies are proposed and at the latest when they first make contact with an insolvency practitioner? If not, how can this be encouraged?
  4. Normally are employee representatives already in place? What are the practicalities of appointing employee representatives when no trade union representation is in place?
  1. The current sanctions against employers who fail to consult take the form of Protective Awards. Do you think these are proportionate, effective and dissuasive in the context of employers who are imminently facing, or have become insolvent? Is the situation different as it applies to directors and insolvency practitioners respectively?

 

As this is a Call for Evidence, the Insolvency Service is looking for examples and experiences, even when they are asking for an opinion.  I am sure that many IPs and others in the profession can report a host of examples illustrating powerfully the realities and justifiable strategies in trying to make the most of an insolvent business, demonstrating that efforts to avoid redundancies certainly do feature highly in IPs’ minds.