Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The new Insolvency Rules: is the wait almost over?

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The last published .gov.uk update on the new Insolvency Rules was July 2015, when the expectation was that the Rules would be made in “Spring 2016 with a commencement date of 1 October 2016”. As that day fast approaches, where are we..?

Is there a light at the end of the tunnel?

At the ICAEW’s London roadshow last week, Simon Whiting, Senior Policy Advisor of the Insolvency Service, gave us the news:

“we are aiming to lay the Rules before Parliament in the week commencing 10 October 2016”

“commencement will be 6 April 2017”

“… all subject to Ministerial approval”

Technical and compliance directors, managers and consultants have been fearing and dreading this day for several years now. Although my stomach still turns when I think of all the candle-burning days and nights ahead, personally I feel like I’ve done enough waiting: I’m ready!

 

Spare a thought for colleagues

This is a short plea to all appointment-taking and practice-heading IPs in England & Wales: please try to avoid giving your technical and compliance staff any other projects over the next six to twelve months.

The new Rules will be well over 400 pages long and they will introduce changes from the blinding to the subtle. Okay, many changes will be neither here nor there; if some changes are overlooked, the worst effect will be a red flush at the next monitoring visit. However, some crucial processes – such as how to get appointed and how to obtain fee approval – will change fundamentally and you will want to get these correct from the start.

Also, don’t be misled into thinking that the changes won’t matter until you get your first new appointment after 6 April 2017. The plan is that, with the exception of a few common-sense items, the new Rules will apply across the board, to both existing and future appointments. This does have an advantage – we won’t have to devise and endure dual processes, as we have done since 2010 – however, it will be impossible to introduce the changes gradually: when we wake up on 6 April 2017, we will have to be ready to implement the new Rules for cases at any stage from cradle to grave.

 

The headline changes

Deborah Manzoori summarised some of the planned changes in an earlier post on the Compliance Alliance’s blog (https://goo.gl/qGLZWv). We’ve known about these ever since the Small Business Enterprise and Employment Act 2015 and the Deregulation Act 2015 came into being. These changes are set in stone and we’ve simply been waiting for the new Rules to tell us “how to”.

They include:

  • Abolition of physical meetings (unless requested by creditors who meet prescribed criteria)
  • Introduction of decisions approved by “deemed consent”
  • “Qualifying decision procedures” – i.e. the methods by which positive responses to proposed decisions can be sought
  • Allowing small debts without proofs
  • Official Receiver immediately being appointed as Trustee in Bankruptcy

If you want to learn more about these changes as set out in the two Acts, which are good foundations to the detailed changes to come, my partner Jo Harris will be recording a webinar in a week’s time. Email info@thecompliancealliance.co.uk for more information.

 

The “how to”s… and more

If you have a chance to attend one of the ICAEW’s roadshows – or indeed one of the IPA’s – I would recommend it. Hearing first-hand how the Insolvency Service plans to implement the Acts’ changes is quite an experience: I challenge you not to leave the room feeling baffled and just a little depressed!

I’m sure things will become crystal clear when we finally get to see the new Rules… won’t they?

I don’t want to steal the roadshows’ thunder, but here are some items that furrowed my brow:

  • Complicated S98s

I am very keen to see how S98s will work: Centrebinds will still be 14 days max, but creditors will have some time after receiving notices (for a virtual meeting or a proposed deemed consent) to request a physical meeting… for which directors (/IPs) then will need to issue notice. I am sure it can be done, but timescales will be very tight (perhaps it will mean that more company meetings will be adjourned) and companies/IPs will need to manage unexpected hiatus periods.

  • Complicated Statements of Affairs

It will take some careful managing to comply with the requirement for statements of affairs submitted to Companies House to exclude details of “consumers and employees”, whilst ensuring that creditors receive the full schedules. Will this mean a new creditor code in IPS etc.? What about cases where the director submits a hard copy SoA (e.g. Administrations); will insolvency staff need to type up separate schedules for RoC? Will “consumers” always be obvious, e.g. will they be easily distinguishable from other individual creditors? What is the risk if an IP gets it wrong..?

  • Complicated ADM-CVL Conversions

The Insolvency Service has made several attempts in the past to manage the move from Administration to CVL. Their latest method sounds better, but still not ideal. It seems that the conversion will happen when the final Admin report is filed at RoC… and, if in the meantime “anything” has happened, the Administrator will inform the Liquidator. So the final Admin report won’t actually present the final position and IPs will still be on tenterhooks waiting for the RoC to bring down the shutter.

These are only some of the meaty changes. There are many, many more, affecting every part of what we do, even to the extent of changing some of our language: you may think that it is not before time that “defray” is being removed from Notices of No (Further) Dividend, but think of the template-editing to be done as a consequence.

 

Standing on the starting blocks

As we take our places on the starting blocks – working (/support!) groups are created, timetables are formulated, and we wave goodbye to holidays – we steel ourselves for the next six months: bring it on!

We at the Compliance Alliance are planning a suite of progressive webinars and document pack updates to help clients prepare for the big day. Call us sceptical, but we’re reluctant to set out exactly what we’re planning until we see the new Rules land – we’ve been here before! However, if you want me to explain to you what we think we’ll be doing, please do get in touch with me.

 

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BHS: lessons for IPs?

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Now that all the pantomiming is over, are there any lessons to glean from the Select Committees’ efforts? I think so. Allegations of “group think” and suggestions of advisers being too heavily incentivised to drive through a particular outcome could lead some to ponder “there but for the grace of God…” Whether or not mud is warranted, some stains may prove stubborn to remove.

The House of Commons Work and Pensions and BIS Committees’ report can be found at: goo.gl/Yi9eMI

 

“A remarkable level of ‘group think’”

Referring to the several advisers to Sir Philip Green and to Dominic Chappell, the Committee report states that “many of those closely involved claim to have drawn comfort from the presence of others”. Names such as Goldman Sachs and respected law firms and accountants appear to have lent credibility to the proceedings.

During the evidence sessions, some witnesses valiantly attempted to explain to the Committee members the scope of customer due diligence checks and the relatively narrow terms of their engagements. The Committees’ response may be discerned from the report (paragraph 64):

“The only constraint beyond the legally required checks is the risk that a company is willing to take that its reputation may be tarnished by association with a particular client or deal. In the case of BHS, it appears that advisory firms either did not consider the reputational risk or demonstrated a remarkable level of ‘group-think’ in relying solely on each other’s presence.”

IPs and related professionals work in a fairly small pond. Although we like to think we’re a robustly independent bunch, could we be at risk of some complacency when we encounter the same old faces?

 

“Advisers were rewarded handsomely”

It is perhaps less fair for the Committees to target the advisers on the levels of their fees. The firm that provided a financial due diligence report on BHS to the prospective purchaser, RAL, were set to be paid four times the fee if the transaction were successful than if it were aborted. The Committee also noted that “advisers were doubly dependent on a successful transaction because RAL did not have the resources to pay them otherwise” (the report does not refer to the existence of any guarantees, which was disclosed in the evidence sessions).

The firm tried to put their engagement into context by explaining the additional risks inherent in a successful purchase and by pointing out the ethical and professional standards that safeguard against such arrangements generating perverse strategies (http://goo.gl/ugfiIP).

The Committees were forced to admit that neither of the advisers “can be blamed for the decision by RAL to go ahead with the purchase”. That said, they did feel that the transaction advisers’ report “could have more clearly explained the level of risk associated with the acquisition” and, in the Committees’ typical emotive style, they stated that the advisers were (paragraph 73):

“…increasingly aware of RAL’s manifold weaknesses as purchasers of BHS. They were nonetheless content to take generous fees and lend both their names and their reputations to the deal.”

 

Countering the Self-Interest Argument

The Committees’ suggestion is that the advisers were too tied into a particular outcome, leading to doubts as to the veracity of their advice. Of course, almost everyone who gives advice – from pensions advisers to dentists – suffer this scepticism. When IPs act both as solutions advisers and implementers, accusations of acting in one’s self-interest are levelled as if they are statements of the blindingly obvious. Such perceptions of being unprofessionally influenced by self-interest are not only articulated by unregulated advisers looking to pigeon-hole IPs into creditors’ pockets, but also are reflected time and again in the Government’s/Insolvency Service’s proposals, for example on how to deal with the pre-pack “problem”, the perennial debates around IPs’ fees and the more recent moratorium proposals.

How do we counter this perception? Personally, I don’t believe the solution lies in setting thresholds on where advisers’ work should end – I was pleased that the early pre-pack suggestions of using a different administrator or a different subsequent liquidator were not taken up – as this risks the evolution of unwritten partnerships with the assumption that the self-interest and self-review arguments automatically fall away.

The perception can only really be tackled by doing a good job, by serving our clients’ interests best and being attentive to our (near-)insolvent clients’ obligations. We also need to remain alert to relationships and when we have stepped over the threshold. We must not see the Insolvency Code of Ethics only in terms of the “Specific Situations”, which I feel is very much an appendix to the real substance of the Code. The Code is by design largely non-prescriptive, but this means that we need to:

  • reflect on prior relationships, e.g. when we have acted as adviser (to the insolvent or to its creditors)
  • evaluate the relationship: is it “significant”, i.e. does it give rise to a threat to our objectivity (or any other fundamental principle)?
  • Can we reduce that threat to an acceptable level?
  • If not, we must have the strength of character to accept the conclusion that we should not take the appointment.
  • And of course, if we do think we can still take the appointment, we need to set out our reasonings and regularly review the position and effectiveness of any safeguards; ticking boxes on an ethics checklist is highly unlikely to be sufficient.

Calls continue to be made for directors to seek help early, when more doors to rescue remain open. IPs are being seen less often solely as insolvency office holders and they have augmented their insolvency skills accordingly.

R3 has just published two helpsheets for individuals and company directors with financial difficulties (at http://goo.gl/WOfCKI and http://goo.gl/eyHlia). These aim to dispel many of the misconceptions about IPs. As the falling insolvency statistics illustrate, IPs can and do help people and businesses get back on track without resorting always to formal insolvency tools.