There’s no doubt that the October Rules and the revised SIP9 generated many questions. However, in this blog (first published on The Compliance Alliance), I summarise the known impacts of the new SIP9 for those who want to double-check that they have the basics right.
Have you remembered that the scope of the new SIP9 reaches wider than simply cases affected by the October Rules? It also affects:
- Pre-October 2015 appointments;
- Case types not affected by the October Rules, i.e. CVAs, IVAs, Receiverships and MVLs; and
- Pre-appointment fees (where these are paid from the estate), e.g. SoA/S98 fees and VA drafting fees;
- But it does not apply to Scottish or NI appointments, which continue to be subject to the “old” SIP9.
I think that paragraph 9 of SIP9 is key. Whenever you are “providing information about payments, fees and expenses to those with a financial interest in the level of payments from an insolvent estate”, you should address the following:
- What work will be done
- Why it is necessary
- How much it will cost (both fees and expenses)
- “Whether it is anticipated that the work will provide a financial benefit to creditors and if so what anticipated benefit (or if the work provides no direct financial benefit, but is required by statute)”
- What work has been done
- Why it was necessary
- How much it has cost (both fees and expenses)
- “Whether the work has provided a financial benefit to creditors and if so what benefit (or if the work provided no direct financial benefit, but is required by statute)”
The information given should be transparent, useful and proportionate to the circumstances of the case (which makes a rigid template approach difficult and dangerous), but also consistent throughout the life of the case. Therefore, whilst you might have made wholesale changes to requests/reports for new cases, you have probably designed a half-way house for older cases. Although the new SIP9 avoids pretty-much all reference to numerical information, if you have already provided tables for a case on the lines of the old SIP9, it seems that you cannot drop them for future reports. However, you should review the narrative elements of pre-December 2015 case reports to make sure that they meet the new disclosure requirements.
As mentioned above, these narrative requirements also apply to fees/costs that are new to the SIP9 scope and that are not affected by the October Rules. Therefore, have you checked off your documentation relating to MVL, SoA/S98, and VA drafting/Nominees’/Supervisors’ fees?
Fixed or percentage fees
Have you ensured that, whenever you are seeking approval for fees on a fixed or percentage basis, you have included some kind of prompt/explanation as to “why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken” (paragraph 10)?
Also with SIP9 paragraph 25 in mind, have you made sure that this explanation is covered when you are hoping to get approval for the following (which are often sought on a fixed/% basis) where they are to be drawn from the estate:
- SoA/S98 fees;
- Nominees’ fees;
- Supervisors’ fees; and
- MVL fees?
As you can see above, the new SIP9 seems to affect SoA/S98 fees quite substantially. I believe it has been rare to see pre-S98 circulars disclose much at all about these fees. Personally, I find it difficult to see how the principles of SIP9 can be met without disclosing in the pre-S98 circular the quantum of the proposed SoA/S98 fee, if the IP is hoping to get this approved for payment from the estate at the S98 meeting. However, I do not think that SIP9 is at all clear on this point, so I’ll put this one in the “known unknown” category.
As mentioned above, the new SIP9 has distanced itself from a formulaic numbers-say-it-all approach in favour of case-tailored narrative. However, the SIP does require some numerical information, not all of which I think flows naturally.
Are your systems set up so that, for cases where (October Rules) fees estimates have been provided, the progress reports disclose:
- “the actual hours and average rate (or rates) of the costs charged for each part… for comparison purposes” (paragraph 13); and
- “when reporting the amount of remuneration charged [i.e. time costs incurred] or expenses incurred… figures for both the period being reported upon and on a cumulative basis” (paragraph 17)?
Having now looked at some fee estimates, I have to say that I really do not think that the average rate for each work category adds anything at all – although I can see that an overall average rate has some value – so why the JIC felt that this was so vital that it had to be prescribed, I do not know! But I do know that it has added expense to some IPs in getting their time recording systems set up to produce these numbers.
The second requirement adds further complication. The 2010 Rules require progress reports to disclose expenses incurred (whether or not paid) in the period and SIP7 requires expenses paid in the period and cumulative, but now SIP9 requires also expenses incurred on a cumulative basis: that’s four different numbers. So much for transparency!
Back to the beginning
The new SIP9 has introduced some subtle changes as regards disclosure of parties’ rights.
Information to creditors about how to access information on their rights has been moved to earlier in the process: no longer should this occur in the first communication following appointment, but simply “within the first communication with them” (and in each subsequent report). Therefore, have you checked that this is covered in the pre-S98 circular? But have you also kept it as standard in any post-S98 template, just in case you take an appointment without having been the IP advising member for the S98 meeting?
Personally, I’ve been struggling to work out how to meet the requirement above for MVLs: does there exist an “official” sensible explanation of creditors’ rights in an MVL? The Creditors’ Guide to Liquidators’ Fees doesn’t really do the job, but I am not convinced that the RPBs expect IPs to draft something themselves, do they..? Perhaps this is another “known unknown”.
Whilst we’re on the subject of Creditors’ Guides… I think that many IPs assumed that, as the new SIP9 applies to old and new cases, the new Guides also apply to both old and new cases. However, if we remember that the purpose behind directing creditors to the Guide is to inform them of “their rights under insolvency legislation”, then it is evident that the pre-April 2010 Guides are still relevant to pre-April 2010 cases, as new rights were introduced in April 2010. It is regrettable, however, that all the old Guides set out the requirements of the old SIP9 – and I would suggest that this might render them no longer “suitable information” – but as regards a creditor’s statutory rights, they’re generally reasonable.
Therefore, do your circulars/reports direct creditors to the Guide appropriate to the case type and appointment date? If you display the Guides on your own website, do you have Guides covering the full range of appointment dates? The R3 website only goes back to 1 November 2011, but the ICAEW website, http://goo.gl/kjZlJC, (for example) has Guides going way back.
The new SIP9 includes several items that fall short of being prescriptive, but the language indicates to me that monitors will still be looking out for them. These include:
- Providing “an indication of the likely return to creditors” when seeking approval of the fee basis “where it is practical to do so”;
- Dividing narrative explanations into the six categories listed in paragraph 12… whilst making sure that not every case follows exactly the same categories (we have to demonstrate that we’ve considered each case’s specific circumstances); and
- Using “blended rates” for fees estimates.
And don’t forget…
Some old SIP9 requirements have survived the revision process. Items that sometimes get overlooked include:
- Disclosure of “any business or personal relationships with parties responsible for approving his or her remuneration or who provide services to the office holder in respect of the insolvency appointment where the relationship could give rise to a conflict of interest”;
- Explanation of why any sub-contractors are being used to do work that could otherwise be done by the IP/staff; and
- An existing SIP7 requirement: disclosure of any pre-appointment costs paid, detailing the amount paid, name of the payor, their relationship to the estate and the nature of the payment.
I get the feeling that the RPBs have been inundated with queries over the practical application of the October Rules and the revised SIP9, many originating from compliance consultants (including The Compliance Alliance). I haven’t raised these queries here; there is no real point, as there are few reliable answers at present.
In many respects, I doubt that we will get straight answers, at least not for some time to come. A recent response from one of my RPB contacts was heavily caveated with the observation that it was only her personal understanding and that the RPB’s stance would be formed by its committees over time. Therefore, please bear with your compliance consultants. You might hear us saying that we don’t know how your authorising body or its monitors view a certain matter and you may find that our recommendations change over time, as we try to remain alert to the shifting sands of interpretation around the Rules and SIP. We will do our best to highlight the issues as we see them, whether they are clear breaches or whether they fall into the currently numerous known unknowns.