Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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SIP16 and the Pool: Great Expectations as yet Unrealised?

I think we’ve all shared in the pain of SIP16 compliance. We’ve tried really hard, haven’t we? So why is it that the wholly-compliant rate dropped from 87% in 2015 to 62% last year? Where are we going wrong?

In this blog, I air my suspicions about the stats, not only on SIP16 compliance, but also on the changing profile of pre-packs and the role of the Pool, as presented in the Insolvency Service’s and the Pre Pack Pool’s 2016 Reviews. Yes, I know I’m a little late on this story (I blame the 2016 Rules!).

The Insolvency Service’s 2016 Review of IP Regulation can be found at: https://goo.gl/Jkwz19

The Pre Pack Pool’s 2016 Review is at: https://goo.gl/fPEXTe

 

SIP16 Compliance Rates Fall Back to Square One

There has been a significant drop in the reported rate of SIP16 compliance – at 62% of 2016’s SIP16 statements considered wholly compliant, it is the lowest annual rate on record (note: several years are estimates because not all SIP16 statements received were compliance-reviewed):

Why is this? It’s true that it takes time to adapt to a new SIP and this is bound to hit compliance, but is this the whole story? Or has the shift of the job of reviewing SIP16s from the Insolvency Service to the RPBs introduced an element of inconsistency into the process?

Let’s drill down into the overall compliance rate of 62% to see how the rate varies from RPB to RPB:

As you can see, the rates range from ICAS’ 100% of SIP16 statements wholly compliant to the ICAEW’s 39%.

I consider it highly unlikely that ICAEW-licensed IPs are in reality far worse at complying with SIP16 than other IPs, so this indicates strongly to me that there is a great diversity in the standards being applied. Given that the ICAEW reviewed 54% of all SIP16s received last year, it’s not surprising that the overall compliance dropped from 2015’s 87% to 62%.

The Insolvency Service’s Review does not help us to understand what might be behind the non-compliances, although it gives us some comfort. It states: “for the vast majority of non-compliant statements, the breach was not deemed to be serious and was merely of a technical nature”.

The ICAEW has published some feedback on their reviewing (Feb 2017, available to their Insolvency & Restructuring Group members at https://goo.gl/YkExP7), which suggests that the following have been lacking in some cases:

  • An explanation of the pre- and post-appointment roles of the IP (the ICAEW acknowledges that SIP16 does not strictly require this explanation in the SIP16 Statement, but it needs to be delivered to creditors and directors somewhere);
  • An explanation of why no requests were made to potential funders to fund working capital (even if in some cases, it is obvious);
  • If the business has not been marketed on the internet, an explanation why not (even if the nature of the business makes this obvious);
  • An explanation of the reasons underpinning the marketing strategy (whereas some appear to have simply provided a list of what marketing has been done);
  • An explanation of the reasons behind the length of time of the marketing (even if there were obviously financial pressures that limited this);
  • The date of the initial introduction – not simply “in December 2016”;
  • An explanation of the rationale behind the basis/bases of valuations (helpfully, the ICAEW give a clear steer on what they expect: “where you have obtained going concern and forced sale valuations, tell [creditors] that you’ve obtained valuations on both bases as you’re seeking to understand whether realisations will be maximised by breaking up the business and selling the assets on a piecemeal basis or whether it’s better to try to find a buyer for the business as a going concern”);
  • If goodwill is valued, an explanation and basis for the valuation provided; and
  • An explanation of the method by which consideration was allocated to different asset classes.

Given the prevalence of some apparent failures to state the bleedin’ obvious, perhaps other RPB reviewers are measuring compliance against a different list of tick-boxes.

 

The Shifting Profile of Pre-Packs

Probably the main difference between the old and the new SIP16 was the introduction of the “marketing essentials”, with the clear message that an absence of marketing should most definitely be the exception. Has the new SIP16 pushed up the frequency of marketing?

I certainly think that the SIP16 pressure has influenced attitudes towards marketing, as this graph indicates. Even in cases where the offer on the table looks too good to beat, I suspect that many view some marketing effort as essential to shield one from criticism. I doubt that safety-blanket marketing in these cases increases realisations and it will increase costs, but if it answers the sceptics’ questions about possible undervalue sales, then it seems to have everyone’s blessing.

Then again, perhaps I am being unfair: is it merely coincidental that the graph above shows that, as the frequency of marketing has increased, the prevalence of connected party purchasers has taken a dive? Could it be that increased marketing has widened the pool of potential purchasers, resulting in more occasions when connected interested parties lose out to the competition?

I am surprised that no one (as far as I have seen) has connected these two trends with this simple cause-and-effect explanation. Rather, perhaps I am not the only person who suspects that the fall in the number of connected purchasers is more a consequence of the new SIP16 pressures on connected party pre-packs, including the pressure to apply to the pre-pack pool. As revealed in its 2016 Review, the Pre Pack Pool is evidently of this view:

“It may be that the introduction of the Pool and the wider post-Graham reforms have deterred some connected party pre-packs from being proposed in the first place.”

But what has replaced these pre-packs? Are connected party sales avoiding the SIP16 obstacles altogether?

Perhaps hurdles are being overcome by having connected party sales accompany liquidations instead of Administrations. Well, I was surprised to discover that the numbers of Gazette notices for S216 re-use of a prohibited name do not follow a trend suggesting more sales in liquidation:

So could it be that Administration sales are being shifted out of the pre-pack definition either by being completed before Administration or perhaps negotiations are not starting until after appointment? This doesn’t ring true either: SIP16 statements as a percentage of the total number of Administrations has been fairly steady since the introduction of the Pool (2015: 29%; 2016: 24%):

* The SIP16 review actually covered 14 months, but for the purpose of this graph the number has been pro rated for 12 months.

Although the number of Administrations continues to fall, I find this picture encouraging: at least the SIP16 and Pool pressure does not seem to be persuading people to find ways around the measures. Pre-packs have a role and it seems that IPs are sticking with them.

 

Is the Pre Pack Pool making its mark?

In light of the second-hand warnings I’ve heard over the past years about how strongly the Insolvency Service feels about the need for IPs to embrace the Pool, I found the Service’s annual review surprisingly dead-pan. In contrast, the ICAEW’s release on the subject stated that the number of referrals to the pool was “disappointingly low”.

However, the ICAEW was relatively subtle about IPs’ role in the referral process: “the aim of the pool is to increase transparency and confidence around prepacks and low level use of the pool is unlikely to achieve that. We know you can’t compel a connected party to approach the pool but encouraging them to do so supports the overall aim of the pool”. I found the Pre Pack Pool less subtle: “the insolvency profession and creditors have important roles to play in ensuring connected party purchasers are informed of the option to use the Pool and putting pressure on them to do so”. How does the Pool expect IPs to “put pressure” on potential purchasers, I wonder.

The Pool also acknowledges that “creditor awareness of the Pool has been low and few have taken the time to read through administrators’ reports”. On the other hand, they report that “those connected party purchasers who have used the Pool have said it has been an important step in building credibility and trust in the ‘NewCo’ among creditors”. The Pool’s Review does not elaborate, but there are some interesting quotes in an article written by Stuart Hopewell, director of Pre Pack Pool Limited, and David Kerr, IPA’s Chief Executive, for Credit Magazine in November 2016 (www.insolvency-practitioners.org.uk/download/documents/1467).

As shown on one of the graphs above, 13% of all pre-packs were referred to the Pool. This represents 28% of all connected party pre-packs. Personally, I’m surprised it was that many! My personal view is that those who find this uptake disappointingly low had unrealistic expectations.

 

The Performance of the Pool

Given that referral to the Pool is voluntary, personally I wasn’t expecting any negative decisions to emerge. After all, if you didn’t have to sit an exam, you wouldn’t do so unless you were certain of passing it, would you? I was wrong…

The breakdown of the Pool’s opinions over the 14 months to the end of 2016 is as follows:

  • 34 referrals: the case for the pre-pack is “not unreasonable”
  • 13 referrals: the case is “not unreasonable but there are minor limitations in the evidence provided”
  • 6 referrals (although 4 were a group of connected companies): the case for the pre-pack is “not made”

I appreciate that the Pool doesn’t want to give away its secrets, but unfortunately the Review gives nothing away about what factors tipped the balance or indeed how they measure a good pre-pack from the bad. The author ends the Review by stating that “hopefully referrals to the Pool will increase in 2017 as stakeholders become more familiar with the way it works and the reassurance it provides”, but without more feedback than simple statistics I cannot see this happening.

 

The Future of Pre-Packs

As we know, the Small Business Act included a reserve power to legislate the operation of pre-packs, with a sunset clause ending in May 2020. The Service’s Review continued its dead-pan mood, simply stating that they would carry out an evaluation “in due course”.

The Pool seemed barely more enthusiastic, simply stating in its Review that “it would be a shame to lose” pre-packs.

 

The Future of the Pool?

Back in May, the Times reported (https://goo.gl/QRcVZc) that Frank Field, Labour MP and Chair of the House of Commons’ Work & Pensions Select Committee, found the number of referrals to the Pool “deeply worrying” and he raised the prospect of the Committee scrutinising the Pool after the election. Sir Vince Cable also said that the number of referrals raised “worrying questions” and said that moves should be made towards making Pool referrals mandatory.

The Pre Pack Pool may be contemplating how to enlarge its role, but not necessarily with mandatory pre-pack referrals in mind. In the Credit Magazine article mentioned earlier (www.insolvency-practitioners.org.uk/download/documents/1467), Stuart Hopewell and David Kerr considered the extension of the Pool’s remit in the context of the revision of SIP13, suggesting “perhaps there is a role for the Pool to represent [creditors’] interests in all connected sale situations?” Although I continue to be concerned that much of the media outrage at connected party sales is levelled at the liquidation equivalents of pre-packs, surely the Pool must first provide convincing evidence that it is achieving the objective for which it was created before we seek to cast its net farther afield.

Are we to conclude that Hopewell/Kerr’s perception is that SIP13 sales to connected parties is an issue and having an independent review will regulate these sales?  I am not aware of any research into whether Liquidation connected party sales need regulating, so it would seem again that the tide is pulling us to tackle perceptions. Considering that the regulatory objectives include “promoting that maximisation of the value of returns to creditors” and encouraging IPs to provide “high quality services at a cost to the recipient which is fair and reasonable”, I struggle to see how these objectives are met by contributing further to this expensive over-regulated PR exercise.


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More little gems from the Insolvency Service’s blog

As promised in my last blog (but later than planned – sorry), here is my second selection of news from the Insolvency Service’s blog and Dear IP 76 that I think is worthy of spreading… with some further commentary from me, of course.

The questions fall into the following topics:

  • S100 Decisions
  • Other Decision Processes
  • Timing Issues

As I mentioned previously, I am very pleased that the Insolvency Service has shared their views on many issues and I do hope they will continue to be this open. I would also like to thank the technical and compliance managers and consultants with whom I have spent many hours debating the rules; without these valuable exchanges, many of the issues would not have occurred to me.

 

S100 Decisions

  • Can the Statement of Affairs and SIP6 Report be delivered by website?

As the director is responsible for delivering the Statement of Affairs, it is the Insolvency Service’s view that the Statement cannot be delivered by means of a website, as the rules governing website delivery – Rs 1.49 and 1.50 – only apply to office holders. Therefore, the Statement must be either posted or emailed to creditors.

Of course, delivery of the SIP6 report is not a statutory requirement and strictly-speaking SIP6 simply requires the report to “ordinarily be available”. I understand that at least one RPB is content for the SIP6 report to be made available via a website.

  • Does an invitation to decide on whether to form a committee need to be sent along with the S100 proposed decision notice?

The question arises because R6.19 requires such an invitation where any decision is sought from creditors in a CVL, whereas usually the company is not in CVL when the S100 proposed decision notice is signed.

The Insolvency Service has answered “yes”, the director needs to seek a decision from creditors on whether to form a committee when they propose the S100 appointment.

  • Can the SoA/S100 fee be approved via deemed consent?

In view of the Insolvency Service’s approach to IPs’ fees in general, the answer to this might seem an obvious “no”. However, the background to the query was that the rules require creditors to approve the payment of the fee, not its quantum, and therefore it is not quite so obviously “a decision about the remuneration of any person”, which the Act limits to decision procedures, i.e. not including the deemed consent process.

But unsurprisingly the Service answered: “no”.

This has led some people to rethink their process of getting paid the SoA/S100 fee. We have been receiving quite a few questions on whether such fees need approval if they are paid pre-appointment and/or by a third party.

The Insolvency Service has confirmed that R6.7(5) – which requires approval of payments made to the liquidator or an associate – applies to payments referred to in R6.7(4), i.e. those made by the liquidator. R6.7(3) provides that, where payment is made from the company’s assets before the winding-up resolution, the director must provide information on the payment along with the SoA, but they do not require creditor approval.

  • Does R15.11’s timescale for decisions on the liquidator’s remuneration (when made at the same time as the S100 decision on the liquidator) apply also to decisions on the SoA/S100 fee?

R15.11 provides that at least 3 business days’ notice must be given for S100 proposed decisions on the liquidator. This rule also provides that the same timescale applies to “any decision made at the same time on the liquidator’s remuneration”. It stands to reason that, if a virtual meeting were convened to consider a decision on the SoA/S100 fee at the same time as the decision on the liquidator, the same notice requirements would apply, but does the SoA/S100 fee strictly fall under “the liquidator’s remuneration”?

The Insolvency Service has stated that R15.11 should be taken to include the proposed pre-liquidation payments referred to in R6.7(5).

 

Other Decision Processes

  • What access information needs to be provided on a notice summoning a virtual meeting?

This question arises from the requirement of R15.5 that the notice to creditors must contain “any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”.

The Insolvency Service has answered: “we think that sending a contact number or email address for creditors to contact in order to obtain such details is also acceptable under this rule”.

Personally, I am pleased with this answer, as I think it makes the logistics of virtual meetings far more manageable. It almost eliminates the risk of unknown “excluded persons”, as you would know who is planning to attend. You could also set up ways of verifying who participants are; you could contact them beforehand, maybe send them agendas and meeting packs. Also during the meeting if they get cut off, you would have a ready alternative contact for them, and it would be easier to count votes or set participants up with electronic voting. I don’t think that some kind of pre-meeting contact is too much to ask from creditors; to illustrate, if I want to sign up to an open-access webinar, I think nothing of contacting the convener beforehand in order for a link to be sent to me.

  • Can creditors ask upfront for an Administrator’s Para 52(1) Proposals to be considered at a physical meeting?

As we know, when Administrators include a Para 52(1) Statement in their Proposals, they do not ask creditors to vote on whether to approve the Proposals, but they must start a decision process going if the requisite number of creditors ask for a decision within 8 business days of delivery of the Proposals. Para 52(2) makes it clear that the request from creditors is for a decision, not a meeting as was the case before the Small Business Act. However, R15.6(1) states that “a request for a physical meeting may be made before or after the notice of the decision procedure or deemed consent procedure has been delivered”. Therefore, if the consequence of creditors asking for a Para 52(2) decision is that the Administrator issues a notice of decision procedure (say, a correspondence vote on the Proposals), then this rule seems to allow creditors to ask for a physical meeting before this notice is delivered.

The Insolvency Service has confirmed that this is the case: “there is no reason that the requisitioning creditor should not at the same time request a physical meeting. We note your comment that the request for a physical meeting is being made here before a decision process has even commenced, but we think that is it reasonable to interpret the rules this way on this occasion because the request does clearly relate to a decision”.

  • Ok, so does a creditor asking for a physical meeting to consider the Para 52(1) Proposals need to pay a deposit to cover the costs of this meeting?

R15.6 sets out how creditors’ requests for a physical meeting should be handled. It includes no reference to paying a deposit to cover the costs of the meeting. Mention of paying a deposit appears at R15.18, which relates to requisitioning decisions.

Therefore, quite rightly (albeit unfairly) in my view, the Insolvency Service has stated that “it would follow that where costs of the decision are met by the requisitioning creditor then these would be for a decision which is not made by a physical meeting. Any costs of the physical meeting over and above the security paid by the creditor for a decision process would be an expense to the estate”.

Thus, it would seem that, on receiving sufficient requests for a physical meeting to be summoned to consider Para 52(1) Proposals, the Administrator would need to calculate hypothetically how much it would cost to organise this via a non-physical-meeting procedure and ask the requisitioning creditor for this sum. As the rules require “itemised details” of this sum to be delivered to the creditor, this would take some explaining in order to put the creditor’s mind at ease that we weren’t ignoring their request for a physical meeting even though we were asking them to pay the costs for conducting, say, a correspondence vote!

  • Does a creditor need to lodge a proof of debt in support of a request for a physical meeting?

The Insolvency Service’s simple answer is “no”. This is what I thought when I read the rules, but it does seem odd… and could lead to all sorts of controversy.

  • Can approval for an Administration extension be sought by deemed consent?

Understandably I think, the Insolvency Service has answered “yes”. It almost goes without saying, however, that seeking secured creditors’ consents is not a decision process; the positive approval of each and every secured creditor is required (just thought I’d mention it).

  • How do you deal with the need to invite creditors to make a decision on whether to form a committee when seeking a decision by deemed consent?

The Insolvency Service has confirmed that this committee decision can be posed by deemed consent.

Via Dear IP 76, the Service also endorses the format of a proposed decision in the negative, i.e. that a committee shall not be formed… although it adds a sticky proviso: “in this way, if creditors have already indicated a lack of desire to appoint a committee, the office holder could simply propose that no committee be formed”. How do creditors indicate a lack of desire? In S100 CVLs, this seems straightforward enough in view of the fact that, as mentioned above, the director will have needed to invite such a decision in the first place. However, whether an absence of anything but the usual creditor concerns in, say, the first few weeks of an Administration is sufficient to indicate a lack of desire to satisfy the Service, I don’t know.

What is the alternative: that a positive deemed consent decision be posed, i.e. that a committee will be formed? The problem here is that, unless creditors object, then this decision will be made by default. In the light of probable creditor apathy, this could be unhelpful. Therefore, if a positive deemed consent decision is posed, it would seem necessary to describe it something like “a committee will be formed if there are sufficient creditors nominated by [date] and willing to act as members”, which to be fair is almost the wording set out in the Rules (e.g. R10.76). In this way, if the invitation for nominations is similarly ignored, then the positive decision, even if technically made, is of no effect.

However, it’s all a bit of a faff, isn’t it? It hardly makes for a Plain English process. I also dislike the idea that an office holder must propose a decision that he/she may not support. It doesn’t sit right with me for an IP to invite creditors to approve a decision to form a committee when the IP does not see the need or advantage in having one on the case in hand.   However an IP words the proposed decision, creditors can take action to appoint a committee and, as the Rules do not prescribe a form of words, then surely office holders are free to propose a decision as they see fit.

  • If a Notice of General Use of Website has already been issued, what is the effect of Rs3.54(3/4), 2.25(6/7) and 8.22(4/5), which require additional wording about website-delivery in certain circumstances?

This question requires some explaining. As we know, R1.50 provides that the office holder can send one notice to creditors informing them that all future circulars (with a few statutory exceptions) will be posted onto a website with no further notice to them – this is what I mean by a Notice of General Use of Website. However, we also have R1.49, which repeats the 2010 provision that each new circular can be delivered by posting out a one-pager notifying creditors that the specific document has been uploaded to a website.

Things get complicated when looking at Rs3.54, 2.25 and 8.22. These rules govern how we invite creditors to decide on an Administration extension and a CVA/IVA Proposal. They state that the notice regarding such a decision may also state that the outcome of the decision will be made available for viewing and downloading on a website and that no other notice will be delivered to creditors and these rules go on to specify additional contents of such a notice, which draw from R1.49.

So the question arises: if you have already given notice under R1.50 to confirm that a website is going to be used for (almost) everything, do you need this extra gumpf?

The Insolvency Service has clarified that you don’t. If you have already followed (or are following simultaneously) the R1.50 process, then you need not worry about adding such references to your R3.54/2.25/8.22 notices; you can simply issue the notice via the website and then issue the outcome via the website also. Of course, given that you’re inviting creditors to consider an important decision, you might also want to post something out to them, but this does not appear necessary under the rules.

 

Timing Issues

  • If an Administration has already been extended pre-April 2017, when should I next produce a progress report?

As covered in a previous blog, the issue here is that, before April 2017, an extension would have resulted in the reporting schedule moving away from 6-monthly from the date of appointment and instead it will be 6-monthly from the date of the progress report that accompanied the request to approve the extension. As drafted, the 2016 Rules had not provided a carve-out for these cases, so it seemed that the reporting schedule for these extended Admins would be reset on 6 April back to 6-monthly from the date of appointment.

An attempt was made to fix this in the Amendment Rules, but in my view it was not wholly successful. They state: “Where rules 18.6, 18.7 or 18.8 prescribe the periods for which progress reports must be made but before the commencement date an office-holder has ceased to act resulting in a change in reporting period under 1986 rule 2.47(3A), 2.47(3B) 4.49B(5), 4.49C(3), or 6.78A(4), the period for which reports must be made is the period for which reports were required to be made under the 1986 Rules immediately before the commencement date.” The intention is clear: where the 1986 Rules have moved a reporting schedule away from the date of appointment, this adjusted schedule should continue. However, the reference to an IP ceasing to act is unfortunate, because in the scenario described above, this has not happened.

The Insolvency Service acknowledged that this rule “could perhaps have been more explicit” (ahem, I think the problem is that it was too explicit), but emphasised that the intention is clear. Presumably therefore the Registrar of Companies will not reject filings made on the extended 6-monthly schedule.

Also, just in case you haven’t already picked it up, I should mention that the Amendment Rules have most definitely fixed the issue I raised some months ago about the length of a month, so progress reporting now continues pretty-much in the pre-April way… although of course we now have to factor in the time taken to deliver reports.

  • Do Administrators’ Proposals really have to include a delivery date?

Sorry, this is more just me having a whinge: R3.35(1)(e) requires Administrators’ Proposals to state the date that the Proposals “are delivered” to creditors. When the Proposals are signed off, this will be a date in the future.

The Insolvency Service has confirmed that this is the case: they require the future “deemed” delivery date to be listed.

Of course, there are practical issues with this. If you deliver Proposals using more than one method, e.g. by R1.50 general website-delivery but also by post where some creditors have asked for hard copies (which admittedly will be rare), then you may well have more than one delivery date.

More practically, how will you/your staff complete this little nugget? It is commonplace for Proposals to go through lengthy drafting processes (despite some non-appointment taking IPs’ views that Proposals should be simple to produce in the first few days especially where there has been a pre-pack); drafts are turned over to several different people, being edited as they go. It is going to be a real faff to keep an eye on this insignificant date. My personal recommendation, if the issue date cannot be guaranteed at the outset, is to keep this delivery date coloured/highlighted on draft Proposals so that it is the very last item completed just before the Proposals are signed off.

  • Do you have to wait until the MVL final account has been delivered to members before submitting a copy to the Registrar of Companies?

When closing an MVL, the liquidator is required to confirm to the Registrar that s/he “has delivered” the final account to members (R5.10(3)).

The Insolvency Service does not believe that the liquidator has to wait until the final account has been “delivered” to members at this stage; it is sufficient that the liquidator has sent it. From what I can decipher, it seems they are viewing delivery here as “deemed” delivery, i.e. once it has left your office, it will end up being delivered a couple of days’ later (if sent by post).   Personally, I still think it is odd to confirm at this point that the final account has been delivered, but at least we have an answer for any pedant who wants to debate this.

  • Do you have to wait until the Notice of Establishment of the Committee is delivered to the Registrar/Court before holding the first Committee meeting?

Despite the paradoxical “no” for the previous question, the answer to this one is “yes”.

The issue arises because R17.5(5) states that “the committee is not established (and accordingly cannot act) until the office-holder has delivered a notice of its membership” to the Registrar/Court.   The Insolvency Service has confirmed that, yes, the notice must be delivered before the first meeting is held.

The frustration here, of course, is that we will no longer be able to hold the first committee meeting immediately after any meeting that establishes it, but because the rules require us to hold a first meeting (although this can be by remote attendance), we will have to call the committee members back again.

Personally, I wonder if practically it would still be valuable to hold an informal meeting with the (elected) committee members immediately – so that matters for investigation can be discussed and so that you can help them understand how committees work, maybe even discuss the office-holder’s fee proposal with a view to agreeing this later on – and then, hopefully, the actual first meeting will be little more than a formality.

 

The next instalment..?

As we apply the new rules in practice, I am sure that more issues and ambiguities will emerge. As I mentioned previously, I am grateful to the Insolvency Service for their openness.

Emerging interpretations and views force me to revisit my previous conclusions, which is a good thing, although I am very conscious that earlier blog posts and presentations quickly become out-of-date. Even my presentation for the R3 SPG Technical Review at the end of March needed an update and this is now available to Compliance Alliance webinar subscribers (drop me a line – info@thecompliancealliance.co.uk– if you want to know more 😉 ).

I am also looking forward (err… sort-of!) to presenting on the rules at other R3 events – 6 June SPG Technical Review in Leeds; 7 June Southern Region meeting in Reading; 28 June North East Region meeting; and 4 July SPG Technical Review in Bristol. I welcome your queries and quirky observations on the rules, which will help me to make my presentations useful to the audience. I’m sure there are many more gems to unearth.


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Emerging Interpretations of the New Rules – Part 1: the biggies

Along with Dear IP 76, the Insolvency Service’s Rules blog has been a fascinating read. If you don’t fancy trawling through all 148 comments, here are my personal favourites. There are too many to cover in one go, so I’ll start here with a handful of the more contentious:

  • How do the New Rules affect existing VAs?
  • What is the deadline for forcing a S100 physical meeting?
  • What happens if a Centrebind is longer than 14 days?
  • How should you handle decisions sought from preferential creditors alone?
  • How should creditors comply with the Rules when submitting notices and forms?

 

I’ll also take this opportunity to reflect on how these emerging interpretations and the Amendment Rules have impacted on my previous blog posts. I have tried to update old blog posts as time has moved on, but I cannot promise that old blog posts – or indeed this one – will remain current. Things are moving fast.

Dear IPs can be found at: https://goo.gl/wn8Vog (although no. 76 has yet to appear)

The Insolvency Service’s Rules blog is at: https://theinsolvencyrules2016.wordpress.com/

 

Can we rely on the Insolvency Service’s answers?

Nick Howard’s introduction to Dear IP 76 states candidly “While it is only a Court that can give a binding interpretation of the law, the enclosed article sets out the policy intentions and how we believe the Rules support those”. That’s understandable. Much as we thirst for a cut-and-dried answer, we cannot have it. Just like the 1986 Rules, it will take decades to establish robust interpretations and even then there will always be the Minmar-like decision that takes us by surprise.

  • What about the Rules blog?

To be fair, the Service provided it with the purpose “to offer users the chance to share their thoughts and experiences as they prepare for commencement” of the Rules. It was never meant to be an inquisition of the Insolvency Service, but it was inevitable that it would turn out that way and I am very grateful that the Service has grasped the nettle and been prepared to post their views publicly for the benefit of us all.

  • So what comfort can we draw from the answers?

At the very least, the Service’s explanations are extremely valuable in understanding how they meant the Rules to work and in giving us all a starting point. I wonder if it could be seen a bit like the new mantra, “comply or explain”: if we don’t trust an answer, we need to be certain that our reasons for departing from it are well-founded. And at the very best, the Service has provided explanations that make us say: “right, yes I can see that. Thanks, I’ll work on that basis”.

 

What are the New Rules’ Impacts on Existing VAs?

The difficulty for the Insolvency Service – and indeed for all of us – is that of course each VA is dependent on its own Proposals and Standard Terms & Conditions (“STC”), so expressing any opinion on the effect of the New Rules on VAs in general is going to be dangerous.

  • The difference between IVA Protocol and R3 STCs

The majority of IVAs use either the IVA Protocol or R3’s STC, so you might think it would be relatively straightforward at least to establish some ground rules for these two documents and then leave each IP to determine whether the Proposal itself has any overriding effect. Dear IP seems to have made a stab at this in relation to the IVA Protocol at least. However, I think it is important to bear in mind that Dear IP makes no mention of R3’s STCs and from what I can see there is a chasm of difference in how the two STCs have incorporated the 1986 Rules.

True, both STCs define the “Rules” as the Insolvency Rules 1986 as amended and the Service makes the case for equating this to the 2016 Rules. I have heard argument that the Service’s reliance on S17 of the Interpretation Act 1978 does not stack up: if a contract – which is what we’re talking about here – refers to Rx.xx of the Insolvency Act 1986 (as amended), does it not remain as such notwithstanding that the 1986 Rules have been revoked?

This takes me to the chasm between the two sets of STC: for example, the IVA Protocol STC state that “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules” (19(1)), whereas the R3 STC describe in detail how to convene meetings and conduct postal resolutions with no reference to the Act or Rules. Therefore, personally I am struggling to see how the 2016 Rules affect existing VAs’ methods of seeking creditors’ agreements where those VAs are based on the R3 STC. However, I also question whether the R3 STC restrict meetings to physical ones – when I read the STC cold, I’m not persuaded that they don’t also work for virtual meetings (but then again, don’t most meetings happen only on paper anyway?) – so it seems to me that the R3 STC may allow a variety of routes but, thankfully, without all the baggage that the 2016 Rules carry with them, which may load down Protocol IVAs in view of their vague reference to “in accordance with the Act and the Rules”.

  • Does Dear IP make the IVA Protocol position clear?

It’s Dear IP’s treatment of the Protocol STC’s wording, “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules”, that puzzles me. On the one hand, Dear IP acknowledges that the Act and Rules “remain silent on how decisions are taken once in (sic.) a voluntary arrangement is in place”… so they seem to be saying that the Act and Rules are irrelevant to a supervisor looking to call a meeting. But then Dear IP says: “we do not believe [supervisors] should feel restricted to only using a physical meeting. We expect supervisors to take advantage of the new and varied decision making procedures that are available under the Act as amended and the 2016 Rules”.

But how possibly can the phrase, “the supervisor may summon and conduct meetings of creditors”, morph into for example: “the supervisor may seek a decision by means of a correspondence vote”? This is too much of a stretch, isn’t it? Rather than be meant as a comment on the application of the 2016 Rules to existing VAs, perhaps the Service is simply stating that it would like IPs to incorporate the various processes in future VA Proposals and STC, don’t you think?

Because the Act and Rules in themselves do not empower supervisors to seek decisions, does this mean that the Protocol STC’s words “in accordance with the Act and the Rules” are redundant? Or are these words supposed to mean that the supervisor should “apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications”, as paragraph 4(3) of the Protocol STC states? Ok, if the latter is the case, then what is the effect of S379ZA(2), i.e. that a trustee cannot summon a physical meeting unless sufficient creditors request one? This would seem to take us far from the Dear IP position where supervisors should not “feel restricted to only using a physical meeting”.

For these reasons, I think the Dear IP is horribly muddled. Perhaps the IVA Standing Committee might like to clarify the position in relation to their STC..?

 

What is the deadline for forcing a physical meeting in a S100 scenario?

This is another area that seems to have got horribly muddled. It seems to me that much of the confusion over this arises because of the conflating of two potential creditor responses: (i) a creditor can object to a decision sought by deemed consent; or (ii) a creditor can request a physical meeting. It is true that, when a S100 decision on the liquidator is sought by deemed consent, the consequence of either response is the same: a physical meeting is summoned. However, the Rules around each response are different.

  • The deadline for objections

R15.7(2)(a) states that the notice seeking deemed consent must contain “a statement that in order to object to the proposed decision a creditor must have delivered a notice, stating that the creditor so objects, to the convener not later than the decision date”. “Not later than the decision date” must surely mean that objections delivered on the decision date are valid (note: although this rule only specifies what must appear in a notice, S246ZF(4) makes clear that “the procedure set out in the notice” is binding).

  • The deadline for physical meeting requests

For a S100 decision, R6.14(6)(a) states that “a request [for a physical meeting] may be made at any time between the delivery of the notice… and the decision date”. I have heard argument that “between” excludes the days at each end, which would mean that the deadline for requests would be the end of the day before the decision date. At first, I was persuaded by this interpretation, given that, if I were to count how many people in a queue were between me and the ticket office, I would not include myself in the number… but then someone asked me to pick a number between 1 and 10..!

This interpretation of “between” also makes little sense when considering R15.4(b), which states that an electronic voting system must be “capable of enabling a creditor to vote at any time between the notice being delivered and the decision date”… so the IP isn’t interested in votes cast on the decision date then..?

  • The Insolvency Service’s policy intentions

How does Dear IP pull these threads together? It states: “The policy intention (in all cases) is that a request for a physical meeting must arrive before the decision date. The policy intention with regard to electronic voting is that creditors may cast their votes up until the decision closes (i.e. 23:59 on the decision date). We believe that the 2016 Rules are capable of supporting both these policy intentions.”

The Insolvency Service appears blinkered in their statement that the 2016 Rules support the policy intention, because they simply focus on requests for a physical meeting. Irrespective of how “between” is interpreted, the fact is that a deemed consent can be objected to up to 23.59 on the decision date and such an objection would force a physical meeting. Therefore, a members’-appointed liquidator will still be left in the position of not knowing whether there will be a last-minute objection that will force an unexpected c.week-long Centrebind.

 

What happens if a Centrebind is longer than 14 days?

I feel I should apologise for wasting people’s time in explaining (via this blog (https://goo.gl/hikYKr), R3 presentations and our webinars) the risks that a Centrebind could last longer than 14 days if material transactions need to be reported or a physical meeting needs to be convened.

  • The Insolvency Service’s simple answer

The Insolvency Service gave the simple answer on their blog that “it is sufficient that the original decision date was within the required timescale”. In other words, provided that the convener fixed the decision date for the S100 deemed consent process or the virtual meeting not later than 14 days after the winding-up resolution, it is of no consequence that this decision date falls away because the date of a consequent physical meeting falls outside this timescale.

I find the Insolvency Service’s answer startling. Personally, I would expect the Rules to make explicit that it is the original S100 decision date that matters, in the same way as Para 51(2) uses the expression “initial decision date” when setting down the 10-week deadline for Administrators to seek approval of their proposals (i.e. Para 51(3) explicitly provides that Administrators do not get into a pickle if creditors reject a decision by deemed consent and then the Administrator convenes another decision process with this second decision date falling outside the 10 weeks).

  • Can this principle apply also to VA Proposal decision dates?

What about the other instance when an important decision date deadline must be met: the approval of an IVA Proposal? R8.22(7) states that this decision date must be not more than 28 days from the date on which the nominee received the Proposal (or when the nominee’s report was considered by the court). Given that 14 days’ notice is required, it would be very possible for a physical meeting decision date to be outside this timescale. Would it matter as long as the original decision date was inside it? The Rules do not address this point, but neither do they address the unintended Centrebind position.

Much as my heart’s cockles are warmed by the Insolvency Service’s answer, personally I would be nervous in relying on it.

 

How do you deal with preferential creditors’ decisions?

The Insolvency Service’s answers on this topic are eminently sensible and I am more than happy to live with them… but it’s just that I cannot help but continue to ask myself: “yes, but where does it say that?”

The questions surround the New Rules’ defined process for seeking prefs’ approval of matters such as the Administrators’ fees. Exactly how do you conduct a decision procedure of prefs alone?

Firstly, what do you do with pref creditors who have been paid in full? R18.18(4) states that pref creditors must make a decision on fees, if the Administrator “has made or intends to make a distribution” to prefs (in a Para 52(1)(b) case). This would seem to include prefs who have been paid in full, but R15.11 excludes them from receiving notice of the decision procedure.

But, actually, what do we mean when we refer to pref creditors being paid in full? Usually we mean that the pref element of their claim has been paid in full, but often they will still have a non-pref unsecured claim. How do you calculate a pref creditor’s value for voting purposes?

R15.31(1)(a) states that, in an administration, votes are calculated “according to the amount of each creditor’s claim as at the date on which the company entered administration, less any payments that have been made to the creditor after that date in respect of the claim”.

  • Another simple answer from the Insolvency Service

The Insolvency Service’s answer to these questions was: “Our interpretation is that [R15.31(1)(a)] 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.”

Personally, I don’t see that R15.31(1)(a) gets us anywhere: it doesn’t state that a creditor’s claim is only its preferential element when a decision procedure is only open to pref creditors and it doesn’t state that you do not need to seek a decision from pref creditors who have been paid their pref elements in full… but in all other respects I like the Service’s answers!

 

Do creditors need to get forms absolutely correct?

There is no denying that the 2016 Rules have placed a heavier burden on us all to get the details correct. Many things that we were used to doing in simple text form are now described as “notices” and every statutory notice must include “standard contents”, which often require the addition of new detail such as insolvents’ company registered numbers or residential addresses.

  • The validity of old proofs of debt

In many cases, creditors are not spared these requirements. For example, the prescriptive detail of proofs of debt – R14.4 – is quite different from the old requirements. If you are adjudicating on pre-April proofs, can you accept them for dividend purposes? Indeed, can you rely on a Notice of Intended Dividend process commenced before 6 April?

As regards the need for creditors to submit new proofs to meet the New Rules’ requirements, the Insolvency Service answered: “Section 16 of the Interpretation Act 1978 may be relied upon here, and proofs which have already been submitted do not become invalidated.”

Incidentally, S16 of the Interpretation Act 1978 states that a “repeal does not, unless the contrary intention appears… affect the previous operation of the enactment repealed or anything duly done or suffered under that enactment [or] affect any right, privilege, obligation or liability acquired, accrued or incurred under that enactment”, so does this help as regards NoIDs? Are IPs safe to rely on old NoIDs as protecting them from late creditors? This wasn’t the question put to the Service, but it would seem to me the only way the New Rules could possibly work.

However, I’m not quite sure how S16 helps IPs decide now whether to admit an old proof for dividend purposes, when surely they must measure proofs against the New Rules, mustn’t they? But, realistically, what could an old proof possibly be lacking that might struggle to get it admitted under the New Rules?

  • Providing the detail required for new proofs

I asked the Service about the requirement for a proof to be authenticated. R1.5(3) states that “if a document is authenticated by the signature of an individual on behalf of… a body corporate of which the individual is the sole member, the document must also state that fact”. If a creditor failed to state this on a proof, would it render the proof invalid? And, if so, does this obligate office holders to check this point?

Alternatively, does R1.9(1)(b) help us all out? This rule states that “where a rule sets out the required contents of a document, the document may depart from the required contents if… the departure (whether or not intentional) is immaterial”.

The Insolvency Service’s answer was: “The extent to which an office-holder could rely on rule 1.9(1)(b) here would be a matter for them to decide, possibly in liaison with their regulatory body.” I can understand why the Service was not tempted to put their neck on the block on this question, but it does demonstrate to me the nonsensical nature of the New Rules: they set out prescriptive detail of what must be provided… then add a rule that states it’s okay if a departure is “immaterial”. Why put prescriptive immaterial requirements in the Rules in the first place?!

  • Do creditors need to meet the notice requirements?

I felt a similar irritation when I read Dear IP’s article, “Do creditors’ notices have to comply with standard content”, for example when creditors object to a decision sought by deemed consent. The Service seems to be implying that the answer is no: “if it is clear what the creditor is seeking in their notice, it should be accepted”. Again, this leaves me wondering: if a creditor is free to run a red light, why put the lights up in the first place?

Having said that, R1.9(1)(b) might be a useful one to remember the next time the RPB monitors call… although we might expect some debating over what is “immaterial”.

  • The detail (not) required for proxy forms

I think it is also worth mentioning here the observation made on the Service’s blog at the lack of prescription when it comes to proxy forms. The Service explained that “the requirement to authenticate [a proxy form] was removed as a deregulatory measure, because authentication does not confer legitimacy. As long as the office-holder is satisfied that the proxy comes from the creditor then the requirements for submission are met.” So a creditor must sign a hard copy proof but need not sign a proxy form. Well, fancy that!

 

In my next post, I’ll set out some other nuggets gleaned from the Insolvency Service’s blog.


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Annual review: IPs, complaints and visits down, but sanctions up

The Insolvency Service’s 2016 Review of IP Regulation always makes for interesting reading. This year, the headlines include:

  • The number of IPs falls again
  • Regulatory sanctions generally increase and for one RPB in particular
  • Complaints handled by the RPBs drop by 28%… although 17% of all complaints seem to be held in the Gateway
  • Apparent missing of the mark for 3-yearly visits
  • Current regulatory priorities include IVAs and fees, whereas routine monitoring appears less popular

The report can be found at https://goo.gl/Jkwz19.

 

IP number falls again

The Review reveals another drop in the number of appointment-taking IPs. In fact, there was the same number on 1 January 2017 as there was on the same day in 2009: 1,303.

Is it a surprise that the number of appointment-taking IPs has dropped again? The 2016 insolvency statistics show modest increases in the numbers of CVLs and IVAs compared with 2015 and of course there was a bumper crop of MVLs in early 2016. Why is it that fewer IPs seem to be responsible for more cases?

My hunch is that the complexity of cases in general is decreasing and I suspect that the additional hurdles put in place as regards fees have encouraged IPs to look at efficiencies, to create slicker processes, and to be more risk-averse, less inclined to go out on a limb with the result that some cases are despatched more swiftly and require less IP input.

I also suspect the IP number for next January will show another drop. The expense and effort to adapt to the 2016 Rules will make some think again, won’t it?

Does the presence of the regulators breathing down one’s neck erode IPs’ keenness to remain in the profession? How worried should IPs be about the risk of a regulatory sanction?

 

Regulatory actions on the increase

The RPBs seem to have shown varying degrees of enthusiasm when it comes to taking regulatory action.

To me, this hints at regulatory scrutiny of a different kind. Is it coincidental that the ACCA issued proportionately far more sanctions than any other RPB last year? Could the Insolvency Service’s repeated monitoring visits to the ACCA over 2015 and 2016 have had anything to do with this spike?

What are behind these sanctions? Are they generated from the RPBs’ monitoring visits or from complaints?

 

Monitoring v complaints sanctions return to normality

Last year, I observed that for the first time RPBs’ investigations into complaints had generated more sanctions than their monitoring visits. Regulatory actions in 2016 returned to a more typical pattern.

Does this reflect a shifting RPB behaviour or is it more a result of the number of complaints received and/or the number of monitoring visits undertaken?

 

Dramatic fall in complaints

Well, no wonder there were fewer disciplinary actions on the back of complaints: the RPBs received 28% fewer complaints in 2016 than they did in 2015.

Why is this? Is it because fewer complaints were made? Undoubtedly, IVAs have generated a flood of complaints in recent years not least because of the issues surrounding ownership of PPI claims, but those issues were still live in 2016, weren’t they?

Perhaps we can explore this by looking at the complaint profile by case type:

Yes, it looks like IVAs continued to be contentious last year, although perhaps the worst is over. It seems, however, that the most significant drop has been felt in complaints relating to bankruptcies and liquidations. The reduction in bankruptcy complaints is understandable, as the numbers of bankruptcies have dropped enormously over the past few years, but liquidation numbers have kept reasonably steady, so I am not sure what is going on there.

But are fewer people really complaining or is there something else behind these figures?

 

An effective Complaints Gateway sift?

When the Complaints Gateway was set up in 2014, it was acknowledged that the Insolvency Service would ensure that complaints met some simple criteria before they were referred to the RPBs. There must be an indication of a breach of legislation, SIP or the Code of Ethics and the allegations should be capable of being supported with evidence. Where this is not immediately apparent, the Service seeks additional information from the complainant.

The graphs above are based on the complaints referred to the RPBs, so what is the picture as regards complaints received before the sifting process occurs?

This shows that the Complaints Gateway sifted out more complaints last year: the percentage rejected rose from 25% in 2014, to 27% in 2015, to 29% in 2016.

The Insolvency Service’s review explains that in 2016 a new criterion was added: “Complainants are now required in the vast majority of cases to have raised the matter of concern with the insolvency practitioner in the first instance before the complaint will be considered by the Gateway”. This is a welcome development, but it did not affect the numbers much: it resulted in only 13 complaints being turned away for this reason.

But this rejected pile is not the whole story. The graph also demonstrates that a significant number of complaints – 144 (17%) – were neither rejected nor referred last year, which is a much larger proportion than previous years.   Presumably these complaints are being held pending further exchanges between the Service and the complainant. Personally, I am comforted by this demonstration of the Service’s diligence in managing the Gateway, but I hope that this does not hint at a system that is beginning to get snarled up.

 

How many complaints led to sanctions?

When I looked at the Insolvency Service’s review last year, I noted that the IPA’s sanctions record appeared out of kilter to the other RPBs. It is interesting to note that 2016 appears to have been a more “normal” year for the IPA, but instead the ACCA seems to have had an exceptional year. As mentioned above, I wonder if the Insolvency Service’s focus on the ACCA has had anything to do with this unusual activity (I appreciate that 2010 was another exceptional year… and I wonder if the fact that 2010 was the year that the Insolvency Service got heavy with its SIP16-reviewing exercise had anything to do with that particular flurry).

The obvious conclusion to draw from this graph might be that an ACCA-licensed IP has a 1 in 3 chance that any complaint will result in a sanction. However, perhaps these IPs can rest a little easier, given that the ACCA’s complaints-handling is now being dealt with by the IPA.

What about sanctions arising from monitoring visits? How do the RPBs compare on that front?

 

All but one RPB reported an increase in monitoring sanctions

These percentages look rather spectacular, don’t they? It gives the impression that on average almost one third of all monitoring visits result in some kind of negative outcome… and it appears that 90% of all the CAI’s monitoring visits gave rise to a negative outcome! Well, not quite. It is likely that some monitoring visits led to more than one black mark, say a plan for improvement and a targeted visit to review how those plans had been implemented.

Nevertheless, it is interesting to note that almost all RPBs recorded increases in the number of negative outcomes from monitoring visits over the previous year. I am not sure why the IPA seems to have bucked the trend. It will be interesting to see how the populations of ACCA and IPA-licensed IPs fare this year, as they are now being monitored and judged by the same teams and Committees.

 

How frequently are visits being undertaken?

The Principles for Monitoring, which forms part of a memorandum of understanding (“MoU”) between the Insolvency Service and the RPBs, state that the period between monitoring visits “is not expected to significantly exceed three years but may, where satisfactory risk assessment measures are employed, extend to a period not exceeding six years”. However, most if not all the RPBs publicise that their monitoring programmes are generally on a 3-yearly cycle.

The following graph shows that the RPBs are not quite meeting this timescale:

If we look at each RPB’s visits for the past 3 years as a percentage of their appointment-taking licence-holders, how far off the 100% mark were they..?

ICAEW’s missing of the mark is not surprising, given that they publicise that their IPs in the larger practices are on 6-year cycles. At the other end of the spectrum is the ACCA, which managed to visit all their IPs over the past 3 years and then some. However, as we know, the ACCA has relinquished its monitoring function to the IPA, so it seems unlikely that this will continue.

 

What is the future for monitoring visits?

The Insolvency Service’s 2015 review hinted that the days of the MoU may have been numbered. Their 2016 review strengthens this message:

“We propose to withdraw the MoU as soon as is reasonably feasible, subject to working through some final details”.

The review goes on to explain that the Service will be adding to their existing guidance (https://goo.gl/wDHElg). As it currently stands, prescriptive requirements such as the frequency of monitoring visits is conspicuously absent from this guidance. Instead, it is largely outcomes-based and reflects the Regulator’s Code to which the Insolvency Service itself is subject and that emphasises the targeting of monitoring resources where they should be most effective at addressing priority risks. The Service itself seems to be lightening up on its own monitoring visits: the review states that, having completed their round of full monitoring visits to the RPBs, they are now moving towards a number of risk based themed reviews. If this approach filters through to the RPBs’ monitoring visits, will we see a removal of the 3-yearly standard cycle?

 

Current priorities for the regulators

Does the 2016 review reveal any priorities for this year?

Not unsurprisingly, given one particularly high profile failure, IVAs feature heavily. The review refers to “general concerns around the volume IVA business model and developments in practice” and continues:

“The Insolvency Service is working with the profession to tackle some of these concerns; for example, through changes to guidance on monitoring and protections for client funds, and also a review of insurance arrangements. We are also engaging with stakeholder groups to better understand their concerns and how these may be tackled. We expect that this will be a key focus of our work for the coming year.”

Other projects mentioned in the review include:

  • Possible legislative changes to the bonding regime – consultation later this year;
  • Progression of the Insolvency Service’s recommendation that the RPBs introduce a compensation mechanism for complainants who have suffered inconvenience, loss or distress;
  • Publication of the Insolvency Service’s review into the RPBs’ monitoring and regulation processes, including consistency of outcomes, the extent of independence between the membership and regulatory functions, and the RPBs’ financial capabilities – report to be released within 12 months;
  • Progress on a review into the RPBs’ approach to the regulatory objective to encourage a profession which delivers services at a fair and reasonable cost, including how they are assessing compliance with the Oct-15 fee estimate regime – report to be released by the end of the year; and
  • A consultation on revisions to the Code of Ethics – expected in the spring.

 


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Navigating Obstacles: S100s for Work-Winners

I suspect that many of you (like me) have heard plenty of theory on the New Rules’ decision-making changes. Maybe reading it from the practical perspective of the work-winner will give it a freshness.

Some non London-centric IPs who missed out on my recent presentation for R3 expressed disappointment, so I thought a blog post was warranted. Here I have concentrated only on the S100 process.

 

S100 CVLs: Deemed Consent or Virtual Meeting?

Before we start thinking about what we might discuss with directors, I think it’s worth weighing up the pros and cons of the two possible routes in to a CVL appointment… well, apart from a physical meeting, of course, but a physical meeting might be required whichever initial decision process we start with.

  • Material Transactions

The rules don’t define a material transaction, but they do say that (R6.17):

“where the statement of affairs sent to creditors… does not, or will not, state the company’s affairs at the creditors’ decision date, the directors must cause a report… to be made to the creditors… on any material transactions relating to the company occurring between the date of the making of the statement and the decision date”.

That sounds to me like it’s any transaction that changes the SoA, but the InsS people I’ve spoken to don’t see this as wrapping in, say, changes in asset class where book debts are converted into cash at bank or where a forgotten van pops up. They say they intended the rule to ensure that creditors learn of events that might impact on the independence of the proposed liquidator, i.e. things that happened with his involvement or since his appointment in Centrebind cases.

Personally, I found this interpretation most surprising, as it’s really not what the rules say – and I’d love to get this down in writing from the InsS, as I think it’ll make a huge difference to the frequency of material transactions.  (UPDATE 02/05/2017: Dear IP 76 simply states that a New Rules’ material transaction “is the same as 1986 rules 4.53B-CVL(1) and should be interpreted as such”… so we’re on our own on this one.)

So why should it matter?

Well, it won’t matter if you’re having a meeting, because you’d just report the material transaction to the meeting – it’s in our rules now, but it is never done (well I’ve never seen it done) because the SoA is usually signed off minutes before the meetings.

But it will matter if you’re working with the Deemed Consent process.

In this case, you must send out the report to creditors and if the report is delivered within 3 business days of the Decision Date, then the decision date moves to the end of 3 business days from delivery of the report.

This could leave you either in an unexpected Centrebind or needing to adjourn the members’ meeting.

  • Fees Decisions – who knows?!

I have put question marks on the table above, as the rules are very unclear when it comes to proposing fees decisions around the S100 time. That’s so helpful, isn’t it? It’s not as if fees is something we need to get absolutely spot-on, is it..?!

The only thing we do know for certain is that Deemed Consent cannot be used for “a decision about the remuneration of any person” (S246ZF(2)). The rest is unclear.

Can you propose a fees decision via a correspondence vote to run concurrently with the S100 Deemed Consent process? I struggle with this, as I cannot see who has authority under the rules to “convene” such a Decision Procedure. The IP isn’t in office (and if he is the members’ liquidator, his limited powers do not extend to seeking fee approval) and the director only has the power to convene a decision by Deemed Consent or by virtual meeting.

Can fees decisions be considered at a virtual meeting? There is nothing in the rules that expressly addresses this, but at least the director does have the power to convene the virtual meeting. Is it not arguable that tagging on (pre and post) fees decisions corresponds to what we do with S98s now (especially as the New Rules expressly provide for the “proposed liquidator” to circulate fees information – R18.16(10))?

I have received conflicting opinions on the routes available from reliable sources. As the consequences of getting this wrong are so serious, I’m very reluctant to pass further comment and I do hope that the powers-that-be will put us all out of misery and tell us categorically – and before 6 April! – how/whether fees decisions can be made at the same time as the S100 decision, as R15.11(1) seems to suggest is possible… somehow.

  • Timing

The deadline for the Deemed Consent process is 1 minute to midnight. The disadvantage here is that you won’t be certain on the decision until the next morning. I get the sense that most IPs are planning to hold their members’ meeting on the day of the Deemed Consent process, but this will still leave us with an inescapable Centrebind – it may be for only a few hours, but it’s worth thinking about it for insurance purposes at least.

On the other hand, virtual meetings can be held at anytime – the old between-10-and-4 rule has not been repeated in the New Rules. However, the convener still needs to “have regard to the convenience of those invited to participate when fixing the venue for a decision procedure” (R15.10), so the virtual meeting’s timing and “platform” (which has been added to the definition of “venue”) is still a factor to consider.

  • Excluded Persons

The rules describe an excluded person as (R15.36):

“someone who has taken all steps necessary [to attend the meeting virtually or remotely, but the arrangements] do not enable that person to attend the whole or part of that meeting.”

In other words, the technology or signal for the virtual meeting has failed.

If the chair becomes aware of an excluded person, he can continue the meeting, suspend it for up to an hour, or adjourn it. If the chair decides to continue the meeting, resolutions can be taken and these will be valid but they’re subject to complaints from the excluded person or from any other attendee who claims they were prejudiced by the exclusion.

The timescale for complaints is short – before 4pm on the next business day from the meeting or from receipt of an “indication” of what occurred at the meeting – but the consequences can be far-reaching. The chair could review the voting and conclude that the excluded person’s vote overturns resolutions that had been thought passed.

Practically, where would this leave a liquidator who thought they were free to publicise their appointment and perhaps also to complete asset sales? I am not certain that these actions would be covered by the S232 defects-deemed-valid provision.

Clearly it is vital that office holders know where they stand immediately after a meeting, but how would they know whether there were any excluded persons? They may know if someone drops out of contact mid-stream, but what if someone could not get online in the first place? Obviously, this is a risk if the notice of the virtual meeting includes all the information necessary to attend… but is this what the Rules require?

R15.5 states that the notice to creditors must provide:

“any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”

A couple of InsS people have told me that they believe that simply giving out a contact number so that creditors can ask for the login details before the meeting would satisfy this Rule – it is “necessary information”, after all. Clearly, this would be a great help in identifying excluded persons as well as going some way to “safeguard[ing] against participation by persons who are not properly entitled to participate” (SIP6) and helping to plan for sufficient access to a virtual meeting. Hopefully the InsS will confirm this in writing when they respond to a question about this on their blog.  (UPDATE 02/05/2017: Dear IP 76 describes the Insolvency Service’s view as explained here.)

 

S100 CVLs: What Directors Need to Know

Please bear in mind that it has been a loooong time since I worked on the frontline. I do not feel worthy of explaining to IPs what they should discuss with directors pre-appointment. However, with the New Rules – and new SIP6 – in mind, here are my suggestions:

  • S100/SoA fees

With the lack of clarity in the Rules, you’ll probably want to get your fees paid upfront. But what happens if you have to convene a physical meeting? Who is going to pay for that? It might be an idea to factor this in to your engagement letter: make sure that it’s clear what the fixed fee covers and what effect the cost of an additional physical meeting might make.

  • Quick information

You’ll want to line the director up to providing information very quickly, given the short timeframes for compiling the SoA and the SIP6 report (see below).

  • Post-SoA material transactions

It might be helpful to make the directors aware of the consequences of any material transactions occurring after the SoA is produced. The risk of a postponement in the Decision Date might help them to focus on giving you the whole story and avoid doing anything silly in the hiatus period.

  • Postponed decisions

Material transactions or the need for a physical meeting will delay the S100 decision. If these events happen early enough, there might be a chance to adjourn the members’ meeting. But of course, if this happens, then the directors will be in control of the company for longer. What effect will this have on the CVL strategy?

You might also want to warn the director that they may need to attend a physical meeting. And will you be around for the physical meeting? Fortunately, the new rules have been relaxed a bit so that the members’ liquidator need not attend the physical meeting, he can appoint someone else in his stead (another IP or an experienced staff member), but if a physical meeting has been requested, then you might want to make sure you’re there.

  • SIP6 additions to engagement letters

The new SIP6 states that the assisting IP should “take reasonable steps to ensure that the convener is made fully aware of their duties and responsibilities”, so you may need to beef up your engagement letter to set out the director’s duties to take appropriate action as regards objections, requests for a physical meeting, material transactions and excluded persons, all of which are the convener’s/chair’s responsibilities; and to provide the SoA/SIP6 required information swiftly.

SIP6 also requires “reasonable steps to ensure that… the instructions to the IP to assist are adequately recorded”. I’m not sure what the RPBs are getting at here, other than expecting a signed engagement letter. Do they want you to have set out whether your instructions are to proceed with the Deemed Consent or the virtual meeting route? And/or should you specify that you’ll be assisting with assessing objections and requests for physical meetings?

Connected with this is SIP6’s requirement to “take reasonable steps to ensure that the convener and/or chair is informed that it may be appropriate for them to obtain independent assistance in determining the authenticity of a prospective participant’s authority or entitlement to participate and the amount for which they are permitted to do so in the event these are called into question”. This isn’t surprising given that something similar is in SIP8 regarding the conflict risk when counting proxies, but it may be a good idea to put it in your engagement letter if it isn’t already.

  • Excluded persons

Given the risk of excluded persons changing the outcome of meetings, you might want to be careful about what you indicate to directors that you plan to do on the day of, and the day after, the meeting.

 

S100 CVLs: The Unintended Centrebind

So what does the new S100 process look like? What needs to happen when?

Here is a timeline for a no-complication Deemed Consent, demonstrating the shortest notice possible:

A virtual meeting timeline would work the same, but it would just mean that you’d be able to schedule the meeting on Business Day 7 for a sensible time instead of a minute to midnight.

In particular, note the time needed to send the SoA and SIP6 report in order to accommodate delivery in time.  (UPDATE 23/03/17: it has been pointed out to me that SIP6 only requires the report to be “made available”, so some are interpreting this to mean that it does not have to be delivered to creditors (although the SoA still does need to be).)

But what if creditors object to the Deemed Consent at the last minute (i.e. after the members’ meeting had been held on business day 7)?

(UPDATE 23/03/17: it has been pointed out to me that requests for a physical meeting must be received “between the delivery of the notice and the decision date” (R6.14(6)) and thus it has been suggested that a physical meeting request received on the decision date will be too late. (UPDATE2 02/05/2017: the Insolvency Service’s view, as set out in Dear IP 76, is explored further in my post, https://goo.gl/ygnWjg.)  The deadline for deemed consent objections, however, is “not later than the decision date” (R15.7(2)), so I believe the timelines above and below are still relevant.)

You could fit the physical meeting within the statutory 14 calendar day timescale, provided that you can get the director to move quickly to convene it, but it would leave you managing an unintended Centrebind.

The picture looks grimmer if a material transaction occurs:

 

As you can see, there isn’t enough time to deal with a material transaction and a physical meeting.  (UPDATE 02/05/2017: the Insolvency Service has expressed the view on its blog that “it is sufficient that the original decision date was within the required timescale”.)

Virtual meetings avoid this issue, as the report on the material transaction would occur at the virtual meeting. It’s not the whole answer to avoiding a Centrebind, as creditors could still request a physical meeting, but at least it could be held within the 14 days.

 

There’s More

As I mentioned at the start, I’ve limited this blog post to S100 decisions only – it’s long enough already.

If you want to listen to my whole presentation, you can purchase it via The Compliance Alliance (£250+VAT for firm-wide access to all our webinars for a year) – just drop a line to info@thecompliancealliance.co.uk.

Other topics covered include:

  • The timeline of an intended Centrebind
  • S100s for the IP acting for creditors
  • VAs: correspondence vote or virtual meeting?
  • Creditors’ powers and the process to seek an IP appointment in bankruptcies and compulsories
  • Administrations: the pros and cons of seeking approval of Proposals by Deemed Consent or a decision procedure
  • How creditors can stay in the loop on communications


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New Rules, Part 15: Decisions, Decisions!

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More than one IP has asked me: ok, I know the New Rules pretty-much remove creditors’ meetings, but what’s all the fuss about? It gets me every time! Not only are the changes far more widespread than this, but also this change is hardly simple. It sounds simple though, doesn’t it: just replace all creditors’ resolutions with some kind of postal vote?

From what I believe was a desire to provide options – to creditors mainly, but also to directors and IPs – has evolved a web of overlapping timescales and feedback mechanisms, not to mention reams more information to creditors, which cannot fail to bamboozle and further dissuade them from engaging.

 

Decision 1: what type of decision do you have?

The SBEEA15 introduced the idea of two tiers of decisions (by the way, in our new world, there are few resolutions anymore, just decisions… although some decisions are made by resolution, if considered at a meeting, whether physical or virtual). There are decisions that can be made by Deemed Consent and others that must be made by a Qualifying Decision Procedure (although the New Rules drop the “Qualifying” bit). In the latter category are:

  • any “decision about the remuneration of any person” (S246ZE(2)); and
  • the acceptance of IVA and CVA Proposals.

So what decisions might be dealt with by Deemed Consent? The biggie is the appointment of a CVL Liquidator (you might also have thought about the appointment of an IP in court cases, but this involves first the removal of the incumbent OR – aha, now the reason for the change so that the OR becomes Trustee immediately on the order becomes clear, doesn’t it..?). Other Deemed Consent decisions could include several ADM items, e.g. extensions, discharge and even the Proposals themselves. But other than these, Deemed Consent is unlikely to get out much.

I think the Insolvency Service saw Deemed Consent being useful to office holders in seeking creditors’ approval to certain strategies, e.g. to commence litigation. I agree that this is a possibility, however the abolition of the statutory requirement to seek sanction to exercise many old Schedule powers has meant that more often than not IPs feel empowered to take such decisions in the interests of creditors in any event.

 

Decision 2: should you use Deemed Consent?

The key point to note about Deemed Consent is that, unless more than 10% in value of creditors (entitled to vote) positively object to the decision, then it is approved as proposed. If this proportion of creditors objects, then the IP has another bite of the cherry by proposing the decision by one of the other decision processes (excluding a physical meeting unless the proposed decision is for your CVL appointment).

There is a wrinkle: creditors who meet different criteria can respond by asking for a physical meeting, rather than (or in addition to) objecting to the decision proposed by Deemed Consent. If this happens, then the Insolvency Service has stated that the Deemed Consent process is superseded and the decision must be considered at a physical meeting. Personally, I have failed to spot where this consequence is set out in the rules, so I have asked the Service for clarification.

The thresholds for seeking a physical meeting are either 10% in value of creditors, 10% in number, or 10 creditors (the “10/10/10” criteria). (UPDATE 23/03/17: recently-issued Amendment Rules affect this, although their application is unclear.  I have blogged a question on the Insolvency Service’s blog.) This time, the criteria relate to all creditors, not just those entitled to vote. Thus it seems to me more than just a theoretic possibility that a creditor/s might reach the threshold to seek a physical meeting but fall short of the threshold to object to a Deemed Consent decision… hence the need, I believe, for the rules to be clear on the consequences of a request for a physical meeting.  (UPDATE 02/05/2017: the Insolvency Service has blogged: “The intention here is that the creditors that have an interest in the decision being taken are the ones who determine whether the costs of holding a physical meeting should be incurred. Therefore the convener would consider the value of the potential vote of the creditor(s) making the request, and compare them to the total value of the potential vote.”  Got that? 😉 )

Whilst there are potential complications, I think the Deemed Consent advantages are clear, especially where you need to seek approval from uninterested creditors, e.g. the ADM extension and discharge questions (although if you need secured creditors’ approval, silence from the unsecureds is only half the battle won).

What if you are seeking a CVL appointment, should you go for Deemed Consent? Well, one downside is that you will need to add on another decision procedure if you want to get your fees, including your pre-appointment fee, approved. However, if another IP starts showing an interest, they will first have to object to the Deemed Consent process before the scene is re-set to count votes on nominations. Granted however, it may mean that you’re looking at an unexpected Centrebind.

Another strange characteristic of seeking a CVL appointment by Deemed Consent is that, if unopposed, there is no statutory requirement for any pre-appointment Gazette notice – how odd is that?!

 

Decision 3: which other Decision Procedure might you use?

How else might you seek a decision? In the order that I think they will be used, the methods are:

  • vote by correspondence (no longer a “meeting” by correspondence and not defined in the rules);
  • virtual meeting (yes, cumbersome and in some respects risky, but the only way effectively to negotiate decisions);
  • electronic voting (hmm… maybe not for some time yet);
  • only if sufficient creditors request it, a physical meeting;
  • and A N Other process that none of us has yet thought up.

Virtual meetings are prepared for pretty-much as physical meetings are now: they require Gazetting and they involve proxy forms, which can be delivered anytime up to the start of the meeting in any case, no longer just for VA meetings. Proofs of debt also need to be delivered and, although there is a deadline of 4pm the business day before the meeting, there is also provision for the chair to accept late proofs, if he is “content”.

Of course, the obvious difference is finding an appropriate virtual meeting resource. From those who I know have been exploring this, I understand that there is no clear winner. Issues include: being able to identify attendees, especially when they join and leave, and being able to block access to people not entitled to attend. The main risk in holding a virtual meeting is that an “excluded person” (i.e. someone who tried to participate but could not through no fault of their own; say, they just happen to live in an area of the UK with unreliable broadband connections) can influence the decision after the meeting (assuming you did not decide to adjourn it). They are given a very short window of opportunity to complain that, had they participated, they would have swung the vote, but this is clearly not an uncertainty you want to be left with after a decision on your appointment or on a VA Proposal. There is also the practical uncertainty in knowing how many people are likely to want to join in to a virtual meeting: multi-party conference calls are exasperating at the best of times and the prospects of being surprised by a virtual room full of fired-up creditors doesn’t bear thinking about.

So should you go for a correspondence vote? Well, if you’re looking for a CVL appointment, it’s worth clocking now that this is not an option: Deemed Consent and virtual meeting are your only options. It is also worth remembering that the deadline for correspondence votes (and other non-meeting processes, including Deemed Consent) is one minute to midnight on your chosen day (the “Decision Date”), so we will have to get used to not knowing the outcome of a proposed decision until the day after… which could prove challenging if you’re trying to coordinate it alongside a members’ meeting. Correspondence votes need to be supported by proofs of debt submitted by the Decision Date and importantly, once a vote has been lodged, it cannot be changed. This makes correspondence vote a risky choice for VA Proposals, I think. I also wonder where correspondence votes will get us on fee approvals: if there is no negotiating possible, then will it result in an increase in court applications?

As with Deemed Consent, on receiving an invitation to a virtual meeting or to vote by another means, a creditor may react by asking for a physical meeting. They have 5 business days after delivery of the notice of the decision procedure in which to have delivered a request (but see Timetables below) and the 10/10/10 thresholds apply.

There is also no ability to ask creditors for a deposit as security for the costs of convening a physical meeting on request… unless it is a requisitioned decision (yes, there is a difference!). The latter may arise for example as a consequence of issuing Para 52 Proposals, although the rules allow you only to ask for the costs of seeking a “decision”, not a physical meeting… however it is not clear whether creditors could ask explicitly for a physical meeting at this stage (that’s another question to the Insolvency Service).  (UPDATE 02/05/2017: the Insolvency Service has blogged that they think it is reasonable to interpret the rules as allowing the creditor to request a physical meeting at the same time as requisitioning a decision, although they have also confirmed that the deposit sought should only be for requesting a decision, not holding a physical meeting.)

 

Invitations to Form a Committee

In all cases (except, strangely, in Compulsory Liquidations unless the meeting is to appoint a liquidator), whenever a Deemed Consent or decision procedure notice is issued, creditors must be asked at the same time whether they wish to establish a Committee and to propose nominations. This requirement sits unhappily besides the other rules, especially the Deemed Consent process. For starters, how do you ask creditors “whether” they want something? You must propose it as a decision, e.g. I propose the decision that a Committee be established. But if you were to propose this as a Deemed Consent decision and received no objections, this would mean that the decision had been made and you would need to canvass for (more) nominations, thus postponing your original objective until the sorry “no we didn’t mean we wanted a Committee, we simply don’t care” response was made certain. Therefore, several have designed the proposed decision in the negative: I propose the decision that a Committee should not be established (which personally I think also sits better ethically where the IP does not believe a Committee is warranted: is it honest and straightforward for an IP to propose a decision he does not himself desire?). In this case, creditors’ silence works well.

But is it truly necessary to go through this rigmarole every time you propose a decision? Yes, it seems so. And of course we will need to highlight the SIP15 Committee Guidance… however I am puzzled by the SIP15 reference to highlighting it prior to inviting creditors for nominations: does this mean that we need to write to creditors separately before our first proposed decision? For once, this is not a question for the Insolvency Service!

 

Timetables

In most cases, notice of a decision – by Deemed Consent or other process – must be at least 14 days (plus delivery time). CVL appointment is the obvious exception: in this case, notice must be 3 business days after delivery, which including a weekend makes it very slightly shorter than the current requirement. Because of the short timescale in CVL appointments, requests for a physical meeting can be made at any time up to the Decision Date.  (UPDATE 02/05/2017: oops!  Sorry, the rules set the deadline as between the notice and the Decision Date and Dear IP 76 suggests that the Decision Date is not included in this period.  See https://goo.gl/ygnWjg for more analysis.)

 

There’s more

The rules contain prescriptive details about the content of notices and how to deal with “excluded persons”. In addition, the interaction of Deemed Consent/decision procedures with other requirements such as the need to send a Statement of Affairs before the CVL appointment Decision Date adds another layer of complexity to the work.

If you want to know more:

  • on the detail of decision processes especially in the context of CVL appointments, then access Jo Harris’ webinar, “New Rules: Decision Procedures and Changes on CVL Appointments” (mailto:info@thecompliancealliance.co.uk for details);
  • on the pros, cons and strategies of decision processes, then join me at the R3 breakfast seminar, The New Rules for Insolvency Work-Winners (16 March in London), or any of the three R3 SPG Technical Reviews (28 March in London, 6 June in Huddersfield, 4 July in Bristol)… and there are more Compliance Alliance webinars to come on these topics;

… or feel free to get in touch with me… but don’t expect many simple answers!


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The 2015 Fees Rules: One Year On

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In November last year, I gave a presentation at the R3 SPG Forum: a look back at one year under the new fees regime. Although I don’t have the benefit of my co-presenter, Maxine Reid, I thought I would set out some of my main points here, as well as some new and improved observations on Administrators’ Proposals:

  • Do more recent Proposals indicate a move away from time costs?
  • How are creditors voting now?
  • How do time costs incurred compare to fees estimates?
  • Are progress reports and excess fee requests compliant with the rules and SIP9?
  • Is the picture any clearer now on what the regulators’ expectations are on some of the finer points of the rules and SIP9?

Is there a move away from time costs?

My analysis of Proposals issued in early 2016 (https://goo.gl/bvebTz) showed that time costs was still the preferred choice: 75% of my sample (108 Proposals) had proposed fees based on time costs.

To see whether things had changed more recently, I reviewed another 67 Proposals issued between July and September 2016 (no more than two from each insolvency practice). This is how the fee bases proposed compared:

feebasis2

This suggests that not a lot has changed, which isn’t too surprising I guess as there are only a few months’ difference between the two sets of Proposals. I also suspect that, if I looked at CVLs, I’d see quite a different picture. There does seem to be a bit more experimenting going on though, especially involving percentage fees, which is a topic I’ll come back to later.

How are creditors voting?

The filing of progress reports on my early Administration sample enabled me to fill in the gaps regarding how secured creditors and committees had voted on fees:

feecaps

Although I accept that my sample is small, I think that this is interesting: the average reduction in fees approved is the same whether the decision was made by unsecured or secured creditors. I’d better explain the committee percentage: in these cases, the committees were approving fees only on the basis of time costs incurred, not on the estimated future time costs, which is also interesting: it isn’t what the fees rules envisaged, but I think it is how most committees are accustomed to vote on fees.

Have creditors’ decisions changed more recently?

As I only have the Results of Meeting to go on for the more recent cases, this is not a complete picture, but this is how the two samples compare:

  • Jan-Mar 2016 (67 Results of Meeting):
    • 11 modified; 1 rejected
    • 7 early liquidations; 4 independent Liquidators
    • 1 Administrator replaced
    • 6 fees modified (average reduction 29%)
  • Jul-Sept 2016 (55 Results of Meeting):
    • 5 modified
    • 2 early liquidations; no new IPs
    • 1 fee modified (reduction 48%)

Again, it’s only a small sample, but it seems to me that creditors’ enthusiasm to modify Proposals or cap fees has waned, although c.10% of Proposals were still modified, which is fairly substantial.

How have actual time costs compared to fees estimates?

With the filing of 6-monthly progress reports, I was able to compare time costs incurred with the fees estimates:

timecosts

Over the whole case sample, the mean average was 105%, i.e. after only 6 months of the Administration, on average time costs were 105% of the fees estimate included in the Proposals. This graph also shows that, on a couple of cases, the time costs incurred at 6 months were over 250% of the fees estimate, although to be fair a large number were somewhere between 50% and 100%, which is where I’d expect it to be given that Administration work tends to be front-loaded.

You can see that I’ve distinguished above between cases where unsecured creditors voted on the fees and the “para 52” cases where the secured (and possibly preferential) creditors voted. The graph appears to indicate that time costs exceeding the estimate is more marked in cases where unsecured creditors approve fees.

Of course, fees estimates and fees drawn are entirely different worlds, so the fact that time costs have exceeded estimates will be of no practical consequence – at least, not to creditors – where a case has insufficient assets to support the work. In around only half of the cases where time costs exceeded estimates did the progress report disclose that the Administrator was, or would be, seeking approval to excess fees. This suggests that in the other half of all cases the IPs were prepared to do the work necessary without being paid for it, which I think is a message that many insolvency onlookers (and the Insolvency Service) don’t fully appreciate.

How compliant are progress reports and excess fee requests?

Firstly, I think it’s worth summarising what the Oct-15 Rules and the revised SIP9 require when it comes to progress reports. The Rules require:

  • A statement setting out whether:
    • The remuneration anticipated to be charged is likely to exceed the fees estimate (or additional approval)
    • The expenses incurred or anticipated to be incurred are likely to exceed, or having exceeded, the details given to creditors
    • The reasons for that excess

SIP9 requires:

  • Information sufficient to help creditors in understanding “what was done, why it was done, and how much it costs”
  • “The actual costs of the work, including any expenses incurred, as against any estimate provided”
  • “The actual hours and average rate (or rates) of the costs charged for each part should be provided for comparison purposes”
  • “Figures for both the period being reported upon and on a cumulative basis”

It is clear from the above that the old-style time costs breakdown alone will not be sufficient. For one thing, some automatically-produced old-style breakdowns do not provide the average charge-out rate per work category. I also think that simply including a copy of the original fee estimate “for comparison purposes” falls short as well, especially where the fees estimate uses different categories or descriptions from the time costs breakdown.

What is required is some narrative to explain where more work was necessary than originally anticipated. The best examples I saw listed each work category (or at least those categories for which the time costs incurred exceeded the fees estimate) and gave case-specific explanations, such as that it had proven difficult to get the company records from the IT providers or that the initial investigations had revealed some questionable transactions that required further exploration.

I also saw some useful and clear tables comparing the fee estimates and actual time costs per work category. As mentioned above, in some cases, the progress reports were accompanied by a request for additional fees and in these cases the comparison tables also factored in the future anticipated time costs and there was some clear narrative that distinguished between work done and future work.

Reporting on expenses to meet the above requirements proved to be a challenge for some. Admittedly, the Rules are not ideal as they require fees estimates to provide “details of expenses” likely to be incurred and some IPs had interpreted this to require a description only of who would charge the expense and why, but it is only when you read the progress report requirements that you get the sense that the anticipated quantum of expenses was expected. For example, where an Administrators’ Proposals had stated simply that solicitors’ costs on a time costs basis were likely, it is not easy to produce a progress report that compares this with the actual costs or that states whether the actual expense had exceeded the details given previously.

What do the regulators expect?

A year ago, the regulators seemed sympathetic to IPs grappling with the new Rules and SIP9. Do they consider that a year is sufficient for us all to have worked out how to do it?

I get the sense that there may still be some forbearance when it comes to complying with every detail of the SIP, but understandably if there is a fundamental flaw in the way fees approval has been sought, it is not something on which the RPBs can – or indeed should – be light touch. Fees is Fees and the sooner we know our errors, the less disastrous it will be for us to fix them.

The S98 Fees Estimate question seems to have crystallised. There seems to be general consensus now amongst the regulators and their monitoring teams that, whilst there are risks in relying on a fees resolution passed at the S98 meeting on the basis of fees-related documentation issued prior to appointment as a liquidator, the regulators will not treat such a fees resolution as invalid on this basis alone. Fortunately, the 2016 Rules will settle this debate once and for all.

The trouble with percentage fees

From my conversations with a few monitors and from the ICAEW Roadshow last year, I get the feeling that the monitors are generally comfortable with time cost resolutions. There is a logical science behind time costs as well as often voluminous paper-trails, so the monitors feel relatively well-equipped to review them and express a view on their reasonableness. The same cannot always be said about fees based on a percentage – or indeed on a fixed sum – basis.

In her 2013 report, Professor Kempson expressed some doubts on the practicalities of percentage fees, observing that creditors could find it difficult to judge the reasonableness of a proposed percentage fee. When the Insolvency Service’s fees consultation was issued in 2014, R3 also remarked that fixed or percentage fees were not always compatible with unpredictable insolvencies and could result in unfair outcomes. The recent shift towards percentage fees, which appears more pronounced in CVLs, has put these concerns into the spot-light.

In the ICAEW Roadshow, Allison Broad expressed her concerns about fees proposed on the basis of (often quite substantial) percentages of unknown or undisclosed assets. I can see Allison’s point: how can creditors make “an informed judgment about the reasonableness of an office holder’s request” if they have no information?

Evidently, some IPs are proposing percentage fees as a kind of mopping-up strategy, so that they do not have to go to the expense of seeking creditors’ approval to fees later when they do have more information and they feel that creditors can take comfort in knowing that the IPs will not be drawing 100% of these later-materialised assets. Although a desire to avoid unnecessary costs is commendable, the message seems to be that compliance with SIP9 requires you to revert to creditors for fee-approval only when you can explain more clearly what work you intend to do and what financial benefit may be generated for creditors, e.g. what are the assets that you are pursuing or investigating.

Another difficulty with percentage fees is the quantum at which they are sometimes pitched. I have heard some stories of extraordinary percentages proposed, although I do wonder if, taken in context, some of these are justifiable, e.g. where the percentage is to cover the statutory work as well as asset realisations. Regardless of this, the message seems to be that some of us could improve on meeting SIP9’s requirement “to explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”… and you should not be lulled into a false sense of security that 15% of everything, which of course is what the OR can now draw with no justification (and indeed with no creditor approval), is always fair and reasonable.

Looking on the bright side

Although getting to grips with the Oct-15 Rules has not been easy, I guess we should count our blessings: at least we have had this past year to adapt to them before the whole world changes again. If there’s one thing we don’t want to get wrong, it is fee-approval, so at least we can face the April Rules changes feeling mildly confident that we have that one area sorted.

If you would like to hear and see more on this topic (including some names of Administration cases that I found had particularly good progress reports and excess fee requests registered at Companies House), I have recorded an updated version of my R3 SPG Forum presentation, which is now available for Compliance Alliance subscribers. For more information, email info@thecompliancealliance.co.uk.


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Part 18: Reporting and Remuneration

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Finally, I’ve reached the end of the crazy-busy season and I can get back to the New Rules. This post deals with Part 18 of the Rules: Reporting and Remuneration.

I’m very pleased to see that the Insolvency Service has taken the opportunity to iron out some of the overly prescriptive, clunky and vague rules.   For example:

  • Fixing the prescriptive: stripping back on the loooong list of final report contents
  • Fixing the clunky: new approaches to the ADM-to-CVL conversion process and to reporting for changes in office holder or ADM extensions
  • Fixing the vague: settling the debates on issuing a fees estimate before being appointed as liquidator and on the process of seeking preferential creditors’ approval to fees in Para 52(1)(b) Administrations

Other changes have slipped in too, mainly as a consequence of the more material changes affecting other areas of practice, such as the abolition of final meetings.

For a step-by-step guide to Part 18, including many rules that I have not touched on in this post, I would recommend Jo Harris’ webinar, available now through The Compliance Alliance – contact info@thecompliancealliance.co.uk.

 

Part 18: Scope

Part 18 is one of the now “common” parts. I think it does help to bring together the procedures that are common to all cases… but it’s not quite this simple. Part 18 covers reporting and remuneration for Administrations, all Liquidations and Bankruptcies. It does not deal with VA reporting. Neither does it deal will all the closing reporting requirements – bits of these appear in the case-specific parts. Ho hum.

One key point to remember is that for the most part the changes apply across the board, so we need to be ready to report and seek rem under the New Rules from the off.

The exceptions are, as previously mentioned, progress reporting on the old pre-2010 appointments and any progress reports that fall due before 6 April 2017. But for everything else – including closure processes on all cases – the New Rules apply.

 

Contents of Progress Reports

There are some pesky little changes in here. One intriguing change is that, no longer must we detail “assets that remain to be realised”, but instead we need to detail “what remains to be done” (R18.3(1)(h)). I know that we usually do provide a one-liner on this, but isn’t it charming for the Insolvency Service to make it a statutory requirement..?

R18.3(6) accommodates the significant change in the process of an ADM moving to CVL. It’s good to see the Insolvency Service have yet another go at getting this process working smoothly. In my mind, the New Rules improve the process… although I still don’t see why we need to rely on the Registrar of Companies (“RoC”) to tell us when the ADM ends and the CVL starts. Regrettably, though, the trigger for the move has been set down in the Act, so the New Rules simply try to make the best of this awkward situation.

R3.60 sets out the new ADM-to-CVL process. The Administrator submits the Notice of the Move together with their final report to the RoC and copies the pack to creditors etc. Once the Notice is registered, the former Administrator informs the Liquidator of “anything which happens after the date of the final progress report and before the registration of the notice which the administrator would have included in the final report had it happened before the date of the report” (R3.60(5)).

Consequently, within the Liquidator’s first progress report, they must include “a note of any information received by the liquidator from the former administrator” (R18.3(6)).

This process sounds a bit odd when you remember that usually the Administrator is the Liquidator – will the RPBs expect the file to contain a “note to self”..? I think we get the idea though and at least the new process avoids the uncomfortable position of completing and issuing a final Administration report after having vacated office.

 

Timing of Progress Reports

In principle, nothing has changed on timing. However, again a couple of welcome simplifications in other areas will affect reporting complications with which we have all become familiar under the current Rules.

In future, the 6/12-monthly reporting routine will not be affected by the following events:

  • A change in office holder: under the New Rules, incoming office holders are required to deliver a notice to members/creditors (depending on the case type) “of any matters about which the succeeding (office holder) thinks the members/creditors should be informed” (Rs18.6(3), 18.7(4), 18.8(3)). This removes the need for a formal progress report to draw a line under the change, so the original progress reporting routine remains unaffected. The New Rules are vague on what triggers this requirement, but in my view it is likely to mean that nothing is required if the office holder changes but the practice does not.
  • Extension of an Administration: under the New Rules, a progress report is no longer required in order to seek approval of an extension. The New Rules simply require the Administrator to send, along with the court application or the notice requesting creditors’ consent, “the reasons why the administrator is seeking an extension” (R3.54(2)).

This is all good stuff, thanks Insolvency Service.

These changes do leave me with a question, though: what if you are already dealing with a case with an altered reporting schedule, i.e. an extended ADM or a case involving a change in office holder where the court was not asked to over-ride the current rules’ effect of changing the reporting timeline? After 6 April 2017, will you need to revert to the pre-extension/office holder-change schedule or will you continue to produce 6/12-monthly reports from the date of the last pre-April report? I have heard rumours that the Insolvency Service’s intention is the latter, but personally I think that the wording of the New Rules would require such cases to revert to the old schedule.   That’s another question for the Insolvency Service’s blog, I reckon.

(UPDATE 17/01/2017: the Insolvency Service responded to my query on their blog: “It was not the intention that where a reporting cycle in any relevant process had already been reset, it would need to be changed again as a result of the commencement of the new rules. As you have suggested, we had identified that a transitional provision would make it clear that this should not happen, and we are looking to see whether and how we can insert such a provision into Schedule 2 of the new rules.”)

(UPDATE 23/03/2017: the Insolvency Service has indeed introduced a fix via the recently-issued Amendment Rules.  This fixes the position for changes in office holder such that, if you have an existing case with an amended reporting schedule due to a pre-6/4/17 change in office holder, then after 6/4/17 you continue to report according to your amended schedule.  The position is a little less satisfactory for already-extended ADMs: whilst it seems that the Insolvency Service has attempted to apply the same principle to these cases, I am not convinced that the Amendment Rules wording delivers this effect… although casparjblog has suggested a possible wriggle-through – see the Insolvency Service’s blog at https://goo.gl/IE0pmK.)

(UPDATE 02/05/2017: in Dear IP 76, the Insolvency Service expresses the view that the Amendment Rule is “sufficiently clear” that the reporting schedule for an already-extended ADM should continue, rather than be re-set to the original schedule.)

 

Contents of “Final Accounts” and “Final Reports”

The abolition of final meetings in Liquidations and Bankruptcies necessitates a change in the final reporting processes. The new processes can be found at:

  • Rs5.9 and 5.10 for MVLs;
  • R6.28 for CVLs;
  • R7.71 for Compulsory Liquidations; and
  • R10.87 for Bankruptcies.

I won’t cover them here, but suffice to say that creditors (and/or members/bankrupt) are provided with a final account (or, in Bankruptcies, a final report) 8 weeks before the office holder obtains their release.

The contents of these final accounts/reports are found in R18.14. Delightfully, the Insolvency Service has decided to lighten up on the miserable prescription that had been introduced by the 2010 Rules (e.g. no more statements of the aggregate numbers of preferential and unsecured creditors or that accounts have been reconciled with those held by the SoS) – thank you again!

In case you’re wondering about Administrations, R3.53 contains details of some of the contents of an ADM final progress report… but because, in Administrations, the final document is called a final progress report, the Part 18 rules on the contents of progress reports also apply to Administration final progress reports (plus an additional requirement slipped in to R18.3(2)).

 

Remuneration: Circulating Fees Estimates

The biggest change in the remuneration chapters is something very welcome: finally, we can stop debating whether it is possible for an IP to issue a fees estimate (and/or other fees-related information) before they are appointed as Liquidator. R18.16(10) states that “a proposed liquidator” may deliver the information. Excellent!

Of course, the New Rules will transform the whole S98 process beyond recognition – this is a huge topic for another blog post entirely.

 

Remuneration Niggles

Yes, I know I can be pedantic. If you have visited the Insolvency Service’s blog, you will have seen my query on R18.18(3), which could be read as requiring every Administrator’s fees to be agreed by creditors by a “decision procedure”, which would have had unexpected consequences for Para 52(1)(b) ADMs with only secured creditors in the frame. Thankfully, the Service is on the case and hopefully this will be fixed before April.  (UPDATE 23/03/2017: the recently-issued Amendment Rules have fixed this issue so that Para 52(1)(b) case fees are subject to approval only by secureds/prefs.)

Another niggle of mine is that the wording of the time costs basis has been changed – again. I think it passed by many of us that the 2015 Rules changed the time costs basis from “the time properly given… in attending to matters arising in the administration/winding up/bankruptcy” to “the time properly given… in attending to matters arising in the administration/winding up/bankruptcy as set out in the fees estimate”. Those words in italics have been removed for the New Rules – so if you were diligent enough to change the wording of your standard resolutions last year, unfortunately you’ll have to put them back to the way they were pre-2015.

 

Preferential Creditors’ Approval

The New Rules resolve another long-running debate: how were we to read the current R2.106(5A)(b)(ii), which sets out that Administrators who have made a Para 52(1)(b) statement and who have made or intend to make a distribution to preferential creditors need to seek the approval to fees of “preferential creditors whose debts amount to more than 50% of the preferential debts of the company, disregarding debts of any creditor who does not respond to an invitation to give or withhold approval”. The question has always been: what happens if no preferential creditor votes, does this mean that you have approval?

R18.18(4) eliminates all doubt. It states that in future Administrators will need to seek preferential creditors’ approval (on relevant cases) “in a decision procedure”. This is a New Rules-defined term, which I will not go into here (again, this is another blog post entirely), but it does mean without a doubt that there will need to be at least one positive vote to reach a decision.

A second long-running question on the current R2.106(5A)(b)(ii) has also been: what if you have paid preferential creditors’ claims in full, do you still need to ask these creditors to approve your fees?

This conundrum is solved by Rs15.11 and 15.31(1)(a), which indicate that in these circumstances only preferential creditors who have not been paid in full are circulated and that, if there’s no claim left, the creditor has no vote. These two rules are specific to creditors voting in decision procedures in Administrations though, so they won’t help you in any other cases (including, I assume, where secured creditors are being asked to approve fees in Administrations).

 

As mentioned earlier, there are many more rules in Part 18 that are essential-reading, but if you prefer to hear about them, drop an email to info@thecompliancealliance.co.uk and ask about Jo’s webinar.


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The New Rules: Part 1… of many

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We’ve all heard overviews of the new Rules by now, but time is short – less than 5 months to go – and so it’s about time that we started delving into the nitty gritty.

 

Starting at the start

It would be wrong to assume that, with the exception of the SBEE changes that everyone has already talked about, the new Rules are simply the old rules in a different order. I thought that starting with the introductory Rules and definitions would be straightforward and frankly dull, but the new Rules are peppered with unexpected intricacies that make such assumptions dangerous.

 

New Rules, new approach to transitional provisions

No doubt you have heard that the new Rules are a departure from the tradition of leaving old cases to run out under the old rules. This has some advantages: no longer will we need to think twice about the date of an appointment before deciding how to approach a statutory matter, nor will we need to maintain old checklists, diaries and templates to cope with a variety of aged cases. Eliminating this complication should mean that we could run all cases, present and future, on one system… but is that true…?

 

If you don’t want the confusion, clear away pre-2010 CVLs (and MVLs)

The transitional provisions (Schedule 2 of the new Rules) refer specifically to cases commencing (i.e. orders in the case of bankruptcies (“BKYs”) and compulsory liquidations (“WUCs”)) before 6 April 2010:

  • BKYs & WUCs: this is the easy bit – the new Rules’ provisions on progress reports do not apply
  • CVLs: “a progress meeting required by section 104A of the Act” continues and “R4.223-CVL as it had effect immediately before 6 April 2010 continues to apply”
  • No specific reference to MVLs – did the Insolvency Service assume that all pre-2010 MVLs would be closed?

In pretty-much all other respects, the new Rules apply to these old cases.

What is “a progress meeting”?! Search all you like in the current Act and Rules, you won’t find one. And what is the relevance of S104A to meetings? S104A was the method used to replace the old S105 annual meetings by progress reports.

I think that the Insolvency Service planned for annual meetings to continue on old CVLs, as well as the old six-monthly R&Ps, which had been required under the old R4.223… but I accept that this takes a bit of a stretch of the imagination. Perhaps we will receive some clarity before April.

(UPDATE 23/03/17: the recently-issued Amendment Rules have changed the references to “progress meeting” and S104A so that it now refers to “meetings required by sections 93 and 105 of the Act”.  Therefore, it seems to me that annual meetings on pre-04/2010 MVLs and CVLs should continue to be convened after 04/2017.)

 

Perhaps also avoid calling a meeting to be held after 6 April 2017

Schedule 2 also includes transitional and savings provisions to enable meetings called before the Rules’ commencement date to be held after that date and for all the usual items resolved upon in meetings, e.g. fixing the basis of fees, to be decided. In a similar way, the old rules will apply also where an invitation to vote on a resolution by correspondence was issued prior to 6 April 2017 but where the deadline for voting falls afterward.

The Schedule includes potential catch-all references, e.g. “governance of the meeting”, stating that “the 1986 Rules relating to the following continue to apply”. Presumably, this will also cover matters such as adjournments.

It is not clear to me whether these transitional provisions will also work where a draft final report has been issued but where, say, R4.126(1D) kicks in after 6 April 2017. That is, what should happen where you have not complied with R4.49D, e.g. because something unexpected has occurred in the 8-week period? Should you follow old R4.126(1D) and issue a revised draft final report and fresh notice of a final meeting under the old rules? It looks like it to me, but I would prefer to avoid straddling the April date with any meeting convened under the old rules.

 

Other transitionals

Schedule 2 contains many other transitional and savings provisions, including:

  • old rules apply where any progress report became due pre-6 April 2017 but where it has not been issued by that date;
  • conversions from Administration (“ADM”) to CVL started under the old rules generally continue; and
  • all statements of affairs due on pre-6 April 2017 cases continued to be expected under the old rules.

 

(UPDATE 23/03/2017: the recently-issued Amendment Rules have resolved the issues explored in these next two sections.)

How long is one month?

The mind-bending Schedule 5, “Calculation of Time Periods”, also appears in Part 1 of the Rules.

It starts sensibly enough: “days” are calculated according to the CPR (there is no definition of “weeks” in the Rules).

There are two ways of calculating “months”, depending on whether the date specified is the start date (e.g. the time period within which a progress report should be issued or the progress report review period) or the end date. As I’m struggling to think of any specified end dates involving months, let’s look at a scenario where the start date is specified:

  1. the month in which the period ends is the specified number of months after the month in which it begins, and
  2. the date in the month on which the period ends is:
    • the date corresponding to the date in the month on which it begins, or
    • if there is no such date in the month in which it ends, the last day of that month.

If I’m reading this correctly, then one month from 10 April is 10 May – one month and one day.

 

Reporting transactions on a period-end date

Let’s say that you received some money on 10 April 2017 on a CVL that began on 10 April 2016. How would this be reported in your progress reports?

  • The review period of your first progress report would be 10 April 2016 to 10 April 2017, so you would report it.
  • The review period of your second progress report would be 10 April 2017 to 10 April 2018… err… so you would report it..?!

This cannot be right, can it?! It would skew all your R&Ps, as the c/f and b/f figures would not tally. In the same way, your time cost breakdowns would be confusing if you incurred any time costs on the threshold day.

What I’m struggling with is why the Insolvency Service has seen fit to redefine the length of a month: what was wrong with the way us mortals measure time?

(UPDATE 17/01/2017: the Insolvency Service responded to my query on their blog: “We have taken legal advice on this matter and will be looking at whether and how we can clarify the definition of a period expressed in months in Schedule 5 so that there is no day which occurs in two different reporting cycles.”  Phew!)

(UPDATE 23/03/2017: the recently-released Amendment Rules have fixed this – no more time-shifting: a month is a month long again.)

 

So what is the deadline for sending out progress reports?

Let’s take an ADM with a period end date of 10 April 2017. You have “one month after the end of the period” in which to deliver a progress report. Setting aside whether “after” starts the day after – which would add another day to your timescale – let’s assume that this period ends on 10 May 2017.

Ah, but there’s a catch. The report must be “delivered”, not “sent”, by this date. The new Rules define “delivery” as follows:

  • 1st class post is “treated as delivered on the 2nd business day after the day on which it is posted”; and
  • 2nd class post is “treated as delivered on the 4th business day after the day on which it is posted”.

Therefore, you need to factor the delivery times into your statutory timescale. If you left it until 9 May 2017 to put the progress reports in the post, you would be too late. When the new Rules refer to “deliver”, in fact they are referring to the time that the document is deemed to be received by the recipient.

 

So will every statutory deadline need to factor in the time to deliver the document?

Unfortunately, it is not that simple. For example, the new Rule on issuing progress reports in CVLs – R18.7 – sets the 2-month deadline with reference to the sending of the report, not its delivery. “Send” is not defined in the new Rules.  (UPDATE 23/03/17: the Amendment Rules have changed this “send” to “deliver”, so that all filing deadlines are now consistent.)

However, notwithstanding this inconsistency (I thought that making the rules consistent was one of the main objectives behind the new Rules!), you could do worse than factor time periods to deliver documents into your processes. At least that way you should always meet the deadlines (and you would avoid any debate over semantics -v- the perceived “spirit” of the Rules with your regulator).

 

Opting out

In her November Technical Update https://goo.gl/XBTAFV, Jo Harris summarised the new Rules under which creditors can send to office holders a notice asking to be excluded from most future standard circulars. This provision – along with the wider website use described below – are two significant changes introduced by the Small Business, Enterprise & Employment Act 2015 that appear in Part 1 of the Rules.

I won’t go into detail on these points, but I will just add to Jo’s observations:

  • Ensuring that you provide information on opting out in your “first communication with a creditor” could take some managing. You will need to make sure you include this when you first communicate with newly-discovered creditors. The new Rules are also silent on how this applies to a successor office holder.
  • As Jo mentions, you will need to designate opted-out creditors differently on your system, but also ensure that they are included in the exempted circulars, such as “notices of intended distribution” (R1.37)… or should that be “notices of proposed dividend” (R1.39)… or perhaps even “notices of intention to declare a dividend” (R14.29)!
  • If you are taking on a consecutive insolvency proceeding, you will need to ask the predecessor for a list of opted-out creditors, as you must exclude them from the defined circulars.

Personally, I don’t expect many creditors to opt out – after all, if they are not engaged enough to be interested in future updates, then are they likely to be sufficiently engaged to sign and return an opting-out notice? However, this new section will add yet another page (no really – the prescribed contents do go on a bit) of information to first circulars, which we will need to take care to get right.

 

Wider website use

Finally, this is something in the new Rules that put a smile on my face! Again as Jo explained in her Update, under the new Rules office holders will be able to issue to creditors just one notice explaining that future communications will only be uploaded to a website, rather than issue such a notice every time a communication is uploaded as is currently the case.

I have heard some unrest about this provision. Many feel that it will simply help to distant creditors even further from the process. I agree, it will. However, I do not feel that this is sufficient reason to avoid taking advantage of this provision. The Insolvency Service seems to have been charged with the aims of increasing engagement and reducing costs – two aims that are clearly in opposition to one another, as demonstrated also by the new Rules’ abolition of office holder-convened physical meetings – but I wonder how much engagement really is achieved by progress reports that are necessarily unwieldy in order to comply with the plethora of SIPs and statutory requirements. On the other hand, I think that the new provision allowing for website use alone most certainly will reduce costs.

 

Part 1: just the beginning

As I hope I’ve demonstrated, there are plenty of revisions in Part 1 of the new Rules that will require some thoughtful planning… and that generate more than the odd furrowed brow. I am looking forward to posing a few questions on the Insolvency Service’s forum, which we expect to be launched in the next few weeks.

If you would like to listen to my webinar that explores this Part in more depth and that will be available in the next few days, please drop a line to info@thecompliancealliance.co.uk.

The second webinar in this series, which will review the new Rules on Reporting and Remuneration, will be presented by Jo Harris in a few weeks’ time.


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2017: it’s not all about the Rules

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A watched kettle never boils, so I’ll stop watching for the new Rules to land – having missed their “aim” of w/c 10/10/16, the Insolvency Service is now claiming that it was always their “plan” to have them issued this month – and instead I’ll shift my focus to what other delights the next year may bring.

 

A Review of the Bonding Regime

What do you think? Is the bonding regime fit for purpose? Does it really work as an effective protection?

The Government has issued a Call for Evidence to explore the weaknesses and reform possibilities of the bonding regime. The opportunity for submissions closes on 16 December 2016 and the Insolvency Service’s document can be found at: https://goo.gl/wiKc0K.

The document notes that the Insolvency Service has “seen evidence where the costs claimed by an insolvency practitioner in proving a bond claim are disproportionate to the loss suffered by the insolvent estate”, whilst the specific penalty bond premiums have increased for smaller firms by 200% in one year. No wonder there are questions over whether bonding is achieving its objective.

The Call for Evidence explores questions (albeit worded differently) such as:

  • Would a system similar to the legal profession’s arrangements for dealing with fraud and dishonesty work for insolvency?
  • Could a solution be a “claims management protocol” incorporating a panel of IPs to deal with bond claims and ways to limit cost?
  • Alternatively, perhaps the bonding regime should be abolished altogether?

 

Complaints-handling by the RPBs

In September, the Insolvency Service released a summary of its review into the RPBs’ complaints-handling processes.

The Service reported that “the introduction of Common Sanctions Guidance has improved transparency in decision-making but there is scope to ensure more consistency in the application of the guidance”. The Service’s answer is to work with the RPBs to make changes to the guidance.

Three other main recommendations emerged from the review:

 1.  The RPBs should ensure that information is sought from the IP, e.g. “if the complainant has not provided or is unable to provide evidence to support their complaint”, unless there is a justified reason not to do so (whatever that looks like).

The report explains that “the most common reasons for closing a complaint at the assessment stage are the complainant’s failure to respond to further enquiries or their inability to provide evidence to support their complaint”. The Service also reports that “the review identified that some cases had been closed which appeared to merit further investigation”. Thus, the Service is recommending that RPBs look to the IPs for the information and evidence.

The Service seems to be expecting the RPBs to conduct thorough investigations on receipt of nothing more than unsupported suspicions raised by parties who then go to ground as soon as they’re asked to explain or substantiate their allegations. The Service also seems to take no account of the costs to IPs in responding to RPB requests, which of course are not recoverable from the insolvent estates irrespective of whether the complaint is founded. Isn’t it about time that the Service stopped labouring onto IPs more and more expensive burdens whilst simultaneously pursuing the agenda that IPs’ fees need to be curbed?

2.  The RPBs should consider with the Service the feasibility of a regulatory mechanism whereby compensation can be paid by the IP to the complainant where they have suffered inconvenience, loss, or distress.

The Service is recommending this measure “to ensure fair treatment for complainants”, given that some RPBs (but see below) have a compensation mechanism, but others do not. But how often do the RPBs order compensation? This information is conspicuous by its absence from the report.

From the report, it seems that the ACCA is the only RPB with a formal compensation mechanism. In view of the fact that the ACCA is handing over its complaints-handling to the IPA with effect from 1 January 2017, surely the simplest way to make things “fair” to all complainants is to have no compensation mechanism, isn’t it?

I also do not understand the Service’s logic in arguing that compensation should be offered “where minor errors or mistakes have been made”, whilst accepting that “any such mechanism would not be a substitute for any legal remedies available to individual complainants through the Courts”. Next thing we know the Service will be expecting the RPBs to decide whether fees are excessive on fairly straightforward cases, whilst accepting that decisions on really meaty fees should remain with the courts. Oh hang on a minute…

Unfortunately, the IPA is making it easy for the Service to push its agenda: the report mentions that the IPA intends to introduce a formal conciliation process in any event (which is news to me, as I suspect it is to most IPA members).

3.  RPBs experiencing particular issues progressing complaints cases should discuss their plans with the Service.

I think this is directed mainly at the ACCA, which has come in for some heavy criticism, as reported in the Insolvency Service’s monitoring reports over the last couple of years. Now that the ACCA has announced its “collaboration” with the IPA, which will investigate and decide on complaints levelled at ACCA licensed IPs (as well as conduct their monitoring visits), perhaps the Service already will be happy to tick that box.

To read the full report, go to: https://goo.gl/radZpS.

 

Action on Anti-Money Laundering

This subject really deserves a blog post of its own. The prospects for change are coming from all directions.

“Consent” SARs no more

Actually, this happened in July, but I’ve not seen it covered elsewhere, so I thought I would shoe-horn it in here. Although the Proceeds of Crime Act 2002 refers to “consent”, the NCA has issued guidance clarifying that it will no longer be granting consent, but rather a “defence to a money laundering offence”.

The NCA has taken this step to counteract the “frequent misinterpretation of the effect of ‘consent’ (e.g. assuming that it results in permission to proceed, or is a statement that the money is ‘clean’ or that the NCA condoned the activity going ahead)”.

To request a “defence”, however, you will still need to tick the “consent requested” box on the SAR submission.

For a useful reminder on the purpose and process of consent/defence SARs, including the kinds of responses you might get back from the NCA, go to https://goo.gl/c8tJzk.

Allowing “joint” SARs and other proposals

In April, the Government (via HM Treasury) issued an “Action Plan”, representing “the most significant change to our anti-money laundering and terrorist finance regime in over a decade”, and the Government sought views on the proposed actions.

Amongst other things, the Government was proposing to reform SARs, given the enormous resource demand of c.400,000 SARs submitted each year. The proposals included doing away with the SARs consent/defence process altogether, which alarmed me considerably, but I was relieved to see that the Law Society and others (including R3, although I have to say that they were not as forceful as the LawSoc) urged the Government to reconsider.

The Government’s response on the consultation was issued earlier this month at https://goo.gl/pzezpx and the conclusions are reflected in the Criminal Finances Bill, which is now making its way through Parliament.

I can only see the proposed changes affecting IPs in exceptional cases, but in brief they include:

  • some changes to the SARs regime including empowering the NCA to obtain further information from SARs reporters, but the consent process will continue at least for the moment (“the Government will keep this issue under review”);
  • “establishing a new information sharing gateway for the exchange of data on suspicions… between private sector firms with immunity from civil liability” – I am interested to discover how this will be constructed, although the Government response does include reference to…
  • enabling “joint” SARs to be submitted, which I’m sure will be good news to all IPs who have been conscious of multiple SARs being submitted on cases involving external joint office holders and legal advisers;
  • introducing Unexplained Wealth Orders;
  • strengthening powers to seize and forfeit criminal proceeds in bank accounts or “portable high value items” such as gold.

The Fourth Money Laundering Directive

I understand that Brexit is unlikely to halt the progress of the EU’s Fourth Money Laundering Directive in the UK, which is set to be transposed into national law by 26 June 2017.

In September, HM Treasury issued a consultation on how the Directive should be implemented. The consultation document can be found at https://goo.gl/5AdhQd and it closes on 10 November 2016.

Items with the potential to affect IPs include:

  • a reduction in the threshold for cash or “occasional” transactions from €15,000 to €10,000;
  • changes in the criteria triggering simplified and enhanced due diligence;
  • a potential widening of the scope of those whose AML due diligence may be relied upon (which I find interesting given that the RPBs seem to recommend avoiding reliance);
  • potential prescription surrounding requirements for certain businesses to appoint compliance officers, to conduct employee screening, and to carry out independent audits;
  • a requirement to retain AML due diligence records for 10 years (up from 5 years); and
  • a requirement for certain Supervisors (i.e. the RPBs and others) to “take necessary measures to prevent criminals convicted in relevant areas or their associates from holding a management function in, or being the beneficial owners of” AML-regulated businesses (which, personally, I think is extremely unfair – for example, is it fair to curtail someone’s career because of what their father has done?). Although the consultation refers only to accountants, solicitors and some other businesses as needing this oversight, I would be surprised if IPs escape notice when any legislation is drafted.

 

More and More Changes in Scotland

Imminent changes

As we know, the new Bankruptcy (Scotland) Act 2016 (and presumably the accompanying Regulations, which are yet to be finalised) come into force on 30 November 2016.

The AiB has headlined the Act and Regulations as “business as usual” but simply a cleaner and more straightforward reorganisation of the existing statutory instruments, the most material effect being that what was the Protected Trust Deeds (Scotland) Regulations 2013 has been written into the Act (all except from the forms, which are in the 2016 Regs).

However, inevitably the AiB has taken the opportunity to slip in a couple of changes. As drafted, the MAP asset threshold will be reduced from £5,000 to £2,000 (Regulation 14).

In its response to the AiB’s informal consultation on the draft Regulations, ICAS took the opportunity to raise a number of issues, including having another dig at the AiB’s compromising positions as both supervisor and supplier of debt management/relief services. As regards these expressions of concern and ICAS’ attempt to highlight the archaic “overly penal” use of an 8% statutory interest rate, I say: “good for them!”.

ICAS also points out apparent deficiencies in the Regulations’ treatment of money advisers, who are required under the draft Regulations to have a licence to use the Common Financial Statement, but the Money Advice Trust provides licences to organisations, not individuals. There also appears to be a flaw in the Regulations in that it does not allow a non-accountant/solicitor IP to be a money adviser if they or their employers provide other financial services.

To read ICAS’ response in full, go to: https://goo.gl/xSaKkv.

Future changes to PTDs and DAS

Earlier this year, the AiB ran consultations as part of their reviews of PTDs and DAS. The AiB published summaries of the consultation responses in July 2016 (see https://goo.gl/MW6gC5) and the AiB has promised its own responses “in the coming weeks”, although these have yet to emerge (not surprising really, given everything else going on!).

The scope of the consultation questions was vast and the reviews have the potential to affect many aspects of the two procedures.

 

New Restructuring Moratoriums and Plans… but no changes to rescue finance priority

Although the Government has not yet provided its response to the consultation, “A Review of the Corporate Insolvency Framework”, which ended on in July 2016, it has issued a summary of responses at https://goo.gl/Cf0LWK.

The summary does hint, however, that the Government is likely to take forward some of the proposals.

The introduction of a pre/extra-insolvency moratorium

If the Government were to go with the majority (yes I know, that’s a big “if”), the new moratorium:

  • would be initiated by a simple court filing;
  • would have stronger/more safeguards to protect creditors’ interests than as originally proposed;
  • potentially would not suspend directors’ liability for wrongful trading;
  • would be shorter than the originally proposed 3 months, probably 21 days;
  • could be extended without the need to obtain the approval of all secured creditors;
  • would not affect the length of any subsequent Administration (woo hoo!);
  • would be supervised only by a licensed IP (double woo hoo!);
  • would provide for costs incurred during the moratorium to be paid during the moratorium or, failing that, to enjoy a first charge if an insolvency process follows on; and
  • would provide creditors with the power to seek information (with certain safeguards and exemptions).

Essential suppliers to be held to ransom?

In contrast, consultation responses were split on whether more should be done to bind essential suppliers to keep on supplying during a moratorium or indeed during an Administration, CVA or potentially new “alternative restructuring plan”. The only clear majority response was that providing suppliers with recourse to court to object to being designated by the company as “essential” was an inadequate safeguard for suppliers.

The reaction? “Government notes stakeholder concerns and is continuing to consider the matter.”

A new restructuring plan with “cram down”

Cheekily, the consultation actually didn’t ask whether we saw value in a proposed new restructuring plan. It just asked how we saw it working.

The majority were in favour of a court-approved cram down process with the suggested addition that the cram down provisions could also apply to shareholders.

Will the long grass welcome back the proposal for super-priority rescue finance?

The Government had revived its 2009 proposal for super-priority rescue funding. Again this time, the response was pretty overwhelming with 73% disagreeing with the proposals.

 

Further Education Insolvencies

In July 2016, BIS issued a consultation that explored whether the usual insolvency procedures – as well as a Special Administration Regime – should be introduced to deal with insolvent further education and sixth form colleges in England.

The proposed objectives of the education Special Administration include to “avoid or minimise disruption to the studies of the existing students of the further education body as a whole”. The Government envisages that this emphasis would “provide more time than normal insolvency procedures to mitigate the risk that a college is wound up quickly and in a way which, by focusing only on creditors, would be likely to damage learners.”

Although a Government response has yet to be issued (the consultation closed on 5 August 2016), my scanning of a few published responses indicates that there are some loud objections to the idea from those working in the sector. Many of those who responded to the consultation also expressed exasperation that BIS issued a 4-week consultation over the holiday period, which does seem particularly insensitive in view of the intended audience (which strangely did not include IPs!).

 

Recast EC Regulation on Insolvency Proceedings

This is another piece of legislation that is set to come into force on 26 June 2017.

I admit that my partner, Jo Harris, is far more knowledgeable on this subject than me and personally I’m waiting for her to record a webinar on it, so that I can learn all about it (no pressure, Jo! 😉 ).

 

SIP13, SIP15… and many others

The JIC’s consultations on revised drafts of SIP13 and SIP15 closed many months ago. I understand that a revised SIP13 is very near to being issued and the aim is to have a revised SIP15 also issued before the end of the year.

Given that many of the SIPs refer to the Insolvency Rules 1986 – SIP8 on S98 meetings comes immediately to mind – many will need to be reviewed over the next 5 months if they are to remain reliable and relevant (although admittedly it has not stopped SIP13 continuing to refer to S23 meetings and Rule 2.2 reports, despite the fact that they were abolished in 2003!). Well, it’s not as if we have anything else to do, is it?!