Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The Rules’ complexities: get used to them!

In their report on the 2016 Rules’ review, the Insolvency Service all but acknowledges that some of the Rules leave IPs playing Twister, being forced into shapes that just won’t fit.  However, there are few admissions that things need to change.  Generally, all we can hope for is a review-on-the-review, which will consider further what, if anything, should change.

In this article, I cover:

  • The CVL process – top of the InsS’ list for change
  • The InsS maintains a general reluctance to fix fees
  • The new decision processes – successful or too complicated?
  • The InsS sees few problems with committees, dividends, the lack of prescribed forms, SoAs and personal data
  • But there are a handful of odds-and-sods that the InsS intends to change

The InsS report on their review can be found at https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

My personal consultation response is at https://insolvencyoracle.com/consultation-responses/

CVLs to change

One area that the InsS does appear committed to change is the CVL process.  In scope for consideration are:

  • The fact that the Rules only empower an office holder, not a director (or an IP acting on their instructions), to deliver documents by website
  • The fact that, although the Temporary Insolvency Practice Direction allows remote statutory declarations, a more permanent change to verifying Statements of Affairs would be beneficial
  • The fact that the Rules do not provide for the liquidation estate to pay any non-R6.7 pre-appointment expenses, e.g. the costs of seeking the shareholders’ resolution to wind up
  • Some respondents’ requests for more time to consider S100 decisions and SoAs

I find the last point a irritating: the new Rules’ S100 process for commencing CVLs is already more creditor-friendly than the IR86’s S98.  Now, the Statement of Affairs must be received by creditors at the latest the business day before the decision date, whereas under the IR86 the SoA only needed to be provided to the meeting.  Also, the new Rules’ 3-business-days-between-delivery-and-the-decision-date means that the notice period is usually one day longer than it was under the IR86. 

True, few CVLs need to happen quickly, but an extension in the period really must be accompanied by wider scope for the advising IP’s costs, as well as those of agents and solicitors, to be paid from the estate where the work is done with a view to the CVL.

 

A lacklustre response on fees

It was disappointing to read the InsS’ opening comment on the general subject of fees that:

“It is not certain that the rules on a necessarily moderately complex topic can be made clearer”. 

Pah!  You’re just not thinking hard enough, guys.

But at least we have some comfort that the InsS has “particularly noted concerns around rules 18.24 to 18.27 on changes to the bases of remuneration”, a topic on which I have blogged on several occasions, and they propose to review these fees rules “at a future date”.

While the InsS notes “concerns that the new Rules are not effective for small cases, including the absence of the ability of remuneration in a CVL to default to Schedule 11 scales”, they stated that “stakeholders”suggested “that reintroducing this measure… would make the process more complicated”.  Strange, I’m not sure why anyone would be against this measure.

They also stated that it might make “the process burdensome and more expensive rather than more efficient” if the rules were to provide different fee criteria for small cases, although the report does not make clear to what suggestion this was alluding. 

In my consultation response, I had suggested a de minimis statutory fee (after all, the OR has a set fee of £6,000) in recognition of the basic statutory and regulatory requirements of all CVLs, BKYs and WUCs.  This IP statutory fee either could be granted as automatic or, if the InsS weren’t comfortable in taking off all the reins, could be approved using the deemed consent process.  Personally, I was not suggesting different fee criteria for small cases, I was suggesting that this could be the standard for all cases, leaving the office holder to seek approval in the usual way for any fees above this de minimis level. 

I’m not entirely surprised that they’ve ignored such a suggestion from little me.  However, to suggest that there is no process by which the Rules could be changed to help IPs avoid the burden and expense of seeking the court’s approval where creditors refuse to engage in a decision procedure on fees is disappointingly defeatist and, I suspect, reflects a persistent lack of understanding of the difficulties encountered by many IPs.

Not even fees estimates to change

The report also noted that several respondents had made suggestions to simplify the fees estimate requirements.  The InsS gave several reasons why they felt there should be no changes, including:

  • the fees estimate provisions align with the statutory objective that regulators ensure that IPs provide high quality services at a fair and reasonable cost (hmm… does spending truck-loads of time creating a fees estimate pack really achieve this?);
  • “the level of fees charged by officeholders have often been a cause of complaint amongst creditors and sanctions by their regulators” (“often”?  Really??  The InsS Regulatory Report for 2021 reported that 5 out of 423 complaints were about fees and only one of the 53 regulatory sanctions listed was about the level of fees); and
  • “amending the Rules in the ways that have been suggested would have the effect that creditors would once again find it difficult to scrutinise and challenge remuneration due to a lack of timely information”. 

It’s a shame that the InsS appears to view the time that IPs spend in complying with the copious information requirements as time – and cost to the estate – well spent.

The case for physical meetings

Before the new Rules came into force, I think that many of us thought that removing the power to convene a physical meeting and replacing this with a variety of decision processes was unhelpful and an unnecessary complication.  Although the InsS report indicates that these views have persisted, personally I think that 5 years of experience with the new decision processes, as well as the pandemic lockdowns, has led many of us to think that maybe this new normal of decision-making isn’t so disastrous after all. 

But I do struggle to accept the report’s contention that “there is some suggestion that the new processes have not been detrimental to creditor engagement”, unless by “engagement” they simply mean “voting”.  It seems the InsS is arguing that correspondence and deemed consent decision processes “may encourage creditor engagement precisely because they reduce the need to spend time and money actively interacting with officeholders in cases of lesser interest”.  Hmm… this might explain why it seems that some creditors lodge objections to deemed consents and then fail to engage when the IP is forced thereafter to convene another decision procedure. 

I also had to smile at the InsS’ suggestion that the increased number of creditor complaints over the complexity of the decision processes may actually reflect creditors’ increased interest in engaging!

Decisions, decisions…

Fundamentally, the InsS report concludes that the new processes require no material changes.  In particular:

  • The InsS is happy with the 11.59pm cut-off time;
  • The InsS is happy that non-meeting votes cannot be changed (R15.31(8)); they state that, to provide otherwise “would require a framework to govern exactly how and when that could happen” (Would it really?  It’s not as if we have a framework for changing a vote submitted by proxy, do we?)
  • The InsS is happy that there is no ability to adjourn a non-meeting process; they consider that “naturally officeholders would not use a non-meeting process where there was any indication that an adjournment might be needed”
  • The InsS is happy that their Dear IP 76 encouragement for IPs to take a pragmatic approach as regards the statutory timescales for delivering documents to overseas creditors is sufficient
  • In response to some comments that office holders would value the discretion to convene a physical meeting, the InsS believes that at present “the restriction on physical meetings is operating correctly, this does not rule out future changes in this area”

But the InsS has indicated that a couple of suggestions are worthy of further consideration:

  • That creditors with small debts should not be required to prove their debt in order to vote
  • Fixing the apparent inconsistency in requiring meetings, but not non-meeting decision procedures, to be gazetted

Information overload

The InsS report does acknowledge that “information overload” as regards creditors’ circulars for decisions is “a core concern”.  However, they suggest that this is in part because some IPs “are still in the process of determining how best to use and present the new decision-making options”.  Charming!  But, InsS, you cannot escape the truth that the new Rules require an extraordinary amount of information – R15.8 alone covers a page and a half of my Sealy & Milman!

Surely we can cut out some of the gumpf, can’t we?  For example, some people raised the point that R15.8(3)(g) requires pre-appointment notices to include statements regarding opted-out creditors even though no such creditors would exist at that stage.  The InsS suggests the solution lies in adding yet further information in such notices if IPs “think that reproducing the literal wording of the rules could cause confusion”. 

This implied confirmation that IPs do need to provide such irrelevant statements in notices is frustrating, given that the court had previously expressed the view (in re Caversham Finance Limited [2022] EWHC 789 (Ch)) concerning the similarly irrelevant requirement of R15.8(3)(f) for notices to refer to creditors will small debts:

“I think that Parliament cannot have intended that redundant information should be included on the notice”. 

Well, the InsS has spoken: they do require such redundant information.

Are decisions like dominoes?

I love it when the InsS writes something that makes me go “ooh!” 

The report describes the scenario where a decision procedure was convened to address several decisions, but then “a physical meeting is requested in one of those decisions but not the others”.  Someone had suggested that the physical meeting be convened to cover all the original proposed decisions or that the Rules make clear that the request applies only to one. 

The InsS has responded that they consider that:

“the Rules are clear that each decision is treated separately for the purposes of requests for physical meetings”. 

While I can see this from Ss 246ZE(3) and 379ZA(3) – these refer to creditors requesting that “the decision be made by a creditors’ meeting” – I have not seen this being applied in practice. 

So this means that every time a creditor asks for a physical meeting, it seems the director/office-holder should ask them what decision(s) they want proposed at the meeting and, if there are any decisions that they don’t list, then these decisions should be allowed to proceed to the original decision date.  Interesting.

What about concurrent decision processes?

The report noted comments that the Rules are unclear as to whether a decision procedure can run concurrently with a S100 deemed consent process in order to seek approval of pre-CVL expenses or the basis of the liquidator’s fees. 

The InsS’ reaction to this issue is curious.  The report merely flags the “risk” that the decision procedure on fees would be ineffective where the creditors nominate a different liquidator to that resolved by the company (would it?  Why??). 

So… does this mean that the InsS doesn’t see any technical block to these concurrent processes?  Are we any clearer on this debate that has been running since 2017?

What about the reduced scope for resolutions at S100 meetings?

The report notes that the new Rules have excluded the IR86’s provision that S98 meetings may consider “any other resolution which the chairman thinks it right to allow for special reasons”, which was previously used as the justification for S98 meetings also considering the approval of pre-CVL fees.  Does this omission affect the ability for fees/expenses decisions to be made at S100 meetings?

The InsS’ response to this one is equally cryptic.  They appear to be saying that, as “rule 6.7 now includes expenses that were omitted from the Insolvency Rules 1986”, the “any other resolution” provision is no longer necessary. 

I don’t get it: R6.7 is no wider in scope than the old Rs 4.38 and 4.62, so there’s no remedied omission as far as I can see.  The problem is that the new Rules still lack an explicit provision that the initial S100 meeting may consider other resolutions, such as approval of the R6.7 expenses and indeed the basis of the liquidator’s fees.  At least it’s nice to have the InsS’ view that there is no problem, I suppose!

Committee complexities

The InsS report does not pass comment on whether respondents’ questioning “the value of continually requesting that creditors decide whether to create a committee” was a good point worth taking forward.

The report does suggest that the InsS won’t be taking forward issues around the establishment of a committee where there are more than 5 nominations.  The InsS considers that the decision in Re Polly Peck International Plc (In Administration) (No. 1), [1991] BCC 503, “remains relevant”.  This decision concluded that, “where more nominations are received than available seats on the committee, that a simple election should be held with those nominees who receive the greatest number of votes (by value) filling the vacancies”.  Ah yes, the simple election – simples! 

The more recent decision, Re Patisserie Holdings Plc (In Liquidation) ([2021] EWHC 3205 (Ch)), suggests that even where fewer than 5 nominations are received, those nominations will only be decisive where they have been made by the majority creditors.  Therefore, it seems to me that we are still left with a cumbersome committee-formation process stretching over two decision processes.

No going back on prescribed forms

The InsS is of the view that the decision to abolish prescribed forms was the correct one.  The report states that there does not appear “to be truly widespread difficulty” and they maintain that their impact assessment had accommodated the familiarisation cost appropriately. 

Although I think this unfairly plays down the impact on small businesses, I do think the boat has sailed on this debate.  I would have loved the InsS to have provided optional templates to support the prescribed content rules, but given that even the InsS’ own proof of debt form does not help creditors to meet all the Rules’ requirements, it is probably safer that they did not.

No easy fixes for dividends

An age-old bugbear is the hassle for all parties where a dividend payment is paltry.  It does the profession no favours when office holders are required to post out cheques for sums smaller than the postage stamp. 

I understand that the InsS did consider the pre-IR16 request to provide a statutory threshold for dividend payments below which they need not be paid.  But I’d heard that this had been considered unconstitutional, as every creditor has the right to the dividend no matter how small.  Instead, the InsS gave us the “small debts” provisions, which I think do the opposite and only increase the likelihood that office holders will be sending small payments to creditors who consider it is just not worth their trouble. 

This time around, it was suggested to the InsS that creditors be entitled to waive their dividend rights in favour of a charity or that this process could be automatic for payments below a certain amount.  The InsS rejected this suggestion, citing that it would simply add a different administrative burden onto office holders and creation of an automatic process would impair creditors’ rights to repayment.

The report does a good job of explaining why a NoID for an ADM must be sent to all creditors, not just those who have not proved as in other cases.  This is because the ADM NoID triggers the set-off provisions of R14.24, so all creditors need to know about it.  So no change there either.

Some respondents commented on the generally unnecessary duplication of requiring employees to submit proofs even though the IP receives information about their claims sent to the RPO.  This is an area that the InsS has noted for future consideration.

SoAs and personal data

I’m sure we remember the kerfuffle created by Dear IP chapter 13 article 97, which seems (or attempts) to grant IPs the discretion to breach the Rules requiring the circulation to creditors of personal data in Statements of Affairs.  Well, it seems that the InsS has already forgotten it.

As regards suggestions that the Rules might restrict the circulation of the personal details of employee and consumer creditors, the report states that the InsS is:

“satisfied that the current balance struck by the Rules remains an appropriate one” 

Oh!  So does that mean they will be recalling the Dear IP article?

Respondents also raised other concerns regarding the disclosure of personal details:

  • the requirement for non-employee/consumer creditors’ details to be filed at Companies House, so this would include personal addresses of self-employed creditors etc.
  • the need to disclose an insolvent individual’s residential address on all notices
  • the fact that, if the InsS is truly concerned with creditors being able to contact each other, then wouldn’t email addresses be more relevant?

The report states that “these issues will remain under consideration for amendment in future updates to the Rules”.

The opt-out process: who cares?

In my view, far too much space in the report was devoted to explaining the feedback of the creditor opt-out process, with the conclusion that the InsS “will give further thought to whether there should be any changes to, or removal of, these provisions”. 

I was not surprised to read that few creditors – “less than 1%” (personally, I would put it at less than 0.1%) – have opted out.  One respondent had a good point: don’t the opt-out provisions give the impression “that information provided by officeholders has no value or interest”?  Even the report referred to creditors opting out of “unwanted correspondence”.  Doesn’t this suggest something more fundamental, that in many respects the Rules are overkill and that communications could be made far more cost-effective?

Odds-and-sods to fix

The report acknowledged the following deficiencies in the Rules… or in some cases the InsS admitted merely the potential for confusion:

  • ALL: the court’s ruling in Manolete Partners plc v Hayward and Barrett Holdings Limited & Ors ([2021] EWHC 1481 (Ch)), which highlighted the limited scope of “insolvency applications” in R1.35 leading to additional costs – this issue has been singled out by the InsS as being one of the “most pressing” to resolve
  • ADM: the requirement for the notice of appointment of Administrators to state the date and time of their appointment – in view of the expansive comments by the courts on this topic, it is surprising the InsS only intends to “give further consideration to removing this requirement”
  • ADM/CVL/MVL/WUC: oddly, the report states that, as R18.3(1)(b) does not explicitly require a progress report to include details of the company (but just the bankrupt), this “gives the appearance of an error so may be confusing”.  However, R18.3(1)(a) states that reports need to identify “the proceedings”, which under R1.6 includes information identifying the company, so I don’t understand the problem.  In contrast with some of the items mentioned above, the InsS apparently thinks that this issue is of such significance that they “will look to rectify this in a future update to the Rules”.  Guys, where are your priorities?!
  • CVL: “The differing use of the word ‘between’ in rules 6.14(6)(a) and 15.4(b)” (i.e. in one case, the InsS believes it does not include the days either side of the “between”, but in the other case, I think they believe it does) – the InsS has set aside for further review whether the contexts make this inconsistency sufficiently clear
  • BKY: the fact that R10.87(3)(f) lists the contents of a notice being that the Trustee will vacate office once they have filed a final notice with the court, but the Act/Rules do not require the Trustee to file such a notice
  • BKY/WUC: the 5-day period in which to nominate a liquidator or trustee after the date of the OR’s notice – the InsS acknowledged that the short timescale has caused issues (indeed! Especially considering this seems to be the only Rules’ timescale that does not start on delivery of the notice, but rather on the date of the notice)
  • CVA/IVA: Rs 2.44(4) and 8.31(5) appear to have caused some confusion as they now state that a supervisor “must not” (previously: “shall not”) vacate office until the final filing requirements have been met
  • CVA: the fact that there is no provision to file at Companies House any notice of a change of supervisor – again, the InsS’ response is surprisingly non-committal; they will merely “consider whether this justifies creating an additional filing requirement for officeholders”
  • IVA: R8.24 was overlooked in the EU Exit changes and still reflects the wording required when the UK was part of the EU

So much to do, so little opportunity

This article demonstrates the Insolvency Service’s long to-do list.  And this is only the Rules’ review.  Last month, the InsS issued a call for evidence on the personal insolvency framework and they will have a fundamental role in the statutory debt repayment plan process expected to be rolled by the end of this year… and of course no doubt behind the scenes they are working on the response to the proposed single regulator consultation. 

With such high profile projects, when on earth are they going to find the time to get back to the Rules?!


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HMRC guidance note on S100 notices: what exactly does it mean?

I’m sure you have all seen the HMRC guidance note, “Deemed Consent Procedures”, but what does it actually mean?  I have asked HMRC and received some answers.

The guidance note can be found at: https://www.icaew.com/-/media/corporate/files/regulations/regulatory-news/april-2022-deemed-consent-procedures-update.ashx (amongst other places).

“Deemed Consent Procedures” only?

R3 notified members of the guidance note under the heading, “HMRC Insolvency Guidance – Deemed consent procedures”.  Similarly, the IPA piece read: “HMRC update: we draw your attention to an update from HMRC on deemed consent procedures” and the ICAEW news heading was “April 2022: Deemed consent procedures update”.  The emphasis on the deemed consent process in the R3/RPB emails was not surprising given the title of the HMRC note, but does this reflect HMRC’s message?

Firstly of course I think it can be assumed that HMRC was not writing about all deemed consent process notices, e.g. notices proposing to extend an administration.  The note’s contents make clear that it applies only to “initial notification of a CVL”, by which I assume they mean the pre-CVL S100 notice, not the initial notification after the CVL has begun.

But did HMRC intend the change to affect only S100 deemed consent notices?  Nowhere in the HMRC note was any mention made of virtual or physical meeting notices.

A changed email address?

The original Dear IP article (chapter 8 article 26) and corresponding R3/RPB bulletins that notified us of the HMRC request to email S100 notices gave an email address of notifications.hmrccvl@hmrc.gsi.gov.uk, whereas the latest guidance note gives a different address: hmrccvlnotifications@hmrc.gov.uk (and incorrectly states that this was the email address that was given in January 2018).

Has HMRC got the email address in its new guidance note wrong?  Or have they changed the email address?  At present, the old one works.

HMRC’s response

After a couple of attempts, HMRC responded to my queries as follows:

Our recent comms note should have reflected the same instruction as the Dear IP article, with the only difference being that we now want IPs to stop using the mailbox where there is a compliance interest (as defined in our recent comms note). HMRC would like all S100 notices to be delivered in the same manner and to a compliance caseworker or the mailbox where there is no active interest.

Thank you.  So we can ignore the misleading title of the HMRC guidance note: all S100 notices – for virtual or physical meetings and for deemed consent processes – should be emailed to their mailbox or, where there is a compliance matter, delivered to the HMRC caseworker.  I also gather from this response that the email address is the one described in the Dear IP article.

What is the practical effect of the change?

Ok, setting aside my gripes about the wording of the note, what change is HMRC looking for? 

With effect from 1 June 2022, as quoted above, on prospective CVLs where there is an HMRC compliance interest, HMRC would like the S100 notice to be sent to the compliance caseworker, not emailed to their mailbox.

This will mean some more diligence when preparing for a S100 to establish whether there is a compliance interest and, if so, to get the details of the HMRC caseworker. 

The HMRC note states that a compliance matter “could be an ongoing compliance check or other correspondence regarding determination of the amount of any of the company’s tax liabilities”.  The words “could be” suggest to me that this is not an all-encompassing definition, but it seems to me that you could use this wording as a prompt in any questionnaire to directors to supply details of the caseworker where such a matter exists.

What if you don’t get full information from the directors?  Surely, all you can do is ask.

Will there be an update to Dear IP?

At present, the original Jan-18 HMRC request remains in the online Dear IP bank, at https://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26.  I asked HMRC if they would please publish an update to this article (and/or withdraw this obsolete article) also via Dear IP, preferably making absolutely clear what HMRC now wishes.

What about a central bank for HMRC guidance notes?

While we’re on the subject, do you find it as frustrating as I do that there is no central bank for all these HMRC guidance notes?  I now have a folder dedicated to all these missives, which seem quite randomly produced on all sorts of subjects.  HMRC also appears to rely on the RPBs and R3 to notify members of new notes, who then often need to relay these to staff members to action. 

Wouldn’t it be better if there were a dedicated free-access web space for all these notes especially for future reference, much like Dear IP?


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A tale of two views: is a paid creditor still a creditor?

The Insolvency Service’s report on the 2016 Rules review contains some interesting gems.  It’s a detailed report, which demonstrates they have scrutinised the consultation responses.  The result is a list of proposed fixes to the Rules – most are welcomed, a few are alarming.

In this blog, I describe what I found was the most surprising and alarming statement in the report.  It relates to the age-old question: is a paid creditor still a creditor?  The report’s statement is surprising, as it is the polar opposite of a comment published by the Insolvency Service 5 years’ ago.  And it is alarming because the report states merely that the Rules need to be made “clearer”, which suggests that we have all been misinterpreting the Rules over the past 5 years.  But hey ho, we’re only talking about fee-approval and Admin extensions!

The Insolvency Service’s report is available at: https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

Is a paid creditor still a creditor?

If a creditor’s claim is discharged (and not subrogated to the payer) after the start of an insolvency proceeding, should that creditor still be treated as a creditor for decision procedures and report deliveries?

Before I left the IPA in 2012, the question began to be discussed at the JIC.  It turned out to be a hotly debated topic and I never did learn the conclusion.  I’d always hoped that there would be a Dear IP on the subject to settle the matter once and for all (subject to the court deciding otherwise, of course).  It was such a live topic at that time that surely the 2016 Rules were drafted clearly, weren’t they?

The general principle?

I had heard a rumour long ago that the Insolvency Service’s view was once-a-creditor-always-a-creditor.  I understood that the basis for this view was that creditors are generally defined as entities who have a claim as at the relevant date, so the fact that the creditor’s claim may have been discharged later does not change their status as a creditor.

Of course, this doesn’t work if, after the insolvency commences, the creditor sells their debt (or it is otherwise discharged by a third party): the purchaser/settlor tends to acquire the creditor’s rights, so the original creditor would no longer be entitled to a dividend or to engage in decision procedures – there are Rules and precedents to address these scenarios.

I can see where this view might come in handy, e.g. where an office holder had already paid creditors in full and only afterward realises that creditors have not yet approved their fees.

However, this view always seemed illogical to me: why should a paid creditor be entitled to decide matters that no longer affect them, e.g. the office holder’s fees or the extension of an Administration?  Indeed, some paid lenders refuse to engage where their debt has already been discharged, even though an Administrator may need all secured creditors’ consents to move forward.

Setting aside this issue, it could be argued that in some respects the 2016 Rules support a once-a-creditor-always-a-creditor view.  For example, R15.31(1)(c) states that in CVLs, WUCs and BKYs, a creditor’s vote is calculated on the basis of their claim “as set out in the creditor’s proof to the extent that it has been admitted”, which could indicate that post-commencement payments are ignored for voting purposes. 

But then what about R14.4(1)(d), which states that a proof must:

“state the total amount of the creditor’s claim… as at the relevant date, less any payments made after that date in relation to the claim… and any adjustment by way of set-off in accordance with rules 14.24 and 14.25”? 

Is the “claim” the original sum or the adjusted sum?  If, for the purposes of identifying the “claim” for voting purposes, conveners are supposed to ignore post-commencement payments made, then doesn’t R14.4(1)(d) (and R15.31(1) – see below) mean that they should also ignore any set-off adjustment?  That doesn’t make sense, does it?

Administrations are always “special”, aren’t they?!

R15.31(1)(a) provides that creditors’ claims for voting purposes are calculated differently for ADM decision procedures.  It states that in ADMs creditors’ votes are calculated:

“as at the date on which the company entered administration, less (i) any payments that have been made to the creditor after that date in respect of the claim, and (ii) any adjustment by way of set-off…”.

This seems pretty unequivocal, doesn’t it?  A paid creditor would have no voting power in an ADM decision procedure.

It is not surprising therefore that R15.11(1) provides that notices of ADM decision procedures must be delivered to:

“the creditors who had claims against the company at the date when the company entered administration (except for those who have subsequently been paid in full)”.

So the natural meaning of these Rules seems to be that paid creditors have no voting power and therefore do not need to be included in notices of decision procedures.  This seems logical, doesn’t it?

What about prefs-only decision procedures?

These Rules led me to ask the Insolvency Service via their 2016 Rules blog: what is the position where an Administrator is seeking a decision only from the prefs, especially where those creditors also have non-pref unsecured claims?  Do the Rules mean that, where a pref creditor’s claim has been paid in full, the pref creditor is ignored for the prefs-only decision procedure? 

Or does the fact that the creditor hasn’t actually been “paid in full” because they have a non-pref element mean they should still be included in the prefs-only process?  And does that mean that, per R15.31(1)(a), they would be able to vote in relation to their non-pref claim? 

Yes, I know this would seem a perverse interpretation, but it seemed to me the natural meaning of rules that were not designed to apply to a prefs-only process.

The Insolvency Service’s view in 2017

The Insolvency Service’s response on 21 April 2017 (available at https://theinsolvencyrules2016.wordpress.com/2016/11/30/any-questions/comment-page-1/#comments – a forum on which the Service aimed to “provide clarity on the policy behind the rules”) was:

“Our interpretation is that 15.3(1)(a) (sic) would lead an administrator to consider the value of outstanding preferential claims at the date that the vote takes place. This would only include the preferential element of claims, and if these had been paid in full then the administrator would not be expected to seek a decision from those creditors.”

Now: the Government’s “long-standing view”

However, the Insolvency Service’s Rules Review report (5 April 2022) states:

“Several respondents asked for clarification on the position of secured and preferential creditors that had received payment in full. It has been the Government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the Government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditors.”

Wow!  If only the Insolvency Service had published the Government’s long-standing view 5 years’ ago, before all those fees had been considered approved by only unpaid prefs or secureds!

Is it only a R15.11(1) issue?

The Service’s report makes no mention of the voting rights of paid prefs.  So does this mean that paid prefs should receive notice of decision procedures, but, in line with the Service’s statement in 2017, they have no voting rights?  Or do they think that R15.31(1)(a) also needs to be changed?

And what about paid secured creditors?  They’re not involved in decision procedures at all, so R15.11 is irrelevant where an Administrator is seeking a secured creditor’s approval or consent. 

What is a “secured creditor”?

A secured creditor is defined in S248 of the Act as a creditor “who holds in respect of his debt a security over property of the company”.  “Holds” = present tense.  If a secured creditor no longer holds security over the company’s property at the time when an Administrator seeks approval/consent, are they in fact a secured creditor?

It seems to me that, if the Service wishes to amend the Rules to make them clearer as regards the Government’s position, they may need to look at amending the Act too.

The consequence of a clarification of the Rules

If the report had stated that the Service intended to change the Rules to give effect to the Government’s view, I would not have been so alarmed – that would be a problem for the future.  But they have said that they want to make the Rules “clearer”.  This suggests that they believe the existing Rules could be interpreted to give effect to the Government’s view.  In that case, are we expected to apply the existing Rules in the way that this report describes?

And what about all the earlier cases in which paid secured or pref creditors’ approvals were not sought?  What effect does this have on previously-deemed approved fees, extended Administrations and discharged Administrators?

And what does this approach achieve?  Are IPs really expected to seek approvals/consents from paid creditors, most of whom have no theoretic, or even real, interest in the process?  Why should paid prefs get to decide, even if they have non-pref unsecured claims, when no other unsecured creditors have this opportunity?

Are the ADM Para 52(1)(b) Rules fit for purpose?

I have often blogged that I think the Rules around the consequences for Para 52(1)(b) ADMs are confused and illogical.  The Insolvency Service acknowledged some issues in the Rules Review report:

“Some respondents raised issues related to administration cases where statements had been made pursuant to paragraph 52(1)(b) of Schedule B1 to the Insolvency Act 1986, highlighting the difficulties that can sometimes occur when only secured and/or preferential creditors need to be consulted on certain matters under the Rules. It is clear that in some cases engagement with this smaller group of creditors can be difficult. However, we consider that the overall efficiencies provided for by the Insolvency Act and Rules across all such cases outweigh the difficulties that can occur in a minority of them.”

“The overall efficiencies”?  Is the Insolvency Service saying that, because it is useful in many cases not to have to bother with non-pref unsecureds, this outweighs the issues arising in a minority of cases?  If that’s true, then why not roll out this alleged more efficient process across all insolvency case types..?

The advantage of HMRC pref status?

Ok, a silent secured creditor can be a real headache and a silent paid secured creditor is going to be particularly reluctant to lift a finger.  But now that HMRC is a secondary pref creditor in most cases, at least this eases the problem of getting a decision from the prefs, doesn’t it?

I understand that HMRC is still acting stony in the face of many decision procedures.  Oh come on, guys!  If you want IPs to waste estate funds applying to court, you’re going the right way about it.

Other issues with the Rules Review report

This is only one of a number of issues I have with statements in the report.  In the next article, I will cover some others as well as highlight some items of good news for a change.

And apologies for my silence over the past months: an extremely busy working season and an unexpected health issue sapped me of my time and energy.  Last August, I had planned on covering other effects of the IVA Protocol – this will emerge one day.


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New IVA Protocol: what has changed for the Proposal and Conditions?

The new IVA Protocol is half a world away from its predecessor.  In most respects, the changes are welcome.  While Dear IP highlighted the main changes, many more adjustments are hidden away in the detail.  The new template Annexes have also added lots more items worthy of a blog post.

In this post, I’ll explain the changes to the Proposals themselves and the Standard Terms and Conditions (“STC”).  In the next blog, I’ll look at the other Protocol changes around dealing with debtors and introducers etc. and how to administer the IVA.

In this post, I look at:

  • What changes from the April 2021 version were slipped in on 2 August 2021
  • The ambiguities around the new home equity provisions
  • Inconsistencies between the Proposal template annex and the Protocol/STC
  • A host of small, but not inconsequential, changes in the STC

I am sorry for the length of this post! I didn’t want to miss anything out that could trip you up.

The new Protocol and associated docs are available from: https://www.gov.uk/government/publications/individual-voluntary-arrangement-iva-protocol

Where did the April-21 versions go?

The new Protocol and STC were originally released on the .gov.uk website on 29 April 2021.  Dear IP 126 announced that the new Protocol etc. could be used immediately and that they would become mandatory for all new Protocol-compliant Proposals issued to creditors after 1 August 2021.

Then, on 2 August 2021, the April Protocol and STC were replaced on the .gov.uk website by amended versions.

In some respects, this was welcome – the InsS managed to fix some inconsistencies that I was trying to find the time to write to them about.  However, what I cannot fathom is why they removed the April 21 STCs.

The many Covid-19 changes to existing IVAs announced by the IVA Standing Committee give me the impression that the Committee considers STCs to be moving feasts in any event, able to be changed unilaterally simply by saying it is so, much like a bank announces changes to the terms of its products.  Guys, I don’t think that’s how it works.  Surely an IVA must be administered according to the terms agreed by the debtor and the creditors; you cannot sneak in changes to the STCs without approval of the parties.

The new STCs are whizzy, containing hyperlinks that take you to other relevant clauses.  Therefore, I wonder what firms did when they issued IVA Proposals in May, June and July.  Did they reproduce the April 21 STCs on their own websites and/or circulate them to the debtors and creditors… or did they simply provide a link to the .gov.uk version?  If they did the latter, then it will not be easy to track what STCs had been incorporated into which IVAs.

Given that it is evident the Insolvency Service has no qualms about slipping in changes to the STC published on https://www.gov.uk/government/publications/individual-voluntary-arrangement-iva-protocol/iva-protocol-2021-annex-1-standard-terms-and-conditions, it seems essential that IP firms reproduce the STC on their own website so that they – and the debtors and creditors – can have some certainty about which terms apply in each case.

Were the changes to the 2 August version material?

Well firstly, the Protocol itself doesn’t form a part of the IVA, so the changes there have no effect on IVAs proposed.

The STC changes were, as Dear IP 133 had announced:

  • “Some minor amendments have been made to clarify the provisions on equity to reflect the position of the IVA standing committee”

The April-21 version stated that “if a re-mortgage can be obtained, the agreement will be automatically be (sic.) reduced to 60 months”.  The Aug-21 version now reads: “if a re-mortgage cannot be obtained, the agreement will remain at 72 months.  If equity is released the term will be reduced to 60 months”. 

So yes, the Aug-21 version is certainly tighter – at least now the IVA duration won’t change just because a re-mortgage can be obtained – but I think it still leaves wriggle room as regards the amount of equity that must be released in order to cut 12 months off the IVA.  Although the STC explain further what “equity to be released” means, I think a debtor could argue that they had met the terms simply by releasing some of the equity.

  • “the redundancy clause in the protocol… has been updated to make it easier to interpret and understand”

Actually, this part of the Protocol has not changed, but the STC have.  Now, the STC contain a detailed redundancy pay clause, which does not appear to change the debtor’s obligations from the April-21 version.

A change that is not listed in Dear IP 133 is the addition to the STC of:

  • “You will be required to increase your monthly contribution by 50% of any increase in disposable income one month following such review”.

Unless this was included in the Proposal itself (and it is not included in the Protocol’s Annex 4, Proposal template), any PCIVAs issued with the April-21 STCs do not contain this requirement or anything like it.  That could make for some interesting debates with debtors!

Material changes to home equity treatment

The changes between the 2016 and the Apr-21 STC are vast.  The most material relate to the structure of IVAs where there is a property. 

There are now three alternatives:

  1. Where the “available equity is below the de minimis amount”, the IVA will be drafted for a 60-month term and the equity effectively will be excluded from the IVA.
  2. Where the “available equity is above the de minimis amount but does not meet the current lending criteria for a potential re-mortgage as set out in annex 5 of this protocol”, the IVA will be drafted for a 72-month term and the equity effectively will be excluded from the IVA.
  3. Otherwise, the IVA will be drafted for a 72-month term; there will be a revaluation at month 54; and “if the second valuation confirms the equity position in the proposal” and if “equity is released”, then the term will reduce to 60 months.

The Protocol actually provides a fourth option:

  • If option 3 is followed but equity release is not possible, then a third party may contribute a lump sum equivalent to 12 monthly payments and then the IVA can be concluded early.  Unfortunately, however, this option is not covered in the STC, so unless IPs provide for this in the Proposal (and the Protocol’s Proposal template does not mention it), this approach will require a formal variation to be proposed to creditors.

What is the de minimis amount?

This isn’t defined in the STC.  Personally, I think it should be: after all, what will happen if a future Protocol revision changes the amount? 

The Protocol sets the de minimis at £5,000 (or £10,000 for a property jointly owned by two people proposing interlocking IVAs).

What is “available equity”?

Again, this is not defined in the STC.  The Protocol states: “The value of the consumer’s equity will be considered de minimis if it is £5,000 or less when valued before the IVA proposal is put to creditors.  The calculation should be based on 85% of the value of the property less any secured borrowings (e.g. mortgage).  This means that the consumer will retain at least a 15% financial interest in the value of the property in all cases.”

Mmm… so “equity” doesn’t mean equity then.  It means 85% of the equity.

Annex 5 of the Protocol also describes “anticipated equity”, which involves projecting both the property value (“using the simple interest formula at the date of the review”) and the mortgage position at month 54.  It is not clear to me what should be done with this “anticipated equity” figure: I don’t think it is meant to determine whether the equity is above or below the de minimis, but is it intended to be the figure that the debtor must introduce to the IVA from month 54 if their IVA is to drop to 60 months’ long?  Annex 7, the EOS template, doesn’t mention anything about projected equity values, so I really don’t know!

To be honest, although the STC include lots of statements about the upper limits of re-mortgage (e.g. a re-mortgage would bring the amount secured to no more than 85% of the total value of the property), I found it very difficult to identify what minimum payment would satisfy the “available equity” release condition.

What if the second valuation doesn’t “confirm the equity position”?

It isn’t clear what “confirm the equity position” means.  How different from the equity position presented in the Proposal can it be before it is no longer “confirmed”?  If it is way different, then can the IVA end at month 60 if nevertheless the available equity is released? 

Presumably, this provision is meant to address situations where the equity turns out to be less than the de minimis at month 54.  In this case, I would expect the IVA to drop to 60 months, but neither the STC nor the Protocol make this point.

At least the debtor should have a better idea of what is expected of them

The Protocol requires that “a copy of the calculations” – i.e. how the equity is proposed to be dealt with in the IVA – “should be provided to the consumer and also to all their creditors within the scope of the IVA proposal”.

Is the equity treatment clear in the Proposal template?

I have real problems with the Proposal template, which is provided as Annex 4 to the Protocol.  As regards the equity treatment, the Proposal template gives me the following concerns:

  • Para 6.2 states that the property will be valued in month 48, whereas the Protocol envisages month 54
  • Para 6.3 states that the debtor “will make reasonable endeavours to introduce this sum into the arrangement” – it is by no means clear what “this sum” is
  • Para 6.4 states: “Should I be unable to re-mortgage, I will continue to pay my IVA for the full 72 months, if I am successfully (sic.) and introduce equity my IVA will complete at month 60” – again, what amount of “equity” needs to be introduced (and of course the IVA won’t complete at month 60 unless the supervisor can wrap everything up immediately)?

Can the property be sold?

The Proposal template contains an interesting scenario.  Para 6.5 states that, in the event that the debtor sells their home at any time in the IVA and pays in the sale proceeds less costs, “the additional remaining payments will no longer be payable into my IVA” even if the funds are insufficient to clear the debts and costs.  So… a debtor with minimal equity sells their home early on in the IVA, pays in the small amount of sale proceeds… and then they are not required to pay in any more income-related contributions?!

I cannot see that this is an expectation of the Protocol.  All it states is that, if a property is sold, then the proceeds of sale to the extent of settling the costs and debts in full – excluding statutory interest – shall be paid into the IVA.

Is statutory interest not payable for early completion?

Yep, that’s what the STC say.  However, Para 5.1 of the Proposal template states: “The IVA will finish when the agreed level of payments have been made or I have paid creditors together with the costs of the IVA in full and with statutory interest”.

Are there other issues with the Proposal template?

Yep.  I have lots of minor gripes (like reference to an irrelevant “3.1”), but some other material ones are:

  • While it is reasonably complete as regards ticking off SIP3.1 and Rules’ matters, it does not flag up the SIP3.1 requirements to disclose the referrer, their relationship/connection to the debtor, or any payments to the referrer made or proposed, amounts and reasons.
  • No monthly contribution amount is specified.  It simply states (Para 5.1): “I will make monthly payments of my surplus income estimated at £X”.  Odd!
  • Para 7.3 strangely provides for a trust “in favour of the Supervisor” and states that the trust will end when the notice of termination is filed with the SoS.  The STC state the trust will end earlier, i.e. when the certificate of termination is issued or, as regards assets not realised, when a bankruptcy order is granted.
  • Para 7.11 states that late-proving creditors “will not be entitled to disturb dividends already paid but will be entitled to participate in future dividends”.  The STC state that they will also be entitled to catch-up dividends.

Do these inconsistencies matter?

The STC state that, “in the event of any ambiguity or conflict between the terms and conditions and the proposal and any modifications to it, then the proposals (as modified) shall prevail”.  So, yes, as always the Proposal takes precedence. 

So, if the Proposal reverses or negates the apparent intended effect of the STC, can the Proposal be called Protocol-compliant?  Surely not… except if the Proposal simply follows the Protocol’s Proposal template annex, then presumably it’s ok..?

Are IPs obliged to use the Proposal template?

It is not at all clear.  The 2021 Protocol repeats the previous Protocol’s introduction that “Where a protocol IVA is proposed and agreed, insolvency practitioners and creditors agree to follow the processes and agreed documentation”.  But, apart from the contents list, there is no specific mention in the Protocol to the Proposal template.  Contrast this with specific reference to Annex 6, which gives examples of how an IP might comply with the Protocol’s new requirement to “set out details of how the funds received… will be allocated towards the costs of the IVA, together with a timetable and schedule of expected payments to creditors” (which interestingly is a document that is not mentioned in the Proposal template!).

So is the Proposal template intended to be just for guidance?  Given its departures from the Protocol and STC, it cannot be intended to over-ride it all, can it?

What about the other templates?

The Proposal template states that attached is a “combined outcome and Statement of Affairs”.  Annex 7 is clearly solely an estimated outcome statement, not a SoA. 

Annex 3, which is an “example” letter to send to the debtor along with the draft Proposal, does not mention that a SoA (i.e. one that complies with the Act/Rules) is enclosed and there is no reference to a Statement of Truth, which the debtor is required to provide to the IP per R8.5(5).  The letter also contains the old pre-29 June DRO thresholds.

Again, it is not clear whether IPs must use these templates.  I also appreciate that it will be difficult to maintain templates to deal with changes in legislation or SIPs… but, hey, that’s what we all have to do, isn’t it?

Some things never change

One of the obvious changes needed to the STC was to bring it into line with the 2016 Rules as regards the various decision procedures.  Way back in April 2017, Dear IP 76 had expressed the Insolvency Service’s expectation that supervisors “take advantage of the new and varied decision making procedures that are available under the Act as amended and the 2016 Rules”.

Did someone forget this expectation?  The new STC still refer solely to “meetings of creditors” that may be called during the course of the IVA.  As the STC state that they be called “in accordance with the Act and the Rules”, we are talking about only virtual meetings here.  What is evident, however, is that it does not include electronic or correspondence votes.

Other STC changes

There are some relatively minor changes introduced by the new STC – I would love to give you paragraph references, but crazily the STC no longer have para numbers!

  • Unsurprisingly, the old STC that supervisors can make a reasonable charge for variations has gone.
  • The STC state that a completion certificate “will be issued within 28 days of all payments and obligations being satisfied”, although the Protocol states that the completion certificate should be issued within 3 months.  Both the STC and Protocol provide a long-stop date of 6 months.
  • The concept of a completion certificate where there has been substantial compliance has been ditched.
  • The liabilities can now be up to 25% more than those estimated in the Proposal before it is considered a breach (the old STC provided for a 15% limit).
  • A Notice of Breach will now always provide a timescale of one month to remedy and/or explain a breach (the old STC allowed the supervisor’s discretion to set a timescale of between one and three months).  Now, a remedy can include proposing “a reasonable plan to remedy” the breach, which may be useful, although of course some proposals will still need to be varied formally.
  • All trusts will end on issuing a certificate of termination or completion (the old STC were silent).
  • A variation to reduce contributions can only be proposed in the first 2 years of the IVA “if evidence can be provided to creditors that the supervisor could not have reasonably foreseen such a change in circumstances at the start”.
  • Interestingly, “if you cannot reach agreement with the supervisor in respect of your obligation to contribute additional income, then the supervisor has the discretion to issue a notice of breach”… or not.
  • Oddly, the STC no longer describe any means for changing supervisors except by a block transfer order (or removal by a creditors’ decision).  Presumably, though, a switch may still be proposed by variation.  Para 2.8 of the Proposal template, however, does provide a simple: any “vacancy may be filled by an employee of the same firm who is qualified” as an IP, although I’m not sure if this over-rides the requirement for a court order or creditor decision appointing them. 
  • The requirement to register a restriction on a property has been removed from the STC.  It is, however, still required under the Protocol, so you will need to make sure that it is included in your Proposal template (it is in the Annex 4 template).
  • Creditors now only have 2 months to submit a claim, rather than the old 4 months.
  • The supervisor now has discretion to admit claims of £2,000 (up from £1,000) without a PoD or claims that do not exceed 125% (up from 110%) of the amount listed in the Proposal without additional verification… with the new condition that this cannot “result in a substantial additional debt being admitted” – I’m not sure how this would be measured.
  • Although both old and new STC state that all payments into the IVA “are intended to be used to pay dividends” and costs, now there is no limit on the surplus funds at the end of the IVA that will be returned to the debtor (it used to be £200 max.).
  • I’m confused about the HMRC-specific requirements: they state that HMRC’s claim will include self-assessment tax arising in the tax year in which the IVA is approved (less payments on account), but then they state that the debtor “will be responsible for payment of self-assessment/NIC on any source of income that begins after the date of approval”, but then also that any “monthly charge for income tax/NIC as it appears in the income and expenditure statement” must be paid into the IVA for the rest of the tax year after approval of the IVA.

The consequences

All these intricate changes will complicate systems and procedures, as you will need to be alert to which terms apply to which IVAs you’re administering.  As you can see, it would also be valuable to refresh your Proposal template to ensure that it corresponds with the new STC, plugs the gaps and eliminates ambiguities. 

If you do choose to use the Protocol’s Proposal template, I recommend that you give it some tweaks to make sure it is SIP3.1-compliant (as well as tailored to your own practices, as some clauses are quite bespoke) and that it does not stray far from the new Protocol and STC.

More changes

These are only Protocol changes affecting the Proposal and STC.  In the next blog, I’ll look at the other changes including new requirements as regards advising debtors and liaising with introducers.


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Revised SIP16 and SIP13 affect more than Administrations

30 April 2021: Connected Persons Disposal Regs, InsS Guidance, SIP13, SIP16, new IVA Protocol (with eight annexes), SIP9 FAQs from the RPBs and Dear IP 126 – wow!  Even Usain Bolt would struggle to keep up with the pace of regulatory change right now!

Firstly, I’ll look at the SIPs. 

“No changes have been made to the SIPs other than those required by the change in the law”

stated some of the RPB/R3 releases.  Well, that’s not quite true…

 

What needs changing?

In summary, solely to deal with the SIPs (i.e. not including the Connected Persons Disposal Regs at all), I think the following needs to be done:

  • Ensure that all staff know the widened scope of SIP13 – i.e. affecting all corporate insolvencies – and consider including prompts within checklists, progress reports etc. to ensure that any sales to less directly connected parties are picked up
  • In the pre-ADM letter template to connected parties (and letter of engagement, where relevant), replace the old Pre-Pack Pool reference with the new evaluator’s report requirement… and repeat the letter template (tweaked) for any post-appointment substantial disposals
  • Ensure that pre-pack connected parties that are not also connected persons are notified of the potential benefits of a viability statement
  • Tweak the SIP16 statement to remove references to the Pre-Pack Pool and viability statement, except where a viability statement has been provided, and add reference to enclosing any evaluator’s report with an explanation if it has been redacted

 

SIP13’s scope enlarged…

The old SIP13 affected sales to parties connected to the insolvent debtor or company by reason of S249 and S435 (but excluding certain secured creditors).  Now, SIP13 defines a connected party as:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”

If SIP13 had been changed solely to reflect the new regulations, why has the reach of SIP13 been expanded far wider than the regulations’ scope?  And what does “any connection” mean exactly?  Are we talking friendships?  Even if “any connection” is still intended to mean something approaching the statutory definition, including connections with the associates of directors, shareholders – and secured creditors – wraps in a whole host of business and familial relationships that were not captured by S249, S435 or Para 60A(3) Sch B1.

…but also narrowed..?

There is a curious omission from the above definition: reference to any connections with the debtor.  Presumably this is an error, as the SIP still states that it “applies to both personal and corporate insolvency appointments”.  Oops!

 

Connected person communications

The above definition is of a connected party, but both SIPs also refer to connected persons.  These are the statutorily-defined connected persons caught by the new regulations, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, as defined by Para 60A(3) of Schedule B1.  Of course, it is sensible for IPs to ensure that any connected person considering a regulations-caught disposal is aware of the requirement to obtain a qualifying evaluator’s report to enable the disposal to be completed without creditor approval.  This is now also a SIP requirement.

Because SIP16 is concerned only with pre-packs, the requirement appears also in SIP13 in order to capture substantial disposals in Administrations that are not pre-packs.  In my mind, this means substantial disposals that occur in the first 8 weeks of an Admin where there have been no pre-appointment negotiations (and, I guess, the odd “hiring out” or non-sale “disposal” of all or a substantial part of the business/assets), i.e. truly post-appointment sales.  Indeed, the R3/RPB releases explained that the 8-week time frame of the new regulations led to the changes in SIP13.

However, the changes are odd.  SIP13 requires the “insolvency practitioner” to ensure that the connected person is made aware of the regulations, but SIP13 states that:

“for the purposes of this Statement of Insolvency Practice only, the role of ‘insolvency practitioner’ is to be read as relating to the advisory engagement that an insolvency practitioner or their firm and or/any (sic.) associates may have in the period prior to commencement of the insolvency process.  The role of ‘office holder’ is to be read as the formal appointment as an office holder”. 

So the new SIP13 requirement for connected person communications applies to IPs acting pre-appointment, not to office holders post-appointment.  Given we are talking about non pre-pack disposals here, would it not have made more sense for the SIP13 requirement to be on office holders?

But don’t worry RPBs, I am sure that no Administrator is going to spend time negotiating a deal with a connected person without ensuring that they are in a position to complete.  They hardly need a SIP to tell them to warn a relevant purchaser that they’ll need a qualifying evaluator’s report where necessary.

 

Viability Statements’ appearance narrowed…

I reported at https://insolvencyoracle.com/2020/10/30/pre-pack_reforms/ that the Insolvency Service’s report that led to the regulations had noted the government’s plan to “work with stakeholders to encourage greater use” of viability statements.  I was most surprised, therefore, to see viability statements take a step further into the shadows in the revised SIP16.

The old SIP16 required Administrators to report to creditors on the existence or otherwise of a viability statement and, if there were none, on the fact that the Administrators had at least asked for one.  Now, the only appearance of reference to a viability statement in a SIP16 statement is where one exists, in which case it should be attached.

…but also enlarged!

But we cannot ignore viability statements entirely: the new SIP16 has retained the need to make certain purchasers “aware of the potential for enhanced stakeholder confidence in preparing a viability statement”.  You might think: well, that’s fine, it had been in my letters to connected purchasers when I told them about the Pre-Pack Pool, so now I’ll leave in the viability statement bit and just tweak those letters to include the bit about the evaluator’s report instead.

Ah, if only it were that simple!  Now this requirement applies “where the purchaser is connected to the insolvent entity”… and this time, “connected” means:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”. 

So, if you are contemplating a pre-pack to someone who isn’t connected to such an extent that the new regulations apply, but they still have some kind of connection, you will need to write to them solely to tell them about the “potential for enhanced stakeholder confidence” of a viability statement.  What is the point?!

 

Copy evaluator’s report in SIP16 statement

Unsurprisingly, the new SIP16 requires a copy of any qualifying evaluator’s report to be included with the SIP16 statement circular (whether or not this is at the same time as the Proposals). 

The SIP does not mirror the regulations’ provision that the copy qualifying report (when included with the Proposals) may exclude any information that the Administrator considers is confidential or commercially sensitive, but presumably this would be acceptable provided that, as per SIP16 para 19, the Administrator explains why the report in full is not being provided.

 

More changes to come?

Yes, I’m afraid so.  Dear IP 126 states that:

“SIP16 will be reviewed and amended further during the next 6 to 12 months”. 

I shall be interested to see the trend of Administrations in the future.  I suspect that it is not so much the evaluator’s report that will discourage pre-packs but rather the endless tinkering!


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New SIP7: No surprises?

SIP7 is the baby bear of the three revised SIPs that came into force on 1 April 2021.  However, despite the RPBs’ intention being primarily to bring SIP7 into line with the revised SIP9, the new SIP7 includes some wrinkles that are worth exploring.

The revised SIP7 (E&W) can be found at: https://insolvency-practitioners.org.uk/regulation-and-guidance/england-wales/

Does it apply to MVLs?

Although SIP9 is headed up “Payments to Insolvency Office Holders…”, the revised SIP9 states explicitly that it does not apply to MVLs (“unless those paying the fees require such disclosures”).  In comparison, SIP7 is entitled “Presentation of Financial Information in Insolvency Proceedings”, but there is no explicit reference to MVLs.  Does this mean that MVLs are included, as they are a proceeding under the Insolvency Act 1986, or are MVLs excluded, as they are not proceedings in relation to an insolvent entity?

If I had to jump one side of the fence, I’d say that SIP7 leans towards excluding MVLs: paras 12 and 15 refer to “the insolvent estate”and “case” has been replaced throughout with “insolvency appointment”.

Does it matter if MVLs are included or excluded?

Ok, I admit that in general I don’t think it matters, at least not to the current generation of IPs.  We’re all accustomed to producing MVL reports with generally the same format as reports on insolvency cases.  However, when new entrants start drafting reports from a clean slate, practices may begin to diverge.

It would have been useful if the scope of SIP7 had been made clear in at least a couple of areas.  Para 19 of SIP7 conveys a similar requirement as para 15 of SIP9, that creditors and other interested parties should be informed of their rights (although oddly SIP7 states that “adequate steps should be taken to bring” those rights to their attention – I’m not sure I know what constitutes adequate steps).  If MVLs are included, is more required than simply complying with R18.4(1)(f) when issuing progress reports? 

Another area that could make a difference in MVLs is para 15e, which requires “any amounts paid to the office holder or their associates or firm other than out of the estate” to be disclosed.  It is fairly commonplace for MVL liquidators – and indeed their firm’s accounts and tax departments or sister companies – to be paid fees other than out of the estate.  Are the RPBs content for this detail to be excluded from MVL reports?

Consistency in “Associates”?

SIP7 repeats the revised SIP9’s definition of associate as including “where a reasonable and informed third party might consider there would be an association”.

However, “associates” appears in SIP7 in only one other spot: in para 15e mentioned above, which now requires disclosure of payments paid other than out of the estate, not only to the office holder, but also to “their associates or firm”.  Does this mean that we’re not required to disclose payments to associates or to the firm from the estate?  No, it seems to me that this is required by the rest of para 15, which includes the disclosure of “all other amounts required to be approved in the same manner as remueration”, so if we’ve handled SIP9 correctly and recognised that associates’ costs need approval, then we will disclose them separately under SIP7.

What kind of payments could be captured by these disclosure requirements?  Although we are awaiting the RPBs’ additional guidance on SIP9, which hopefully will clarify what an “associate” is, it occurred to me that it could include the following:

  • Where the firm pays for pre-appointment work carried out by someone with whom they have an association (e.g. introducers, fact-finders)… although it is not clear whether the SIP7 disclosures are required only for the period being reported on;
  • Where the firm has received payment for pre-appointment work over and above that captured by R3.1 (i.e. work with a view to the administration), R6.7 (i.e. work pre-CVL for the SoA and S100 process), or for pre-Nominee (e.g. Proposal drafting or advice) work – I have seen cases where the firm has worked with the company (or debtor) for some time before settling on the eventual insolvency process and the fees paid in those early days haven’t always been disclosed; and
  • Any IVA-connected payments received by associates from the debtor or elsewhere, although I expect the revised SIP3.1 will soon take care of that in the same way that the revised SIP3.2 has done.

Reconciliations required

Para 11 is new:

“Accounts should be reconciled to the balances at bank, the case records and to any amounts due to the office holder”

I suspect that most practices make the producing of a statutory report the ideal time to reconcile the bank account and to record for the file the IP’s (or manager’s) formal review of this.  Of course, practices regularly reconcile accounts at other times too.  Generally therefore, this SIP7 requirement does not appear onerous, but it does mean that, if an R&P is revised because a report has been delayed – especially Admin Proposals, fee proposal packs or final accounts/reports, where the report dates usually move when they’re revisited – another reconciliation will need to be produced.

Ok, so that’s covered reconciling accounts to the bank, but what about reconciling them to “the case records and to any amounts due to the office holder”?  Does this mean that the accounts need to be reconciled to the case records’ lead schedules, e.g. of debtors, rental payments, even where those schedules have pretty-much fallen out of use?  What about where you’ve raised a final bill but only had it part-paid from the estate (because you’re waiting for a VAT refund), should you now be noting a reconciliation of the R&P with your firm’s debtor records?  Or is it enough simply to sense check the R&P to make sure that it doesn’t include any peculiar narratives, such as “preparation of SofA” when it should be pre-administration costs?

Given that “accounts” in a SIP7 sense might include “reporting on remuneration and/or expenses, whether incurred, accrued or paid” (para 16), should you be checking that everyone has posted their timesheets for the period under review before producing a time cost breakdown?  And again, if your Admin Proposals, fee proposal packs or final accounts/reports were delayed and a fresh time cost breakdown is attached, does this mean you need to reconsider this reconciliation?

Another scenario is where a decision procedure needs to be repeated: I have seen some IPs issue a new Notice of Decision Procedure with a new decision date and simply refer to the original fee proposal pack as providing all the necessary information.  This doesn’t really work, does it, where 2 weeks or more have passed?

Comparing EtoRs

Spot the difference:

  • Old SIP7 (para 6): “Receipts and payments accounts should show categories of items under headings appropriate for the case, where practicable following headings used in any prior statements of affairs or estimated outcome statements.  Alternatively, an analysis should be provided to enable comparison with the ‘estimated to realise’ figures in any prior document.”
  • New SIP7 (para 9): “Receipts and payments accounts should show categories of items under headings appropriate for the insolvency appointment, where practicable following headings used in prior statements of affairs or estimated outcome statements.  An analysis should be provided to enable comparison with the ‘estimated to realise’ figures in any previously issued document.”

Steven Wood in the ICAS webinar on the SIPs stated that the change means that it is “no longer acceptable to simply have the R&P using headings previously used in a SoA or EOS thereby leaving creditors with the information to do the comparison but requiring several documents to do so”.  I can understand why the RPBs might want this outcome, but personally I don’t see that SIP7 achieves it.  True, the word “alternatively” has been removed so that now in every case “an analysis should be provided to enable comparison with the ‘estimated to realise’ figures in any previously issued document”, but this does not mean that all R&Ps must provide the EtoR figures.  It just means that the R&P must provide sufficient information to enable a comparison to be made with any such figures in any previously issued document, which can be achieved by analysing receipts according to the previously-issued SoA/EOS headings.  This meaning is reinforced by para 8 of the SIP, which states: “Unless there is a statutory provision to the contrary, this does not require repetition of information previously provided”. 

Having said that, it’s not a big deal, as most IPs provide the EtoR figures in report R&Ps… but I do think that an RPB might have a hard time enforcing the practice based on the wording of the SIP.

Other changes

To be honest, I don’t think the remaining changes need much attention:

  • The introduction and principles use pretty-much all the same words, just in a different order;
  • Para 20 is new: it requires a former office holder to provide to their successor information to the extent set out in the SIP;
  • Para 25 explains that a trading R&P is provided “to enable an appropriate understanding of what was done, why it was done and how much it cost”; and
  • Hive-downs have been replaced by “Alternative approaches to asset realisation”.  The section (paras 26 and 27) doesn’t explain what is meant by this, but gives hive-downs as an example.  Again, the SIP states that sufficient information should be provided “to enable an appropriate understanding of what was done, why it was done and how much it cost”, which is a principle that seems to me adequately required by SIP9 in any event.

What’s Next?

One of our clients sent Jo and me a plea that we reduce as far as possible the number of updates to our document packs.  Oh, if only we could! 

We understand that a revised SIP3.1 is near to release, we expect a revised SIP16 to be issued around the end of this months to coincide with the new Connected Person Disposal Regulations, and I have heard rumours of some changes to SIP13 also because of the new Regs.


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New SIP3.2: more red tape and longer docs

It would be a mistake to assume that we don’t need to think about the revised SIP3.2 until 1 April.  It applies to all nominee appointments from 1 April 2021, so in view of the lead time on preparing CVA Proposals, you may well find that you already have engagements that need to comply with the new SIP3.2.

In this article, I look at the practical effects of the changes to SIP3.2.

Firstly, though, I should apologise for maligning the ICAEW.  In my last blog, I’d said that they had not formally issued the revised SIPs, but I’d overlooked an email that hit my inbox two days before I posted my article.  The IPA finally issued the SIPs on 10 March 2021… so if you’re an IPA member who has already issued an unchanged advice letter to deal with a nominee appointment that you expect to get after 1 April, I suggest that you have a very good excuse why the letter didn’t comply with the new SIP.

The revised SIP3.2 (E&W) can be found at https://www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/sips/england/sip-3-2-company-voluntary-arrangements-england-and-wales.ashx

 

More Ethical Taglines

There are several new references in the SIP to acting professionally, objectively etc.  In practice, these don’t affect how IPs work, as I’m sure that your Ethics Checklists and periodic case reviews already keep these requirements in the frame.  The SIP3.2 additions just seem to be another cudgel that an RPB may wield if they see unethical behaviour, although I’m not sure why the Ethics Code needs an escort.

Instead, let’s focus on what you need to change to comply with the new SIP.

 

“Additional Specialist Assistance”

The SIP requires the IP to have procedures in place to ensure that, at each appropriate stage of the process, the company/directors are informed about:

“whether and why the company will require additional specialist assistance which will not be provided by any supervisor appointed, including the likely cost of that additional assistance, if known”

On a similar theme, the Proposal must contain information on:

“any additional specialist assistance which may be required by the company which will not be provided by any supervisor appointed, and the reason why such assistance may be necessary.., the cost of any additional specialist assistance”

What do the drafters have in mind here?  Perhaps they are thinking about restructuring professionals.  “Additional specialist assistance” could also encompass other instructions, for example where the company expects to deal with something outside the ordinary course of business, such as selling assets… or dealing with a legal matter… or refinancing… or…

Of course, it makes sense to ensure that the directors are prepared to factor in such additional costs, but I am not sure I understand what this has to do with the creditors: if the Proposal sets out what net proceeds or contributions will come into the CVA together with sensible forecasts where appropriate – and further details if the IP’s firm is to receive any additional payments (as was already required by SIP3.2) – then isn’t that enough to enable them to assess the Proposal?

 

Changes to Advice Letters and Interview Records

In addition to covering off any additional specialist assistance, advice letters and/or interview records must now explain the directors’ responsibilities and role both before and during the CVA – “during” is new.

Instead of requiring a “face to face” meeting with the directors, the SIP now requires the initial meeting to be “in person (whether a physical meeting or using conferencing technology)”.  For sole directors, would a telephone meeting be acceptable..?  In any event, it might be useful to add to your interview record the method used.

 

More Strategy Notes

The SIP adds some new strategy note requirements, which might also be incorporated into interview records.  It requires:

  • “A detailed note of the strategy, outlining the advantages and disadvantages of each option”, which was previously only required for Administrator/Liquidator Proposals
  • “…including the impact of trading within a CVA for a prolonged period and the continued viability of the business during that period” – this is new and makes sense to me: it is of course sensible to manage the directors’ expectations, make them fully aware of how tough it can be to trade on in a CVA. CVA companies may have some protection via S233 and S233A, but practically I suspect that most creditor suppliers make CVA companies go through pain.  The SIP also requires:
  • Creditors to be “given adequate time to consider what is being planned as regards the CVA”. I find this odd: what are the RPBs’ expectations?  In the ICAS webinar (http://ow.ly/tcGU50DKuCp), David Menzies suggested that IPs should document why the period of time given to creditors to consider the CVA is adequate, including factors such as the delivery time and the time creditors would need to get advice.  But the company is insolvent, it is probably continuing to trade under difficult and uncertain circumstances, surely the approval of a CVA should be pursued as quickly as possible, for creditors’ sakes as well as the company’s?  The Rules put a narrow timescale on the process – effectively between 14 and 28 days from delivery of the nominee’s report – so presumably the legislators felt that 14 days (post-delivery) was adequate time for creditors, doesn’t this satisfy SIP3.2?

 

Signposting Sources of Help

Something else to record on the strategy note might be your consideration of “signposting sources of help” “where creditors may need assistance in understanding the consequences of a CVA”.

In his webinar, David Menzies recommended that IPs should document their consideration of the creditor composition, such as their knowledge, experience and skills, and especially if the IP is not going to be signposting creditors to sources of help.  He also suggested that we gather details of potential sources of help – generic and sector specific – that could be signposted to.

Ok, a generic one is the R3’s site at http://www.creditorinsolvencyguide.co.uk/, which I expect many of us added to our initial creditor letters years ago.  Other than that, where would you signpost creditors to?

The elephant in the room is the British Property Federation, which was represented on the SIP3.2 working group.  Additions to the Proposal’s contents listed below strongly suggest that the BPF had quite some influence over the revised SIP.  True, the BPF provides guidance for landlords who receive a CVA Proposal, but I question whether it is helpful to the process to recommend that landlords issue a 33-point wishlist to nominees as “a standard document… if they do not feel they have been provided with the requisite information” (https://bpf.org.uk/media/2319/cva-creditor-friendly-document-09102019.pdf).

What about employees?  Ok, employees rarely have much more than contingent claims that won’t crystallise, but particularly as they could find that not all their claims would be covered by the RPS in the event of an insolvency process following the CVA, it would seem appropriate to consider giving them access to guidance.  However .gov.uk’s coverage is poor.  https://www.gov.uk/your-rights-if-your-employer-is-insolvent simply lists CVA amongst the insolvency processes and states that employees might be able to make claims to the government.

Well, that’s two creditor groups that might not be helped with any existing resources.  It seems that the JIC has put the cart before the horse on this one.

 

Much More Required in Proposals

The new SIP adds several new items to the Proposals’ tick-sheet:

  • Additional specialist assistance, as explained above;
  • The alternative options considered, both prior to and within formal insolvency by the company;
  • An explanation of the role and powers of the supervisor;
  • Details of any discussions with key creditors;
  • Where it is proposed that certain creditors are to be treated differently, an explanation as to which creditors are affected, how and why;
  • An explanation of how debts are to be valued for voting purposes, in particular where the creditors include long term or contingent liabilities;
  • An explanation of how debts that it is proposed are compromised will be treated should the CVA fail;
  • The circumstances in which the CVA may fail; and
  • What will happen to the company and any remaining assets subject to the CVA should the CVA fail.

Although I dislike the way SIP requirements grow and grow, most of the above additions are not disastrous and in fact several are probably addressed in most CVA Proposal templates already.  At least two of the new requirements are clearly targeted at multiple landlord CVA Proposals, which one would hope are already being well crafted with the assistance of solicitors.

One of the new requirements has got us puzzling.

 

How to Value Votes

Firstly, is it possible to define how votes will be valued for the S3 process other than as set out by legislation and case law precedent?  If the chair/convener were to value votes in any other way, wouldn’t it give rise to grounds for a challenge of material irregularity?

Secondly, what can be the point of adding to the Proposal terms setting out how claims will be valued for voting in the S3 process, when the Proposal does not take effect until after the vote has been determined?  A Proposal’s terms cannot have any effect on what happens before it is approved, can it?

Presumably, therefore, the regulators only expect Proposals to set out how votes would be valued in decision processes during the course of the CVA… although that’s not what the SIP says.

But what kind of explanation do the regulators expect?  If it is proposed that votes be valued by applying the Rules for statutory decision processes in CVA, e.g. by following R15.31(1) that votes will be calculated according to the claims as at the decision date and R15.31(3) that debts of unliquidated or unascertained amounts will be valued at £1 unless the chair/convener decides to put a higher value on it, is this sufficient explanation?  Or do the regulators expect Proposals to set out how every single claim (especially the uncertain ones) will be valued and at every stage of the CVA, e.g. before adjudicating on claims for dividend purposes and then after having paid a dividend?  What about if there is new case law that takes things in a different direction?  Should a supervisor simply consider themselves bound by what the Proposal (and perhaps as modified!) dictates?

 

After Approval

AND breathe.  In comparison, the post-approval additions don’t look too grim.

The SIP adds to the supervisor’s post-approval duties:

  • Sources of income of the associates of the IP in relation to the case must be disclosed (the old SIP restricted it to the IP’s and their firm’s income);
  • If the CVA costs have increased beyond previously reported estimates, not only should the increase be reported, but also “an explanation of the increase” should be provided;
  • When a CVA concludes or fails, the supervisor should ensure that the company is dealt with appropriately in accordance with the CVA Proposal (presumably where this is in the supervisor’s power?); and what is to happen should be reported to creditors.


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New SIPs, what new SIPs? Part 1: SIP9

The new SIPs might be the RPBs’ worst-kept secret: they’re available on the ICAEW’s website, but the ICAEW has yet to announce their release; in its recent webinar advert, the IPA mentioned in passing that three revised SIPs are “due to be issued in the beginning of March”; whereas ICAS has already presented a (free) webinar on them.

And thank goodness ICAS has been upfront about them!  While R3 stated that “the changes are not expected to be far reaching”, Jo and I think that they very well could be for IPs who still bill Category 2 disbursements.

 

In this blog, I take a look at the revised SIP9, which takes effect from 1 April 2021 in relation to all relevant cases, i.e. including existing cases.  My recommended to-do list includes:

  • Review whether your existing Category 2 disbursements recharges will be prohibited from 1 April and set up safeguards to avoid billing these from that date
  • Revisit all documents that refer to Category 1 or 2 disbursements and change definitions to meet the new SIP9’s, including referring now to Category 1 and 2 “expenses”
  • Ensure that fee proposal and/or progress report templates meet the enhanced disclosure requirements for:
    • The use of associates or those with whom you have a professional or personal relationship that falls short of a legal association
    • Sub-contracting work that could be done by you or your staff
    • Explaining what you expect to be paid (not only what it should cost) and an indication of the likely return to creditors in all cases
    • Making clear what direct costs are included in fixed/percentage fee bases
  • For fees estimates, check that you calculate a blended rate correctly
  • Don’t get too hung up on your MVL documentation, as MVLs are (almost) carved out of the new SIP9

You can access all the revised SIPs (for E&W) from https://www.icaew.com/regulation/insolvency/sips-regulations-and-guidance/statements-of-insolvency-practice/statements-of-insolvency-practice-sips-england

You can access ICAS’ webinar at http://ow.ly/tcGU50DKuCp

 

Changes to recharging costs to estates

Jungle drums have been rumbling for several years now on the topic of whether a cost can be recharged to an estate as an expense or whether it is an overhead that is not permitted to be recharged.  This SIP9 goes some way to clarifying the distinction:

  • Whereas the current SIP9 (I’ll call this the old SIP9 from here on) states that “basic overhead costs” are not permissible as disbursements, the new SIP9 widens the scope to “any overheads other than those absorbed in the charge out rates”.
  • The new SIP9 no longer refers to Category 1 and 2 “disbursements”, but to Category 1 and 2 “expenses”. If you managed to avoid getting into a debate about this with an RPB monitor over the past few years, you may find this an odd and subtle change.  The point is that a “disbursement” is an expense that is first paid by a party (e.g. the IP/firm) and only later recharged to the estate.  The consequence of this change is that direct payments from an estate to an associate are now Category 2 expenses (whereas under the old SIP9, such a payment would be neither a Category 1 nor 2 disbursement, as it is not a disbursement at all).  A more frustrating consequence is that lots of templates – fee proposal packs, disbursements policies, progress reports, Fees Guides – will also need changing to reflect the new terminology.
  • The most important change is the new SIP9’s statement that:

“All payments should be directly attributable to the estate from which they are being made or sought”.

 

Is this the end of Category 2 disbursements?

What does “directly attributable” mean?  Does this mean that you will no longer be able to be paid Category 2 disbursements on a roughly calculated basis, say, £x per creditor to cover stationery and photocopying?  Or internal room hire of £x per meeting?

Here’s the odd thing: although only “directly attributable” costs can be passed on, the SIP still allows “shared or allocated payments”.  An example of a shared cost that David Menzies of ICAS gave in his webinar was where an office holder hires an external conference room for physical meetings in relation to three connected insolvencies: this charge could be split up and passed on to the three cases… but as it is a shared cost, it would be a Category 2 expense… so it would need to be approved before being paid from the estate.

David Menzies helpfully suggested that, for a cost to be directly attributable, there needs to be a direct causal relationship between the cost and the case.  He suggested asking yourself the question: would the cost have been incurred if the case did not exist?  On this basis, it seems to me that photocopying and internal room hire charges could not be viewed as “shared costs”, as the firm would still incur the cost of the photocopier or premises rental whether or not the one case to which you are aiming to recharge the costs existed.

 

What is an “overhead”?

David’s own definition was that overheads are costs that are not directly attributable to an individual insolvency estate but which are incurred in support of insolvency appointments for the IP or are costs associated with other services that the IP/firm provides as part of their business.

So if the cost is incurred to support the administration of a case plus other aspects of the business, it is likely to be an overhead.  Here are some other examples from ICAS’ webinar:

  • Where an IP’s office space is used to store company records, the IP could not charge the estate for storage
  • Where an external storage company charges, e.g., £x per box per quarter, this could be charged to an estate based on the number of boxes stored on that case
  • Where an external storage company charges a global fee for the facility, which is used to store case files and office admin files, this is probably an overhead that could not be split up and charged to the estate
  • Where a mailing company produces a monthly itemised bill, the items relevant to each case could be charged to the estate as a Category 1 expense
  • Where a software provider charges on a per case basis, this could be considered an expense
  • Where a firm pays a global fee for software, e.g. a Microsoft licence, this could not be split up across the cases

I have tried to reflect as closely as possible what was said on the ICAS webinar – and I do see the logic of these examples – but please note that the strict wording of the revised SIP9 does not lead unequivocally to these conclusions.  We expect to see some additional guidance from the RPBs, which may help clearly define the boundaries explored by these examples.

 

How will this affect recharging?

Although the revised SIP comes into force on 1 April 2021, it does not relate only to new appointments from that date.  Therefore, even if you have already obtained approval for Category 2 disbursements that will not be allowed under the revised SIP, you will not be able to draw payment for them from the estate after 1 April.

I suggest that you revisit all your current Category 2 disbursements practices and decide now how you will put safeguards in place to make sure that no “overheads” are inappropriately billed after 1 April.

 

Other Category 2 clarifications: Associates

The revised SIP9 makes it clearer that even the charges from parties with whom the IP/firm has no legal association may fall within the scope of Category 2 treatment.  It states: “Where a reasonable and informed third party might consider there would be an association, payments should be treated as if they are being made to an associate”, i.e. they will need to be approved as a Category 2 expense.

But what is an “association”?  In my response to the JIC consultation, I gave the example that, as an IPA member, I have “an association” with the IPA, so does this mean that I would treat the IPA as an associate (e.g. if I were to hire its boardroom for a creditors’ meeting)?  David Menzies was helpful in his webinar: he suggested that the context here might be the Code of Ethics’ significant professional or personal relationship concept – if such a relationship were present (or might be perceived by a reasonable and informed third party to be present), then this would equate to an association for the purposes of SIP9.

The revised SIP9 adds to the required disclosure: now, office holders must disclose “the form and nature of any professional or personal relationships between the office holder and their associates”… presumably where it is proposed that the insolvent estate shall bear the associate’s fees/costs.

 

It’s not all extra burdens

I suspect that a big relief to many IPs will come in the form of a reduction in scope of SIP9.  With effect from 1 April, SIP9 will no longer apply to MVLs… “unless those paying the fees require such disclosures”.

In the ICAS webinar, it was suggested that a prospective liquidator might ask the members upfront whether they want to receive such disclosures and keep evidence that they had been so asked and what their response is.  But this isn’t in the SIP and personally I hope that this does not become the regulatory expectation for all MVLs.  Quite frankly, if a party is paying your fees, I’m sure you will give them whatever information they so require irrespective of what a SIP does or does not say.

Sensibly, the new SIP9 clarifies that it does not reach to Moratoriums, although I’m not sure that this needed saying considering there isn’t really an “estate” in a Moratorium appointment, is there, there’s simply a “client”?

 

The small print

Here are the other most material changes in the revised SIP that I have seen:

  • Proportionate payments

“All payments from an estate should be fair and reasonable and proportionate to the insolvency appointment” – how do you measure proportionality?

I often query IPs who instruct agents to deal with chattels that are only worth, say, £3,000 when they include agents’ costs of £3,000 (and in some cases, more!) in an expenses estimate.  The IPs often respond that the agents are doing much more than simply realising chattels – will arguments like this fall foul of the proportionate test in future?  Instructing solicitors is another minefield: hindsight sometimes makes such costs look disproportionate to what has been achieved.

 

  • Consider who is approving your fees

“Payments should not be approved by any party with whom the office holder has a professional or personal relationship which gives rise to a conflict of interest”.

For example… a firm’s IPs are often appointed on Admins by a secured creditor and now you need your fees approved by that secured creditor.  Or… you have paid or plan to pay the company’s accountants for helping on a Statement of Affairs, as you have done on a number of cases before, and those accountants are the only unsecured creditor to vote on your fees.

These relationships certainly give rise to self-interest threats, but do they overstep the SIP9 conflict of interests threshold?  David Menzies suggested that the barrier is reached where there is an unacceptable conflict, not simply an ethical threat that can be managed to an acceptable level with safeguards.

 

  • More disclosure on sub-contractors

The old SIP9 required disclosure where the office holder sub-contracts work that could otherwise by carried out by them or their staff.  Now the disclosure must also include “what is being done and how much it will cost”.

 

  • Not so much what it will cost, but what do you expect to be paid?

Whereas the old SIP9 included as a key issue of concern the anticipated cost of work proposed to be done, now the SIP includes the anticipated payment for the work.  So, for example, while a fees estimate may set out that time costs of £30,000 are anticipated to be incurred, it seems you now need to disclose that, due to insufficient assets, you only expect to be paid £10,000.  Also, where you are seeking (or have approved) a percentage basis, what payment will this likely equate to?

 

  • Always provide an indication of the likely return to creditors

Further crystal ball-gazing now appears necessary: whereas the old SIP stated that “where it is practical to do so”, you need to provide “an indication of the likely return to creditors when seeking approval for the basis of” fees, this has been toughened to a requirement in all cases, whether or not it is practical to do so.

 

  • What is included in your fixed/percentage fee?

Oddly, “where a set amount or a percentage basis is being used, an explanation should be provided of the direct costs included”.  I would think it were more important to be clear about what direct costs are excluded.  The new SIP continues: “The office holder should not seek to separately recover sums already included in a set amount or percentage basis fee and should be transparent in presenting any information”.

 

  • How to calculate a blended rate

Helpfully, the SIP now explains what is meant by a “blended rate”: it “is calculated as the prospective average cost per hour for the appointment (or category of work in the appointment), based upon the estimated time to be expended by each grade of staff at their specific charge out rate”.

You might think this is an obvious definition.  However, I have seen several fees estimates based on a “blended rate” calculated as simply the average of the charge-out rates, e.g. IP at £400 per hour and case-worker at £200 per hour, so the estimate is calculated at £300 per hour.  This method generates an artificially inflated fees estimate where, as you would expect, the case-worker spends the majority of time on the case.

The method that the SIP now promotes is use of a blended rate that reflects the estimated time to be spent on the case.  In the above example, if the IP is estimated to spend 10 hours and the case-worker 60 hours on the case, the blended rate would be c.£229 per hour, leading to a total fees estimate of £16,000, which is much more realistic than the £21,000 (i.e. 70 hours at £300) reflected by the earlier method.

 

There’s more

Yep, there’s a new SIP7 and SIP3.2… and we expect a revision to SIP16 before the end of April.  Never a dull moment!

 


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Court decides on solution for misfiled SoA schedules

I don’t usually write on legal decisions anymore, but I felt that this was such a good news story, I would make an exception.

I have seen many an IP look ashen and frustrated at learning that the employee or consumer creditor schedules have been sent to Companies House for filing along with a Statement of Affairs (“SoA”).  It’s a very easy mistake to make, but it can be costly.  Not only is it a data breach, but over the past few years, the Registrar seems to have hardened his stance and no longer agrees to whip out the offending schedules but instead refers the IP to the expense of getting a court order for their removal.

In the recent case of Re Peter Jones (China) Limited ([2021] EWHC 215 (Ch)) (https://www.bailii.org/ew/cases/EWHC/Ch/2021/215.html), HH Judge Davis-White QC gave his view on the matter.

In this case, the IP was quick to spot the error, so just a few days after the SoA containing the employee/consumer schedules had been emailed for filing, he emailed the Registrar asking for the filing to be cancelled.  Unfortunately, although the Registrar had confirmed that the SoA had been returned in the post, there was a mix up and the SoA-plus-schedules were filed.

The Registrar told the IP that he would need a rectification court order to remove the schedules.

 

Employee/consumer schedules were “unnecessary material”

The court decided that the schedules were “unnecessary material” under S1074 of the Companies Act 2006 (“CA06”):

(2) “Unnecessary material” means material that—

(a) is not necessary in order to comply with an obligation under any enactment, and

(b) is not specifically authorised to be delivered to the registrar.

This section also gives the Registrar discretion to choose not to file the unnecessary material.  If the unnecessary material cannot readily be separated, then the Registrar can reject the whole document submitted.  But if it can readily be separated, then S1074 allows the Registrar to remove just this item.  Of course, this is handy when employee/consumer schedules are mistakenly submitted with SoAs.

S1094 CA06 also gives the Registrar discretion to remove such unnecessary material from documents already filed.

 

Should the Registrar have used his discretion to remove the schedules?

The court said: yes.

The judge pointed out that:

“If the IR 2016 prohibit delivery of the Schedules to the Registrar it is difficult to see how it could be lawful for him to register them.”

Therefore, the Registrar’s refusal to exercise that discretion was considered “unlawful and irrational within the Wednesbury principles”.

The force of the judge’s decision perhaps is felt in the fact that the judge ordered that the Registrar pay the costs of the IP’s application:

“Having found that the Registrar had a discretion which he should have exercised to remove the Schedules or not to register them in the first place, I ordered that he should pay the costs of the application. His repeated position in correspondence that a court order was necessary was simply wrong.”

 

Will the Registrar use his discretion in future?

Let’s hope so!

The Registrar was not represented at this application, except by written submission on the question of costs.  I suppose an appeal is possible, but I would think unlikely.


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Brexit brings changes even for exclusively-UK insolvencies

Have you found yourself reading articles about the effects of the end of the Brexit transition period that leave you wondering: ok, but is there anything that directly affects my bog-standard UK insolvency work?

As we have been labouring on fixing our own document packs, I thought I’d publish our to-do list.

Jo’s latest Technical Update summarised the main changes and gave a full list of useful resources.  If you have bought the latest Butterworths, you’ll see that the changes have already been helpfully inserted in italics.  However, you still really need to refer to the Insolvency (Amendment) (EU Exit) Regulations 2019 (at https://www.legislation.gov.uk/uksi/2019/146/contents) to see which Act sections and Rules have been affected.  And then of course there’s non-insolvency legislation like the GDPR to think about.

Jo and I found that the key effects boil down to:

  • Determining the type of proceedings;
  • Ignoring member State liquidators; and
  • Re-defining the GDPR

 

New Types of Proceedings

It seems like only yesterday that we started to add to docs whether the EU Regulation (or EC Reg as it was then in 2010) applied and thus whether the proceedings in question were main, secondary, territorial or non-EU proceedings.

Unfortunately, the Brexit effect is not that this sentence can now be eliminated.  Instead, we need to replace it with a statement as to whether the proceedings are (or will be):

“COMI proceedings, establishment proceedings or proceedings to which the EU Regulation as it has effect in the law of the United Kingdom does not apply”.

What defines the proceedings?

New definitions have been added to Rule 1.2:

“COMI proceedings” means insolvency proceedings in England and Wales to which the EU Regulation applies where the centre of the debtor’s main interests is in the United Kingdom;

“establishment” has the same meaning as in Article 2(10) of the EU Regulation;

“establishment proceedings” means insolvency proceedings in England and Wales to which the EU Regulation applies where the debtor has an establishment in the United Kingdom

Dear IP no. 116 explains that effectively COMI proceedings are the new “main” proceedings: the COMI tests are very similar to the previous ones and so, where a company’s principal place of business and registered office are in the UK, this will be the reason why the proceedings are COMI proceedings.

Dear IP no. 116 also explains that similarly establishment proceedings occur where the COMI is elsewhere but the insolvent has an establishment in the UK, where previously this would have resulted in secondary or territorial proceedings.

“Proceedings to which the EU Regulation as it has effect in the law in the United Kingdom does not apply” will be encountered where, per Dear IP no. 116, “one of the UK’s other grounds for the opening of insolvency proceedings has been relied upon”.

What documents are affected?

The documents affected (excluding those that an IP’s solicitors would draft, such as Admin order applications and winding-up petitions) are:

As regards the last document listed above, in fact there has been no change to R8.24(2)(c), which requires the Nominee’s report on the consideration of the IVA Proposal to “state whether the proceedings are main, territorial or non-EU proceedings and the reasons for so stating”… but we assume that this was mistakenly omitted.

 

Member State Liquidators: blink and you’ll have missed them

In June 2017, the Act and Rules were amended to require office holders to engage with member State liquidators involved with the debtor.  For example, office holders needed to send to the member State liquidator copies of all their notices to the court, Companies House or the OR and liquidators and administrators needed to seek the member State liquidator’s consent to the dissolution of the company prior to filing the final docs at Companies House.

All those obligations have now been removed.

Even if you have never dealt with a member State liquidator before and your checklists never even referred to them, there is one change that you need to make to documents as a consequence: R15.8(3)(j) requires decision procedure notices in CVAs and IVAs to state the effects of R15.31 about the calculation of voting rights.  R15.31(7) and (9) have been changed to remove reference to the rights of a member State liquidator to vote, so likewise you will need to tweak your CVA and IVA R15.8 notices.

 

The GDPR: what is it called now?

The EU’s GDPR (i.e. EU 2016/679) forms part of the UK’s law as a consequence of the European Union (Withdrawal) Act 2018.  The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019 define the product of this action as the “UK GDPR”.  These Regulations also make the necessary amendments to the GDPR to reflect the fact that the UK is not a member State.

Does this mean that we now need to start referring to the “UK GDPR”?  Personally, I don’t think so.  “GDPR” was a colloquial term in any event, so I don’t think this has ceased to be relevant… unless you’re communicating with someone in the EU about the GDPR, of course.  Certainly, I don’t think there is any need to go editing internal checklists and I don’t think there’s any pressing need to change documents that refer in passing to the GDPR… although you might like to take this opportunity to replace “GDPR” with something more generic like “data protection legislation” to future-proof it in case the EU GDPR and the UK GDPR diverge materially over time.

So no changes are required for the GDPR switch then?

Almost none.  If you have any documents that accurately define the EU GDPR, then you should update this.  For example, many letters of engagement make specific reference to the General Data Protection Regulation EU 2016/679 in setting out the parties’ obligations as data controllers (such as the style clause for engagement letters that was issued in 2018 by ICAS at https://www.icas.com/regulation/guidance-and-helpsheets/preparing-for-gdpr).  If so, then it would be correct to update this to refer to the effect of the 2019 Regulations.

You should also check what your privacy notice says about transferring data outside the EU.  Some notices are specific about when this would happen (if ever).  Of course, now the data you process are already outside the EU and if you were to transfer any of it to any of your service providers (e.g. ERA providers or debt collectors) in the UK, it would be a transfer outside the EU.  Other than making sure that your privacy notice describes this reality, it’s not a big deal, as you would still be transferring data in accordance with the data protection legislation, wouldn’t you..?

What about GDPR-compliant contracts?

To be honest, I’ve encountered a staggering diversity in the levels of concern about the creation of GDPR-compliant contracts with data processors.  I suppose that’s not surprising when even some RPB reviewers have chosen not to explore GDPR compliance to any great degree.

But if you do ensure that the data processors that are engaged by you, your firm, or the insolvents over which you are appointed are wrapped into a GDPR-compliant contract, then you may want to revisit the wording of your standards, especially around the conditions for transferring data outside the EU.

 

Fortunately, as far as we can see, those are the only practical effects on day-to-day UK insolvency work.  What with all the changes to documents and processes in consequence of the CIGA and HMRC secondary preferential creditor changes, I think we could all do with a break from largely unhelpful tinkering for a while.