Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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It’s not just connected pre-packs and it’s not just legislation

If the draft regs and pre-packs were a Venn diagram…

The new draft legislation requiring an evaluator’s opinion on connected pre-packs has drawn most attention.  But the measures will affect more than just connected pre-packs and the Insolvency Service’s report reveals other planned efforts to influence IPs’ activities and disclosures.

In this article, I focus on the less-publicised changes that are afoot, including:

  • The impact on post-appointment connected party sales
  • The option of seeking creditors’ approval, rather than getting an independent opinion
  • The government’s desire to increase the use of viability statements
  • The emphasis on SIP16’s “comply or explain” requirement
  • The government’s wish for RPBs to probe into cases where marketing is not undertaken
  • The need for greater compliance with SIP16’s disclosure requirements

The Insolvency Service’s Pre-Pack Sales in Administration Report and the draft regulations are at: https://www.gov.uk/government/publications/pre-pack-sales-in-administration.

 

The draft regulations are not about pre-packs

No, really, they’re not.  The draft regulations impose new requirements on:

  • Connected party sales only
  • But not just connected party pre-packs, also any sales of “all or a substantial part of the company’s business or assets” within 8 weeks of the start of the Administration
  • How is a “substantial part” defined? It isn’t.  It will be up to Administrators to form an opinion about whether a sale involves a substantial part
  • And the regs will capture not just sales, but also the “hiring out” of all or a substantial part of the business or assets

 

Why interfere with post-appointment sales?

The Insolvency Service’s report does not explain or seek to justify this step.  It seems to suggest that, because the SBEE Act’s power to legislate extended to all connected party sales, they were free to regulate all such sales.  However, they have graciously decided “only” to apply the requirements to sales within 8 weeks of the start of the Administration.

So… a secured lender appoints Administrators perhaps in a hostile manner.  The Administrators have had no contact with the director before their appointment, but they soon learn that the director is anxious to hold onto the business so will offer almost anything.  The Administrators are keen to recover as much as possible for their appointor and, as is their statutory duty, to care also for other creditors’ interests, so they play hard ball to squeeze out the best deal.  The Administrators’ agents recommend that they snap up the offer – maybe they’ve now carried out some marketing, maybe it’s a no brainer that no unconnected party in their right mind would offer anything approaching the director’s offer – the secured lender is happy with it, and the Administrators make sure that the purchaser is good for the money.  But still the purchaser must instruct an independent evaluator?

 

What will the evaluator evaluate?

The evaluator’s report must state whether or not they are:

“satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances”

It seems to me that the people best-placed to evaluate whether the consideration is reasonable are professional agents, aren’t they?  Shame that independent, qualified, PII’d agents instructed by the Administrators to do just that cannot be trusted with this task, isn’t it?

How does someone assess whether “the grounds for the substantial disposal” are reasonable?  It’s not “the grounds for Administration”, so this will not address the cynics’ belief that directors engineer companies into Administration to “dump debts” and start again.  I’m not saying this happens often, if at all.  Unnecessarily putting yourself through an Administration and then battling to restore, or to build new, trust of suppliers, employees, and customers seems a drastic step to take.  I think that many connected purchasers underestimate the struggles ahead of them.

Presumably, “the grounds for the substantial disposal” relates to the question: could a better price be achieved by a different strategy?  This sounds like a debate about the marketing strategy, the prospects of alternative offers, and going concern v break-up, so again professional and experienced agents seem best-placed to make this evaluation.

 

But why not just ask the Pool?

I understand the noises of: what’s wrong with simply asking the Pre-Pack Pool?  But I return to the question: why have an opinion in the first place?  It won’t dispel the suspicions that the whole thing has been designed by the directors who shouldn’t be allowed to use Administration or Liquidation and it won’t answer the many who just believe that it’s wrong for a director to be allowed to buy the business or assets from an Administrator or Liquidator.  The public comments below The Times’ articles on pre-packs say it clearly: some people call connected party sales (and CVAs) “fraud” or “legal theft”.  How do you persuade these people to see things differently?

The strongest argument I could find in the Insolvency Service report for a Pool opinion was:

“Whilst some stakeholders said that an opinion from the Pool (or lack of one) would not affect their decision to trade with a business that was sold to a connected party purchaser, other creditor groups said that their members valued the Pool’s decision, and that the opinion did influence their decision as to whether to trade with the new company.  They also stated that where the Pool had been utilised, the opinion given helped to demonstrate to creditors that in some circumstances a sale to a connected party provided a reasonable outcome for creditors.”

So some say it helps, some say it doesn’t.

Somehow the Insolvency Service concluded that their “review has found that some connected party pre-packs are still a cause for concern for those affected by them and there is still the perception that they are not always in the best interests of creditors”, but I saw nowhere in the report where those perceptions originate.  The report referred to the media and the CIG Bill Parliamentary debates.  Is that your evidence?  Oh yes, some Parliamentarians have been very colourful in their descriptions of pre-packs; one said that the directors offer “a nominal sum – maybe only £1 or a similarly trivial sum”.  Their ignorance – or the way they have been misled to believe this stuff – is shameful and on the back of such statements, distrust of connected party pre-packs grows and so the case for an independent opinion is made.

And now the R3 President is reported as saying that “effectively anyone will be allowed to provide an independent opinion on a connected party pre-pack sale, which risks abuse of the system that undermines the entire rationale of these reforms”.  Again, we feed the beast that bellows that IPs – and professional agents – cannot be trusted.

So, ok, if it makes you happy, fine, let it be a Pre-Pack Pool opinion.  In my view, they have fallen far short of justifying their existence, but if it shuts the mouths of some who see pre-packs as “Frankenstein monsters” (The Times) or at least gives them pause, then so be it.

 

Getting creditors’ approval as an alternative

The draft regulations provide that, as an alternative to getting an evaluator’s opinion, a substantial disposal to a connected party may be completed if:

“the administrator seeks a decision from the company’s creditors under paragraph 51(1) or paragraph 52(2) of Schedule B1 and the creditors approve the administrator’s proposals without modification, or with modification to which the administrator consents”

This must be achieved before the substantial disposal is made, so it will not be available for pre-packs… unless you can drag out the deal for 14+ days.

Could it help for post-appointment business sales?  Provided that you don’t make a Para 52(1)(a), (b) or (c) statement in your proposals, it might.  And let’s face it, if you’re issuing proposals immediately on appointment and before you’ve sold the business and assets, you may be hard pressed to make any positive statement about the outcome of the Administration.

But if you issue proposals immediately, i.e. before you have negotiated a potential deal with anyone, what exactly would the creditors be approving?  Presumably, they would be informed of your strategy to market the business and assets and shake out the best deal from that.  They would not be informed of what offers (if any) are on the table and it would be commercial suicide for the proposals to include valuations.  Would such vague proposals achieve what the Insolvency Service is expecting from this statutory provision?

Could it be that the Service recognises that true post-appointment connected party sales (i.e. not those that avoid the pre-pack label by resisting negotiation until a minute past appointment) do not require independent scrutiny and this is their way of avoiding putting them all in that basket?

 

Smartening up on SIP16 statement compliance

The Insolvency Service reports that SIP16 statement compliance has improved: since the RPBs took on monitoring compliance in late 2015, the annual non-compliance rate has dropped from 38% to 23%.  The report states, however, that:

“the level of non-compliance continues to be a concern, as SIP16 reporting is a key factor in ensuring transparency and maintaining stakeholder confidence in pre-pack sales”

Hang on, when did SIP16 require a “report”?  The Insolvency Service refers throughout to a SIP16 report.  It’s funny, isn’t it, how something that started off as “disclosure”, then became a “statement”, and now is considered a “report”?  I think this demonstrates how the SIP16 disclosure requirements have grown legs.  And, while the report acknowledges that the RPBs state that most of the non-compliances are “minor technical breaches” and that there is “now more information available to creditors as a result of the SIP16 changes”, it seems to suggest that stakeholder confidence can only be enhanced if we eliminate even those minor breaches.

The report focuses on three areas where it seems that “greater consistency needs to be promoted across the profession”: viability statements, marketing activity and valuations.

 

The value of viability statements

The report indicated that, of the 2016 connected party SIP16 statements reviewed, 28% of them “stated viability reviews/cash flow forecasts had been provided”.  69% of the purchasers in these cases were still trading 12 months later.  However, in the category of cases where no viability statements were evidenced, 87% of those purchasers were still trading after 12 months.  This suggests to me that disclosure of a viability statement does not particularly help Newco to gain trust with creditors!

Of course, rightly so the report states that the purchasers may well have carried out their own viability work but have been unwilling to share it.  What I was far less pleased about was that the report stated that “alternatively, it may be that the insolvency practitioner… is not requesting the purchaser to provide a viability statement, which would indicate non-compliance with the requirements of SIP16”.  The cheek of it!  If a progress report omitted the date that creditors had approved an office holder’s fees, would the Service suspect that this was because it never happened?  Actually, I can believe that they would.  The Insolvency Service has no evidence of non-compliance in this regard, but they can’t help but stick the boot in and foment doubts over IPs’ professionalism and competence.

Having said that, IPs would do well to double-check that they are asking for viability statements and making sure that there’s evidence of requests on the file, don’t you think..?

I wonder whether a future change will be that the RPBs will ask to be sent, not only the SIP16 statement, but also evidence of having asked the purchaser for a viability statement.

The report’s conclusion is puzzling:

“In discussions with stakeholders no concerns were raised regarding the lack of viability statements. However, the government considers that there continue to be benefits to completing viability statements for the reasons highlighted in the Graham Review. Therefore, we will work with stakeholders to encourage greater use.”

Hmm… so no one seems bothered about their absence, but the government wants to see more of them.  Logical.

 

Compliance with the SIP16 marketing essentials

The review sought to analyse 2016 connected party SIP16 statements as regards explaining compliance with the six principles of marketing set out in the SIP.  The report states:

“the principles that encourage exposure of the business to the market ‘publicised’ (54% compliance), ‘broadcast’ (53% compliance) and ‘marketed online’ (56% compliance) have only been complied with in just over 50% of cases.”

Given that they were reviewing only the SIP16 statements, I’m not sure they can say that the marketing principles have not been complied with.  Might it just be that the IPs failed to explain compliance in the SIP16 statement?

Having said that, the review also revealed that, “of those that deviated from the marketing principles, over 80% of administrators provided justification for their marketing strategy”, i.e. they complied with the SIP16 “comply or explain” principle.  This suggests to me that 20% of that c.50% need to try harder to get their SIP16 statements complete.

 

The value of marketing

The report acknowledges that “in some limited cases it may be acceptable for no marketing… to be undertaken”.  I think that many would go further than this: in some limited cases, it may be advantageous not to market.  The review stated that no marketing had been carried out in 21% of the 2016 connected pre-packs reviewed.  This does seem high to me and I think does not help counteract suspicions of undervalue selling.

Interestingly, though, where marketing was undertaken, 46% of those connected party sales were below the valuation.  But where marketing was not undertaken, 43% were below “the valuation figure”.  As most IPs get valuations on both going concern/in situ and forced sale bases, I’m not sure which “figure” the Service is measuring against here.  But nevertheless perhaps this is some comfort that marketing doesn’t make a whole lot of difference… unless of course it attracted an independent purchaser, which would have taken the case outside the scope of the Service’s review entirely.  Shame that they didn’t analyse any unconnected SIP16s!

 

The compliance problem

The government’s response to the diversity in approach to marketing and to SIP16 disclosure includes that they will:

“work with the regulators to ensure: there is greater adherence to the principles of marketing”; and “there is a continued increase in compliance with the reporting requirements under SIP16”.

As I mentioned above, the report stated that SIP16 statement non-compliance was at 23% in 2019… but in her recent virtual roadshow presentation, Alison Morgan of the ICAEW stated that their IPs’ 2019/2020 rate was at c.50%.  We must do better, mustn’t we?!

I too am frustrated about the levels of compliance with SIP16.  I realise it’s a killer of a SIP – some of the requirements don’t follow chronologically or logically and some leave you wondering what you’re being asked to disclose.  I realise that almost no pre-packs fit neatly into the from-a-to-b SIP16 ticksheet.  But I don’t know when I last saw a 100% fully compliant SIP16 disclosure!  I know I’m harsh, harsher it seems that some of the RPB reviewers, but whatever SIP16 asks for, please just write it down… and tell your staff not to mess with templates – they/you may think that some statements are pointless or blindingly obvious, but please just leave it in.

 

Expect to be “probed”!

Another part of the government’s response is to:

“ensure that where no marketing has been undertaken, the explanation provided by the administrator is probed by the regulator where necessary”.

True, SIP16 allows for a “comply or explain” approach, but if a large proportion of businesses are not being marketed, it just opens us up to the cheap shot that the sale might have been at an undervalue, doesn’t it?

What is a valid reason for not marketing?  Again in her recent presentation, Alison Morgan indicated that a fear of employees walking out or of a competitor stealing the business may not in themselves be sufficient justification.

 

SIP16 changes in prospect

So what changes will we see in SIP16?  The government response is that they:

“will work with the industry and the RPBs to prepare guidance to accompany the regulations and to ensure SIP16 is compatible with the legislation.”

Guidance?  Sigh!  If it’s anything like the moratorium guidance, then I don’t see why they bother: what more can they say apart from regurgitate the regulations, which are only 6 pages long?

And how is SIP16 incompatible with the regulations?  Well, obviously in referring specifically to getting an opinion from the Pre-Pack Pool… but I wonder how the regulations will look when they’re finalised.  With all the murmurings about almost anyone being able to call themselves an evaluator, I suspect it may be the regulations that will be brought more into line with SIP16 on this point!

But let’s hope that SIP16 is not changed to accommodate the regulations’ capture of all connected party Administration business/”substantial” asset sales within the first 8 weeks.  That truly would be sledgehammer-nut territory, wouldn’t it?

The government has also threatened to:

“look to strengthen the existing regulatory requirements in SIP 16 to improve the quality of information provided to creditors”.

“Strengthen” the requirements?  I wonder what they have in mind…

 

What about valuations?

Oh yes, I forgot: that was the third area the government highlighted for greater consistency.

Right, well, they weren’t happy that 18% of the SIP16s they reviewed failed to state whether the valuer had PII.  I don’t know what they think IPs do, have a chat with a guy in a pub?  So, yes, we need to check that our SIP16 ticksheets are working on that point.

The report also noted that some SIP16s didn’t have enough information to compare valuations to the purchase price, although they didn’t make a big deal of it.  In her recent roadshow presentation, Alison Morgan repeated her request that IPs produce SIP16s that neatly detail the valuations per asset category alongside the price paid.  (You’ll have gathered that Alison had a lot to say about SIP16 compliance – I recommend her presentation!)  Although I share Alison’s view, working through the SIP’s requirements in the order listed is not conducive to presenting the valuation figures alongside the sale price, so this is definitely a SIP16 area that I think could be usefully changed.

 

What if SIP16 compliance does not improve?

Ooh, the government is waving its stick about here:

“Should these non-legislative measures be unsuccessful in improving regulatory compliance, the quality of the information provided to creditors and the transparency of pre-pack sales in administration, government will consider whether supplementary legislative changes are necessary.”

SIPs have pretty-much the same degree of clout as legislation.  In the case of SIP16, arguably it carries a greater threat.  There have been several RPB reprimands for SIP16 breaches published over recent years.  How many court applications does the government think will result if they enshrine SIP16 in legislation?  More than the number of RPB reprimands?  If IPs are failing to comply with SIP16, it’s not because the SIP is toothless.

 

Will the measures solve the pre-pack “problem”?

In my view, no.  There is just too much general cynicism about IPs being in cahoots with directors and about directors being determined to stiff their creditors.

What I think might help a little is if our regulators – the Insolvency Service and the RPBs – reported a balanced perspective of SIP16 compliance.  I know that the report acknowledges that most SIP16 disclosure breaches are “minor technical” ones, but the simple stats grab the headline.  We also need a simpler SIP16 so that compliance is easier to achieve and to measure.  Concentrating on the minutiae and concluding that the statement is non-compliant just does not help.  Are the minutiae really necessary?  Does it improve the “quality” of the information and the transparency of the sale?  I know, I know, the SIP isn’t going to get any simpler, is it?

I think the regulators might also help if they were to defend themselves and in so doing defend IPs as a whole.  Do they not realise that the perceptions that pre-packs are not in creditors’ best interests is also a slight on how they may be failing to regulate IPs effectively?  No one naïvely claims that all IPs are ethical and professional, so what steps have the RPBs taken to tackle the actual, suspected or alleged abusers of the process?  If they have identified them and are dealing with them, then can they not publicise that fact and confirm that the rest of the IP population are doing the right thing?  Instead, all we hear especially from the Insolvency Service is that, while pre-packs are a useful tool, IPs do a poor job of acting transparently and that there needs to be an independent eye scrutinising the proposed deal to give creditors confidence.  Are not the regulators the policemen in this picture?


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Compliance Hot Topics

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:

  1. Remuneration
  2. Ethics
  3. Investigations
  4. Statutory Deadlines
  5. Insolvency Compliance Reviews
  6. 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”):

1. Remuneration

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.

 

2. Ethics

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?

 

3. Investigations

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!

 

SIP11 Reviews

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.

 


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Moratorium Muddles

I’m sure we’ve all been flooded with articles on the new moratorium process.  Therefore, I am avoiding the usual broad-brush approach here.  Instead, I hope to draw out some of the niggly complexities and awkward practical consequences of the new provisions… although, to be honest, the closer we look, the more we find…

Jo made an early start on listing some issues in her Technical Update issued earlier this month.  If you’d like a copy, please drop us a line at info@thecompliancealliance.co.uk.

Of course, you all know where to find the Corporate Insolvency & Governance Act 2020 (“CIGA”), but for completeness, it is available at:  www.legislation.gov.uk/ukpga/2020/12/contents/enacted.  The references in brackets in this article are to provisions in CIGA, unless otherwise stated.

The Insolvency Service’s Guidance for Monitors is available at: www.gov.uk/government/publications/insolvency-act-1986-part-a1-moratorium-guidance-for-monitors.

In brief, this article looks at:

  • The need for speed and tenacity in monitoring
  • When monitors might do more than just monitor and how they get paid for this
  • The dangerous timeline of seeking creditors’ consent to an extension
  • A mixed bag of CIGA drafting issues
  • The consequences for SIP9 compliance
  • The ethics of a subsequent appointment
  • The practicalities of a subsequent appointment

 

Monitors Must Monitor, not Supervise

Over the years, I’ve seen several CVA files with seemingly half-hearted or sporadic efforts to extract information, and sometimes even payments, from directors.  A deadline may come and go, a chaser or two might be sent, and at worst efforts simply fizzle away.  The defence is run: but I have discretion… the CVA isn’t strictly in default… it is in creditors’ interests to keep the CVA ticking over even if there’s not 100% compliance, rather than see the company go into liquidation.

This approach will not work in a moratorium: the monitor needs to stay keen, the information flow needs to be far swifter and more frequent.  A monitor must end the moratorium if they think that, by reason of a directors’ failure to provide information, the monitor is unable properly to carry out their functions (A38(1)(c)).   This is not a discretionary power, it’s a “must”, and if a monitor lets things slide, I think they open themselves up to a challenge (A42).

The termination-by-monitor provision (A38) also states that the monitor must bring the moratorium to an end when “the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern” (albeit that this is modified in these coronavirus times) or when they think “that the company is unable to pay any moratorium debts or non-payment holiday pre-moratorium debts that have fallen due” (subject to the tweak in para 37 Sch 4).

This seems to call for a continual process, not a periodic one.  Of course, monitors are going to have a periodic approach to reviewing the company’s position, checking that the required debts have been paid when they fell due, checking the company’s prospects going forward and making sure that the rescue strategy remains on track.  But surely we are talking days here, not several weeks or months.

Therefore, getting the directors geared up to provide information quickly and regularly and ensuring that you have the internal resources of a disciplined team to keep up the pace are vital.

 

Not all Fees are “Monitors’ Fees”

Over recent years, several IPs have discovered to their loss the idiosyncrasies of R6.7 and R3.1, which restrict what they can be paid for after appointment in relation to pre-CVL and pre-administration costs.  CIGA has given us another trap like this.

CIGA requires the directors to complete several tasks during the moratorium such as notifying the monitor before they take steps to go into another insolvency process (A24), when the moratorium ends.  Worryingly, the directors are also responsible for extending the moratorium.  The InsS Guidance states:

“Directors may not be familiar with the rules surrounding decision making in insolvency procedures and whilst it is not part of a monitor’s statutory duty to assist directors in obtaining the consent of creditors they may choose to do so in an advisory capacity.”

Yep, InsS, I think you can rest assured that no monitor is going to trust a director to run a creditors’ decision procedure without the IP’s strong oversight, as the decision procedure rules are so complex (and made more complex by CIGA’s special voting rules)!

Thus, moratorium extensions will work in a similar way to S100 decision processes: strictly speaking, the director is tasked with the job, but they instruct an IP – almost inevitably the monitor – to do the work for them.  But, as the IP is not carrying out this work in their capacity as monitor, payment will not be classed as the “monitor’s fees”, at least not unless your letter of engagement makes it so.  Therefore, you need to ensure that you have a letter of engagement signed to cover this “advisory capacity” work.

 

Tight Timings

In brief, the timescales of a moratorium are:

  • The first 20 business days are granted on commencement
  • This can be extended by a further 20 business days by the director filing a simple form with the court
  • The moratorium can be extended for period(s) up to the anniversary by getting creditors’ consent via a decision procedure
  • The moratorium can be extended for any length by a court order

In general, the IR16 apply as regards decision procedures, so we’re looking at decisions by correspondence/electronic or a virtual meeting.

What happens if creditors ask for a physical meeting?  What if they say “no” or they simply don’t vote at all?  What if you want to adjourn the virtual meeting, but the moratorium will end in the next day or two?

With these scenarios in mind (and especially as the director needs to sign the docs), you would do well to start a decision procedure long before the moratorium is due to end.

It would have helped if the CIGA had provided that moratoria receive an automatic extension where the decision procedure’s conclusion is delayed, in the same way as an automatic extension is given where a CVA proposal is pending (A14), but hey ho.

 

Impossible Timescale

One timescale in the CIGA simply does not work.  The decision procedure requires five calendar days’ notice, but R15.6(1) (IR16) has not been disapplied, so it seems that creditors have 5 business days from delivery of the notice in which to request a physical meeting.  How does that work then??

It might help, therefore, to hold virtual meetings instead of trusting that creditors will be content with a vote by correspondence/electronic.  At least a virtual meeting is a moderately useful forum for airing grievances and concerns.  Of course, virtual meetings also do not suffer the there’s-no-changing-a-cast-vote issue of the other procedures either, so this might also help if there’s any horse-trading to be done.

 

General Fuzziness

Jo and I have spent far too long debating the following questions:

  • A17(2) requires the monitor to notify creditors of the end of the moratorium in several situations, but we can find no notification requirements if the moratorium simply ends because it has run out of time. The InsS Guidance states that “there is no requirement for the monitor to notify creditors or the registrar of companies that the moratorium has ended on expiry of the initial period of 20 business days”.  Ok, but what about where a longer moratorium ends through the effluxion of time?  And does anyone ever tell the court (or for that matter, the PPF, Pensions Regulator, FCA or PRA)?
  • Court notification of the end of the moratorium also appears lacking in other situations: when a CVA proposal has been disposed of (A14); when a court order’s deadline had been reached (A15); and when the company enters an insolvency procedure (A16). Was this intentional?
  • There also doesn’t appear to be any duty on the monitor to notify relevant persons of the end of the moratorium where a court order under A15(2) has specified a time limit (or event) after which the moratorium is ended. Maybe this is why there is no Companies House form to record this end event?
  • What exactly does A24(2) mean, where it requires the directors to notify the monitor before “they recommend that the company passes a resolution for voluntary winding up under section 84(1)(b)”? Is this triggered when the director issues notices to members or would this occur earlier, e.g. when they instruct an IP to help?
  • Why on earth do we have different prescribed content for the proposed monitor’s consent to act in A6(1)(b) and para 17 Sch 4? Do we need both (e.g. that the IP “is a qualified person” and they certify that they are “qualified to act as an insolvency practitioner in relation to the company”)?  And does a monitor act in relation to the moratorium (A6) or the company (para 17)??
  • A28 requires the monitor’s (or the court’s) consent if the company wants to pay certain pre-moratorium creditors. A28(1) states that, with such consent, “the company may make one or more relevant payments to a person that (in total) exceed the specified maximum amount”.  The “specified maximum amount” is defined in A28(2) as £5,000 or 1% of certain liabilities, but do these thresholds relate to “payments to a person… (in total)” or to payments to all such persons in total?  I think that A28(1)’s grammar leads to a meaning of payments to the person in question, but the InsS’ Guidance states that “total payments shall not exceed…”, which gives the impression that the thresholds relate to payments to all such persons.  Which is it?

 

SIP9

SIP9 applies to “all forms of proceedings under the Insolvency Act 1986”, but clearly it was not written with moratoria in mind.  Does it create any difficulties if we assume that we need to follow it (and assuming that its references to “office holder” include a monitor)?

Well, for a start, it means that we all need to draft a Creditors’ Guide to Fees, which will say… erm… not a lot, as fees are a matter for the IP and the company, apart from a couple of rights to challenge.  Of what rights should we inform “other interested parties”?  What about the requirements to justify why a fixed fee is considered fair and reasonable or to cover the “key issues of concern” such as what work we are proposing to do, the anticipated financial benefit to creditors?  Is there any expectation by RPBs that we comply with these requirements even if compliance is required only in spirit?

I know that there’s a SIP9 consultation going on, but when do we think we might see a revised SIP9 come into force..?  Could the RPBs issue some clarification in the meantime?

 

Ethical Threats

This is another area where RPB guidance would be very welcome.  In my view, the InsS Guidance does a poor job in helping IPs observe the Code of Ethics.  It states:

“The monitor is not prevented from taking up a subsequent appointment subject to the insolvency practitioner making an assessment of any threats to compliance with the fundamental principles.  Practitioners may find it helpful to refer to section 2520 of the Code of Ethics that deals with “Examples relating to previous or existing insolvency appointments” in terms of how any subsequent insolvency appointments following appointment as monitor (as administrator or liquidator for example) may be treated. The monitor should satisfy themselves that they have identified any threats to compliance with the fundamental principles and have been able to put in place appropriate safeguards to reduce any threats to an acceptable level.”

My heart always sinks when someone in the profession goes straight to the Code’s examples to see whether they or their boss can take an appointment.  At best, I think that it’s lazy, but at worst it may mean that they don’t really get it.  My heart similarly sank when I read the InsS’ emphasis on the Code’s examples.

Agreeing to act as a monitor has immediate consequences, including an immediate change in priority of liabilities in a subsequent liquidation or administration.  Some of those given an automatic leg-up may be connected to the company; they could be directors or shareholders.  The IP who becomes monitor probably advised the company on its options.  Then there are the during-moratorium self-review and self-interest threats: whether the monitor failed to terminate promptly; whether their fees were excessive; whether it was the right decision to consent to certain payments or to security being granted; and whether they have any outstanding fees thus making themselves a creditor.  All these threats need to be taken seriously and cannot be ticked off simply by seeing that there is normally no reason why an administrator may not take a subsequent liquidation appointment.

 

But who would want a subsequent appointment?

Surely the CIGA’s shifted priorities would make any IP think twice about taking on a subsequent liquidation or administration!  Would you want to risk discovering a whole host of unpaid moratorium liabilities and pre-moratorium claims ranking ahead, not only of your fees, but also of all the expenses of the liquidation or administration (paras 13 and 31 Sch 3)?  And, if you are an administrator, you must make a distribution to those creditors (para 31 Sch 3)!

I think that directors/monitors would be hard-pressed to find an independent IP willing to pick up such a murky can of worms.  It seems to me that the Official Receivers may find themselves with a delightful new source of work.  Perhaps that’s why the InsS made sure that the ORs’ fees take priority over them all (para 13 Sch 3)!

 

The Marketing Bit

Jo and I have rolled out a large part of our moratorium document pack: all the statutory docs are there – to get in to a moratorium, extend it and exit it (although we do still have the nagging questions above) – and we are in the process of topping and tailing the pack to include items like file notes to record the key decisions, which should become available in the next week or so.

The moratorium pack is available at no extra cost to all our document pack subscribers and we shall continue to update it at no further cost to these clients.  We are also happy to provide the moratorium pack as a standalone purchase – as-is when complete – for £2,000+VAT.

If you would like more information, please contact us at info@thecompliancealliance.co.uk.


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Ethics: The Reboot

How does an Ethics Code more than triple in size overnight?  In my view, largely by adding lots of unnecessary words.  The devil, however, is in finding the detail hidden within the new Code that affects how we should be viewing and handling things differently from 1 May.

A primary reason why the new Code is substantially longer is that we now have “requirements” – highlighted in bold and given an “R” paragraph number – and “application material”, identified by normal text and “A” paragraph numbers.  This application material is “intended to help an insolvency practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement” (1.4 A1).  So don’t be misled into viewing “A” paragraphs as optional guidance: although all the “shall”s appear in the “R” paragraphs, the language of most of the “A”s indicates that they also are necessary to achieve compliance.

Although I have tried to highlight the main areas of change, I do recommend that you read through the Code in its entirety yourself.  There is a great deal more detail to explain RPB expectations and you could find that the particular circumstances of you or your firm and your engagements gives rise to ethical threats that you may have overlooked in the past.

The ICAEW’s version of the new Code can be found at www.icaew.com/-/media/corporate/files/technical/ethics/insolvency-code-of-ethics.ashx?la=en and the IPA’s version of the new Code is at www.insolvency-practitioners.org.uk/regulation-and-guidance/ethics-code (although the IPA hasn’t amended the text of the page to highlight that the link is not to the Code that came into force in 2009, nor have they archived the accompanying docs that relate to the old Code).  The ICAEW’s Code has an additional “2” at the start of each paragraph (to fit the insolvency section into its overarching Code).  In this article, I have used the IPA’s numbering.

 

Why now?

Do I think that the implementation date of the new Code should have been postponed?  Yes, I do!

True, we have been waiting a loooong time for a revised Code – the JIC’s consultation on a draft revised Code concluded in July 2017.  However, the new Code is so much different from the old one (and from the 2017 draft), it is not at all an easy read at 70 pages, and there are many new requirements in there.  Therefore, expecting IPs to have absorbed and adapted systems to the new Code and to have trained staff by 1 May is grossly unfair in these extremely difficult times.  Shame on you, IS/RPBs!

 

Surely the Fundamental Principles are the same?

Generally, yes of course.  Some look a bit different now, though.

“Integrity” has been beefed up.  In addition to the “straightforward and honest” statement, we now have that an IP (R101.2):

“shall not knowingly be associated with reports, returns, communications and other information where the insolvency practitioner believes that the information:

  • Contains a materially false or misleading statement;
  • Contains statements or information provided recklessly; or
  • Omits or obscures required information where such omission or obscurity would be misleading.”

The Code allows IPs to be viewed as not in breach of this where they “provide a modified report” (101.2 A1), although I guess they could still have fallen foul of the principle of professional competence and due care by allowing the incorrect or misleading statement to be released in the first place.

As another solution, the Code requires an IP to “take steps to be disassociated” (R101.3) from such information when they become aware of having been associated with it.  Thus, it goes further than the advertising and marketing requirements of the old Code, capturing the spoken word and information that might wriggle out of “advertising”, and it makes clear that the IP need not have a marketing agreement with the party issuing the information, the IP just needs to be “associated” with it.

Having said that, the Code’s “Advertising, Marketing and Other Promotional Activities” section (360) has also been expanded on, making unacceptable standards more explicit.

“Confidentiality” has also grown by a page and a half.  Comfortingly, though, this Code has elevated the requirement for transparency, i.e. to report openly to creditors etc., by putting it up-front at R104.2, rather than buried as at para 36 in the old Code.  Most of the new text are statements of the obvious, e.g. being alert to the possibility of inadvertent disclosure in a social environment or to family and not using confidential information for the personal advantage of the IP or of third parties.

“Professional Competence and Due Care” is now accompanied by a new 1.5 page section, “Acting with Sufficient Expertise”, but I saw nothing in here that I thought really needed to be said.

“Professional behaviour” contains a subtle change: no longer must IPs only avoid action that discredits the profession, but they are required to avoid “any conduct that the insolvency practitioner knows or should know might discredit the profession” and they “shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession” (R105.1).

 

What about the Framework Approach?

Yes, we still have the basic framework of:

  1. identifying threats;
  2. evaluating them; and
  3. eliminating or reducing those threats to an acceptable level, often with the use of safeguards.

And in case there was any risk that we might forget this, it is provided in full twice (at 1.5 A1 and R110.2) and then appears in the introduction to almost every other section.  In fact, the word “framework” appears 45 times in the new Code (and only 6 times in the old Code).

 

Ok, so what has changed?  More paperwork, right?

Yes, of course!

Some have expressed the view that the requirements to evidence pre-appointment ethical considerations haven’t increased, if we’d been documenting things properly in the first place.  As the old Code had a simple “record considerations” message, there is some truth in that, but it is difficult to deny that the new Code reflects the record-keeping mission creep that the profession has seen over this century.

To avoid doubt over the extent of documentation required, we now have a list of six items to be documented at R130.2 – they are what you would expect, but you would do well to ensure you’re your Ethics Checklists specifically prompt for these items.

In addition, this list of six items should define the structure for documenting your ethical considerations when a threat arises after appointment (130.1 A1).

Under the old Code, we were required to keep threats under review, simple as that.  This has survived the revision (R210.7), but we now have added “application material” – 210.7 A1 – that helps define what such a review process should look like:

  • has new information emerged;
  • or have the facts or circumstances changed (facts cannot change, can they..?);
  • that impact the level of a threat;
  • or that affect the IP’s conclusions about whether safeguards applied continue to be appropriate?

Again, periodic review checklists may need to be enhanced.

 

Other paperwork: using specialists (Section 320)

To be honest, I never did like the old Code’s “obtaining specialist advice and services” section.  Its meanings were ambiguous; I never really understood in what circumstances periodic reviews had to be conducted and whether these were to be on a firm-wide or a case-by-case basis.

The new Code leaves us with no (ok, fewer) doubts.

The four “R”s in the section are key:

  • R320.3: “When an insolvency practitioner intends to rely on the advice or work of another, from within the firm or by a third party, the insolvency practitioner shall evaluate whether such advice or work is warranted.”
  • R320.4: “Any advice or work contracted shall reflect best value and service for the work undertaken.”
  • R320.5: “The insolvency practitioner shall review arrangements periodically to ensure that best value and service continue to be obtained in relation to each insolvency appointment.”
  • R320.6: “The insolvency practitioner shall document the reasons for choosing a particular service provider.”

So every time an IP plans to instruct a third party (or another department within the firm) to provide advice or work, they need to determine whether the instruction is warranted and then why they have decided on the particular provider, having in mind the need to achieve best value and service.  Then, they need to review periodically whether best value and service is being achieved for each appointment.

This sounds like another checklist or file note process per instruction together with more prompts on case reviews.

To reduce the detail required on each case’s instructions, it may be possible to create a firm-wide process evaluating the value and service provided by regular suppliers – in effect, an approved supplier list.  This would seem particularly relevant when using a specific service provider (e.g. storage agents, insurers/brokers and pension and ERA specialists) across your whole portfolio.

 

And more disclosure to creditors?

Oh yes!  In relation to using specialists, the Code says: “Disclosure of the relevant relationships and the process undertaken to evaluate best value and service to the general body of creditors or to the creditors’ committee” (320.6 A6) is an example of a safeguard to address a threat arising from instructing a regular service provider in the firm or those with whom there is a business or personal relationship.

The new section, “Agencies and Referrals”, also provides as an example safeguard similar disclosure to address threats created by any referral or agency arrangement (330.5 A2).

 

What about disclosure of ethical threats generally?

This is an area that appears to have been watered down.  The old Code stated that generally, it would be inappropriate for an IP to accept an appointment where an ethical threat existed (or could reasonably be expected to arise) unless disclosure were made prior to appointment to the court or creditors.

However, the new Code simply requires IPs to consider disclosure of the threats and the safeguards applied (210.5 A3)… although as disclosure is a safeguard, IPs would do well to disclose wherever this is practical (200.3 A3).

 

New Section (330): Agencies and Referrals

I would strongly urge you to read through Section 330 in full and consider how this impacts on your firm’s processes and communications.  There are a lot of disclosure and other safeguard requirements, which, when you think about it, could encompass a number of dealings.

For example, at the immaterial end of the spectrum, how do you decide where to send directors who have a Declaration of Solvency to swear?  Do you recommend the solicitor around the corner (or, now, one who is prepared to witness swearings remotely)?  Such referrals, even if the decision is a geographical no-brainer, must be subject to the rigorous evaluation and disclosure standards.

Of course, there will be other more material referrals, e.g. when assisting businesses outside (or prior to) formal insolvency or when conflicted from taking on an appointment or from advising directors personally, as well as recommendations made to individuals in IVAs.  These will require substantial documentary evidence that the appropriateness of the referral or introduction has been carefully and objectively considered and that a great deal of information (including the alternatives) has been provided.

 

Any change to referral fees?

There are some subtle changes in Section 340.

The new Code repeats the old Code’s principle that the benefit of any referral fees or commissions received post-appointment must be passed on to the insolvent estate.  The new Code extends the reach, though, in stating that no associate (as well as neither the IP nor their firm) may accept a referral fee or commission unless it is paid into the insolvent estate (R340.7).  Associates include connected companies and those with common shareholdings or beneficial owners (340.8 A1).

The new Code also puts a duty on IPs who do not control decisions on referrals to get information on referral fees received (340.8 A6).  This could be challenging for IPs in large firms or with a wide network of associates.

Its reach also extends to “preferential contractual terms… for example volume or settlement discounts” – these must also be passed on to the insolvent estate in full (R340.8).

Also, whereas previously the IP only needed to consider making disclosure to creditors, now, where an insolvency appointment is involved, any referral fee or commission payments must be disclosed to creditors (R340.6 and 7).

 

What about paying referral fees out?

The new Code is more direct in stating simply that an IP “shall not make or offer to make any payment or commission for the introduction of an insolvency appointment” (R340.4).  It also wraps the firm and associates in this prohibition and, again, if the IP does not control the referrals paid out by their firm or associates, they nevertheless need to ascertain what they are (340.8 A6).

I am not sure why we have now lost the old “furnishing of valuable consideration” prohibition.  After all, not every benefit is couched as a “payment”.

But then the old Gifts and Hospitality section has been substantially lengthened from half a page to four and a half pages, so non-monetary inducements connected with improper motives are caught elsewhere.

 

“Inducements, including Gifts and Hospitality” (Section 350)

This is another section that I’d recommend reading in full, as it has been beefed up.

The old Code had included assessing the appropriateness of a gift by having regard to what a reasonable and informed third party would consider appropriate.  However, the new Code makes the connection more directly with motive:

  • R350.6: “An insolvency practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the insolvency practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”
  • R350.7: “An insolvency practitioner shall not accept, or encourage others to accept, any inducement that the insolvency practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”

It goes further than this too, even stating that the Code’s requirements (including the “A”s) “apply when an insolvency practitioner has concluded that there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another” (350.9 A3).

Examples of such inducements that might still create threats are where (350.9 A3):

  • “An insolvency practitioner is offered hospitality from the prospective purchaser of an insolvent business…
  • “An insolvency practitioner regularly takes someone to an event…
  • “An insolvency practitioner accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.”

The Code also imposes an obligation on IPs to remain alert to inducements being offered to, or made by, close family members and requires IPs to advise the family member not to accept or offer the inducement, if it gives rise to a threat (R350.12 and 13).

 

New Section (390): “NOCLAR”

Presumably, accountants are already familiar with this acronym for “non-compliance with laws and regulations”.  The new section in the Insolvency Code certainly seems to be a lift-and-drop from the accountancy code, but in my view a clumsy one.

For example, instead of referring to the “firm”, which had been nicely defined and otherwise used throughout the Code (except where other lift-and-drops have been unsuccessful), this section refers to the IP’s “employing organisation”, which I think could mislead some into assuming that IP business owners do not need to apply many of the requirements.

But more fundamentally, this section fails to acknowledge IPs’ relationships with insolvents.

I can see how accountants working with live clients need to understand how they should react when they discover that their client has breached a law or regulation.  Although of course IPs often deal with live clients, the vast majority of their time is taken up as office holders over non-trading entities and individuals and it’s those engagements that – very often – reveal non-compliances committed by the insolvent.

The new Code makes no distinction between non-compliance committed by: (i) the IP’s/firm’s clients; (ii) the entity/individual over which the IP has been appointed office holder; or indeed (iii) the IP or their staff themselves.  I think that each of these situations gives rise to different concerns and so they each deserve a different approach.

In a nutshell, the core requirements of this section are: to explore all non-compliances (including suspected or prospective non-compliances); and then, unless they are clearly inconsequential non-compliances (except where they are money laundering related etc.), to report them upwards within the firm and, where appropriate, to those charged with governance of the entity/business and to appropriate authorities.  In addition, if the case is an MVL of an audit client or a CVA, the IP must consider communicating it to the audit partner/auditor (R390.12 and 13).

The Code also imposes similar exploration and internal reporting duties on insolvency team members.

Of course, there is an expectation that this will all be documented, although the Code only encourages IPs/team members to document the matter and actions taken (390.16 A2 and 390.20 A2).

Setting aside all the “consider” and “where appropriate” steps, what does this section actually require an IP/team member to do in all circumstances?

  • Take timely steps to comply with the NOCLAR section (R390.9)
  • “Seek to obtain an understanding of the matter” (R390.10 for IPs and R390.17 for team members)
  • For IPs: “discuss the matter with the appropriate level of management” (R390.11) and for team members: “inform an immediate superior” or, if they appear to be involved in the matter, “the next higher level of authority within the employing organisation” (R390.18)

In my view, these cumbersome NOCLAR requirements are OTT for the vast majority of non-compliances committed by insolvents (e.g. do IPs really need to discuss all director misconduct with “the appropriate level of management”?) and indeed a fair number of those committed by the IP/staff.  You might be able to rely on the “clearly inconsequential” paragraph (390.6 A2), but experience with RPB monitors has taught me that there are diverse opinions over what non-compliances are inconsequential.

 

New Section (380): “The insolvency practitioner as an employee”

Although clearly this section is most relevant in the volume IVA market, it is an important section for all IPs who act as employees.  Unsurprisingly, it reinforces the message that, even as an employee, the IP has a personal responsibility to ensure that they comply with the Code (R380.5).

Having said that, some statements seem to me unfair or perhaps the writers are simply treating IP employees as ethical novices.  For example, 380.5 A2 describes a circumstance that might create ethical threats: where the IP is “eligible for a bonus related to achieving targets or profits”… but nowhere does the Code highlight that the business/beneficial owner IP might be exposed to a similar self-interest threat.

However, the section cuts to the core in highlighting the tension that an IP seeking to administer engagements ethically may experience with their superiors and peers across the rest of the firm.  The Code doesn’t pull punches: in some circumstances, an IP’s efforts to disassociate themselves with the matter creating the conflict may demand their resignation from employment (380.7 A1).

 

My other gripes

Ok, this is just a final section to allow me to get some gripes off my chest.  My main ones are:

  • The whole of the Ethical Conflict Resolution section (140)

It took a debate with my partner, Jo, for me to understand that these requirements did not apply to a specific kind of conflict situation.  The problem I have is that this section, which refers to “resolving ethical conflicts”, sits awkwardly alongside the rest of the Code, which refers to “managing ethical threats and keeping them under review”.  In my mind, an ethical conflict is only resolved by removing it entirely, e.g. by walking away from an appointment, whereas in most circumstances an IP applies safeguards to manage threats to an acceptable level.

  • The lack of change to the insolvency examples section

Last year, there was some consternation over the ethics of retaining an appointment over an MVL converting to CVL.  The example in the old Code made no sense.  It had stated that: “Where there has been a Significant Professional Relationship, an insolvency practitioner may continue or accept an appointment…”  But the old Code had explained that a relationship is denoted as a Significant Professional Relationship (“SPR”) where, even with safeguards, the threats cannot be reduced to an acceptable level, so the IP should conclude that their appointment is inappropriate.  Therefore, how was it possible for an IP to continue with an appointment in the face of an SPR?  The new Code was the ideal opportunity to fix that.  But there has been no change: paragraph 520.4 still states that in some cases an SPR will not block an IP’s appointment or continuation in office and this conflicts with R312.7, which more strongly states that, in the face of an SPR, the IP “shall not accept the insolvency appointment”.

I have similar issues with the example at 510.2, which deals with an IP accepting an appointment after having worked as an investigating accountant for the creditor.  For starters, not all IPs are accountants, but they may still do investigation work for a creditor – the text indicates that those IPs are in the scope of the example… so why not change the heading?!  More importantly, the instructions include impossibilities: they state that, where the secured creditor is seeking to appoint the IP as an administrator or admin receiver, the IP needs to “satisfy them self (sic.) that the company… does not object to them taking such an insolvency appointment”.  But it then explains that an IP may still take the appointment, even if the company does object or where the directors haven’t had an opportunity to object… so the IP doesn’t need to “satisfy them self” then?!

On the bright side, at least IPs taking on Scottish or Northern Irish appointments are now better represented in the examples section.

 

And now the marketing footer

My partner, Jo Harris, has recorded two webinars covering the new Ethics Code (there was just too much for one sitting).  We have also: created new checklists to address the new sections such as instructing specialists and dealing with referrals; substantially revised our main ethics checklists to address specifically the new Code’s requirements; and enhanced other docs like progress reports and case review forms.

If you would like more information on signing up for access to our webinars, document templates – we’re offering the ethics templates as a standalone package or you can subscribe to all our document packs and future updates – or technical support service, please do get in touch with us at info@thecompliancealliance.co.uk.


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Appointment Numbers During Lockdown

Just a short blog today to let you know about a new page I’ve added: appointment statistics.

The past few weeks have been so disruptive, it has been difficult to discern how the demands on IPs have changed: are more companies toppling now or are many directors waiting out the storm?

At https://insolvencyoracle.com/appt-stats/ (and below for this post only), I have added graphs showing the ADM, CVL and MVL appointment notices published in the Gazette each week over the past couple of months.  I intend to update these graphs on a weekly basis.  The vertical line marks the day that the UK went into lockdown.


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Welcome measures to help IPs in these times

In my last blog post, I published a wishlist of measures that would help IPs to do their jobs in these difficult times.  Since then, some extraordinary steps have been taken very quickly to address many of them.  Here, I summarise those actions.

Taking on New Appointments

  • Notices of intention to appoint, and of appointment of, administrators: the Temporary Insolvency Practice Direction (judiciary.uk/publications/temporary-insolvency-practice-direction-approved-and-signed-by-the-lord-chancellor/) came into force on 6 April. Although it states that a statutory declaration by video conference may constitute a formal defect or irregularity, it confirms that this by itself shall not be regarded as causing substantial injustice, provided that the declaration is carried out in the manner specified in the Practice Direction:

“9.2.1. The person making the statutory declaration does so by way of video conference with the person authorised to administer the oath;

9.2.2 The person authorised to administer the oath attests that the statutory declaration was made in the manner referred to in 9.2.1 above; and

9.2.3 The statutory declaration states that it was made in the manner referred to in paragraph 9.2.1 above.”

UPDATE 30/05/2020: Please note that the authority for statutory declarations to be administered virtually in Scotland derives from Schedule 4 para 9 of the Coronavirus (Scotland) (No. 2) Act 2020 (http://www.legislation.gov.uk/asp/2020/10/enacted), which came into force on 27 May 2020.  The provisions are temporary only and have an expiry date of 30 September 2020, although this can be extended by regulations.  UPDATE 27/09/2020: the expiry date has been extended to 31 March 2021 by means of the Coronavirus (Scotland) Acts (Amendment of Expiry Dates) Regulations 2020.

  • There have been no regulatory measures to help directly with posting mailouts, but many IPs have been exploring outsourcing options. Although I’m sure there are many providers, I understand that Postworks is used successfully by several IPs.  Widespread use of delivery by email, I think, is still a work in progress: Turnkey and others are geared up to assist, but I think the issues are in compiling a list of email addresses that can be used.  Many IPs had moved to website delivery via a single R1.50 notice before the lockdown and I suspect that this process has become even more popular.
  • HMRC S100 documents: I have seen nothing to move forward from the Dear IP article (insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26) that stated that the HMRC email address is only to be used for “the initial pre-appointment notifications under the deemed consent or virtual meeting procedures”, so it seems to me that Statements of Affairs and adjournment notices etc. must still be posted.
  • Court activities: as far as I can tell and as set out in the Temporary Insolvency Practice Direction, the courts are doing a phenomenal job in keeping their virtual doors open. Bravo!
  • Physical meetings: the RPBs published guidance that: “where procedural meetings are required, virtual meetings will suffice in order to avoid breaching social distancing requirements.  A reasonable approach will be required to handling any creditor requests for physical meetings” (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic). Personally, I’m not sure how we’re supposed to take this.  Some may consider it reasonable to convene a physical meeting in a space large enough to accommodate social distancing.  Some others could consider it reasonable to dismiss creditors’ requests for a physical meeting altogether!  In my view, the reasonable approach would be to contact the requesting creditors to explore whether their concerns can be addressed in another way, e.g. an informal discussion or, if there are formal decisions to be made, insist that the “physical” meeting be held entirely remotely, thus requiring just a little departure from R15.6(6).
  • It seems that the Government’s intention to suspend the wrongful trading provisions has been met with some negativity by IPs (e.g. r3.org.uk/press-policy-and-research/news/more/29337/covid-19-corporate-insolvency-framework-changes-r3-response/), whereas the House of Commons’ briefing paper quotes other bodies, including the IoD and ILA, as welcoming the news (https://commonslibrary.parliament.uk/research-briefings/cbp-8877/). Although the change has not yet been made, the Government plans that it will be retrospective from 1 March 2020 and it will continue for 3 months thereafter.

 

Statutory Filings / Deliveries

  • The RPBs’ statement referred to above did not explain their expectations specifically in keeping up with progress reports, but it did acknowledge that the current difficulties could amount to a “reasonable excuse” defence for breaching statutory requirements. The statement highlighted the need to “have followed ethical principles and have justifiable, sound and well documented reasons for making those decisions”, i.e. where “reasonable steps to comply” are not enough to overcome the difficulties caused by the restrictions imposed on us in these extraordinary times.
  • The news on Tuesday that Companies House is now accepting filings by email was extremely welcome (https://content.govdelivery.com/accounts/UKIS/bulletins/28550aa). Understandably, it seems to be taking some time for Companies House to register documents at the moment and, if you physically mailed documents before they opened their doors to emails, you might consider sending them again by email.  I’m sure that Companies House won’t thank me for that though, so only seriously time-critical documents, e.g. ADM-CVL conversions, might merit such a second attempt.  The announcement included several warnings about how a failure to follow the instructions for emailing docs would result in them being rejected and, as Companies House filings by email are excluded from the deemed delivery provisions in R1.45, you would do well to ensure that staff follow the instructions to the letter.
  • I’m a little surprised that the InsS hasn’t sought to extend the deadline for D-reports, especially as they have clearly considered the logistics of collecting books and records. At first glance, Dear IP 95 appeared to concede that IPs didn’t need to take extreme measures to collect books and records, but when I looked closely, it did not such thing.  It replaced the previous instruction that IPs should locate and ensure that books and records are secured and listed as appropriate with a requirement that IPs “should continue to take all possible steps to locate and secure” them (https://content.govdelivery.com/accounts/UKIS/bulletins/284baba).  “All possible steps”?  Well, we weren’t going to be taking impossible ones!  It’s a shame that the InsS hasn’t confirmed that IPs can limit steps to reasonable ones in these times.

 

Case Administration

  • Although communications from the InsS, RPBs and HMRC regarding general case administration have been welcome, there has been little that has helped avoid cumbersome rules and other regulatory requirements. This is understandable, as the rules are the rules until a statutory instrument says otherwise.  However, at least the announcements have given us some comfort that the bodies appreciate some of our difficulties.
  • Included in these are, from the RPBs (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic):
    • “IPs may defer, on a short-term basis, non-priority work on existing cases (for instance investigatory work) and focus on new/urgent areas. IPs must take all reasonable steps to progress case administration in the longer term and ensure stakeholder financial interests are not prejudiced.” (Jo and I have been debating how, if on the other hand IPs have found that new engagements have taken a dip, now would be a good time to try to clear the decks for the future busy times.)
    • It may be acceptable to allow markets to recover before selling assets.
    • “Where a Notice of Intended Dividend has already been issued, we acknowledge that the payment of the dividend can be postponed and may be unable to be paid within two months”… but you will need to remember that, in these circumstances, the NoID process will need to begin again later (R14.33(3)).
    • “In order to provide flexibility for IPs to focus on new/urgent matters and to allow time for market recovery, we are relaxing the expectation in existing MVLs that creditors will be paid in full within 12 months provided that the IP continues to consider the company will be solvent in the medium term when markets have recovered.”
    • “When considering MVLs moving to a CVL (s.95), IPs may take longer than the deadline of seven days to notify creditors that the company is unable to pay debts in full within 12 months.”
    • “We acknowledge that it is not likely to be possible to comply with the SIP 3.1 requirement to respond to debtor enquiries ‘promptly’ and to close IVAs ‘promptly’ and accept that IPs will need to prioritise their work through the crisis period.”
    • The RPBs have also acknowledged that IPs will exercise their discretion in relation to CVAs and IVAs and they “accept that the discretion afforded to IPs in order to manage cases affected by the current crisis is necessarily wide”. I’m not sure how to take this: if a VA Proposal allows the Supervisor to exercise discretion, they hardly need the RPBs to tell them that they can do so, but if the Proposal does not allow any such discretion, then they cannot.  There seems to be a veiled message here, much like a lot of the revised Ethics Code, which seems to have been written with the practices of volume/consumer IVA providers in mind.
  • HMRC’s guidance (icaew.com/-/media/corporate/files/technical/insolvency/insolvency-news/coronavirus-insolvency-bulletin.ashx?la=en) includes:
    • A similar peculiar statement that they would expect IPs to exercise any VA discretion “to its maximum, with reference to creditors only if essential”. Well yes, that’s how a discretion should be exercised, isn’t it?  Let’s hope that HMRC is now realising how unhelpful it is to IPs to have modified out many of the discretions that originally had been proposed!
    • HMRC confirms that it will support a 3-month contribution break for coronavirus-impacted “customers”, but I think its in-bold confirmation that “there is no need to contact HMRC to request this deferment” risks misleading some, not least debtors who may expect an automatic payment break. If a VA’s terms do not allow the Supervisor to permit such a payment break, then this statement does not overcome this hurdle and creditors’ approval must be sought.
    • More helpfully, the guidance confirms that HMRC will not view post-VA VAT as due where the Government has already arranged for those VAT payments to be deferred. Unfortunately, the link HMRC has provided is already obsolete and the HMRC guidance does not refer also to the deferral of self-assessment income tax, but presumably the same principles apply?
  • The InsS continues to move into the electronic age, arranging for the following (to reduce the risks of fraudulent attempts, I’m not providing links):
    • ISA payment requests to be submitted with an electronic signature;
    • ISA payment requests and other CAU forms to be received by email; and
    • IVA registration fees to be paid by BACS.
  • HMRC has done likewise with its opening the way for all dividends to be paid via BACS. Unfortunately, if you have any dividends to pay to HMRC by cheque, HMRC has asked that you “hold on to them” (9 April release on insolvency-practitioners.org.uk/press-publications/recent-news UPDATE: additional guidance on paying dividends to HMRC by BACS is on this IPA page, dated 22/04/20).

 

And there’s more

Finally, some miscellaneous notifications include:

  • Must IPs complete file reviews in these times? Whilst not an official response, an RPB monitor emailed me swiftly after my last blog post.  She observed that, of course, the objective of a file review is to ensure that the case progresses as it ought to and that a firm’s reviewing policies should be designed to achieve this objective.  Thus, if an IP decides to relax their firm’s policy on file reviews in these extraordinary times, they should be considering how they can still try to achieve this objective and document why the firm’s adjusted policy will not compromise effective and compliant case administration wherever possible in the circumstances.  The monitor expressed the view that some kind of file review surely would still be possible in these times, even if access to the full case files is restricted.
  • Can office holders furlough employees? The ICAEW blogged references from .gov.uk guidance (https://ion.icaew.com/insolvency/b/weblog/posts/the-coronavirus-job-retention-scheme—clarity-for-administrators-and-directors), which describes the ability of Administrators to furlough staff as well as some of the finer points about directors’ positions.  Unfortunately, the .gov.uk guidance is not cut-and-dried and furloughing depends on the “reasonable likelihood of rehiring the workers”, so understandably IPs are exercising a great deal of caution before treading a path that could lead to an expensive challenge down the line.
  • Should IPs furlough their own staff? The ICAEW and the IPA have both issued warnings that they would not expect IPs to furlough to the extent that it compromises their ability to meet regulatory requirements (https://ion.icaew.com/insolvency/b/weblog/posts/business-continuity-for-insolvency-practitioners-during-covid-19).  The IPA has also required its members to keep it informed of the numbers and job titles of all furloughed staff as well as those unable to work through serious Covid-19 illness.
  • Are IPs key workers? R3 blogged (r3.org.uk/technical-library/england-wales/technical-guidance/covid-19-contingency-arrangements/more/29316/page/1/is-the-insolvency-profession-classed-as-a-key-sector-24-march-2020/) that likely they are, especially when administering cases that involve managing businesses that themselves are in the key sectors.  R3 also observed that the InsS considers that certain staff working in the RPS, Estate Accounts and ORs’ offices are delivering “essential public services”.  As much of an IP’s work is necessary to enable such InsS staff to deliver these public services, it would seem to follow that the IPs/staff would also be key workers.  Shortly after this post, however, the IPA emailed its members reminding them that it is a decision for each employer per the guidance at www.gov.uk/government/publications/coronavirus-covid-19-maintaining-educational-provision/guidance-for-schools-colleges-and-local-authorities-on-maintaining-educational-provision.
  • Showing us southerners that it can be done, the Scottish Government brought into force the Coronavirus (Scotland) Act 2020 in a matter of a couple of weeks. Amongst other things, it has extended the pre-insolvency moratorium period for individuals from 6 weeks to 6 months.  More details can be found at aib.gov.uk/news/releases/20202020/0404/coronavirus-scotland-act

 

Stay safe and keep well, everyone.


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How can the Insolvency Service and RPBs help in this time?

When the work-place exodus started, I was heartened to read the ICAEW’s acknowledgement that inevitably some statutory deadlines would be missed (although they hoped that remote-working would result in little disruption).  In contrast, the IPA’s two emails to members expressed the expectation that steps would be taken to ensure that statutory compliance continues.

But to be fair, those notices were issued a couple of weeks’ ago when our world looked quite different.  More recently in Dear IP 92, Steve Allinson, Chairman of the Insolvency Service Board, expressed his intention for the Service to do its best to support IPs on their assignments, stressing the need for us all to come together at this time (while keeping our social distance, of course!).

Steps that the InsS has already taken to facilitate the remote-operating of ISAs are very welcome and I hope that these mark just the beginning of changes needed to keep the insolvency wheels moving.

The insolvency technical and compliance community has long practised coming together to resolve difficulties.  Below is a summary of the suggestions of many who are struggling to help insolvency continue to work in these times.  We hold out hope that the InsS and the RPBs will help.

Taking on New Appointments

  • MVL Declarations of Solvency need to be sworn in front of a solicitor/commissioner for oaths. Solicitors are of the view that they must be in the physical presence of the one swearing (although the Law Society guidance is a little woollier).  Could guidance be given to solicitors/IPs on how this could be done virtually?  Better still, could the Act/Rules be temporarily relaxed to allow the author to verify these instead with a Statement of Truth.
  • ADM Notices of Intention to Appoint and Notices of Appointment present the same issue, so similar guidance/relaxation would be invaluable.
  • Posting mailouts is generally problematic – some IPs use commercial mailing providers, but often IPs/staff are simply using their own stash of stamps and making trips to the Post Office/Box, which is not wise – and we cannot be certain that there will be anyone physically present at the recipients’ offices to open the post in any event. The Act/Rules already allow for some mailouts to be dealt with by advertisement notice (e.g. Para 49(6) of Schedule B1 IA86 and R3.38(1) IR16), but not in relation to circulars to creditors (except with court permission).  Could there be a general power for an office holder to publish a notice, say in a Gazette (and such other way if they see fit), informing creditors who to contact/how to access the mailout and that this advertisement would be taken as satisfying the delivery provisions?  Of course, pre-CVL circulars are the responsibility of the director, so any such changes will also need to cover directors’ notifying about the S100 decision process (including any subsequent physical meeting notice) and the Statement of Affairs.
  • If the above is considered a step too far, then it would be useful to be able to write a one-pager to creditors inviting them to access the Statement of Affairs and other pre-S100 decision documents/notices via a website, rather than have to send bulky letters to creditors.
  • Of course, in addition to (or instead of) posting letters, IPs are now endeavouring to email statutory docs to creditors and others as much as possible. 45 states that deemed consent to email delivery occurs when a doc is emailed to the address to which the insolvent “had customarily communicated with” the recipient.  Email delivery is much easier than post in this time, so guidance that what is customary need not be proven would be useful, e.g. to enable directors/debtors simply to provide the IP with an email address for the recipient that the IP can take as valid.
  • HMRC requires notices of S100 decision processes to be sent to their email address, notifihmrccvl@hmrc.gov.uk, but it has not been made clear whether this email address also works for other S100 docs, e.g. the Statement of Affairs – clarification would be useful. An extension of this email address to allow also for post-appointment CVL circulars would also help. 
  • There is some concern that the court filings required in preparation of a CVA will be problematic in light of the courts’ limited activities: the Nominee’s report must be filed in court before the creditors and members can decide on the CVA Proposal.
  • SIP3.2 para 10 requires an IP to meet directors “face to face”. Clarification that this does not have to be a physical meeting would be useful.
  • Where a statutory physical meeting is required (e.g. where a creditor objects to a S100 decision proposed by deemed consent), it should be possible for everyone, including the convener, to attend the meeting virtually. Clarification of this would be valuable.
  • Many IPs are reluctant to consider taking on new appointments that might require them, their staff or agents to attend on-site. However, the business may need to enter an insolvency process and business owners/directors may be nervous to continue to be responsible for the businesses in this period waiting for the coast to clear for an IP to be appointed.  Do they shut up shop now and make everyone redundant?  Or do they furlough employees in the hope that the business might be sold once everyone emerges?  If they choose the latter course, could they be at risk of an allegation of wrongful trading?  Some clarification that business owners/directors would not be penalised for helping employees to continue to be paid via furlough payments in this time would be helpful for IPs advising business owners/directors.
  • On the other hand, some guidance for IPs on how to handle trading-on appointments would also be valuable.

Statutory Filings / Deliveries

  • Of course, some relaxation to statutory deadlines would be invaluable.
  • Some IPs are moving hell and high water to try to get progress reports issued, which can include asking one member of staff to attend premises to print docs, deal with mailouts etc. Personally, I would hope that the RPBs/IS would prefer IPs and their staff to stay at home even if this means that progress report (and other?) deadlines are missed.  In line with the Government’s key messages, some clarification from the RPBs/IS as to the importance (or not) of travelling to work simply to avoid certain breaches of statute/SIPs in these times would seem urgently required.
  • In particular, Para 107 only allows the 8-week timescale to deliver Administrators’ Proposals (and the 10-week timescale for any decision on those Proposals) to be extended by court order. Confirmation that Administrators need not apply to court to extend these timescales would be very welcome. 
  • If shifting deadlines is considered a step too far and the RPBs/IS wish for IPs to meet statutory deadlines wherever humanly possible, perhaps they could confirm that at least they, as regulators, will not look too unkindly on docs that are technically deficient as regards the disclosure requirements of statute & SIPs.
  • As above, it would be good to be able to notify creditors of statutory deliveries, e.g. Administrators’ Proposals, by public advertisement to avoid the problems with posting out packs.
  • At present, all filings to Companies House must be delivered by IPs in hard copy form. In addition to the logistical problems of posting letters mentioned above, IPs are also concerned at the potential for delays by Royal Mail etc. or Companies House such that time-critical dates are missed.  In particular, Form AM22 (notice of move from Administration to CVL) must be received by Companies House before the Administration ends automatically.  Therefore, a mechanism to enable all insolvency forms to be sent to Companies House by email would be valuable.
  • Another issue is extending Administrations by court order. These are always time-pressured at the best of times, but with the courts’ limited activity, there is real risk of Administrations ending automatically before a court order extending them can be granted.  Ideally, a temporary halt of the automatic ending provision (Para 76) and of any subsequent end-date consented to by creditors or the court would be valuable.  If this is a step too far, then perhaps Administrators could be allowed to seek a second extension by creditor consent, rather than having to resort to court.
  • It is now usually impractical for staff/IPs to review company records with a view to submitting CDDA D-reports. Of course they could submit an inconclusive D-report in the 3 month timescale and then, when they are able to review the records, they could submit “new information”.  However, this probably will be unhelpful to the DCRS staff, as in the future they may get a great number of “new information” submissions, which cannot be processed automatically by their rules engine.  Therefore, it is probably in everyone’s interests to extend the 3-month deadline for D-reports.

Case Administration

  • An email address for HMRC forms, e.g. VAT769s, VAT100s, VAT7s, VAT426/427s, would be valuable. Of course, this would involve a number of HMRC departments, but VAT769s and VAT426/427s are particularly needed to be dealt with by email.
  • In light of limited court activity, there is a risk that Trustees in Bankruptcy will not be able to make appropriate applications to avoid bankrupts’ homes revesting under S283A IA86. A pause in the 3-year timescale would help.  Failing this, could S283A(3) be flexed to allow a Trustee to have “applied” for a relevant order by simply posting a skeleton application to the court?
  • Consultations with employees of insolvent entities to comply with TULRCA (and TUPE) have previously been achieved usually by getting all employees together. This should now be avoided, but it does leave office holders with logistical difficulties in complying with TULRCA.  Presumably Job Centre Plus attendance has also ended.  Some guidance on how IPs should approach TULRCA and employee interaction generally would be valuable.
  • It is not clear how furlough payments will work for employees of a business already in an insolvency process. For example, if the office holder retains staff on furlough payments in the hope that they might be able to sell the business (and TUPE transfer all staff) in the future, how will those furlough payments be treated?  Confirmation that these will not be sought back either from the insolvent estate as an expense or from the purchaser would be welcome.
  • Some IPs are office holders of nursing homes and they require regular, usually daily, on-site attendance by them or their staff. Some confirmation that they would be viewed as key-workers might assist.
  • On some cases, office holders had already issued notices of intended dividend before the lock-down, but they will have problems issuing cheques for some time. 34(1) requires the office holder to declare the dividend within 2 months of the last date for proving.  It is possible for the IP to declare the dividend, but not pay cheques out until later, but in the past this has been frowned upon by the RPBs.  Some guidance that this is acceptable in these circumstances would be helpful.
  • In other cases, an office holder would like to extend an already-notified last date for proving in recognition of creditors’ difficulties in submitting proofs and therefore also extend the 2-month timescale for declaring the dividend (as well as the 14 days to adjudicate all claims – R14.32(1)), but there is no way to do this under the rules. The ability to do so would be useful, otherwise the whole process would need to be started again once we all emerge.
  • Dear IP 92 urged IPs to show forbearance “where possible” to individuals who are finding it difficult to meet financial commitments. Although many IVA Proposals will provide capacity for payment breaks/reductions, many will not.   In some cases, the debtors will already have used up their payment break quota.  In other cases, the flexibility simply will not be there in the Proposals.  Of course, variations can be sought but these are cumbersome especially in these times when mailouts are difficult.  It is difficult to see what can be done about IVA terms, but we would welcome some guidance.
  • The same will apply to CVAs based on regular contributions.
  • On many IVAs (involving tax debts) and CVAs, HMRC has modified Proposals to restrict the Supervisor’s ability to propose a variation, e.g. variations may not be allowed in the first year. HMRC has also modified many VAs by including more stringent clauses where the insolvent fails to pay contributions on time.  Perhaps HMRC could notify IPs that, during this time, all such modifications may be considered waived.
  • The AiB has issued a Dear Trustee letter (https://www.aib.gov.uk/sites/default/files/dear_trustee_-_covid-19_-_expanded_ptd_contingency_arrangements.pdf) stating that he believes it would be reasonable for IPs not to extend the period of the Protected Trust Deed in order to ingather contributions that failed to be paid in this period. Personally, I do not believe that the same automatically applies in IVAs (as the Supervisor may be required to take specific action in line with the IVA terms), but the AiB’s letter may create confusion for IVA debtors and IPs in this situation.  Therefore, some guidance may be useful.
  • File reviews are pretty-much impossible for anyone who does not administer electronic case files. Confirmation from the RPBs that IPs are not expected to carry out regular formal file reviews during this period would help.

 


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MLR19: as if we didn’t have enough to do already!

It took less than one month for the draft new Money Laundering Regs to come into force, but I struggle to see how many of the additional burdens loaded onto our shoulders have anything to do with minimising the risks of money laundering.

I realise that I can be guilty of seeing insolvency work as somehow special.  However, the inability or refusal of legislation drafters to recognise that insolvency office holders do not have client relationships with the entities/individuals over which they are appointed means that the ever-increasing AML burdens feel so pointless and nonsensical when it comes to IPs.

I wrote as much when I responded to HM Treasury’s consultation back in June 2019 and I was pleased to see that the ICAEW had responded with many of the same concerns, including that MLR-regulated people should not be burdened with a new requirement to report discrepancies to the Registrar of Companies (see below).  But of course, HM Treasury has been required to make these changes largely to stay in line with the EU’s Fifth Money Laundering Directive (“5MLD”), so inevitably there would be no special treatment for IPs.

The new Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (“MLR19”) can be found at http://www.legislation.gov.uk/uksi/2019/1511/contents/made and I think the Law Society’s summary at https://www.lawsociety.org.uk/policy-campaigns/articles/anti-money-laundering-guidance/ (scroll down for the 5MLD bit) is a particularly good one.

 

How Accurate are PSC Registers?

I have yet to meet anyone working in insolvency who thinks that the adoption of the new People with Significant Control (“PSC”) register was a good idea.  In the good old days, more often than not companies’ annual returns could be relied upon as a true record of shareholdings.  Now that the annual return has been replaced with the confirmation statement, we often don’t know where we are as regards shareholdings!  In addition, from what I’ve seen, many PSCs are incorrect – it seems that many directors or their agents have trouble with percentages (how difficult can it be to determine whether someone has a shareholding of “more than 50% but less than 75%”?!).

People with Significant Control include, not only 25%+ shareholders, but also anyone who otherwise exercises significant influence or control over the company.  Thus, the traditional formulaic approach to registering PSCs, which only ever seem to focus on 25%+ shareholders, does not take into consideration other signs of control, such as those exerted by shadow directors or those relinquished to the significant others of nominal shareholders.

With the abundance of PSC errors in mind, it seems to me that a new MLR19 requirement could add to IPs’ to-do list in a great deal of cases.

 

New Obligation to Inform the Registrar of Companies of Discrepancies

The MLR19 introduces to the MLR17 a new Regulation 30A, which requires relevant persons (i.e. IPs etc.) to:

“report to the registrar any discrepancy the relevant person finds between information relating to the beneficial ownership of the customer and… [that which] becomes available to the relevant person in the course of carrying out its duties under these Regulations.”

When might an IP discover a discrepancy?

One could argue that, as AML CDD should be completed right at the start of the engagement, we might not be certain that the register contains any discrepancy until we investigate the shareholdings, say, to draft a Statement of Affairs… and therefore knowledge of any such discrepancy does not become available “in the course of carrying out” AML duties, but rather it emerges after this point.  However, as the MLR17 require “ongoing monitoring”, such an argument is probably a little weak.

Companies House has provided guidance on reporting discrepancies on the register: https://www.gov.uk/guidance/report-a-discrepancy-about-a-beneficial-owner-on-the-psc-register-by-an-obliged-entity.

They have also provided an online form (https://www.smartsurvey.co.uk/s/report-a-discrepancy/), but, although they provide twelve categories of people who might use the form, insolvency practitioners are not listed *sigh*

 

What will RoC do with the information?

The MLR19 state that:

“the registrar must take such action as the registrar considers appropriate to investigate and, if necessary, resolve the discrepancy in a timely manner.”

So… an IP informs RoC that the PSC register is incorrect on a company in CVL, because someone is recorded as a between-50%-and-75%-shareholder when in fact they are the 100% shareholder.  Is it “necessary” for RoC to resolve this discrepancy?  In an insolvency, it will not make a darned bit of difference, will it?

 

So do IPs really need to inform RoC of the discrepancy?

If you want to comply with the MLR19/17, then yes you do.

Typical, isn’t it?  The Regs require IPs to go to the trouble of notifying RoC of pointless pieces of information, but the Regs give RoC a nice little get-out to avoid having to do anything about it.  What a waste of our time!

 

Widening the MLR-Regulated Net

The MLR19 captures some new businesses into the MLR-regulated net.  Most will only be relevant to IPs when they are appointed over entities/individuals who are trading in these areas – letting agents, art dealers, cryptoasset exchange and custodian wallet providers – but I wonder if the widened definition of “tax adviser” may capture more non-formal insolvency work carried out by IPs themselves.

“Tax adviser” has been newly defined as:

“a firm or sole practitioner who by way of business provides material aid, or assistance, or advice, in connection with the tax affairs of other persons”.

So… you help a company or an individual to agree a TTP with HMRC in order to avoid a formal insolvency process – does this now make you a “tax adviser”?

I appreciate that some firms already put all prospective new engagements through their AML CDD process whether or not they strictly fall as MLR-regulated engagements, but I suspect that just as many other firms do not.  Now they may have to think twice.

 

Training for “Agents”

The MLR19 widens the scope of those for whom a MLR-regulated firm is responsible for training.  As well as the MLR17’s “relevant employees”, now firms must train (and keep records of training) for:

“any agents it uses for the purposes of its business whose work is of a kind mentioned in paragraph (2)”, which covers any work relevant to the firm’s compliance with the MLR17 or which is otherwise capable of contributing to the identification or mitigation of the firm’s ML/TF risks or the prevention or detection of ML/TF to which the firm is exposed.

So… an IP instructs agents to sell an insolvent’s assets and to receive the proceeds of sale to pass on to the IP in due course.  It seems to me that, whether or not the sale transaction is caught by the MLR17*, the agents’ work could contribute to the IP’s ML/TF risks or exposure.  And… what about if you use ERA agents, who might come across ghost employees or illegal workers, surely those ERA agents also can affect your ML/TF risks and exposure?  Do the MLR19 capture these agents??

(* If you have not already read the CCAB’s draft insolvency guidance, I would recommend it – at http://ccab.org.uk/documents/20190830CCAB%20InsolvencyAppendixFDraft_18forHMT.pdf.  In brief, the draft guidance explains that only a Trustee in Bankruptcy sells their own assets – all other insolvency office holders act as agents – so, while a TiB must ensure that relevant asset purchasers are subject to AML CDD, no other office holders need “routinely” do so.  Personally, while I see the technical argument, I do wonder whether it reflects the spirit behind the Regs to allow an Administrator to sell a business for £1m without AML CDD, but to require a TiB to do AML checks on someone who wants to buy a bankruptcy asset for >€15,000.)

Jo and I have debated whether chattel agents etc. are truly agents: do they act under the IP’s delegated authority to enter into legal relations on the IPs behalf?  Even if this is a legal definition of “agent”, does this hold true for the application of the word in the MLR19?

The problem I have is that HM Treasury’s consultation was clearly not interested in agents in general.  The consultation document referred to networks of agents used in a Money Service Business, those involving “multi-layer arrangements with sub-agents who deal with frontline customers”.  But the MLR19 make no such distinction.

 

Prescriptive EDD for Transactions/Parties in High Risk Countries

The MLR17 already highlighted the need for EDD and enhanced ongoing monitoring where a business relationship or transaction involves someone in a “high-risk third country”.  The MLR19 have added (new Reg 33(3A)) six elements of EDD that “must” be included in these circumstances.

In the main, these new statutory requirements are not unusual.  They include: obtaining more information on the customer, their beneficial owner, the nature of the relationship or reason for the transaction, the source of funds/wealth, and getting senior management to approve the establishing or continuing of the business relationship.

The final requirement puzzled me, though:

“conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination”

Unless an office holder is trading (or is monitoring the trading of) the insolvent’s business, it is difficult to see how this works in an insolvency context.

Nevertheless, IPs’ systems may need to be changed in order to cover the newly-prescribed EDD and ongoing monitoring where someone established in a high risk third country is encountered.  For a more thorough explanation of this area, you may want to look at the Law Society’s guidance mentioned above.

 

Other Clarifications

The MLR19 include several other tweaks, which to be fair are valuable clarifications of the MLR17 and which may affect the finer points of some firms’ processes and templates.  Again, I’d recommend the Law Society’s guidance for a detailed summary.

Should IPs wait until the RPBs issue/endorse new guidance before we make changes?

The ICAEW has posted a summary of the changes primarily for accountants and has noted that the CCAB’s Guidance will be updated in due course (https://www.icaew.com/technical/legal-and-regulatory/anti-money-laundering/fifth-anti-money-laundering-directive-5mld).  The IPA doesn’t appear to have posted anything specific on the MLR19, but I expect that they too will look to the updated CCAB Guidance.  However, in light of the fact that the CCAB insolvency-specific guidance was not issued even in draft for over 2 years after the MLR17 came into force, I won’t be holding my breath.


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The Changing Face of Pre-Packs

To explore pre-pack trends, I reviewed 120 SIP16 statements issued over the last 3 years.  Coupled with the Insolvency Service’s intriguing revised guidance on the phoenix rules and their summer report, I’ve been wondering how far we have come in 3 years and what else needs to change.

In this blog, I explore:

  • What is the Government’s timetable for changing pre-packs?
  • How many pre-pack purchasers themselves go out of business? And how many of these were connected purchasers?
  • Does the survival of pre-pack purchasers indicate that the Pool is working?
  • What is the trend in using the Pool?
  • Why do more connected Newcos fail?
  • Are there many serial pre-packers? Do they use the same IPs?
  • What effect will the new anti-phoenix provisions have?
  • What is going on with the Insolvency Service’s revisions of their S216/17 guidance?
  • Will HMRC’s move to preferential creditor change things?
  • How should pre-pack regulation change?

 

Has the heat on pre-packs cooled off?

A significant item on the Insolvency Service’s to-do list for the past few years has been the “pre-pack review”.  The Service’s 2017 Regulatory Report (published in May 2018) referred to the Government’s “review to evaluate the impact of the voluntary measures in order to inform any future decisions on whether legislative measures are required to regulate connected party sales in administration” and the anticipation back then was that the review would be completed by the autumn of 2018.

The Service’s 2018 Regulatory Report (published in May 2019) stated that the Service “have carried out” the review and “the Government hopes to be able to publish the findings and outcome from the review shortly”.

Of course, the Government’s more pressing pre-occupations inevitably have delayed this publication.  Also, since May 2019, the IS/RPB focus seems to have been squarely on the regulation of Volume IVA Providers.  Perhaps there has been little to say on pre-packs because the Service has been waiting for its review to reach the top of the Secretary of State’s pile, but that document is a year older now.  I wonder if its findings and outcome are quite so relevant.

 

The sunset clause is setting

Hanging over this topic, of course, is Section 129 of the Small Business, Enterprise and Employment Act 2015, which allows the Government to make regulations prohibiting or imposing conditions on Administration sales of property to connected parties – pre-packs or otherwise.

This power will end on 26 May 2020.

There is no time left to consult on draft legislation.  The review was carried out behind closed doors and remains under wraps.  Presumably, the profession will have no opportunity, publicly, to engage in the proposals.

Have we seen any hints about what we are likely to see?  I suspect the RPBs have been involved in the Service’s review, so I was intrigued to read the IPA’s Oct-19 response to the Service’s call for evidence on regulation slip in: “the IPA supports the consideration of changes to the pre-pack pool to better scrutinise connected party sales”.  As we all feared, the focus still appears to be on the Pool.

In its May-18 submission to the Service’s pre-pack review, R3 emphasised the value of looking wider: “The Government should support and help develop the reforms made in 2015 and should look at the impact of the reforms as a whole, not just the Pre-pack Pool.”  Hear, hear.

Presumably, the Government’s review will consider the question: are pre-packs any different now than they were before the November 2015 changes?

 

What makes a pre-pack bad?

The answer to this question very much depends on who you ask.  I think that IPs in general will say that a bad pre-pack is one that does not maximise the realisation of the company’s property.  I think that the world before the Teresa Graham report would have said that a bad pre-pack was one that did not instill confidence that the company and the IPs were acting in creditors’ best interests.  That’s what the revised SIP16 and the Pool were intended to fix by providing more information on the pre-pack strategy in the SIP16 Statement and by the Pool providing an independent opinion on whether there are “reasonable grounds” for the proposed deal.  One of my frustrations with the Pool is that they have never explained how they measure such reasonableness.  How do they decide what is bad?

In my review of 120 SIP16 Statements, I came across one brave IP who, despite the prospective purchaser receiving a negative opinion from the Pool member, decided to do the deal anyway.  In his Administration Proposals, he had added a one-page summary, over and above the standard SIP16 disclosure, of why he had decided to complete the sale.  It made perfect sense to me and went to the core of the Administrator’s role: to achieve an Administration objective, which generally involves returning as much value as possible to creditors.  The Administrator also had explained why he believed the submission to the Pool was materially flawed.

 

What about the survival of Newco?

One of the accusations levelled against pre-packs is that they simply give new life to a business that ought to be terminated.  The more sceptical suspect that some directors hatch plans to phoenix by pre-pack and what is to stop them doing it all over again?

Therefore, I decided to test the survival of Newco: how many companies that purchased a business by a pre-pack later terminated?

* Sample size: 120 cases with no repeat of Administrator firm in any one period.  “Terminated” includes dissolutions and MVLs.

Now I know that, of course, the more recently the pre-pack occurred, the more likely Newco will still be alive.  But I still find this graph striking: my 2015 pre reforms group dated from June to October 2015, so how is it that their outcomes are so different from Nov/Dec 2015 cases?  This suggests to me that the measures introduced in November 2015, including the new SIP16, significantly changed the face of pre-packs.

 

Doesn’t this show that the Pre-Pack Pool is working?

No!  Only 6 cases in my sample involved the Pool.  It’s true that all those Newcos are still live companies, but setting those aside, the graph is still the same shape: the change in the survival rate of Newco from before the 2015 reforms cannot be attributed wholly (or even largely) to the Pool.

The Pre-Pack Pool’s 2018 report described its aim as “to provide assurance for creditors that independent experts have reviewed a proposed connected party pre-pack transaction before it is completed”, but it then acknowledged that “for this independent scrutiny to be seen to be effective, reference to the pre-pack pool needs to be seen as an essential part of the pre-pack administration process by both creditors and prospective applicants”.  So… at the moment, there is general apathy towards the Pool – from creditors and applicants – so it cannot do its job of providing assurance that someone other than the IP has considered the proposed sale..?  But perhaps the general apathy towards the Pool is because creditors and applicants do not see a need for the Pool opinion.  Perhaps they do not require the Pool’s opinion, not least I think because it is not at all clear what the Pool is measuring.

 

How many pre-packs have the Pre-Pack Pool reviewed?

Use of the Pool continues to fall.  The Pool’s 2018 report stated that, in 2018, there were 24 referrals to the Pool.  This is more referrals than in 2017, when there were 23 referrals, but as a percentage of the total number of connected party sales, 2018’s referrals were down on 2017.

With such a tiny referral rate, I do not think that the Pool can take any creditor for any material changes in pre-pack practices.

 

Would it help if the Pool were made compulsory for all connected party pre-packs? 

Help how?  What is the ill that the Pool is trying to remedy?  Is it still the case that there is a general lack of confidence?  If there is a general distaste for connected pre-packs, does this not simply stem from the general perception that it cannot be right for a director to fold Oldco, buy the business and assets, and then trade on with Newco?  I cannot see that increasing the frequency of the Pool’s opinion will counteract this perception.

I would be very interested to read how the Government’s review explains what is currently wrong with pre-packs.  I think that many in the profession think that, if the Government simply wants to “do something”, then making the Pool compulsory is the least damaging answer and far preferable than restricting Administrators’ powers to complete pre-packs.  That’s as may be, but I cannot see that expanding the Pool’s scope would achieve anything other than adding to the costs of the process.

 

Are connected party Newcos any more likely to fail?

This graph looks at how many of the failed Newcos had been connected to Oldco, compared to how many of the sample as a whole had been connected:

* Failures exclude terminations by MVL or dissolution

This graph does indicate that, with the exception of 2018 pre-packs, there has been a greater percentage of connected party Newco failures than there should have been if they were evenly spread across the whole population of Newcos… in my small sample, at least.  That’s not such good news for anyone hoping to avoid regulation.

My personal view is that this demonstrates how some directors of failing businesses struggle to face realities: they cannot come to terms with the thought of walking away from the business.  Of course, it is especially difficult for those who have tied up their personal assets in the fate of the business.  I wonder if connected potential purchasers need to be better advised on the challenges facing them, how Newco risks repeating Oldco’s mistakes and may even face new challenges in retaining disillusioned customers and suppliers.  The problem is that the potential Administrator is not in a position to give that advice, given the conflict of interests.  So does this mean that no one helps these directors face realities?

 

What about serial pre-packers?

Of course, there could be another reason for connected Newco failures: are some directors abusing pre-packs to dump debts and start again?  If this is the case, then wouldn’t we see serial pre-packers: if a director gets away with it once, then wouldn’t they be sorely tempted to do it again a few years down the line?

Firstly, here is a breakdown of the terminations in my sample:

So yes, I accept that seven Newco ADMs is a very small sample, but this in itself suggests that serial pre-packing is not widespread.  Arguably, though, even this small number is too many.

Here is a summary of the fates of the purchasers who themselves went into Administration:

It is interesting that two of the businesses were sold to connected parties for a second time.  It is alarming to see that one of those Newco-v2s went into CVL c.1 year after the second pre-pack sale.  It will be interesting to see how the other second connected purchaser fares with a bit more time.

The breaking point seems to be generally around the 2-year mark.  If this is the case, then it is encouraging to see that only one 2017 case and no 2018 cases failed.  Contrasting this with the four 2015 pre reform pre-pack purchasers that failed, doesn’t this again suggest that something happened with pre-pack practices after the 2015 reforms?  The purchasers after the 2015 reforms seem more robust than those before.  Also, my pre-2015 reforms cases only number 17% of the total, so it is even more disproportionate that so many purchaser failures appear in this group.

… and again, I cannot see that the Pool can take credit for this.  Did something else happen to refine the pre-pack process?

 

Should IPs be handling serial pre-packs?

It is alarming to see that, in one of the cases (Case 3), the same IPs then carried out the CVL of the second connected Newco.  I cannot tell you what happened to the assets of the Newco-v2 in this case, because the liquidators have not yet filed a progress report (despite the fact that the anniversary was in September!).  Even if the IPs felt that they were not conflicted from the appointment, surely there would be a significant perceived conflict, wouldn’t there?

 

Will the new anti-phoenix provisions change things?

In essence, the Finance Bill 2019-2020 provides that, where a director has been involved in at least two insolvent companies in a 5-year period and the same director is involved in a further Newco, HMRC can make that director joint and severally liable for the past tax liabilities of all those companies (https://www.gov.uk/government/publications/tax-abuse-using-company-insolvencies).

On the face of it, Cases 3 and 5 above might have fallen foul of these provisions (subject to the finer detail of the criteria) had they been in force at the time.  Of course, it is possible that other cases in my sample had been bought out of a pre-pack prior to 2015, so perhaps it would have affected more.  I also haven’t analysed the 14 CVLs, which may include some other cases where directors have sought to stay in the same business.

Although the provisions will only capture tax liabilities arising after the legislation comes into force, I think the new Finance Bill 2019-2020 has great potential to discourage serial pre-packers and thus I think it could do more to improve creditors’ confidence in pre-packs than the Pool.

I also think that the Insolvency Service’s new approach to R22.4 may impact on connected party pre-packs.

 

What have the current phoenix provisions got to do with pre-packs?

Over the past year, the Insolvency Service have been tweaking their “Re-use of company names” guidance.

In March 2019, Dear IP 87 tweaked the guidance to make clear that, although R22.4(3) provides a 28-day timescale for issuing the notice to creditors/Gazette, it must nevertheless be given and published before the director begins acting in relation to a successor business.  Then, in November 2019, their online guidance expressed the opinion that directors “cannot give notice under this rule if the company is not already in liquidation, administration, administrative receivership or in a CVA”.

So how can a R22.4 notice be given in a pre-pack?

If the sale is completed on the day that the Administration begins, it seems to me that it will be impossible for anyone to comply with R22.4 unless the purchaser decides to close its doors for a couple of days to allow time for the notices to be “given and published”.

 

But the phoenix provisions only apply to liquidations, not Administrations, don’t they?

True, a director can only fall foul of the phoenix provisions if Oldco goes into liquidation.  Of course, some Administrations do exit into liquidation.  Assuming that moves to CVL occur c.1 year after the Administration begins, the stats for the year ending 30 September 2019 suggest that c.28% of all Administrations moved to CVL in that year.  So directors involved in connected pre-packs need to be aware of the phoenix provisions.

The problem is that there is no logic to the application of S216/17 to Para 83 CVLs.

It seems to me that directors of the healthier businesses are targeted.  If the company has sufficient property for a non-prescribed part dividend, the Administration moves to CVL… and thus S216/17 are triggered.  But if the company has no money for unsecured creditors (other than by way of a prescribed part), then it probably will move to dissolution… and S216/17 are not triggered.  In other words, if the directors have pulled the plug when the company’s assets are still relatively meaty, then they risk falling foul of the phoenix provisions.  But if they have bled the company dry and then bought the remaining business for a negligible sum, then they can avoid the phoenix issues!

 

Could ADM-to-dissolution be an abuse of the process?

Of course, a company should only go into Administration if it can achieve an objective.  One of the big unanswered questions is: regardless of whether unsecured creditors receive a dividend from the Administration, does the survival of the business (involving TUPE-transferred employees, landlords with no gap in tenancy, customers with continuing services and products) achieve the second Administration objective of a better result for creditors as a whole than winding-up?  I understand views are divided on this.

Setting this aside though, I think that it will be much easier to achieve the third Administration objective from April 2020.  One of the problems with achieving the third objective in pre-pack scenarios is that there are usually no prefs, as all the employees are transferred to Newco.  However, from April 2020, HMRC will become a (secondary) preferential creditor in the vast majority of insolvencies.  Therefore, where a company has no employee prefs, the third Administration objective may be fairly easily achieved by paying a small distribution to HMRC… and then moving to dissolution.  HMRC has handed would-be phoenix-avoiders a lifeline.

 

But if HMRC is a pref, won’t they control the process?

Some of you may be groaning: does this mean that we risk going back to the bad old days when HMRC used to modify Administrators’ Proposals so that most Administrations exited to liquidation?  I don’t think so.

If the Administrator thinks that neither of the first two Administration objectives are achievable, then they make this statement – a Paragraph 52(1)(c) statement – in their Proposals.  The consequence is that they don’t ask any creditors to decide whether to approve their Proposals, but these are deemed approved if no creditors requisition a decision.  If HMRC (or any creditor, for that matter) wants to modify the Proposals to ensure that S216/17 are triggered by the Administration exiting to liquidation, they would need to put their hand in their pocket and pay Administrators to convene a decision process.  I can’t see HMRC doing this, can you?

Of course, HMRC may still vote on Administrators’ fees – that’s a whole different concern.

 

What effect will all this have on pre-packs?

In summary, my thoughts on the future are:

  • If the Pool is made compulsory for connected party pre-packs, undoubtedly this will reduce the number of pre-packs. Businesses will continue to be sold, but they will avoid falling into the statutory definition of “pre-pack”.  Even now, we’re seeing more business sales that are considered to fall outside the SIP16 definition, with some IPs going to the length of getting legal advice for comfort.
  • The new phoenix provisions, where HMRC will chase directors of serial insolvencies, will also reduce the number of pre-packs. Businesses will continue to be sold, but connections with former directors will be less likely (or simply less clear).
  • Theoretically, the Insolvency Service’s focus on the technical intricacies of the current phoenix provisions should reduce the number of pre-packs or at least reduce the number of pre-pack Administrations exiting to liquidation… but it is not clear to me whether the Service is clobbering directors for technical breaches of compliance with Rs22.
  • HMRC’s leg-up to preferential creditor could make pre-packs more attractive, as directors could more easily avoid the S216/17 provisions, but in reality I think this is too small a factor to influence directors’ decisions.
  • It seems to me from my small sample that pre-pack practices have changed materially from early 2015. Therefore, what I would prefer to see from the Government’s review is empirical evidence on what has been achieved by all the 2015 reforms and what still remains to be remedied, before they take steps to legislate pre-packs.

 

 


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InsS Annual Review, part 3: less carrot, more stick?

The Insolvency Service’s September 2018 report pulled no punches in expressing dissatisfaction over some monitoring outcomes: we want fewer promises to do better and more disciplinary penalties, seemed to be the tone.  Has this message already changed the face of monitoring?

The Insolvency Service’s September 2018 Report can be found at www.gov.uk/government/publications/review-of-the-monitoring-and-regulation-of-insolvency-practitioners and its Annual Review of IP Regulation is at www.gov.uk/government/publications/insolvency-practitioner-regulation-process-review-2018.

In this article, I explore the following:

  • On average, a quarter of all IPs were visited last year
  • But is there a 3-yearly monitoring cycle any longer?
  • 2018 saw the fewest targeted visits on record
  • …but more targeted visits are expected in 2019
  • No RPB ordered any plans for improvement
  • Instead, monitoring penalties/referrals of disciplinary/investigation doubled
  • Is this a sign that the Insolvency Service’s big stick is hitting its target?
  • IPs had a 1 in 10 chance of receiving a monitoring or complaints sanction last year

 

How frequently are IPs being visited?

With the exception of the Chartered Accountants Ireland (which is not surprising given their bumper year in 2017), all RPBs visited around a quarter of their IPs last year.  It’s good to see the RPBs operating this consistently, but how does it translate into the apparent 3-yearly standard routine?

Firstly, I find it odd that coverage of ACCA-licensed IPs seems to have dropped significantly.  After receiving a fair amount of criticism from the InsS over its monitoring practices, the ACCA handed the regulating of its licensed IPs over to the IPA in October 2016.  Yet, the number of ACCA IPs visited since that time has dropped from the c.100% to 79%.

Another factor that I had overlooked in previous analyses is the effect of monitoring the volume IVA providers (“VIPs”).  At least since 2014, the Insolvency Service’s principles for monitoring VIPs has required at least annual visits to VIPs.  Drawing on TDX’s figures for the 2018 market shares in IVAs, the IPA licensed all of the IPs in the firms that fall in the InsS’ definition of a VIP.  On the assumption that each of these received an annual visit, excluding these visits would bring the IPA’s coverage over the past 3 years to 56% of the rest of their IPs.  Of course, there are many reasons why this figure could be misleading, including that I do not know how many VIP IPs any of the RPBs had licensed in 2016 or 2017.

The ICAEW’s 64% may also reflect its different approach to visits to IPs in the largest firms: the ICAEW visits the firm annually (to cover the work of some of their IPs), but, because of the large number of IPs in the firm, the gap between visits to each IP within the firm is up to 6 years.  I cannot attempt to adjust the ICAEW’s figure to exclude these less frequently visited IPs, but suffice to say that, if they were exceeded, I suspect we might see something approaching more of a standard c.3-yearly visit for all non-large firm ICAEW-licensed IPs.

These variances in the 3-year monitoring cycle standard, which cannot be calculated (by me at least) with any accuracy, mean that there is very little that can be gleaned from this graph.  Unfortunately, the average is no longer much of an indication to IPs of when they might expect to receive their next monitoring visit.

 

The IPA’s new approach to monitoring

In addition to its up-to-4-visits-per-year shift for VIPs, at its annual conference earlier this year, the IPA announced that it would also be departing from the 3-yearly norm for other IPs.

The IPA has published few details about its new approach.  All that I have seen is that the frequency of monitoring visits is on a risk-assessment basis (which, I have to say, it was in my days there, albeit that the InsS used to insist on a 3-year max. gap) and that it is a “1-6 year monitoring cycle – tailored visits to types of firm” (the IPA’s 2018/19 annual report).

In light of this vagueness, I asked a member of the IPA secretariat for some more details: was the plan only to extend the period for those in the largest firms, as the ICAEW has done, or at least only for those practices with robust in-house compliance teams with a proven track record?  The answer was no, it could apply to smaller firms.  He gave the example of a small firm IP who only does CVLs: if the IPA were happy that the IP could do CVLs well and her bond schedules showed that she wasn’t diversifying into other case types, she likely would be put on an extended monitoring cycle.  The IPA person saw remote monitoring as the key for the future; he said that there is much that can be gleaned from a review of docs filed at Companies House.  He explained, however, that IPs would not know what cycle length they had been marked up for.

While I do not wish to throw cold water on this development, as I have long supported risk-based monitoring, this does seem a peculiar move especially in these times when questions are being asked about the current regulatory regime: if a present concern is that the regulators are not adequately discouraging bad behaviour and that they are not expediting the removal of the  “bad apples”, then it is curious that the monitoring grip is being loosened now.

Also, now that I visit clients on an annual basis, I realise just how much damage can be done in a short period of time.  It only takes a few misunderstandings of the legislation, a rogue staff member or a hard-to-manage peak in activity (or an unplanned trough in staff resources) to result in some real howlers.  How much damage could be done in 6 years, especially if an IP were less than honest?  Desk-top monitoring can achieve only so much.

What this means for my analysis of the annual reports, however, is that the 3-year benchmark for monitoring visits – or one third of IPs being monitored per year – is no longer relevant ☹ But it will still be interesting to see how the averages vary in the coming years.

 

Targeted visits drop to an all-time low

Only 10 targeted visits were carried out last year – the lowest number since the InsS started reporting them – and it seems that all RPBs are avoiding them in equal measure.

But 2019 may show a different picture, as several targeted visits have been ordered from 2018 monitoring visits…

 

Are the Insolvency Service’s criticisms bearing fruit?

I was particularly alarmed by the overall tone of the Insolvency Service’s “review of the monitoring and regulation of insolvency practitioners” published in September 2018.  In several places in the report, the InsS expressed dissatisfaction over some of the outcomes of monitoring visits.

I got the feeling that the Service disliked the focus on continuous improvement that, I think, has been a strength of the monitoring regime.  Instead, the Service expected to see more investigations and disciplinary actions arising from monitoring visit findings.  The report singled out apparently poor advice to debtors and apparently unfair or unreasonable fees or disbursements as requiring a disciplinary file to be opened with the aim of remedies being ordered.  It does seem that the focus of the InsS criticisms is squarely on activity in the VIPs, but the report did worry me that the criticisms could change the face of monitoring for everyone.  

2018 is the first year (in the period analysed) in which no monitoring visit resulted in a plan for improvement.  On the other hand, the number of penalties/referrals for disciplinary/investigation action doubled.

Could the InsS’ report be responsible for this shift?  Ok, the report was published quite late in 2018, in September, but I am certain that the RPBs had a rough idea of what the report would contain long before then.  Or perhaps the Single Regulator debate has tempted some within the RPBs/committees to be seen to be taking a tougher line?  Or you might think that these kinds of actions are long overdue?

I think that the RPBs have tried hard over the last decade or so to overcome the negativity of the JIMU-style approach to monitoring.  In more recent years, monitoring has become constructive and there has been some commendably open and honest communication between RPB and IP.  This has helped to raise standards, to focus on how firms can improve for the future, rather than spending everyone’s time and effort analysing and accounting for the past.  It concerns me that the InsS seems to want to remove this collaborative approach and make monitoring more like a complaints process.  In my view, such a shift may result in many IPs automatically taking a more defensive stance in monitoring visits and challenging many more findings.  Such a shift will not improve standards and will take up much more time from all parties.

Getting back to the graph, of course a referral for an investigation might not result in a sanction at all, so this does not necessarily mean that the IPA has issued more sanctions as a consequence of monitoring visits.  Also, the IPA’s apparent enthusiasm for this tool may simply reflect the IPA’s (past) committee structure whereby the committee that considered monitoring reports did not have the power to issue a disciplinary penalty, but could only pass it on to the Investigation Committee.  As this was dealt with as an internal “complaint”, I suspect that any such penalty arising from this referral would have featured, not in the IPA’s monitoring visit outcomes, but in complaint outcomes.

So how do the RPBs compare as regards complaints sanctions?

 

Complaints sanctions fall by a quarter

Although the IPA issued relatively fewer sanctions last year, I suspect that the monitoring visit referrals will take some time to work their way through to sanction stage, so it is unlikely that this demonstrates that the monitoring visit referrals led to a “no case to answer”.

What this and the previous graph show quite dramatically, though, is that last year the ICAEW seemed to issue far fewer sanctions per IP than the IPA.  As mentioned in my last blog, the IPA does license a large majority of the VIP IPs and there were more complaints last year about IVAs than about all the other case types put together.  One third of the published sanctions also were found against VIP IPs.

 

Likelihood of being sanctioned is unchanged from a decade ago

In 2018, you had a 1 in c.10 chance of receiving an RPB sanction, which was the same probability as in 2008…

I find it interesting to see the IPA’s and the ACCA’s results converge, which, if it were not for the suspected VIP impact, I would expect given that the IPA deals with both RPBs’ regulatory processes.

There’s not a lot that can be surmised from the number of sanctions issued by the other two RPBs: they’re a bit spiky, but it does seem that, on the whole, the ICAEW and ICAS has issued much fewer sanctions.  It seems from this that, at least for last year, you were c.half as likely to receive a sanction if you were ICAEW- or ICAS-licensed as you were if you were IPA- or ACCA-licensed.

 

Is a Single Regulator the answer to bringing consistency?

True, these graphs do seem to indicate that different regulatory approaches are implemented by different RPBs.  However, I do think that some of that variation is due to the different make-up of their regulated populations.  There is no doubt that the IVA specialists do require a different approach.  To a lesser degree, I think that a different approach is also merited when an RPB monitors practices with robust internal compliance teams; it is so much more difficult to have your work critiqued and challenged on a daily basis when you work in a 1-2 IP practice.

Differences in approach can also be a good thing.  Seeing other RPBs do things differently can force an RPB to challenge what they themselves are doing and to innovate.  My main concern with the idea of a single regulator is the loss of this advantage of the multi-regulator structure.

Perhaps a Single Regulator could bring in more consistency, but it would never result in perfectly consistent outcomes.  I’m sure I’m not the only one who remembers an exercise a certain JIEB tutor ran: all us students were given the same exam answer to mark against the same marking guide.  The results varied wildly.  This demonstrated to me that, as long as humans are involved in the process, different outcomes will always emerge.