Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Regulatory Hot Topics: (1) the SIPs

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Last month, I conducted a webinar for R3 with Matthew Peat, senior compliance officer with ACCA, entitled Regulatory Hot Topics.  The aim was to highlight some areas that we both had seen some IPs stumble over.  I thought there might be value in summarising some of the issues we covered.  In this post, I cover just the SIPs.

SIP2 – Investigations by Office Holders in Administrations and Insolvent Liquidations

Some firms are using checklists that are not well-designed for the task of carrying out a SIP2 investigation.  In particular:

  • Checklists should reflect the fundamental difference between a SIP2 investigation and considering matters of relevance for a D-report/return. SIP2 requires the administrator/liquidator to consider whether there may be any prospect of recovery in relation to antecedent transactions.
  • Checklists should guide you through the SIP2 requirement of conducting an initial assessment on all cases and then moving on to making a decision on what further work, if any, is merited.
  • Checklists should help you meet the SIP2 requirement to document findings, considerations and conclusions reached.

Other recommendations include:

  • Make collection of books and records a priority in the early days of an appointment.
  • SIP2 also requires the outcome of the initial assessment to be reported to creditors in the next progress report.  Although there is an obvious tension between full disclosure and keeping one’s powder dry for progressing any claims, it is not sufficient to report in every case that all investigations are confidential, remembering that SIP2 is not referring to D-reporting matters. If nothing has been revealed that might lead to a potential recovery, this should be reported; if something has been identified, then some thought will need to be given as to what can be disclosed.

SIP3.1 & SIP3.2 – IVAs & CVAs

The “new” SIPs have been in force now for eight months, so all work should now have been done to adapt processes to the new requirements.  In particular, the SIPs require “procedures in place to ensure”, which is achieved more often by clear and evidenced internal processes.  It is also arguable that, even if particular problems have not appeared on the cases reviewed on a monitoring visit, you could still come in for criticism if the procedures themselves would not ensure that an issue were dealt with properly if it arose.

The SIPs require assessments to be made “at each stage of the process”, i.e. when acting as adviser, preparing the proposal, acting as Nominee, and acting as Supervisor.  At each stage, files need to evidence consideration of questions such as:

  • Is the VA still appropriate and viable?
  • Can I believe what I am being told and is the debtor/director going to go through with this?
  • Are necessary creditors going to support it?
  • Do the business and assets need more protection up to the approval of the VA?

The SIPs elevate the need to keep generous notes on all discussions and, in addition to the old SIP3’s meeting notes, require that all discussions with creditors/ representatives be documented.

I would recommend taking a fresh look at advice letters to ensure that every detail of SIP3.1/3.2 is addressed.  The following suggested ways of dealing with some of the SIP requirements are only indicators and do not represent a complete answer:

  • “The advantages and disadvantages of each available option”

Personally, I think the Insolvency Service’s “In Debt – Dealing with your Creditors” makes a better job at covering this item than R3’s “Is a Voluntary Arrangement right for me?” booklet, although neither will be sufficient on its own: in your advice letter, you should make application to the debtor’s personal circumstances so that they clearly understand their options.

Similarly, you can create a generic summary of a company’s options, which would be a good accompaniment to your more specific advice letter for companies contemplating a CVA.

  • “Any potential delays and complications”

This suggests to me that you should cover the possibilities of having to adjourn the meeting of creditors, if crucial modifications need to be considered.

  • “The likely duration of the IVA (or CVA)”

Mention of the IVA indicates that a vague reference to 5 years as typical for IVAs will not work; the advice letter needs to reflect the debtor’s personal circumstances.

  • “The rights of challenge to the VA and the potential consequences”

This appears to be referring to the rights under S6 and S262 regarding unfair prejudice and material irregularity.  I cannot be certain, but it would seem unlikely that the regulators expect to see these provisions in detail, but rather a plain English reference to help impress on the debtor the seriousness of being honest in the Proposal.

  • “The likely costs of each [option available] so that the solution best suited to the debtor’s circumstances can be identified”

This is a requirement only in relation to IVAs, not CVAs, and includes the provision of the likely costs of non-statutory solutions (depending, of course, on the debtor’s circumstances).

An Addendum: SIP3.3 – Trust Deeds

After the webinar, I received a question on whether similar points could be gleaned from SIP3.3, which made me feel somewhat ashamed that we’d not covered it at all.  To be fair, neither Matthew nor I has had much experience reviewing Trust Deeds, so personally I don’t feel that I can contribute much to the understanding of people working in this field, but I thought I ought to do a bit of compare-and-contrast.

An obvious difference between SIP3.3 and the VA SIPs is that the former includes far more detail and prescription regarding consideration of the debtor’s assets (especially heritable property), fees, and ending the Trust Deed.  However, setting those unique items aside, I was interested in the following comparisons:

  • The stages and roles in the process

SIP3.3 identifies only two stages/roles: advice-provision and acting as Trustee.  I appreciate that the statutory regime does involve the IP acting only in one capacity (as opposed to the two in VAs), but I am still a little surprised that there is no “right you’ve decided to enter into a Trust Deed, so now I will prepare one for you” stage.

SIP3.3 also omits reference to having procedures in place to ensure that, “at each stage of the process”, an assessment is made (SIP3.1 para 10).  Rather, SIP3.3 requires only that an assessment is made “at an appropriate stage” (SIP3.3 para 18).  Personally I prefer SIP3.3 in this regard, as I fear that SIP3.1/3.2’s stage-by-stage approach is too cumbersome and risks the assessment being rushed through by a bunch of tick-boxes, instead of considering the circumstances of each case more intelligently and purposefully.

  • The options available

There are some differences as regards the provision of information and advice on the options available, but I am not sure if this is intended to be anything more than just stylistic differences.

For example, SIP3.1 prompts for the provision of information on the advantages and disadvantages of each available option at paras 8(a) (advice), 11(a) (documentation), and 12(e) (initial advice), but SIP3.3 refers to this information only at para 20(a) (documentation).  Does this mean that IPs are not required to discuss advantages and disadvantages, but just hand over details to the debtor?

In addition, SIP3.3 does not specifically require “the likely costs of each [option]” (SIP3.1 para 12(e)).  The assessment section also does not include “the solutions available and their viability” (SIP3.1 para 10(a)); I wonder if this is because there is less opportunity in a Trust Deed to revisit the decision to go ahead with it, whereas in VAs the Proposal-preparation/Nominee stage can be lengthy giving rise to a need to revisit the decision depending on how events unfold.

Having said that, I do like SIP3.3’s addition that the IP “should be satisfied that a debtor has had adequate time to think about the consequences and alternatives before signing a Trust Deed” (para 34).

  • Additional requirements

Other items listed in SIP3.3 that an IP needs to deal with pre-Trust Deed (for which there appears to be no direct comparison with SIP3.1/3.2) include:

  1. Advise in the initial circular to creditors, the procedure for objections (para 9);
  2. Assess whether the debtor is being honest and open (para 18(a));
  3. Assess the attitude (as opposed to the likely attitude in SIP3.1/3.2) of any key creditors and of the general body of creditors (para 18(c));
  4. Maintain records of the way in which any issues raised have been resolved (para 20(d));
  5. Summaries of material discussions/information should be sent to the debtor (para 20) (in IVAs, this need be done only if the IP considers it appropriate); and
  6. Advise the debtor that it is an offence to make false representations or to conceal assets or to commit any other fraud for the purpose of obtaining creditor approval to the Trust Deed (para 24).

 

SIP9 – Payments to Insolvency Office Holders and their Associates

The SIP9 requirement to “provide an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed” fits in well with the statutory requirements governing most progress reports as regards reporting on progress in the review period.  Thus, although it often will be appropriate to provide context by explaining some events that occurred before the review period, try to avoid regurgitating lots of historic information and make it clear what actually occurred in the review period.

In addition, in order to meet the SIP9 principle, it would be valuable to reflect on the time costs incurred and the narrative of any progress report.  For example:

  • If time costs totalling £30,000 have been incurred making book debt recoveries of £20,000, why is that?       Are there some difficult debts still being pursued? Or perhaps you are prepared to take the hit on time costs. If these are the case, explain the position in the report.
  • If the time costs for trading-on exceed any profit earned, explain the circumstances: perhaps the ongoing trading ensured that the business/asset realisations were far greater than would have been the case otherwise; or perhaps something unexpected scuppered ongoing trading, which had been projected to be more successful.
  • If a large proportion of time costs is categorised under Admin & Planning, provide more information of the significant matters dealt with in this category, for example statutory reporting.

Other SIP9 reminders include:

  • If you are directing creditors to Guides to Fees appearing online, make sure that the link has not become obsolete and that it relates directly to the Guide, rather than to a home or section page.
  • Make sure that the Guide to Fees referenced (or enclosed) in a creditors’ circular is the appropriate one for the case type and the appointment date.
  • Make sure that reference is made to the location of the Guide to Fees (or it is enclosed) in, not only the first communication with creditors, but also in all subsequent reports.

 

In future posts, I’ll cover some points on the Insolvency Code of Ethics, case progression, technical issues in Administrations, and some tips on how monitors might review time costs.


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ACCA and Insolvency Service monitoring: poles apart?

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The Insolvency Service has released two reports on its own IP-monitoring team and one on ACCA’s monitoring, but is the Insolvency Service playing fair?  Is it applying double standards and how sensible are its demands of authorising bodies?

The reports can be found at: http://goo.gl/A7mXxJ

 

The Insolvency Service’s monitoring of the Insolvency Service’s monitoring

No, I’ve not copied-and-pasted by mistake: in April/May 2014, the Insolvency Service carried out a monitoring visit of its own monitoring team, i.e. the team that deals with Secretary of State-authorised IPs (“IPS”).

The report issued on 29 August 2014 identified some “serious weaknesses”, leading to a decision to make a follow-up visit three months later.  This occurred in January 2015 – not seriously tardy, I guess (although not a great example to the Team, given that late monitoring visits on IPs was the most serious weakness identified in the first visit) – and the report on the follow-up visit has now been released.

The recent report makes no reference to any further visits or follow-up actions, although the summary discloses a number of wriggle-phrases: “IPS has implemented, or made progress against, all the recommendations…  IPS has moved towards…  IPS has plans in place to address this…”  Would the Insolvency Service be satisfied if an RPB had made such “progress” towards goals?  Or would the Service be content for an RPB to accept such assurances from an IP who had only “moved towards” rectifying matters?

Catching up on overdue monitoring visits

To be fair, there did seem to be significant progress with the key issue – that as at May 2014 over half of their IPs had not had a visit in the past three years.  The report disclosed that, of the 28 IPs that had been identified from the 2014 review as overdue a visit, most had been visited or would be visited by May 2015.  The remaining five IPs had been asked to complete a pre-visit questionnaire, and the IPS planned to consider these on a risk basis and “if appropriate, schedule a prompt monitoring visit”.

It is evident from the report, however, that the only visits carried out by the Team since their 2014 review had been to IPs who were already overdue a visit.  Thus, I’m wondering, how many more IPs’ three years were up between April/May 2014 and now and is the Team constantly chasing their tails?  Of course, we expect SoS-authorisations to go in the future (although the De-regulation Bill provides a run-down period of another year), so is this really something to get excited about?  My issue is with the consistency of standards that I expect the Insolvency Service to apply to all licensing/authorising bodies.

“Independent” decision-making

The report makes reference to the introduction of “a layer of independence to its authorisation and monitoring process”.  This refers to the fact that the Section Head now decides on actions following monitoring visits and reauthorisations – with the benefit of a copy of the last monitoring report (which seems pointless to me: if the monitor’s findings were not such that they merited withdrawal of the IP’s authorisation, on what basis would they merit withholding reauthorisation up to a year later?).  Is the Section Head really independent?  I accept that the Insolvency Service structure (and budget) does not provide for the levels of independence possible for RPBs, but, again, I do feel that the Service is applying double standards here, especially given its report on ACCA below.

 

The Insolvency Service’s report on ACCA

The Service’s review of ACCA revealed “some weaknesses” and it is planning a follow-up visit within three to six months.  ACCA has rejected two of the Service’s recommendations.

Early-day monitoring visits

I was surprised to read the Service write so negatively about early monitoring visits.  About monitoring visits occurring within the first 12 months of the IP’s licence, it writes: “There is no evidence of these initial visits being conducted in accordance with the PfM [Principles for Monitoring]; instead, these appear to be conducted as courtesy visits”.  ACCA has asked the Service to clarify what is intended by the recommendation, given that a full scope visit is always completed within the IP’s first three years.  ACCA points to the PfM’s risk-based approach to early visits and states that it “will consider whether it should discontinue introductory visits in the future, given the Insolvency Service’s comments which suggest they are of little value.”

I know that ACCA is not the only RPB that carries out less-than-full-scope early visits, so I am wondering if we will see a shift from all those RPBs.

Personally, I feel that the Insolvency Service is taking the wrong tack here.  When I was at the IPA, I monitored new IPs’ caseloads to see when their first inspection visit looked appropriate.  I also took into consideration other factors: were they working in an office with other IPs?  If so, what were their track records?  Were they hitting the radar of the Complaints Department?  What did their self certifications look like?  But often a key question was: was their caseload building at such a rate that a visit would be useful?  Very often, new IPs take on very few cases and, on the basis of caseload alone, it is usually around 18 months before a proper visit can be conducted.

Nevertheless, I think that there is value in conducting an early visit.  Calling it a “courtesy visit” is a little unfair, I’m sure.  ACCA responded that “the purpose of these visits is to assist insolvency practitioners to ensure they have adequate procedures in place to carry out their work”.  And that’s the point, isn’t it?  It may be too early to see how the IP is really going to perform, but early-days are a good opportunity to see how geared-up the IP is, explore their attitude towards compliance and ethics versus profit, and perhaps even help them.  Is it sensible to criticise ACCA for not evidencing that an early-day visit has been conducted in the same way as a full visit?  If RPBs are discouraged – or prohibited – from carrying out introductory visits, compliance with the PfM would indicate that the RPB simply needs to record the decision that a full visit in the first 12 months is not necessary and then bump the IP to the 3-year point.  Is that better regulation?

Extensive monitoring reports

I have sympathy with ACCA as regards the Insolvency Service’s next criticism.  The report explains that ACCA’s monitoring reports describe the main areas of concern, but not the areas examined where no concerns were generated.  The Service recommended that “ACCA consider expanding their monitoring reports to include all information obtained during the monitoring process, including areas of no concern to provide a clear audit trail”.

Interestingly, the Insolvency Service’s 2014 report on its own monitoring came up with a similar recommendation, although in 2014 the Service’s recommendation appeared more dogmatic: “Ensuring that monitoring reports include all of the information obtained during the monitoring process, not just in relation to areas of concern; any areas where there are no concerns may be summarised.  The reports should also include the bonding information on each case.”  My original notes in the margin of that report expressed “Why?!”  I certainly don’t see why bonding information always needs to be recorded and I struggle to see how all information obtained could be sensibly written down.  When I review cases, I scribble pages of notes, summarising key facts and events in the case’s lifecycle, such as key Proposal terms and modifications, mainly so that I can see if these points are followed through over time.  As my review questions are answered satisfactorily, I move on; if I had to summarise all this information in my reports, they would double in length but I don’t believe they would be any more revealing or helpful to the reader.

The 2015 follow-up report on the Insolvency Service’s own monitoring states: “IPS had significantly expanded its monitoring reports.  These now contain sufficient detail to enable an informed decision to be made on appropriate action following the issue of the report.”  Hmm… that doesn’t exactly confirm that the reports now contain “all” information or indeed the bonding information on each case.  Does this, along with the Service’s recommendation that ACCA “consider” expanding reports, reflect that they themselves are moderating their original opinion of what should be in reports?

I cheered at ACCA’s response to the recommendation: “ACCA believes that including in the monitoring report areas where there are no concerns risks: expanding the report unnecessarily with no perceived benefit; diluting the overall outcome and reducing focus on the significant weaknesses in the insolvency practitioner’s procedures and the need to make appropriate improvements.”  Good for you, ACCA!

I think it’s a bit of a shame that, despite explaining this opinion, ACCA then states that it has amended its standard report template in an attempt to satisfy the Insolvency Service, although I am sure that many of us appreciate the wisdom in meeting our regulators’ demands even if we don’t agree with them.

“Independent” decision-making

Remembering that the IPS had satisfied the Insolvency Service on this matter by passing all monitoring reports through their Section Head, I sucked my teeth at the Service’s next recommendation to ACCA: “That any monitoring report with unsatisfactory findings be considered independently, for example by the Admissions and Licensing Committee, to assess what regulatory action may be necessary”.

Firstly, no IP is perfect; I have not seen a report with no “unsatisfactory findings”, so this suggests that effectively all monitoring reports would need to go through the Committee.  To be fair, I come from an IPA background where all reports did go through the Committee – and I thought it was valuable that the Committee see the good with the bad – but it’s a big ask for any Committee (especially if reports become far longer seemingly as required by the Service) and I am not surprised that some RPBs have sought to make the process more efficient.  After all, the majority of IPs visited are so obviously way above the threshold where some action is deserved that it makes perfect sense to fast-track these, doesn’t it?

The report stated that “ACCA regrets that it must reject this recommendation as it believes it is an impractical and disproportionate response to the vast majority of visit outcomes”.  ACCA’s response makes clear that each report is considered at least by the monitor and a reviewer, who I think can decide on certain actions such as scheduling a follow-up visit: is this not sufficient for at least the top 50% of IPs?

Admittedly, the devil is in deciding what to do with the reports at the margins: at what stage is an issue serious enough to warrant Committee attention?  Unfortunately for ACCA, the case that led to this recommendation was not a great example.  Although ACCA has done a good job in putting into context each of the breaches identified at this IP visit that ACCA decided fell below the threshold for Committee attention, I have to say that the fees issue alone – even though it was a one-off unusual circumstance (the IP had taken a £5,000 deposit for the costs of liquidating a company, but it was actually placed in administration and the IP drew the deposit for pre-admin costs without complying “fully” with R2.67A) – would have meant, in an IPA context, that it would not only have been considered at length by the Membership & Authorisation Committee, but it would have been an automatic referral also to the Investigation Committee for consideration for disciplinary action.

I am also not persuaded by ACCA’s defence that the IP’s repeat breaches of legislation and/or SIPs resulted in “no actual harm” to the debtor (in one case) or creditors “such that, given the function of the Admissions and Licensing Committee, a referral to it would not have been justified”.  In my experience, it is very rare that breaches of statute or SIPs actually result in harm, but is that the only criterion for deciding whether an issue is sufficiently serious to warrant action?  You could throw out half the rules and SIPs, if all IPs needed to do was avoid harming stakeholders.

I think that ACCA is on stronger ground as regards another issue that the IP had already rectified.  What would be the point of referring this to the Committee?  “Withdrawal or suspension of the licence would be disproportionate and it is not clear what conditions would be appropriate to protect the public, particularly as the breach had already been rectified.”

I think that ACCA’s final comments put it nicely: “To recommend that such cases should routinely be referred to the Admissions and Licensing Committee to decide on any regulatory action and timing of the next visit is a poor use of Committee resources, clearly disproportionate to the findings and, in ACCA’s view, contrary to the guidance contained in the Insolvency Service Regulators’ Code.”

Surely the Insolvency Service should be concentrating on outcomes, shouldn’t they?  After all, that is what Nick Howard said (in the podcast at http://goo.gl/WUst5M) was his objective as regards the Service’s monitoring of all the RPBs: to ensure that they act consistently in reaching the same outcomes.  Admittedly, in this case it does look to me like the IPA (for one) would have put the IP through the ringer, made him sweat a bit more, than ACCA appears to have done, but would it have affected the outcome?  If the IP took on board all of the ACCA monitor’s points and made the necessary changes (some which appear to have taken place prior to the visit in any event), does it matter how his report was processed?

And I would add: how does the IPS’ process – of referring reports to the Section Head – meet the Service’s apparent requirement for independence any better?

Complaints-handling

ACCA has evidently had some difficulties in the past in resourcing their complaints-handling adequately, although they do seem to have cracked it more recently.  I did smile, though, at the Service’s recommendation that “it would be helpful in future for the Insolvency Service to be kept informed of any significant changes in staffing and resources” – ACCA had increased their staffing for complaints from one member to two.  Can you imagine if authorising bodies took such a keen interest in IPs’ staff numbers?!

One of the Service’s other recommendations was that the name of the independent assessor be given to the complainant and the IP “to ensure transparency and openness throughout the process”.  This was the second recommendation that ACCA had rejected: “ACCA does not believe naming assessors will add any real value to the process…  If assessors are named, there is a danger that they may be passed extraneous material, which risks delays in progressing complaints.  There is also the risk of assessors being harassed by members and complainants where their decision is not favourable to them”.

My personal view is that this is another example of the Service trying to meddle with the processes instead of concerning itself with the outcomes.  I can see how they might feel that transparency in this matter might help “improve confidence” in the complaints regime, but is it that material?

 

Single regulator?

What worries me about all this is that the Service appears to be seeking to achieve consistency by ensuring that all authorising bodies’ processes are the same.  This is particularly unhelpful if the Service starts with what they think an authorising body should look like and then exerts pressure on every body to squeeze them into that mould, instead of looking objectively at how the body performs before looking to criticise its processes.

There are a Memorandum of Understanding and Principles for Monitoring.  The Service should be measuring the bodies against these standards.  The Service’s “Oversight regulation and monitoring in the insolvency profession” document (http://goo.gl/jipcWs) confirms that assessing compliance with the MoU and PfM is fundamental.  Thankfully, the MoU and PfM are not so prescriptive that they describe, for example, how much detail should go into monitoring reports.

In this document, the Service also claims to use “an outcomes and principles based approach” in carrying out its oversight role.  I’m afraid that its monitoring reports do not do much to support this claim.  If the Service wants to be effective in its oversight role, personally I think it needs to be thinking and acting smarter.

The clock is ticking for the reserve power to introduce a single regulator.  My problem is that not all that the Service is doing seems to be helping RPBs to achieve their objectives in the best way they think they can.  I ask myself: does the Service really want to support better delegated regulation?


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“Ransom” Payments – seeing things from the other side

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I’m sure that your hackles were raised when you last heard IPs described as seeing a distressed debtor only as an opportunity to make money.  Many of the suppliers’ responses to last year’s consultation on proposed Essential Supplies legislation struck a similar chord.

In this post, I take a look at some of the more persuasive consultation responses as well as the emerging Insolvency (Protection of Essential Supplies) Order 2015, set to come into force on 1 October 2015.

The consultation responses and the draft Order can be found at: http://goo.gl/N4Tg3c

The government press release is at: http://goo.gl/Ta0KOw

 

Energy Suppliers

The key issue for most suppliers is that supplying to an unpredictable business, such as one administered by an office holder in an insolvency situation, could end up as seriously loss-making for them.  Not knowing for how long or how much energy an insolvent business is going to need carries huge consequences for suppliers, as they have to purchase (or sell excess) power on short term markets that trade at very different prices.  If the supplier cannot pass at least some of this cost to the customer, they will be trading at a significant loss.

Some suppliers referred to the “deemed contract rates”, which apply to supplies where a contract is not in existence and thus applies in some cases where an IP does not agree to a post-appointment contract.  These rates inevitably are higher than contract rates as the consumer can switch to another supplier at any moment, and thus some suppliers took exception to the suggestion that these, as well as other post-insolvency changes to manage risks, such as requiring more frequent payments or upfront deposits, in effect are “ransom” payments.

Many respondents predicted that, if they were prohibited from taking action on formal insolvency, suppliers might take precipitative action when a business shows signs of financial distress.  Others felt that the increased risks would be shared by customers with poor credit ratings and new start-ups, with some suggesting that it might even be difficult for these businesses to procure a contract.

Personal guarantees

The topic of personal guarantees threw up a variety of comments.  Some suppliers seemed to confuse these with undertakings that the supply would be paid for as an expense.  Several asked the Insolvency Service to provide a standard form of words for PGs, as they can take a lot of time and effort to agree.  Some suggested that it would save time if the IP simply gave the PG – or undertaking – within a specified timescale, rather than build into the process the need for the supplier to ask for one.

Some suppliers were sceptical that an IP could support a call on the PG, leading to requests that IPs provide proof of their assets or credit insurance and, if the supplier is not satisfied, then the supply could be terminated.  Some also asked that PGs be supported by the IPs’ firms, which led one to suggest that IPs from smaller firms may have difficulty persuading suppliers that the PG was adequate.  Some were nervous about the without-notice withdrawal of a PG or undertaking with one respondent stating that the PGs should have effect for the whole duration of the administration.

Timescales to termination

Many said that the proposed timescales to terminate the supply were too long: respondents are well aware of IPs’ reluctance to agree PGs and therefore felt that the 14-28 day period for suppliers to learn of the appointment and to give the office holder time to sign a PG could end up being effectively a free supply to the insolvent business, with several suggesting that the IP could design things this way whilst having no intention to seek to secure a longer supply.  Many also said that they would need to get a warrant to be able to terminate the supply, which would require leave of court (in administrations), thus lengthening the process considerably.

The suppliers argued that they might not learn of the appointment until at least 14 days after commencement, which under the old draft Order would have left them already out of time to request a PG.  I was surprised that several suppliers seemed to believe that office holders were under no clear obligation to tell them about the appointment, which no doubt is behind Jo Swinson’s reference to the need for guidance (see below).  Some suppliers did accept that office holders might have difficulty identifying energy suppliers, especially when dealing with a large number of properties.  Personally, I have also seen IPs encounter difficulties getting past the front door of some suppliers, with day one correspondence getting thrown back because an account cannot be located.

Some noted that the Impact Assessment pointed the finger more at key trade suppliers and IT suppliers (so, suggested one, why not simply wrap these suppliers into the existing statutory provisions?) and thus they questioned whether affecting how energy providers deal with insolvent businesses will deliver the projected fewer liquidations.  “The proposal to change the right of only certain, specified companies to freely contract with one another, appears to be both disproportionate and an unjustified distortion of contractual law” (RWE npower).

 

Merchant Services

The merchant service providers came out in force, their principal argument being that their “charges”, which is the focus of the Order, fade into insignificance when compared with their exposure to the risk of chargebacks, especially when payments have been made by customers for goods/services (to be) provided by an insolvent business.  Thus, the requirement that the merchant services continue to be provided on the existing terms for the 14-28 day window prior to obtaining a PG – and even after obtaining a PG, if that were even possible – was simply unbearable.

Worldpay’s response sets out the way that, at present, they believe the system works well.  They seek an indemnity to be paid as an administration expense for any chargebacks, including any arising from pre-administration transactions, and they also look to agree “an administration fee with the insolvency practitioner to reflect the significant time incurred in managing the administration”… but Worldpay “does not demand ransom payments”.

Carve-out

The responses indicated that the Insolvency Service was to meet with the merchant service providers shortly after the consultation had ended and clearly they succeeded in convincing the Service of their concerns, as the scope of the Order has now been changed so that it does not extend to “any service enabling the making of payments”.

 

The Insolvency Profession

IPs and others involved in insolvency made – and repeated – some valuable observations about the draft Order, which regrettably have not been taken up.  In some cases, this is because the issues are really with the long-passed Enterprise & Regulatory Reform Act 2013, but it also gives the impression that, once legislation has been drafted, it is extremely tough to get it amended.

R3 and KPMG asked that the scope of the new legislation be widened to encompass other supplies, such as software licences and information systems, and they struggled to see why only administrations and VAs are within the scope: omitting receiverships and liquidations unhelpfully restricts the ability of these insolvency tools to achieve better outcomes for all.

The City of London Law Society Insolvency Law Committee (“the Committee”) noted that the draft Order deviated unhelpfully from provisions covering the same territory in the Investment Bank Special Administration Regulations 2011 and the Financial Services (Banking Reform) Act 2013 (“the SIs”).  Why the difference in rules?

Personal guarantees again

The Committee cast doubts over the “practical and logistical issues” surrounding the PG provisions, highlighting that IPs could encounter demands for PGs from a number of suppliers in the crucial initial days of an appointment.  It “strongly encourages” the government “to reconsider the approach and, if at all possible, to amend Section 93(3), so that the ability to request a personal guarantee is restricted to the utilities currently covered by Section 233 IA”.

The Committee’s quid pro quo suggestion was that the legislation should mirror the SIs mentioned above and provide explicitly for all post-administration supplies to rank as administration expenses, suggestions also made by R3.  Interestingly, the government press release stated that “suppliers will be guaranteed payment ahead of others owed money for services supplied during the rescue period”.  This doesn’t seem to relate to the effect of PGs, as this is covered separately in the press release, but I don’t see where this super-priority for suppliers appears in the statute.

As a last resort, the Committee suggested the production of a pro forma guarantee to save precious time, especially considering that a number of suppliers of varying degrees of sophistication may be seeking PGs.

Unsurprisingly, R3 had strong words for the PG regime: “The provisions allowing a supplier to require a personal guarantee by the office holder are also inappropriate.  This was and is an unwelcome feature of the existing 233 legislation, as it is disproportionate.  In principle, there is no reason why a supplier should enjoy a greater level of comfort from an insolvency officer holder than it would from the directors of a solvent trading company…  No supervisor is likely to give one.”

PwC referred to PGs as “an anathema to most IPs” and its preference seems to be that all possible options remain open for negotiation by the parties.  In its response, PwC stated that “circumstances will remain where the payment of a deposit and/or a higher ‘on price’ are commercially more appropriate, and the IP should retain the discretion to negotiate case by case, supplier by supplier”.

Other flaws

There seem to be several concerns about the detail of the draft Order, concerns that I think have survived even the post-consultation revision:

  • The Order prevents suppliers from terminating contracts simply because of administration/VA, but it does not prevent them from altering contract terms, such as increasing prices (and perhaps then terminating the contract if the revised terms are not complied with).
  • The PG may reach to termination charges incurring post-administration/VA.
  • Because the Order focuses on terms that are triggered by administration or a VA, it does not deal with terminations/changes resulting from the triggers of pre-administration/VA events, such as the Notice of Intention to Appoint Administrators or putting forward a VA Proposal (see also below).

 

The Order

The Order is scheduled to come into force on 1 October 2015.  The current draft differs from the earlier consultation draft in the following respects:

  • The 14-day timescale for suppliers to ask for a PG has been dropped. Therefore, suppliers will be able to ask for a PG at any time and then they acquire the power to terminate the supply if the PG is not given by the office holder within 14 days of the request.
  • The court may grant the supplier permission to terminate the contract, if satisfied that it would cause the supplier “hardship” – as opposed to the draft’s “undue hardship”.
  • The Order no longer applies to “any service enabling the making of payments”.
  • The Order turns a draft clause (the previous S233A(6), which is now S233A(2)) on its head. I think this is to deal with some suppliers’ issues that the previous draft Order would have prevented terminations “because of an event that occurred before” the administration/VA, even though the event was not connected to the formal insolvency. Now the Order states that an insolvency-related term does not cease to have effect if it entitles a supplier to terminate the contract or supply because of an event that occurs, or may occur after the administration/VA. The problem with this is that I think it eliminates the whole purpose of the previous S233A(6), which was to avoid actions resulting from pre-administration/VA events, such as the issuing of a Notice of Intention to Appoint Administrators or the proposing of a VA!
  • The government release points to an additional non-statutory measure: “guidance will be issued to insolvency practitioners that they should make contact with essential energy suppliers at the earliest possible time following their appointment to discuss what supply they expect to use”.

I know that Giles Frampton, R3 President, has said: “These proposals will make it easier for the insolvency profession to save businesses, save jobs, and get creditors as much of their money back as possible”.  I’m not sure that I can be as positive, but a surprising outcome of the consultation for me was a greater understanding of some of the hurdles faced by suppliers.  IPs are not the only ones who want to see businesses (/customers) survive.


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Pre-packs: an oxbow lake in the making?

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Yes, I know it’s an odd title, but all will become clear, I hope.

Water takes the line of least resistance, so when a river course forces water to make a laborious curve, the water eventually finds a short-cut, bypassing the tiresome curve and leaving it high and dry, as a lake cut off from the dynamic water-flow.

I understand the political imperatives behind the pre-pack puffing and blowing… I think.  I also know that Teresa Graham’s vision of a revised SIP16, along with the voluntary pre-pack pool, viability review, and generally sensible marketing essentials, will come to fruition.  However, I suspect that this may be only postponing another inevitable: legislation, which finally may choke the life out of pre-packs… but only because industry will find another way.

When Teresa Graham’s report was released in June 2014 (http://goo.gl/oVhnXt), I resisted the urge to blog my thoughts, mainly because there were plenty of other people more authoritative than me who were saying much the same things that I was thinking.  Bill Burch’s blog was a good one: http://goo.gl/Esm5yr.

Whatever our criticisms are, the Graham Report has reached the status of something indisputable in the same way that the OFT market study on corporate insolvency has.  I feel that we are past the point where the principles are up for debate, as demonstrated by the ICAEW’s announcement of the SIP16 consultation: the JIC is “solely seeking views on whether it will be practical for an insolvency practitioner to comply with the requirements contained in the revised version of the SIP” (http://goo.gl/yVepVw).  Still, it’s nice of them to ask.

To Market or Not to Market?

I think we have come a long way in a relatively short time: Dr Frisby’s 2007 research suggested that perhaps only 8% of pre-packed businesses had been marketed, whereas I would not be surprised if now less than 8% of pre-packed businesses were not marketed.

Is a sale preceded by zero marketing ever acceptable anymore?  Ms Graham accepted as “true in some circumstances” that marketing is not possible or that marketing itself will harm creditors’ proposals (paragraph 9.24).  However, I am not sure what message we should be taking away from the revised SIP16, which states that “marketing a business is an important element in ensuring that the best available price is obtained for it”: does this mean that, if a business is not marketed, the best available price is never ensured?  And where does best outcome fit in?  The best sale price is not the whole story.

“Comply or Explain”

For many years, we have regarded SIPs as required practice, not best practice.  Thus, when we are told to do something, we know we should do it or be prepared to face the wrath of our regulator.  Of course, there will always be circumstances in which one has to decide to break a rule – a bit like needing to drive across a road’s solid white line in the interests of safety – but I feel that a rule-book that states: “this is what you should do” and then immediately follows this with: “but if you don’t, then this is what you should do” lacks credibility, doesn’t it?

The SIP (paragraph 10) states that “any marketing should conform to the marketing essentials”.  However, it then states that “where there has been deviation from any of the marketing essentials, the administrator is to explain how a different strategy has delivered the best available price.”  Ah, so as long as we can justify that our focus has been to achieve “the best available price”, then we don’t need to follow the “marketing essentials”.  Not only does that not make them particularly essential, but it also makes me wonder: why have them at all?  Why not simply state: “do (and explain) what you think is right to achieve the best possible price”?  Possibly because that was the world before the first SIP16 was born – and evidently it was not enough to instil confidence in the process.

Hindsight is a Wonderful Thing

The marketing essentials include: “particularly with sales to connected parties… the administrator needs to explain how the marketing strategy has achieved the best outcome for creditors”.  This assumes that the correct marketing strategy will always achieve the best outcome for creditors.  With the best will in the world, this is unrealistic.

For example, a director offers £100,000 to purchase the business and assets.  Attempts are made to attract other interested parties, but no one else comes forward, so the deal is done with the director at £100,000.  Taking the marketing costs into consideration, has this achieved the best outcome for creditors?  And what if, seeing that no one else is interested and, perhaps in the pre-administration pause, nervous staff or customers jump ship, the director decides to drop his offer to £80,000, has the marketing strategy still achieved the best outcome for creditors?  With hindsight, maybe the best marketing strategy would have been not to have marketed at all.

Maybe we’re being asked not to measure creditors’ outcome in financial terms alone.  Ms Graham reported that some people she spoke to “stated that, if returns are to be low, they would not mind a slightly reduced return… if the sale and marketing process was more transparent” (paragraph 7.26).  So maybe “best outcome” includes a sense of contentment that at least there were attempts to search out the best offer.  I doubt that this is how we’re meant to interpret the SIP – after all, a few creditors might prefer to see a business destroyed rather than to see it back in the hands of the directors – and of course an administrator can only really measure success in terms of achieving the statutory purpose of administration.  It seems a big ask to expect marketing strategies always to achieve the best outcome.

I should point out that I am not anti-marketing.  I just struggle with this unrealistic SIP.  If I close my critical eye, I can see that, in general, the revised SIP’s approach to marketing is sensible.  Whether it will make a difference to prices paid for businesses, I don’t know.  It seems to me that all too often the present incumbents are so emotionally caught up in a business that they offer more than anyone independent in any event.  I also regularly see IPs playing hard-ball, declining a hand-shake in an effort to extract increased offers.  If the revised SIP ensures that all IPs do the sensible thing in marketing (or even in deciding not to market) a business and are seen to be doing it, then fair enough.

Improving Confidence

Will the revised SIP improve confidence in pre-packs?

I do believe that the pre-pack pool may persuade some that the deal was right (although there are bound to be those who simply widen their scope of conspirators to include the pool).  I suspect the pool will be used sometimes, but I do wonder whether we will see many viability reviews: why would a director put his neck on the line (given the risk of Newco’s failure), if he doesn’t have to?  What’s the worst that will happen if no viability review were created?  The administrator would report that he’d asked for one, but not received it.  If the existing statutory offence for failing to submit a Statement of Affairs does not persuade directors to submit one, I cannot see that a SIP requirement for a viability review will have any greater success.

And will the review be worth the paper it’s written on?  It’s not as if the director is going to forecast a meltdown.  Teresa Graham hopes that viability reviews “will reduce incidences of failure… by focussing the minds of those controlling new companies” (paragraph 8.27).  Well, I guess it could clean the rose-tinted specs of some directors reluctant to accept defeat; it might make a few think twice about going through with Newco at all, perhaps resulting in more fire-sales.

Cutting off the Flow

The SIP requirements for connected parties (or is that “purchasing entities”?  The revised SIP is inconsistent on this point) to approach the pool and to prepare a viability review are voluntary, but the government has waved its stick, proposing in the current Bill a reserve power to restrict pre-packs (and potentially all sales in administrations), which “would only be used if the voluntary reforms are not successfully implemented” (http://goo.gl/IbQsLd).

How will the government measure success?  Will it be in increased sales considerations (which would be difficult to compare and which might happen simply because of more buoyant market conditions)?  Or by creditors reporting “improved confidence” in pre-packs?

The issue I have is that, to paraphrase Gloria Hunniford (in her One Show report in June 2013: http://goo.gl/wqcQJd), the perception of a company going bust one day and re-opening the next with the same directors and the same products in the same spot will always be greeted by some with horror and disgust.  As long as something approaching this occurs – whether it is a pre-pack administration with all the bells and whistles or something else – I cannot see these critics feeling any more comfortable about them.

Teresa Graham wrote: “To hobble the whole process to eliminate some areas of sub-optimal behaviour seems to me to be akin to throwing the baby out with the bathwater” (paragraph 8.11).  I think that the expectation of the use of the pre-pack pool and viability reviews, along with the ever-more complex disclosure requirements of the revised SIP16, does hobble the process, especially so if the government resorts to legislation in the future.

Ever since the first SIP16 was released, we’ve seen the flow of business sales start to diverge away from pre-pack administrations.  I remember being at a conference shortly after the first SIP16 was released and an IP telling me that it heralded the death-knell for pre-pack administrations; he’d envisaged that all sales would be done pre-liquidation or immediately on liquidation.  And of course, as currently worded, SIP16 does not apply to sales where there have been no negotiations with the purchaser prior to the appointment of administrators.  A coach and horses can also be driven easily through the SIP16’s use of an undefined “connected party” (personally, I’d prefer to see something on the lines of SIP9, e.g. “proposed sales that could reasonably be perceived as presenting a threat to the vendor’s objectivity by virtue of a professional or personal relationship with the proposed purchaser”).  With such burdens thrown on connected party pre-pack administrations, does anyone seriously think that this will be the option of choice over simpler, cheaper, methods?

Pre-pack administrations could end up being rarely used, left high and dry whilst a dynamic stream of businesses are bought and sold along a more efficient route.  Having all but legislated pre-pack administrations out of existence, what will the government do then?  Who knows – but by then, we will probably have a new government ministering to us.

The consultation closes on 2 February 2015 – the ICAEW has released it as a JIC consultation, but I’ve not seen any other body announce it.  I thought I’d add my penny’s worth.  My response is here: MB SIP16 response 25-01-15, although I have to confess that I’ve only tackled the semantics: if we’re to be measured against this SIP, then at least I’d like to see it less ambiguous.


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Dear IP 64: is no news good news?

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Did you wonder what the RPS was going on about when it announced (Article 54, Dear IP 64) that the recent EAT judgment would not affect its claims-processing, but it has sought advice?  Bearing in mind that the RPS gets involved some way down the insolvency process, is there anything that IPs should be taking into account right now?

The Judgment: Bear Scotland Limited & Ors v Fulton & Ors

I briefly described the decision of the Employment Appeal Tribunal in an earlier blog post: http://wp.me/p2FU2Z-8I.  In a nutshell, the EAT decided that the “normal remuneration”, to be used in calculating the employees’ claims for holiday pay, should include overtime that the employer was not bound to offer but that the employees were required to work (or could not unreasonably refuse to work), if requested (“non-guaranteed overtime”).

Permission to appeal was granted and it seemed widely-thought that an appeal was likely in relation to part of the EAT’s judgment, which limited claims for underpaid holiday pay to instances of underpayment not exceeded by a gap of more than three months.  However, the Unite union announced that it will not appeal (http://goo.gl/EqII77) and, as the Tribunal judge expressed the view that this issue alone was the arguable one, personally I’m not sure why the employers would pursue a further appeal.  Therefore, it seems unlikely that there will be an appeal (but I’m no lawyer).

The Government Task Force

I also mentioned in my earlier post that the government had set up a task force to assess the possible impact of the decision.

On 18 December 2014, the government announced its solution: http://goo.gl/kJ7sJu.  Unusually with no public consultation, it swiftly laid down regulations – the Deduction from Wages (Limitation) Regulations 2014 – to limit unlawful deductions claims to two years.  The regulations will come into force on 8 January 2015, although they will only take effect on claims made on or after 1 July 2015, so there is a 6-month window for claims to be lodged potentially going back to 1998 when the Working Time Directive was implemented in the UK.

It is undeniable that the Bear Scotland case precipitated these measures, although the Impact Assessment (“IA”) makes clear that the regulations will limit claims not only arising from this decision.  The IA mentions, for example, the ruling from the CJEU in the case of Lock v British Gas (see, e.g. my blog post: http://wp.me/p2FU2Z-82).  This case concluded that sales commission should be reflected in holiday pay calculations, although the UK application of this decision will not be known until the case is heard by the Leicester Tribunal, which I understand will not happen until February (http://goo.gl/ezx8Qj).

Although the regulations don’t actually affect the Bear Scotland decision, just the extent of businesses’ (and the RPS’) exposure to claims arising from the decision, the rhetoric doesn’t suggest that the government feels there is much risk that the decision might be overturned.  Then again, the regulations do simply plug a dangerous gap in the ERA96, so they are valuable whether or not Bear Scotland happened; the future is never left wanting for unexpected court decisions.

Dear IP 64

Given this background, I am somewhat surprised that the RPS has announced that it “will continue to process claims in the usual way until the expiry of the appeal period” of the EAT decision.  However, because I assume that the appeal period is largely a valuable pause in which the RPS can take advice and consider its next steps, what puzzles me a little more is: what action might the RPS take if there is no appeal?

The IA makes clear that “it is the worker’s responsibility to prove that they have a holiday pay claim in the employment tribunal”.  Thus, I would have thought that there is no obligation on the RPS – or by extension on insolvency office holders – to examine Company records to see whether past holiday pay claims have been calculated in line with the decision and, if not, look to adjust them.  However, I would also have thought that if any employees present a claim for unlawful deductions, whether to the RPS or to an IP, this could be dealt with without the need for the tribunal process, albeit quite rightly I think after the expiry of the appeal period.

But what about holiday pay claims that have not yet been processed?  Again, understandably the RPS will not want to pay out any enhanced holiday pay until the appeal period has expired.  Also, I assume, it will be for employees to make clear on their RP1s the “normal remuneration” that they expect to form the basis of their holiday pay calculation, although I don’t think that the RP1 form lends itself well to dealing with disclosure of non-guaranteed overtime – maybe another re-write is something that might appear after the appeal period has expired.

Thoughts for IPs

Finally, what about forms RP14A, which IPs complete to provide the RPS with basic information about employees made redundant from insolvent businesses?  The forms (I think) only ask for “basic pay”, so what should IPs be answering here?  I’m sure that IPs will not be criticised for acting on the Dear IP basis and continuing to complete RP14As “in the usual way until the expiry of the appeal period”, although personally this seems a little short-sighted to me.  If an IP were to know that employees’ holiday pay claims would be different if the Bear Scotland decision were applied, should he/she not take this into account when submitting an RP14A, at the very least alerting the RPS to the possible impact of the decision on the employees’ claims against the insolvent business in question?

Other questions arise by extension: should the IP make enquiries of insolvent business’ payroll departments to explore whether the effect of the decision has already been taken into account, or if it has not been considered, what effect it would have?

Of more concern to IPs dealing with a trading-on situation would be: how is the payroll department calculating holiday pay going forward?  IPs will not be want to be taken unawares by receiving claims for unlawful deductions long after the estate funds have been disbursed.

I also envisage this decision impacting on the TUPE obligation to provide to purchasers employee liability information, which would include any claims that the employer has reasonable grounds to believe that an employee may bring.

Of course, all this will already have been considered by ERA specialists and departments and IPs will not be short of solicitors who will be happy to advise.  Eventually also, we may receive an update from the RPS.


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The Value of RPB Roadshows: Forewarned is Forearmed

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Having just returned from a fantastic trip to Vietnam and Cambodia, I have yet to catch up on domestic news, so I thought I’d plug the silence gap with some tips that I picked up from the RPBs’ autumn roadshows.

Ethical issues featured heavily at the ICAEW roadshow, whilst the IPA roadshow raised some controversial Administration points, and both RPBs had much to say about handling complaints in the wake of the Insolvency Service’s Complaints Gateway.

Ethical Issues (ICAEW Roadshow, Birmingham, 9 October 2014)

Allison Broad of the ICAEW described the following ethical dos and don’ts:

• In order to identify any prior relationships before deciding whether to take an appointment, do not rely solely on the company director signing off confirmation that s/he is not aware of any conflicts/relationships; internal checks are still required.

• Ensure that relationships are evaluated, not merely identified. Allison gave the example of an IP who had noted on his ethics checklist that the director of the prospective appointment had been a director of eight other companies that had gone insolvent with the IP acting, but the checklist evidenced no evaluation of the threat to the ethical principles that these prior relationships presented. Personally, I have also seen cases – although not quite as striking as this – where a prior relationship existed but it was not noted on the ethics checklist. Even though an IP may have concluded that a relationship is not sufficiently significant to require the introduction of safeguards or to raise concerns about the appropriateness of taking the appointment, files should disclose the relationship and evidence the IP’s consideration of its significance. In my view, failure to do so, not only could constitute a breach of the Ethics Code (paragraphs 74 and 75), but is also bound to raise suspicions that checklists are completed on auto-pilot and insufficient thought is given to ethics matters.

• Ensure that the IP signs off the ethics checklist, if not before the appointment, then as close to it as possible in order to demonstrate that consideration of ethical matters had been considered before appointment.

• Keep ethical threats under review throughout the life of the case, e.g. by including on case reviews a question – not a simple tick-box – as regards how any safeguards employed to manage a threat have been working.

• Review regular introducers’ websites prior to taking the first appointment from those sources and regularly thereafter, as website contents are frequently refreshed. Allison acknowledged that pre-packs and phoenix services may be covered on websites, but she urged caution when dealing with introducers who position these items at the top of their lists or prominently.

• If an IP feels that the quality of an introducer’s advice to directors/debtors is below par, it is not sufficient to allow the relationship to continue on the basis that at least the IP can ensure that s/he provides good advice. The ICAEW expects IPs to write to the introducer with any concerns and ask that changes be made to their websites and practices. They would then expect IPs to check whether these had been actioned and, if the introducer does not do so, the IPs should terminate the introduction relationship.

Administration Technicalities (IPA Roadshow, London, 22 October 2014)

Caroline Sumner of the IPA highlighted several issues identified on monitoring visits.  However, I think I must have been in a particularly argumentative mood on the day, as my notes are fairly scant on Caroline’s comments about SIP16, SIP13, and the new SIPs 3 – from memory, I think that none of this was rocket science; Caroline just highlighted the need to get them right – but I went to town on some other points she made:

  • Caroline described the Insolvency Service’s view that Administrators’ Proposals should describe only one of the Para 3 administration objectives that the Administrators propose to achieve.

I have a problem with this: firstly, in what respect is this reflected by the statutory requirements?  R2.33(2)(m) requires Proposals to include “a statement of how it is envisaged the purpose of administration will be achieved”.  An old Dear IP (chapter 1, article 5) referred to this and also to Para 111(1) of Schedule B1, which states “’the purpose of administration’ means an objective specified in paragraph 3”, leading to the Service’s conclusion that “administrators should not simply include all three objectives with no attempt to identify which is the relevant objective”.  That’s all well and good – and I think that IPs have moved away from many early-style Proposals, which did reproduce Para 3 verbatim – but I do not see how these statutory provisions require an IP to pin to the mast only one Para 3 objective to endeavour to achieve.

Here’s an example: what would be wrong with an Administrator’s Proposals stating that the company in administration is continuing to trade with a view to completing a sale of the business as a going concern, which should generate a better result for creditors as a whole – and thus achieve administration objective (b) – but if a business sale is not possible, a break-up sale is likely to result only in a distribution to secured/preferential creditors – and thus achieve administration objective (c)?  In my mind, this is the most transparent, comprehensive, and helpful explanation to creditors and certainly is far better than that which the Insolvency Service seems to expect IPs to deliver: for Proposals simply to state that a going concern sale is being pursued to achieve objective (b) is to provide only half the story and, I would argue, would not comply with R2.33(2)(m), as the Proposals would not be explaining “how it is envisaged the purpose of administration will be achieved” in the event that a business sale is not completed.  Para 111(1) simply leads me to an interpretation that an Administration’s eventual outcome – not necessarily the Administrator’s prospective aim – is the achieving of a single objective, which is supported by the Act’s presentation of the objectives as an hierarchy notwithstanding that in practice it is easy to see how more than one objective might be achieved (e.g. rescue of the company and a better result for creditors as a whole).

At the roadshow, I asked Caroline whether she felt that, if the singly-selected objective turned out to be not achievable, the Administrator would need to go to the expense of issuing revised Proposals.  She accepted that, of course, the IP would need to consider that requirement (although I wonder how the decision in Re Brilliant Independent Media Specialists (https://insolvencyoracle.com/2014/10/07/how-risky-is-it-to-act-contrary-to-a-creditors-committees-wishes-and-other-questions/) impacts on this).  Is this really what the government intended?  What happened to the drive to eliminate unnecessary costs?

Finally, I think that this view puts a new colour on the statutory requirement to issue Administrators’ Proposals as soon as reasonably practicable.  Could it be argued that asarp is only reached once the Administrator is reasonably confident of the single objective that he/she envisages achieving?  The RPBs have tried hard to promote the asarp requirement, rather than the 8-week back-stop, but insisting on a single objective in Proposals could encourage a turn in the tide.

I have asked Caroline to clarify the Insolvency Service’s view.  However, if the Service does expect IPs to adopt this approach, I think they should set it down in a Dear IP – of course, assuming that my arguments hold no water – so that all IPs are forced to accept the same burdens.

  • Caroline repeated the Dear IP article that extensions should be sought at the outset only in exceptional cases where it is clear that more than 12 months will be required to complete the Administration.

Although Caroline didn’t go into the technicalities of how an extension might be agreed at an early stage, it gave me cause to revisit the Dear IP article (chapter 1 article 12).  It describes the “questionable” practice of seeking consent for an extension “with the administrator’s proposals including a conditional resolution regarding the extension of the administration, along the lines that if the administrator should think it desirable, then the administration would be extended by an additional six months”.  Over the years I have seen this done, but I have not seen it done properly, i.e. compliant with the Rules.

R2.112(2) requires requests to be accompanied by a progress report, but Proposals are not a progress report.  I guess that a Proposals circular could be fudged to fit the prescription for a progress report as set out in R2.47, but this would have consequences, such as the need to file the Proposals/report with a form 2.24B (as well as filing the Proposals individually) and the clock would be re-set so that the next progress report would be due 6 months afterwards.  Also, how does an Administrator meet the statutory requirement to issue a notice of extension as soon as reasonably practicable after consent has been granted, if s/he has obtained such a “conditional” resolution?

My recommendation would be to avoid seeking extensions in the Proposals altogether, but instead leave them until the first progress report is due.  Of course, if an Administrator has to convene a general meeting (or deal with business by correspondence) at a time other than the Para 51 meeting, this will attract some additional costs, but if the request is made at the time of the statutorily-required 6-month progress report, those additional costs are relatively small, aren’t they?

Complaints-Handling

Complaints-handling was covered at both the ICAEW and the IPA roadshow, which I suspect has as much, if not more, to do with the likely pressure from the Insolvency Service on RPBs as it has with any perceived extent of failings on the part of IPs.

Both Allison and Caroline covered the need to explain how complaints can be made to the Complaints Gateway, although I do feel that generally RPBs have not done much to publicise their “requirements”.  The only guidance I’ve seen is on the ICAEW’s blog – http://www.ion.icaew.com/insolvencyblog/post/Launch-of-the-insolvency-complaints-gateway – that refers to the need to disclose the Gateway to anyone who wants to complain and in engagement terms, if they refer to the firm’s complaints procedure.  This blog also stated that there was no need to inform creditors of existing cases, which leaves me wondering what the expectation is to communicate with creditors generally on post-Gateway cases.  Given the Insolvency Service’s emphasis on the Gateway, I am a little surprised that the RPBs seem to be relying on some kind of process of osmosis to get the message of their expectations out to IPs.

From the two roadshows that I attended, I sense that there is a general expectation that IPs’ websites will display details of the Gateway (although I hope that the RPBs will take a proportionate approach, given that some smaller practices’ websites are little more than a homepage).  I do not get the sense that the RPBs expect the Gateway’s details to be added to circulars to creditors generally, but only that they should be included in any correspondence with (potential) complainants.

Allison also highlighted that, whilst the ICAEW’s bye-laws (paragraph 1.2 at http://goo.gl/1frWQo) include a requirement that all new clients be informed of their right to complain to the ICAEW and be provided with the name of the firm’s principal to whom they should complain, when writing as an insolvency office-holder the need to refer parties to the Complaints Gateway takes precedence over this requirement.

Caroline commented that IPA monitoring visits will include a review of the practice’s internal complaints process to see how these are handled before the complainant resorts to the Gateway.  If complaints are not handled by the IP, the monitors will also be exploring how the IP is confident that complaints are dealt with appropriately.

Why Attend the Roadshows?

I hope that the above illustrates the value of attending an RPB roadshow.  However, I think it also illustrates the risk that we learn about previously unknown and not altogether satisfying views on regulatory matters.  I realise that I am not blameless in this regard: when I worked at the IPA, I also used the roadshows as a medium to convey my thoughts on issues identified in visits and self certifications, so I should not be surprised that this practice is continuing (or indeed that others hold views different to my own!).  I and many of my colleagues were ever conscious that there was no other medium for Regulation Teams to deliver such messages and forewarn IPs of hot topics and evolving regulatory expectations.  Dear IP was the only other method that came close, but as this is controlled by the Insolvency Service, I could only hope that the RPB perspective would not become lost in translation.

The Advantage of Written Guidance?

I hope that, if I’ve got the wrong end of any stick waved at either of the two roadshows, someone will shout – please?  Given the limited audience at roadshows and the risk of Chinese Whispers, it must be better for the RPBs to convey their messages in written form, mustn’t it?

“The 18 month Rule”

A recent example, however, illustrates that even written communications can be unsettling.  At http://www.ion.icaew.com/insolvencyblog/post/The-18-month-rule—it-s-for-real, a QAD reviewer’s blog starts by stating that “there is a suggestion from some compliance providers and trainers that the 18 month rule for fixing fees may not be definitive, and that you still have the option of applying to creditors after the expiry of the 18 month period”.  I shall start by confessing that it’s not me, honest: I’ve never had cause to scrutinise these provisions.  However, now that I do, I have to say that I am struggling to see how the Rules can be interpreted in the way that the Service and the ICAEW are promulgating.

The blog states: “Our interpretation is that if fees haven’t been fixed within 18 months it will be scale rate in bankruptcies or compulsories or a court application. We recently raised the issue with the Insolvency Service and their view is: ‘. . . after 18 months the liquidator is only entitled to fix fees in accordance with rule 4.127(6) unless the stated exceptions apply’.  Clearly this relates to liquidators in compulsory liquidations, but the principal extends.”

I have long thought that this indeed was what the Service had intended by the Rules amendments, but on closer inspection I’m afraid I really can’t see that this is what the Rules state.  R4.127(6) states: “Where the liquidator is not the official receiver and the basis of his remuneration is not fixed as above within 18 months… the liquidator shall be entitled to remuneration fixed in accordance with the provisions of Rule 4.127A.”

“Shall be entitled…”  When I reach state-pensioner age, I shall be entitled to travel on buses free of charge, but that does not mean that the only way I will be able to get to town is by taking a bus.  Similarly, after 18 months, the liquidator shall be entitled to remuneration on the scale rate, but does this mean that the liquidator is only entitled to fees on this basis?  What statutory provision actually prohibits the liquidator from seeking creditors’ approval of fees on another R4.127(2) basis after 18 months?

And how do the Rules “extend” this compulsory liquidation principle to CVLs?  R4.127(7-CVL) states: “If not fixed as above, the basis of the liquidator’s remuneration shall… be fixed by the court… but such an application may not be made by the liquidator unless the liquidator has first sought fixing of the basis in accordance with paragraph (3C) or (5) and in any event may not be made more than 18 months after the date of the liquidator’s appointment.”  Given that the construction of this rule is so different from R4.127(6), it is difficult to see how both rules can be considered as reflecting the same principle.  And in any event, this simply states that a court application may not be made after 18 months (which seems to be precisely the opposite of the ICAEW’s blog post!).  How can this rule be interpreted to the effect that the liquidator cannot seek creditors’ approval for fees after 18 months?  The Rule starts: “If not fixed as above…”, so the rest of the Rule is irrelevant if the fees are fixed as above, e.g. as specified in R4.127(5) by a resolution of a meeting of creditors; I see no provision “above” prohibiting the seeking of a creditors’ resolution after 18 months.

I shall be interested to see how this matter gets handled in a future Dear IP.  In the meantime, what should IPs do?  I reckon that the only certain approach is: seek approval for fees before the 18 months are ended!

(UPDATE 12/01/2015: for another view of the 18-month rule, take a look at Bill Burch’s blog, which to be fair pre-dated mine by some months: http://goo.gl/4ucKaF.  Bill posted another article today at http://goo.gl/jL3WNu, reminding IPs that the wisest course is to seek early fee approval whether or not we agree with the regulators’ interpretation.)

This blog illustrates to me that there must be a better way for the regulatory bodies to convey – considered and sound – explanations of certain Rules and their expectations to IPs.  As a compliance consultant, I suffer many a sleepless night worrying about whether my interpretation and understanding of current regulatory standards are aligned with my clients’ authorising bodies’ stance.  I do value my former colleagues’ openness and I do try to keep my ear to the ground with many of the authorising bodies – I’ll take this opportunity to make a quick plug for the R3 webinar on regulatory hot topics that I shall be presenting with Matthew Peat of ACCA in February 2015.  However, I believe there is a need and a desire in all quarters for the creation of a better kind of forum/medium for ensuring that we all – regulators, IPs, and compliance specialists – are singing from the same hymn sheet.

Have a lovely long break from work, everyone.  I’ll catch up again in the New Year.


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The Insolvency Rules Modernisation Project: an ugly duckling no more?

1229 Port Douglas

The Insolvency Service’s work on the modernisation of the Insolvency Rules has appeared swan-like: to the outside world, the project seems to have drifted on serenely, but I get the feeling that those on the inside have been paddling furiously.  I set out here how the tome has been developing, as described in an update received from the Service last week.  Please note that this project is work in progress and the items as they are described below may evolve yet further before the Rules are finalised.

The Service reports that their consultation, which closed in January 2014, generated over a thousand policy and drafting points for consideration.  Their target remains to have a new set of Rules commencing in April 2016, although they are seeking to publish finalised Rules in autumn 2015 so that all of us who will be applying the Rules can get our houses in order for the big day.  That means that the Insolvency Rules Committee will need to be provided with the bulk of the new Rules to review in spring 2015.

The Service has endeavoured to keep those of us who have expressed a particular interest in the project informed and engaged in the process of developing the draft Rules, holding meetings to discuss related chunks and following this up with “we’d appreciate your comments on…” email exchanges.  Personally, I have been impressed by these efforts, although I have been conscious that such meetings and exchanges barely scratch the surface.  Although we might expect many Rules to remain intact, I envisage that the “simple” task of ensuring consistency throughout as regards, for example, notice requirements wraps in and has a knock-on effect on a whole host of interconnected Rules.  That Herculean task of dealing with the detail is left to the Insolvency Service team and, once the ever-changing impact of other government reviews and Bills is factored in, I can see why the Rules project has a projected 2016 end point.

About-Face

Good on the Service for taking the opportunity to propose some changes that were bound to upset some people!  The Service’s recent update illustrates the value of consultation, as they have reported that consideration of consultation responses has resulted in some proposed changes of direction:

  • Withdrawal of the proposed new requirement for personal service of winding-up petition;
  • Return of the current requirement to disclose any prior professional relationships of proposed administrators; and
  • Return of the ability to have contributory members on liquidation committees.

Further Progress

The consultation responses have led to further proposed changes to the draft Rules:

  • Withdrawal of the requirement for the appointor and committee to check the IPs’ security;
  • The Rules on disclaimers and on proxies will form separate parts (in the previous draft, these appeared to be scattered somewhat within the chapters dealing with different insolvency processes); and
  • Clarification of the requisite majority rules for CVAs and IVAs.

I found that last item particularly interesting.  It was not until I came to scrutinise the Rules – both draft and existing – when I was looking at the consultation that I saw quite how confusing the provisions are.  When considering the impact of connected (or associated) creditors’ votes, I’d had the idea that these connected votes are stripped out and then one looks at which way the remaining unconnected creditors were voting: if more than 50% (in value) of those voting were voting against the VA Proposal, then the Proposal was not approved.  However, I recently realised that this is not what the current Rules say.

Rule 1.19(4) (and similarly R5.23(4), the IVA equivalent) states that “any resolution is invalid if those voting against it include more than half in value of the creditors, counting in these latter only those –
a) to whom notice of the meeting was sent;
b) whose votes are not to be left out of account under [rule 1.19(3)]; and
c) who are not, to the best of the chairman’s belief, persons connected with the company.”

“The creditors” that forms the denominator in this fraction does not relate to creditors voting, but effectively to creditors entitled to vote. This is supported by Dear IP (chapter 24, article 13). Thus, chairmen should be looking, not simply at the majority of unconnected votes cast, but whether the votes cast rejecting the Proposal amount to more than half of the total of unconnected creditors’ unsecured claims.

Now, it may just be me who has misunderstood this all this time (and I hasten to add that I have not had cause to look carefully at this Rule probably since my exam days).  However, I suspect I am not alone, as the draft new Rule dealt with this matter in exactly the same way, but in plainer English, which seemed to make the consequence far more stark and this resulted in quite some debate at the Service-hosted meeting that I attended as to exactly how the requisite majority rule should operate.

I am not sure whether the new draft Rules will follow the current Rules – or if it will reflect how I suspect many of us have been reading it for many years – but I am pleased to hear that the language used will be revisited so that hopefully it will be unequivocal.  As the Administration equivalent – R2.43(2) – clearly refers to total creditors’ claims, not only creditors voting, I suspect the new VA Rules will be consistent with this design.

Unsettled Policy

The Service has also described some areas that are still in the process of being explored.  In responding to my request that I share the Service’s update publicly, I was asked to make it very clear that this is – all – still work in progress and, particularly as regards the following items, the Service is still in inviting-comments-and-reflecting mode and they should not be treated as settled policy.

Creditors

I greeted with disappointment the news that, as some of the Administration consent requirements are contained in Schedule B1 of the Act, the Rules’ Administration approval requirements are unlikely to depart from the Act’s model.  In other words, where all secured creditors’ approvals are required for a matter, this is likely to be repeated in the new Rules.  I am pleased to note, however, that the Service has heard the complaints of difficulties in persuading some secured creditors to engage.

The Service seems to be a little more sympathetic to IPs’ difficulties when it comes to persuading preferential creditors to vote.  They are reflecting on what exactly is meant by the approval of 50% of preferential creditors etc. (for example, in R2.106(5A)): does this mean that at least one pref creditor needs to vote or does 50% of zero equal zero..?  Whether or not the new Rules will allow Para 52(1)(b) fees to be approved on a zero pref creditor basis, it seems very likely that a positive response will be needed, if not by a pref creditor, then by a secured one.

So what about the old chestnut: do paid creditors get a vote?   For some time even before I had left the IPA, this debate has rumbled through many corridors.  The current Rules present a problem: if one views a “creditor” as someone who had a claim at the relevant date, then, as an example, R2.106(5A) may be difficult to achieve.  How do you get a secured creditor who has been paid out to respond to a request to approve fees?  The key may be to seek their approval pdq on appointment before they are paid out, but what if that doesn’t happen?  Do the Rules really require their approval?  It hardly seems in the spirit of the Rules to give a creditor, whose debt has been – or even is going to be – discharged in full, the power to make decisions that could affect someone else’s recovery.

The Service has considered whether it might be possible to define creditors in the Rules to overcome this difficulty.  At present, however, their conclusion is that, largely because of existing provisions defining certain “creditor”s and “debt”s in the Act, seeking to resolve this via the Rules will be difficult to achieve.

Progress Reports

The Service’s proposals regarding progress reports appear more promising.  Several people have commented that the government’s drive to reduce costs in the insolvency process seems at odds with the ever-increasing, e.g. via the 2010 Rules, level of prescription around certain requirements such as the timing and content of progress reports.  Already, the courts seem to have improved the default position of the current Rules when it comes to block transfers of insolvency cases: I understand that more often than not courts are now making orders that disapply the Rules’ requirements for progress reports by departing office holders and the re-setting of the reporting clock to the date of the transfer order (which, if not so ordered by the court, would have the unfortunate consequence that the incoming office holder would need to produce a progress report on all of his transferred-in cases on the same day each year/six months).

The Service is currently considering the following proposals:

  • Dropping the Rules’ requirement for a progress report on a case transfer (although the court may order, or the incoming office holder may decide, otherwise);
  • Dropping the requirement for a progress report to accompany an Administration extension application/request for consent, although the Administrator would need to explain why the extension was being requested; and
  • Because progress reports would not be required in the circumstances above, the timing of the next progress report would not be affected by the event (i.e. by the case transfer or extension request); the case would continue to follow the reporting cycle relative to the insolvency date.

 

Phew!  It’s good to see that much progress has been made – the ugly duckling is already showing signs of maturing into a reasonably-looking bird – and I wish the team all the best in their labours of coming months.


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Standing on the Shoulders: a summary of reported court decisions

0430 Brown & Viv

I think it’s great that summaries of court decisions are more freely-available now than ever before.  I’ve wondered whether I should just drift back into the shadows and leave it to the pros… but then I remember that, even if no one reads them, authoring my own summaries helps get them fixed in my own mind.  Therefore, I shall continue:

  • Sands v Layne – should the court consider all creditors’ interests when considering whether to dismiss a petition because the debtor has reached an agreement with the petitioner alone?
  • Re Business Environment Fleet Street – as statute allows an administrator to take control of property to which he thinks the company is entitled, can he sell it?
  • Parkwell Investments v HMRC – should provisional liquidators be appointed if there is a tax assessment appeal outstanding?
  • Bear Scotland v Fulton – should non-guaranteed overtime be included in holiday pay?
  • Connaught Income Fund v Capita Financial Managers – does a liquidator have a statutory power to get in post-appointment assets?
  • Day v Tiuta International – if the charge under which receivers are appointed is invalid, can they remain in office by reason of the appointor’s subrogated rights under another charge?

Trustee fails to overturn a debtor’s deal with the petitioner

Sands v Layne & Anor (12 November 2014) ([2014] EWHC 3665 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3665.html

Mr Layne originally sought to avoid bankruptcy by offering security over his home and payment by instalments to the petitioning creditor.  However, given the time that the debtor would have needed to pay off the debt, the judge rejected his defence that the creditor had unreasonably refused the offer and made a bankruptcy order in July 2011.  In June 2012, the parties came to an agreement as regards payment and security and, by means of a consent order, the bankruptcy order was set aside.  In June 2013, the Trustee in Bankruptcy applied for the consent order to be rescinded pursuant to S375 of the IA86, the thrust of his submission being that the debtor and creditor had sought to deal with the matter between themselves without taking into account any obligations to him or to other unsecured creditors.

The deputy judge expressed a wavering view over the conclusion leading from the decision in Appleyard v Wewelwala that S375 reviews and rescissions by first instance courts can deal with only decisions made by those courts, not also decisions emanating from appellate courts, and thus the Trustee’s application failed.  However, given the deputy judge’s “diffidence”, he considered further questions arising from the application.

How should the interests of other unsecured creditors impact on the court’s consideration of whether a petition should be dismissed under S271(3)(a), i.e. where “the debtor has made an offer to secure or compound for” the petition debt?  The deputy judge concluded that, as the first ground for dismissal under S271 involves the court being satisfied that the debtor is able to pay all his debts, “the second ground – involving an offer to secure or compound – must therefore be intended to apply even where the debtor is not so able” (paragraph 20).

The deputy judge listed the other unsecured creditors’ potential remedies, including seeking to be substituted as petitioner and challenging the security as a preference (albeit that they would need to establish a desire to prefer the original petitioner).  “In short, in so far as other unsecured creditors may be affected by the provision of the security to the petitioner, the statute provides a targeted remedy in what it considers suitable cases, and it is neither necessary nor appropriate for their interests to be addressed in the context of the bilateral dispute between the petitioning creditor and the debtor and in particular the issue whether, where security is offered and rejected, a bankruptcy order should be made or refused” (paragraph 22).

The deputy judge also observed that the Trustee’s argument “suffered from a serious dose of circularity” (paragraph 24) in that the Trustee could not have been joined as a respondent to the original appeal, which “was to decide whether the bankruptcy order should stand. If the order fell and there was no bankruptcy, all consequences dependent on it – the trusteeship and the vesting – disappeared with it” and thus he had no standing to bring the application in the first place.

Moon Beever published an article examining the role of the Trustee as illustrated by this decision: http://goo.gl/Fu62LU.

 

Court rejects Administrators’ attempts to sell third party assets

Re Business Environment Fleet Street Limited; Edwards & Anor v Business Environment Limited & Ors (28 October 2014) ([2014] EWHC 3540 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3540.html

Administrators applied under Para 72 of Schedule B1 for leave to dispose of assets, including properties subject to subleases and equipment located at the properties, which one of the respondents claimed to own.  Under Para 72, the court can authorise administrators to dispose of “goods which are in the possession of the company under a hire-purchase agreement”, which under Para 111 extends to chattel leasing agreements.

The deputy judge examined the agreement between the Company and the respondent and concluded that the Company had not been granted possession of the assets, which remained either with the respondent or had transferred to the subtenants.  Thus, the agreement did not comprise a chattel leasing agreement, as it did not involve the bailment of goods.

The Administrators pursued an alternative ground, arguing that Paras 67 and 68 combined entitled them to manage – which would include disposal of – property to which they think the Company is entitled.  The deputy judge rejected the argument that “property” in the two paragraphs has the same meaning: it may be appropriate for an administrator to take control of assets in a hurry on his appointment, but disposal would be a step too far.  “It would confer an exorbitant jurisdiction on the administrator to convert property belonging to third parties, simply because this happened to be desirable on the balance of convenience” (paragraph 19.3).  The deputy judge also saw no support in S234, which relieves an administrator from liability for converting third party assets where he acted reasonably.

But what if the sale sought by the Administrators appeared to make sense commercially?  The Administrators’ case here was that there was considerable “marriage” value in disposing of the assets together with the properties, enhancing the purchase price by some £7m.  In this particular case, the deputy judge saw the marriage value in the proposed sale, but did not see that a delay in a sale would be detrimental and thus was not satisfied that the balance of convenience lay in ordering an immediate sale (even if he had been satisfied that the court had jurisdiction to order it).

For an alternative – and far more authoritative – analysis, you might like to read the article by Stephen Atherton QC (via Lexis Nexis) at http://goo.gl/VYFblM.

 

Attempts to “see-saw” between courts does not avoid the appointment of provisional liquidators

Parkwell Investments Limited v Wilson & HMRC (16 October 2014) ([2014] EWHC 3381 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3381.html

This case has received some attention due to the judge’s statement that he was unable to accept the reasoning of the deputy judge in Enta Technologies Limited v HMRC (http://wp.me/p2FU2Z-6W), which if it were correct would lead to a “very undesirable consequence… namely the inability of the court to appoint anyone a provisional liquidator to a company where the company has an outstanding appeal against the assessment” (paragraph 21).

In this case, the Company had applied for the termination of the provisional liquidation and the dismissal of HMRC’s winding-up petition on the basis that the First Tax Tribunal was the place to determine its VAT position and that, as there were appeals against assessments still outstanding, it was inappropriate that the Companies Court should pre-empt the process by appointing a provisional liquidator.  Sir William Blackburne stated: “There is to my mind something highly artificial in the notion that this court has jurisdiction to entertain a winding-up petition brought by HMRC against a company founded on the non-payment of a VAT assessment… for so long as the company has taken no steps to appeal the assessment to the FTT… only to find that that jurisdiction is lost the moment the company files its notice of appeal to the tribunal or, if not lost, is no longer exercisable, irrespective of the merits of the appeal…   I cannot think that this approach is right. Jurisdiction in this court cannot arise and disappear (or be exercisable and then suddenly cease to be) in this see-saw fashion” (paragraphs 19 and 20).

The judge believed that the true question was whether the appeal to the FTT has any merit. If it has none, then the assessment continues to constitute a basis for a winding-up petition.  However, “if the court, on a review of the evidence before it, considers that the company has a good arguable appeal which will lead either to the cancellation of the assessment or to its reduction to below the winding-up debt threshold, it will dismiss the petition” (paragraph 20).  In this case, the judge concluded that the Company had failed to produce sufficient evidence to demonstrate a good arguable case and thus the provisional liquidator was allowed to continue in office.

For a more practical look at the implications of this decision, you might like to look at an article by Mike Pavitt, Paris Smith LLP, at http://goo.gl/0lZyrO.

 

Holiday pay to include non-guaranteed compulsory overtime

Bear Scotland Limited & Ors v Fulton & Ors (4 November 2014) (UKEATS/0047/13) (heard with Hertel (UK) Limited v Woods & Ors and Amec Group Limited v Law & Ors (UKEAT/0161/14)http://www.bailii.org/uk/cases/UKEAT/2014/0047_13_0411.html

None of these cases involved insolvencies, but I can see how their impact on holiday pay calculations could have consequences for IPs.  However, permission to appeal has been granted and the government has set up a taskforce to assess the possible impact of this decision (see http://goo.gl/8jmV53).

The conclusions of the Companies’ appeals against several elements of previous tribunal decisions were as follows:

  1. Normal remuneration – in relation to which holiday pay is calculated –included overtime that employees were required to work, even though the employer was not obliged to offer it as a minimum.
  2. An employer’s failure to pay holiday pay on this basis could be claimed as unlawful deductions from pay under the ERA1996, but not where a period of more than three months had elapsed between each such unlawful deduction (i.e., I think, if, say, holiday was paid short in March, August, and October of this year, only August and October could be claimed; March would not be able to be claimed, as it occurred more than three months before the August short payment).
  3. Pay in lieu of notice is not required to be calculated under the same basis, i.e. it does not include the overtime described in (1) above. This differs from the position as regards holiday pay, because it was felt that the parties’ view of what hours were “normal” at the time the contract was entered into would not have been informed by the experience of working under that contract, which described overtime as not guaranteed and not forming part of normal working hours.
  4. In two of the cases concerned, time spent travelling to work (which was paid during working times as a Radius Allowance and Travelling Time Payment) also fell within “normal remuneration” for the purpose of calculating holiday pay.

There has been some comment (e.g. Moon Beever’s article at http://goo.gl/Etay9A) that overtime other than compulsory overtime is also likely to be comprised in “normal remuneration”.  Whilst this was not dealt with by the Appeal Tribunal, the judge did highlight the principle that “‘normal pay’ is that which is normally received” (paragraph 44) and thus I can see why that conclusion might be drawn.

 

A liquidator’s power to get in post-appointment assets

The Connaught Income Fund, Series 1 v Capita Financial Managers Limited (5 November 2014) ([2014] EWHC 3619 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/3619.html

The key points – and quotes – that I’d extracted from the judgment were the same as those highlighted by Pinsent Masons (http://goo.gl/QU8o9i).

The liquidators of the Fund (which was an unregulated collective investment scheme set up as a limited partnership) took an assignment of the investors’ claims, but these were resisted under a number of arguments including a challenge that the liquidators acted outside their statutory powers in taking the assignments.

The judge decided that the assignments were allowed under the liquidators’ Schedule 4 power “to do all such things as may be necessary for winding up the company’s affairs and distributing its assets”, including those that had not been assets of the partnership when it traded.

 

Receivers’ appointment sound notwithstanding that their appointor’s charge could be invalid

Day v Tiuta International Limited & Ors (30 September 2014) ([2014] EWCA Civ 1246)http://www.bailii.org/ew/cases/EWCA/Civ/2014/1246.html

This is a complicated case, which I think has been successfully summarised by Taylor Wessing LLP (http://goo.gl/YhN2ga).

Tiuta International Limited (“TIL”) agreed to lend money to Day to enable him to repay a loan provided by Standard Chartered (“SC”) and to discharge the charge to SC.  Later, due to Day’s non-payment, TIL appointed receivers under the powers of its new charge, but Day claimed damages against TIL that, if set off against the loan, would release TIL’s charge and invalidate the receivers’ appointment.  TIL argued that, even if Day were successful in escaping from its charge, TIL was still entitled to appoint receivers because it was subrogated to the SC charge by reason of its payment settling SC’s loan and charge.  Day contended that, even if this were so, TIL would need to appoint receivers again but this time in express reliance on the SC charge.

Lady Justice Gloster stated: “it is important to bear in mind that the correct analysis of the right of subrogation is that a party who discharges a creditor’s security interest and who is regarded as having acquired that interest by subrogation, does not actually acquire the creditor’s interest, but rather obtains a new and independent equitable security interest which prima facie replicates the creditor’s old interest. Subrogation does not effect an actual assignment of the discharged creditor’s rights to the subrogated creditor. What subrogation means in this context is that the subrogated creditor’s legal relations with a defendant, who would otherwise be unjustly enriched, are regulated as if the benefit of the charge had been assigned to him” (paragraph 43).

“Thus whilst TIL did not purport to rely on the SC Charge when appointing the Receivers… and purported to rely only on the TIL Charge to make the appointment, that in my judgment was immaterial…  Subrogation is a means by which the court regulates the legal relationships between parties in order to avoid unjust enrichment and the precise manner in which it operates may vary according to the circumstances of the case. In the present case, on the hypothesis that the TIL Charge was voidable, the doctrine of subrogation, in conferring a new equitable proprietary right on TIL, would have operated to entitle TIL to the notional benefit of the SC Charge for the purposes of securing repayment of the TIL Loan made under the terms of the TIL Loan Facility” (paragraph 44).  She continued that TIL was not required to follow the payment demand process as required by the SC charge, which would be “nonsensical” since SC’s liabilities had been discharged, but it was entitled to follow the process set down in the TIL loan facility and charge leading to the appointment of receivers.


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The Future is… Complicated

 

 

1933 Yosemite

My autumn has been a CPE marathon: SWSCA, the R3 SPG Forum, the IPA roadshow, and the ICAEW roadshow. Thus I thought I’d try to summarise all the legislative and regulatory changes currently in prospect:

Statutory Instruments

  • Enterprise & Regulatory Reform Act 2013;
  • Deregulation Bill (est. commencement: May/October 2015);
  • Small Business, Enterprise and Employment Bill (October 2015 for IP regulation items, April 2016 for remainder);
  • The exemption for insolvency proceedings from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) comes to an end on 1 April 2015;
  • New Insolvency Rules (est. to be laid in Parliament in October 2015, to come into force in April 2016); and
  • A plethora of SIs to support the Bankruptcy and Debt Advice (Scotland) Act 2014 (coming into force on 1 April 2015, but, regrettably, I feel so out of the loop on Scottish insolvency now that I don’t dare pass comment!)

Consultation Outcomes

  • IP fees (consultation closed in March 2014);
  • DROs and threshold for creditors’ petitions for bankruptcy (consultation closed in October 2014); and
  • Continuity of essential supplies to insolvent businesses (consultation closed in October 2014).

Revision of SIPs etc.

  • Ethics Code Review;
  • SIP 1;
  • SIPs 16 & 13;
  • SIP 9 (depending on how the government turns on the issue of IP fees);
  • New Insolvency Guidance Paper on retention of title; and
  • Other SIPs affected by new statute.

 

Enterprise & Regulatory Reform Act 2013

The Insolvency Service’s timetable back in 2013 was that the changes enabled by this Act would be rolled out in 2015/16, but I haven’t heard a sniff about it since. However, the following elements of the Act are still in prospect:

  • Debtors’ bankruptcy petitions will move away from the courts and into the hands of SoS-appointed Adjudicators (not ORs).
  • There was talk of the fee being less than at present (£70 plus the administration fee of £525) and of it being paid in instalments, although my guess is that the Adjudicator is unlikely to deal with an application until the fee has been paid in full.
  • The application process is likely to be handled online. Questions had been raised on whether there would be safeguards in place to ensure that the debtor had received advice before applying. This would appear important given that the Adjudicator will have no discretion to reject an application on the basis that bankruptcy is not appropriate: if the debtor meets the criteria for bankruptcy, the Adjudicator must make the order.

The ERR Act is also the avenue for the proposed revisions to Ss233 and 372 of the IA86 – re. continuity of essential supplies – as it has granted the SoS the power to change these sections of the IA86.

The Deregulation Bill

Of course, the highlight of this Bill is the provision for partial insolvency licences. It was debated in the House of Lords last week (bit.ly/1tBmMhe – go to a time of 16.46) and whilst I think that, at the very least, the government’s efforts to widen the profession to greater competition are nonsensical in the current market where there is not enough insolvency work to keep the existing IPs gainfully employed, my sense of the debate is that the provision likely will stick.

I was surprised that Baroness Hayter’s closing gambit was to keep the door open at least to press another day for only personal insolvency-only licences (rather than also corporate insolvency-only ones).  Will that be a future compromise?  What with the ongoing fuzziness of (non-FCA-regulated) IPs’ freedom to advise individuals on their insolvency options and the rareness of bankruptcies, I wonder if the days in which smaller practice IPs handle a mixed portfolio of corporate and personal insolvencies are numbered in any event.

The Deregulation Bill contains other largely technical changes:

  • Finally, the Minmar/Virtualpurple chaos will be resolved in statute when the need to issue a Notice of Intention to Appoint an Administrator (“NoIA”) will be restricted to cases where a QFCH exists.
  • The consent requirements for an Administrator’s discharge will be amended so that, in Para 52(1)(b) cases, the consent of only the secured creditors, and where relevant a majority of preferential creditors, will be required. At present Para 98 can be interpreted to require the Administrator also to propose a resolution to the unsecured creditors.
  • A provision will be added so that, if a winding-up petition is presented after a NoIA has been filed at court, it will not prevent the appointment of an Administrator.
  • In addition to the OR, IPs will be able to be appointed by the court to act as interim receivers over debtors’ properties.
  • It will not be a requirement in every case for the bankrupt to submit a SoA, but the OR may choose to request one.
  • S307 IA86 will be amended so that Trustees will have to notify banks if they are seeking to claim specific after-acquired property. The government envisages that this will free up banks to provide accounts to bankrupts.
  • The SoS’ power to authorise IPs direct will be repealed, with existing IPs’ authorisations continuing for one year after the Act’s commencement.
  • The Deeds of Arrangement Act 1914 will be repealed.

The Small Business, Enterprise and Employment Bill

I won’t repeat all the provisions in this Bill, but I will highlight some that have created some debate recently.

The proposed new process for office holders to report on directors’ conduct proved to be a lively topic at the RPB roadshows. There seemed to be some expectation that IPs would report their “suspicion – not their evidenced belief – of director misconduct” (per the InsS slide), although this was downplayed at the later R3 Forum.  My initial thoughts were that perhaps the Service was looking to produce a kind-of SARs-reporting regime and I wondered whether that might work, if IPs could have the certainty that their reports would be kept confident.

However, I suspect that the Service had recognised that IPs would have difficulty with the proposed new timescale for a report within 3 months, but hoped that this would be mitigated if IPs could somehow be persuaded to report just the bare essentials – to enable the Service to decide whether the issues merit deeper enquiries – rather than putting them under a requirement to collect together substantial evidence. I suspect that the Service’s intentions are reasonable, but it seems that, at the moment, they haven’t got the language quite right.  Let’s hope it is sorted by the time the rules are drafted.

Phillip Sykes, R3 Vice President, gave evidence on the Bill to the Public Bill Committee a couple of weeks ago (see: http://goo.gl/V1XSbX or go to http://goo.gl/jSTmI0 for a transcript).  Phillip highlighted the value of physical meetings in engaging creditors in the process and in informing newly-appointed office holders of pre-appointment goings-on.  He also commented that the proposed provision to empower the courts to make compensation orders against directors on the back of disqualifications seems to run contrary to the ending of the LASPO insolvency exemption and that the suggestion that certain creditors might benefit from such orders offends the fundamental insolvency principle of pari passu. Phillip also explained the potential difficulties in assigning office holders’ rights of action to third parties and described a vision of good insolvency regulation.  Unfortunately, he was cut off in mid-sentence, but R3 has produced a punchy briefing paper at http://goo.gl/mBeU30, which goes further than Phillip was able to do in the short time allowed by the Committee.

Last week, a new Schedule was put to the Public Bill Committee (starts at: http://goo.gl/sY5QUG), setting out the proposed amendments to the IA86 to deal with the abolition of requirements to hold creditors’ meetings and opting-out creditors.  A quick scan of the schedule brought to my mind several queries, but it is very difficult to ascertain exactly how practically the new provisions will operate, not least because they refer in many places to processes set out in the rules, which themselves are a revision work in progress.

IP Fees

The consultation, which included a proposal to prohibit the use of time costs in certain cases, closed in March 2014 and there hasn’t exactly been a government response. All that has been published is a ministerial statement in June that referred to “discussing further with interested parties before finalising the way forward” (http://goo.gl/IbQsLd).  The recent events I have attended indicate that the Service’s current focus is more on exploring the value of providing up-front fee estimates together with creditors’ consent (or non-objection) to an exceeding of these estimates, rather than restricting the use of the time costs basis.  I understand that the government is expected to make a decision on how the IP fees structure might be changed by the end of the year.

Revision of SIPs etc.

I have Alison Curry of the IPA to thank for sharing with members at the recent roadshows current plans on these items:

  • A JIC review of the Insolvency Code of Ethics has commenced. Initial findings have queried whether the Code needs to incorporate more prescription, as it has been suggested that the prevalence of “may”s, rather than “shall”s, can make it difficult for regulators to enforce. The old chestnuts of commissions, marketing and referrals, also may be areas where the Code needs to be developed.
  • Although RPB rules include requirements for their members to report any knowledge of misconduct of another member, it has been noted that, of course, this is not effective where the misconduct involves a member of a different RPB. Therefore, the JIC is looking to amend SIP1 with a view to incorporating a profession-wide duty to report misconduct to the relevant RPB or perhaps via the complaints gateway.
  • As expected, SIP16 is being reviewed in line with Teresa Graham’s recommendations. This is working alongside the efforts to create the Pre-pack Pool, which will consider connected purchasers’ intentions and viability reviews. A consultation on a draft revised SIP16 is expected around Christmas-time. I had heard that the target is that a revised SIP16 will be issued by 1 February 2015 and the Pool will be operational by 1 March 2015, but that seems a little optimistic, given the need for a consultation.
  • SIP13 is ripe for review (in my opinion, it needed to be reviewed after the Enterprise Act 2002!) and it is recognised that it needs to be revised in short order after SIP16.
  • A new IGP on RoT has been drafted and is close to being issued. We received a preview of it at the IPA roadshow. To be honest, it isn’t rocket science, but then IGPs aren’t meant to be.


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The Insolvency Service’s labours for transparency produce fruits

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The Insolvency Service has been busy over the past months producing plenty of documents other than the consultations. Here, I review the following:

  • First newsletter;
  • Report on its visit to the SoS-IP monitoring unit;
  • Summary of its oversight function of the RPBs;
  • IVA Standing Committee minutes; and
  • Complaints Gateway report.

The Insolvency Service’s first newsletter

http://content.govdelivery.com/accounts/UKIS/bulletins/d469cc

Although this is a bit of a PR statement, a couple of crafty comments have been slipped in.

The newsletter explains that the Service’s “IP regulation function has been strengthened and we have raised the bar on our expectations of authorising bodies”. I started off sceptical but to be fair the Service’s summary of how it carries out its oversight function of the authorising bodies – https://www.gov.uk/government/publications/insolvency-practitioner-regulation-oversight-and-monitoring-of-authorising-bodies – does convey a more intensive Big Brother sense than the Principles for Monitoring alone had done previously.  This document puts more emphasis on their risk-based assessments, desk-top monitoring and themed reviews, as well as targeting topical areas of concern, which can only help to provide a better framework in which their physical monitoring visits to the RPBs can sit.

I commend the Service for establishing more intelligent regulatory processes, but two sentences of the newsletter stick in the throat: “We saw the impact that our changing expectations had in a few areas. Things deemed acceptable a few years ago were now being picked up as areas for improvement.” This is a reference to its report on the visit to its own people who monitor SoS-authorised IPs, the Insolvency Practitioner Services (“IPS”): https://www.gov.uk/government/publications/monitoring-activity-reports-of-insolvency-practitioner-authorising-bodies.  Having worked in the IPA’s regulatory department from 2005 to 2012, I would like to assure readers that many of the items identified in the Service’s report on IPS have been unacceptable for many years – at least to the IPA during my time and most probably to the other RPBs (I am as certain as I can be of that without having worked at the RPBs myself).

I am aghast at the Service’s apparent suggestion that the following recent discoveries at the IPS were acceptable a few years ago:

  • A 5-year visit cycle with insufficient risk assessment to justify a gap longer than 3 years;
  • Visits to new appointment-takers not carried out within 12 months and no evidence of risk assessment to justify this;
  • No evidence that one IP’s receipt of more than 1,000 complaints in the previous year (as disclosed in the pre-visit questionnaire) was raised during the visit, nor was it considered in any detail in the report;
  • No evidence of website checks (which the Service demanded of the RPBs many years ago);
  • “Little evidence that compliance with SIP16 is being considered”;
  • “No evidence that relevant ethical checklists and initial meeting notes from cases had been considered”; and
  • “Once a final report has been sent to the IP, there does not appear to be any process whereby the findings of the report are considered further by IPS”.

Still, that’s enough of the past. The Service has now thrown down the gauntlet.  I shall be pleased if they now prove they can parry and thrust with intelligence and effectiveness.

Worthy of note is that the newsletter explains that, in future, sanctions handed down to IPs by the RPBs will be published on the Service’s website (presumably more contemporaneously than within its annual reviews).

IVA Standing Committee Minutes 17 July 2014

https://www.gov.uk/government/publications/minutes-from-the-iva-standing-committee-july-2014

“Standardised Format”

The minutes report that the IPA will have a final version – of what? Presumably a statutory annual report template? – within “a couple of weeks” and that two Committee members will draft a Dear IP article (there’s a novelty!) to explain that use of the standard is not mandatory.

Income and Expenditure Assessments

The minutes recorded that Money Advice Service had been preparing for consultation a draft I&E statement – which seems to be an amalgam of the CFS and the StepChange budget with the plan that it will be used for all/a number of debt solutions. The consultation was opened on 16 October: https://www.moneyadviceservice.org.uk/en/static/standard-financial-statement-consultation

IVA Protocol Equity Clause

As a consequence of concerns raised by an adviser about the equity clause, DRF has agreed to “draft a response” – it seems this is only intended to go to the adviser who had written in, although it would seem to me to have wider interest – “to clarify the position, which is that a person will not be expected to go to a subprime lender and the importance of independent financial advice”. It is good to have that assurance, but what exactly does the IVA Protocol require debtors to do in relation to equity?  Does the Protocol clause need revising, I wonder.

Resistance to refunding dividends when set-off applied

I see the issue: a creditor receives dividends and then sets off mis-sold PPI compensation against their remaining debt. Consequently, it could be argued that the creditor has been overpaid a dividend and should return (some of) it.  The minutes state that “it is a complicated issue and different opinions prevail” (well, there’s a revelation!), although it has been raised with the FCA.

Variations

It seems that the Committee has only just cottoned on to the fact that the Protocol does not allow the supervisor to decide whether a variation meeting should be called, so they are to look at re-wording the standard terms to “give supervisor discretion as to whether variation is appropriate so when one is called it is genuine and in these instances the supervisor will be entitled to get paid”.

I’m sorry if I sound a little despairing at this, not least because of course the cynic may see this as yet another avenue for IPs to make some easy money! It was something that I’d heard about when I was at the IPA – that some IPs were struggling with IVA debtors who wanted, say, to offer a full and final settlement to the creditors that the IP was confident would be rejected by creditors, but under the Protocol terms it seemed that they had no choice but to pass the offer to creditors.  I’m just surprised that this issue has not yet been resolved.

Recent pension changes

The minutes simply state: “InsS to enquire with colleagues as to how it is planned to treat these in bankruptcy and feed back”. About time too!  Shortly after the April proposals had been first announced, I’d read articles questioning whether the government had thought about how any lump sum – which from next April could be the whole pension pot – would be treated in a bankruptcy.  Presumably, legislation will be drafted to protect this pot from a Trustee’s hands, but that depends on the drafter getting it right.  The lesson of Raithatha v Williamson comes to mind…

Well, I’m assuming that this is what the Committee minutes refer to, anyway.

Report on the First Year of the Complaints Gateway

https://www.gov.uk/government/publications/insolvency-practitioner-complaints-gateway-report-august-2014

Aha, so Dr Judge has been able to spin an increased number of complaints as evidence that the gateway “is meeting the aim of making the complaints process easier to understand and use”! I wonder if, had the number of complaints decreased, his message might have been that insolvency regulation had played a part in raising standards so that there were fewer causes for complaint.

The report mentions that the Service is “continuing dialogue” with the SRA and Law Society of Scotland to try to get them to adopt the gateway.

The Service still seems to be hung up about the effectiveness of the Insolvency Code of Ethics (as I’d mentioned in an earlier post, http://wp.me/p2FU2Z-6I) and have reported their “findings” to the JIC “to assist with its review into this area”.

The Service also seems to have got heavy with the RPBs about complaints on delayed IVA closures due to ongoing PPI refunds. The ICAEW and the IPA “have agreed to take forward all cases for investigation” – because, of course, some complaints are closed at assessment stage on the basis that the complaints reviewer has concluded that there is no case to answer (i.e. it is not that these complaints do not get considered at all) – “where the delay in closing the IVA exceeds six months from the debtor’s final payment”.  Does this mean that the general regulator view is that any delay under 6 months is acceptable?  Hopefully, this typical Service measure of setting unprincipled boundaries will not result in a formulaic approach to dealing with all complaints about delayed closure of IVAs.  And, although the other RPBs may license a smaller proportion of IVA-providing IPs, I wonder what their practices are…

The report also explains that the Service has persuaded the ICAEW to modify its approach a little in relation to complaints resolved by conciliation. Now, such a complaint will still be considered in the context of any regulatory breaches committed by the IP.  Years ago, the Service urged the RPBs to consider whether they could make greater use of financial compensation (or even simply requiring an IP to write an apology) in their complaints processes, but there was some resistance because it seemed that the key objective of the regulatory complaints process – to pick up IPs failing to meet standards – was at risk of getting lost: might some IPs be persuaded to agree a swift end to a complaint, if it meant that less attention would be paid to it?  To be fair, this has always been an IP’s option: he can always satisfy the complainant before they ever approach the regulator.  However, now settling a complaint after it has started on the Gateway path may not be the end of it for the IP, whichever RPB licenses him.

The Statistics

I think that the stats have been more than adequately covered by other commentaries. In any event, I found it difficult to draw any real conclusions from them in isolation, but they also don’t add much to the picture presented in the Insolvency Service’s 2013 annual review.  That’s not to say, however, that this report has no use; at the very least, it will serve as a reference point for the future.

Ok, the complaints number has increased, but it does seem that the delayed IVA closure due to PPI refunds is an exceptional issue at the moment. Given that the IPA licenses the majority of IPs who carry out IVAs, it is not surprising therefore that the IPA has the largest referred-complaint per IP figure: 0.63, compared to 0.54 over all the authorising bodies (although the SoS is barely a whisker behind at 0.62).  My personal expectation, however, is that the Insolvency Service’s being seen as being more involved in the complaints process via the Gateway alone may sustain slightly higher levels of complaints in the longer term, as perceived victims may not be so quick to assume that the RPB/IP relationship stacks the odds so heavily against them receiving a fair hearing.