I think we all need a break from new legislation and threats of more changes, don’t we? How about settling back into something more familiar and, I think, strangely comforting: common non-compliances.
Usually, late spring brings us the Insolvency Service’s annual review of regulation, but there’s no sign of it this year. But we do have the ICAEW’s reports, which are well worth a read for any IP, as they highlight common issues that I think we’re all seeing. This year, there are three ICAEW reports, although this blog only looks at their Insolvency Monitoring Report at: www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/annual-return-and-monitoring/insolvency-monitoring-report.ashx
In the report, the ICAEW highlights the following areas that have brought IPs to the Committee’s attention:
- Statutory Deadlines
- Insolvency Compliance Reviews
- Information to Debtors
The ICAEW report identifies several other areas of concern as well as providing some useful tips on conducting SIP11 reviews.
Issues that have led to Committee-referral
The ICAEW reports that the following have led IPs to face the Insolvency Licensing Committee (“ILC”):
The ICAEW reported instances of:
- Drawing fees without proper authority
The issues that I have seen include: drawing pre-CVL fees that do not meet the R6.7 definition; getting in a muddle with who is required to approve Administrators’ fees (and failing to make sure that this tallies with the Proposals); and accepting shareholders’ informal approval of MVL fees, rather than getting a proper resolution.
- Fees (or proposed fees) appearing excessive or unreasonable
When I have spoken with monitors (ICAEW and IPA), I have been given examples of excessive/unreasonable fees that truly are toe-curling, although I have seen other cases that do not appear particularly damning. I understand that both RPBs have a number of cases working through their disciplinary procedures, but I have yet to see any sanction published under this heading. It may be a difficult allegation to make stick, but for some time I have felt that the RPBs and the InsS have been looking for a worthy scalp.
- Failing to follow the decision procedure rules
This one frustrates me: despite the comprehensive checklists and templates that many firms have, somehow several people still manage to overlook a key component in fee proposal packs. Often, the missing piece is a Notice of Decision Procedure when seeking a vote by correspondence. Sometimes, it is an Invitation to Nominate Committee Members and/or a failure to seek a decision on the formation of a Committee. In some other cases, fee proposal packs have not been circulated to all the relevant creditors, sometimes because a bunch of creditors (usually the employees) have not been provided previously with a R1.50 website notice and sometimes because IPs have assumed that, as the RPO is the major preferential creditor, it is the only one who needs to be asked to approve an Administrator’s fees in a relevant Para 52(1)(b) case.
- Failing to provide fee estimates, where required
This is scary, considering that the Rules changed in 2015! Personally, I haven’t seen this in a few years now. I do still see, however, fee proposal packs lacking details of expenses, which is a necessary statutory component of all ADM, CVL, WUC and BKY fee proposal packs (and a SIP9 expectation in all case types).
The ICAEW’s tips to improve in this area are:
- Consider using a billing authority form so that evidence of statutory approval is provided whenever a bill is raised/paid from the estate
I agree that this is valuable, although it will not ensure that valid approval has been achieved unless minutes of meetings/records of decision are signed off with similarly rigorous checks.
- Critically review fee proposal packs: does the pack explain clearly the work done or to be done and, in light of the explanation, do the costs seem reasonable?
Yep, I agree with this too. When considering fee estimates, I find it useful to consider the hours being proposed. For example, it might look like good value to estimate time costs of £5,000 to recover £30,000, but if this means you’re expecting to spend three whole days to collect one book debt, then without more explanation this will look unreasonable.
The ICAEW reported three instances where:
- Prior relationships had not been considered
I see this so often that it makes me want to weep. In these cases, the reviewer’s view was that the IP should have concluded that it was unethical to accept the appointment: now, that will get you into hot water.
Unsurprisingly, the ICAEW’s tips are:
- Simply do proper ethics reviews and write them down before appointment
I wonder if this goes wrong because people independent from the case (and/or people who don’t really understand ethics) are tasked with completing the ethics review… and then the prospective office holder signs it off without thinking. IPs, please think before you sign off an ethics review: does it disclose all prior relationships and are they well explained and evaluated?
The ICAEW reported:
- A systemic failure to record sufficient SIP2 work
Over recent years, there has been a trend away from lengthy checklists. While I can understand this for routine case administration not least as checklists are often completed after-the-event, this approach simply does not work for SIP2 investigations. The RPBs expect to see contemporaneous evidence of what work has been done and the office-holder’s thinking on whether anything is worth looking into further.
- Failure to pursue antecedent transactions
I have seen SIP2 investigations fail to pick up weird goings-on like money moving out of accounts after the company had apparently stopping trading. I have also seen SIP2 checklists identify a potential action and then the trail goes cold. Both are just not acceptable and, I think, usually stem from an overflowing caseload or disorganised case administration.
The ICAEW’s tips are:
- Do the work at an early stage and then follow up; and
- Document decisions not to continue pursuit
The ICAEW reminds us that litigation funders may be able to help. Some IPs screw their noses up at this suggestion based on rejections they received many years’ ago. Times have changed, so I would recommend trying again. And if you still get a rejection, at least this can form part of your decision. Of course, your decision will also be based on your target’s wealth: it may be a no-brainer decision, but always write it down.
4. Statutory Deadlines
The ICAEW reported:
- An increasing number of systemic failures to meet deadlines
This isn’t an issue I have seen. Perhaps it derives from poor diary/task templates? I have seen some sub-standard designs since the 2016 Rules were introduced, but I think those issues have largely been ironed out now. Could the problem be overwhelming caseloads? Firms weren’t exactly working at full pelt last year, so if this is your problem, then heaven help you in 2020/21! Also, try not to get into the habit of running off progress reports at the very end of the deadline (and remember that ADM deadlines are one month, not two): if you do that, then there is no wriggle-room when you have a flurry of new work.
The ICAEW’s tips are:
- Have robust diary prompts and case-specific checklists; and
- Consider appointing a staff member to oversee/chase compliance
If diaries are very detailed, sometimes it is difficult to see the wood for the trees. Having this as one person’s duty (or requiring, say, all managers to monitor/chase) can help sift out the vital diary prompts from the not-so-important ones. It also helps more junior staff to learn which diary lines are non-negotiable.
5. Insolvency Compliance Reviews
The ICAEW reported:
- Weak or non-existence ICRs
It is worth remembering that the ICAEW does take this seriously, so please do give ICRs a great deal of attention.
- Failure to implement changes
Sometimes actually conducting the ICR is the easy bit. The time required to make the necessary changes can be substantial.
The ICAEW’s tips are:
- Use a robust checklist to carry out the ICR
The ICAEW provides a checklist (note: this works for corporate and personal cases): www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/corporate-insolvency-casework. Some questions are subjective, e.g. re case progression, but if used critically with no preconceptions it covers all the major statutory bases. The ICR also needs to consider key areas on a firm-wide basis. The ICAEW’s Review of Internal Controls and Systems Helpsheet – at www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/insolvency-compliance-review-helpsheets – is a good start, but remember that, aside from the ICR itself, SIP11, client money and the Money Laundering Regs require more thorough individual attention.
- Make the necessary changes
I recommend getting the easy wins, e.g. fixing document templates and diary lines, out of the way quickly. Meatier tasks may take months to resolve, especially if they involve changing procedures, training staff and making sure that they have adapted to new requirements. Plan to tackle these tasks methodically, assign the tasks to appropriate staff and follow up with chasers/meetings to make sure that progress continues to be made. Then, review the effectiveness of the changes ideally before the next ICR is due and keep going until the issue is resolved.
6. Information to Debtors
The ICAEW reported:
- Delivery of poor information to debtors presumably in a pre-IVA context
…including: omitting relevant options; rushing calls; leading the debtor; and not sufficiently explaining the pros and cons of options.
The ICAEW’s tips are:
- Train staff;
- Review and update scripts regularly;
- Regularly review calls for quality; and
- Ensure that calls are tailored to the individual and give them time to consider their options
Nothing more needs to be said, really. Quality-controlling advice calls is a never-ending job and one that needs to be well-resourced.
The Worst of the Rest
Yes, there’s more… lots more.
The above issues will get you in front of the ILC, but the ICAEW’s report also highlights other issues that are worth double-checking:
- Miscalculation of delivery timescales
Be careful of assuming first class delivery times and then using second class post. Take care also to exclude the date of delivery and the date of a decision when calculating notice periods.
- Flaws in reports and fee estimates
In addition to the issues raised above, a plethora of qualitative issues arise, e.g. does the narrative explain the WIP or fee requested; are the numbers consistent throughout the doc; and are generic statements relevant to the case in question? Something I see missing a lot are explanations as to whether the fee and expenses estimates have been (or will be) exceeded and if so why. In some other cases, these explanations do not stack up with the WIP analysis, e.g. it might be reported that the fee estimate has been exceeded because of difficulties pursuing a certain asset, but the WIP analysis shows the fee estimate has only been exceeded in the Admin & Planning category. Sometimes this can point to poor time-recording practices.
- Poor case progression and dividend practices
The ICAEW reports some delays in asset recovery and in progressing dividends, as well as miscalculation of claims, especially those of employees. Remember that in most cases you have only 2 months after the last date for proving to declare the dividend and, if you miss that, then you will need to go through the NOID rigmarole again (and, if you don’t have a good reason for missing it, then your second attempt should be at your own cost). The ICAEW expects payment of interim dividends in appropriate cases. I have also seen IPs put off progressing a preferential distribution until they can see their way clear to an unsecured dividend, which is not acceptable. The ICAEW has also highlighted an issue with IPs telling creditors that they will apply the small debt provisions and then they fail to follow this through. I have seen some initial letters and progress reports state such an intention and, although personally I think this is not binding until the NOID is issued (R14.31), to avoid any creditor confusion, I strongly recommend removing such statements from these early circulars: if you decide later to apply the small debt rules, then you can make this clear in the NOID.
- Inadequate annual AML tasks
The ICAEW report reminds readers about the need to review the firm-based AML risk assessment annually and to carry out a full AML review. I’ll take a closer look at this topic in a future blog when I review the ICAEW’s other annual reports.
- Clients’ Money Regulations: a reminder for non-ICAEW IPs
The ICAEW report highlights that its Clients’ Money Regs apply to more than just ICAEW-licensed IPs. If you work in an ICAEW-defined firm or the ICAEW is the firm’s AML Supervisor, then you need to comply with the ICAEW’s Clients’ Money Regs whether or not you are licensed as an IP by them. To be honest, there are few differences between the IPA’s and the ICAEW’s Regs, but one notable difference is that the ICAEW requires an annual review of the operation of a client account.
- Inadequate GDPR checks
The ICAEW reports that some are not considering on a case-by-case basis what personal data is held by the insolvent, whether it is secure and for what purpose it is held/processed. The ICAEW also expects IPs to check whether the entity was registered with the ICO… although it is not clear what they expect you to do subsequently. I recall that R3 asked the ICO way back in 2018 whether IPs should be maintaining (or even initiating) insolvents’ ICO registrations, which of course would attract additional costs to the estate. But then 2018’s problems seem so last year!
The ICAEW devotes a whole page to this topic in its report. Noteworthy points include:
- Make sure the financial controls and safeguards are written down in the first place
I have seen more than one firm try to carry out a SIP11 review without having taken this step. How can you check whether the firm’s processes have been followed, if they’re not written down? SIP11 lists nine areas in paragraph 9 to document… and then adds a tenth (insurance cover) in paragraph 11. In effect, these areas result in a cashiering manual setting out what happens to money in, payments out, bank recs etc.
- Then review them annually
The ICAEW report highlights that traditional ICRs will not cover everything required of a SIP11 review. Jo and I concur: if you want us to do a SIP11 review alongside your ICR, please let us know this and expect the ICR to be longer (and more expensive). There is no prescription as regards a SIP11 review, but the ICAEW report lists four points that could be considered:
- Review a sample of cases to see whether procedures have been followed correctly
To some extent, this will be covered by a traditional ICR, but the reviewer may only carry out full reviews of a couple of cases, which will be insufficient for SIP11 purposes.
- Review the findings of the annual client account compliance review
From a SIP11 perspective, key issues include: how quickly client account money is moved to estate accounts; whether all post-appointment transactions are reflected on the case’s cash-book; and what happens to any interest credited to the client account.
- Run reports from IPS etc. to review money held and bank rec frequency
I would also recommend running reports on balances held in closed cases or in “suspense” accounts.
- Review a sample of bank recs
I have seen bank recs with uncleared adjusting entries or uncleared receipts signed off month after month without any apparent thought as to what is behind these. Understandably, uncleared payments can sit around for longer, but they do need to be resolved at some stage.
Although not included in the ICAEW’s list, the report does note that the firm’s bonding and insurance procedures also need to be reviewed as part of the SIP11 exercise. This could include a comparison of your open case list against your bond insurer’s, which would help identify whether bonds are being released appropriately. You could also review whether bond schedules are issued before the 20th day of the following month – look particularly at appointments occurring right at the end of the month, as they can easily fail to hit IPS etc. in time for the following month’s bordereau – and see how swiftly increases are arranged. Of course, the firm’s insurances are reviewed annually on renewal, but you could prove SIP11 compliance by keeping a record of that renewal consideration by the IP(s) in the same location as the SIP11 review docs.
August 12, 2020 at 9:42 am
Michelle, thanks again for this very useful summary of “pit-falls for the unwary IP”.
August 12, 2020 at 3:11 pm
Ah thanks, Paul, you’re welcome. Hope you’re keeping well.