Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Money Laundering Regulations 2017 – part 2: Customer Due Diligence and more

The objective of the MLR17 is “to make the financial system a hostile environment for illicit finance while minimising the burden on legitimate businesses”. The impact assessment shows a net direct cost to businesses of £5.2m pa… so don’t expect the MLR17 burden to be any lighter than their predecessor’s.

In this blog post, I summarise the key changes in the MLR17 affecting day-to-day activities, including:

  • Focussing the customer due diligence (“CDD”) more squarely onto risks
  • A need to refresh the risk assessment process
  • More than ID checks are required to complete CDD
  • How the impacts of the enlarged definition of a PEP can be managed
  • A simultaneous easing and toughening of the reliance provisions
  • Necessary additions to engagement letters and other letters to insolvents

My earlier blog post reviewing the MLR17’s effects on firms’ systems and controls can be found at: https://insolvencyoracle.com/2017/07/22/mlr17-part-1/

 

Customer Due Diligence: a clearer objective?

For most intents and purposes, the MLR07 CDD requirements boiled down to identifying and verifying identities. Ok, there was also the need for a risk-based assessment, but it seemed that the objective of this was only really to determine the extent of checks employed in the CDD process.

I think the MLR17 provide a welcome adjustment in the emphasis. For example, in setting out the enhanced due diligence (“EDD”) process, Reg 33 puts the risk assessment in the following context:

“When assessing whether there is a high risk of money laundering or terrorist financing in a particular situation, and the extent of the measures which should be taken to manage and mitigate that risk…”

This thought – that the focus of the risk assessment is to consider the risk that “a particular situation” gives rise to a high risk of money laundering or terrorist financing – is repeated elsewhere and emphasises the need to manage and mitigate the risk e.g. of becoming an unwitting “enabler”. Realistically, how far does simply identifying who we’re dealing with get us in this process?

I do understand that money launderers generally want to work under a cloak of anonymity, so getting to the root of who really is behind a company and in the process showing customers that we’re serious when we carry out CDD help manage and mitigate the risks: money launderers may go looking for a less diligent professional. But what really are the risks of the particular situation of an insolvency?

If we’re being appointed over a dead company with few assets, what are the risks of money laundering or terrorist financing? If there have been any such activities, they will only be historic, won’t they? There will be negligible, if any, risk that any such activities will continue under our watch. So in what ways can – or should – any risks be managed or mitigated? Increasing the extent of identity checks we carry out surely won’t help; it may only give us more information to add to a SAR, if we develop suspicions about past events.

Although the new CDD requirements of the MLR17 will be a pain to complete, I do think they get closer to the nub of the issue: what does the customer do and what do they want us to do for them? In so doing, it seems that the flipside is that, if we have a defunct “customer” who isn’t asking us to do anything risky, then we might find the CDD simpler.

I hasten to add that this post describes purely my own interpretation of the MLR17 (plus some input from Jo Harris). I would be surprised if the RPBs see all the requirements in the same light. Regrettably, it may be a long time before we learn how they think the regulations should be applied, but until they make their expectations clear, I am not sure we can be heavily criticised for trying to do our best.

 

First things first: the risk assessment

Like its predecessor, the MLR17 state that the extent of CDD measures must reflect the level of risk assessed. However, I think the MLR17 far more clearly explain how this risk should be assessed.

For instance, Reg 28(12) states that there are two factors involved:

  • the Reg 18 risk assessment – this is the business-wide risk assessment, which I covered in my last blog; and
  • an “assessment of the level of risk arising in any particular case” – I think this finally answers unequivocally the question of whether a risk assessment needs to be done on court appointments: surely a case-specific risk assessment must be done each time.

Although I think we all developed passable approaches to risk assessments under MLR07, I think that the MLR17 help us much more. Reg 28(13) lists the factors to consider for the risk assessment, but in particular I found Reg 33(6) valuable. This regulation lists potential flags of higher risks, setting them out nicely into three categories:

  • customer risk factors, e.g. where the business is cash intensive;
  • product, service, transaction or delivery channel risk factors, e.g. where payments are received from unknown or unassociated third parties; and
  • geographical risk factors.

I found a useful exercise was to develop a list of questions that put many of the eighteen Reg 33(6) factors into a practical insolvency context. This generated several questions that were similar to the MLR07, but I discovered that the emphasis on whether ongoing insolvency engagements could lead to encounters with money launderers emerged strongly.

At the other end of the spectrum, Reg 37(3) is helpful in assessing cases for low risk. This regulation lists another fifteen indicators of potential low risk, categorised into the three headings above, some of which similarly can be converted into insolvency-relevant questions.

As the MLR17 are non-prescriptive however, the warning described at Regs 33(7) and 37(4) should be incorporated somewhere into the risk assessment:

“the presence of one or more risk factors may not always indicate that there is a high [or low] risk of money laundering or terrorist financing in a particular situation”

This will no doubt frustrate those that would much prefer a straightforward way to steer risk assessments to a definitive conclusion, but I think that this final sense-check is valuable, as it is impossible to squeeze all scenarios into a bundle of questions.

 

More steps in the process

The process no longer follows the formula: risk assessment + beneficial owner IDs = CDD. The MLR17 require other information to be examined. For example, Reg 28(3)(b) requires us to “take reasonable measures to determine and verify”:

  • “the law to which the body corporate is subject, and its constitution” (Reg 28(3)(b))
  • “the full names of the board of directors and the senior persons responsible for the operations of the body corporate” (Reg 28(3)(b))

Personally, I do wonder how these items can be “verified”, especially the full names of the senior persons – obtaining this information before engagement may be a struggle as it is.

The MLR17 also turn an eye toward a new person not covered by the MLR07: anyone who purports to act on behalf of the customer. Reg 28(10) requires that such a person be identified and their identity verified in all cases.

 

Enhanced Due Diligence

Continuing the theme of a better targeted approach, I like the way the EDD requirements no longer focus simply on increasing the extent of ID checks… although the downside is that the process has become more time-intensive for higher risk cases.

Reg 33(4) states that EDD measures must include:

  • “as far as reasonably possible, examining the background and purpose of the transaction, and
  • “increasing the degree and nature of monitoring of the business relationship in which the transaction is made to determine whether that transaction or that relationship appear to be suspicious.”

Also, Reg 33(5) states that EDD measures may include “among other things”:

  • “seeking additional independent, reliable sources to verify information provided or made available to the relevant person;
  • “taking additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction;
  • “taking further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship;
  • “increasing the monitoring of the business relationship, including greater scrutiny of transactions.”

In an insolvency context, I think much of this can be translated into asking oneself: why does this “customer” want to take this step, does it seem logical in the circumstances or could it be a cover for something more sinister?

 

PEPs: are they high risk?

Well of course, in this non-prescriptive world, the answer to this question is always going to be: it depends.

The MLR17 have widened the definition of a PEP to encompass UK PEPs. Therefore, something that for most of us was little more than theoretic under the MLR07, likely will become more of a reality in future. However, PEPs are still likely to pop up only once in a blue moon, which makes it tricky to design systems to accommodate them without overcomplicating processes for the 99.9% of cases.

  • Additional steps for PEPs and PEP connections

In all cases where a PEP or PEP connection (i.e. family member or “known close associate” of a PEP) has been spotted, the MLR17 require the following steps:

  • Assess the associated risk level and tailor the due diligence measures accordingly;
  • Obtain approval from “senior management” in establishing or continuing the business relationship;
  • “Take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transactions with that person”; and
  • Conduct enhanced ongoing monitoring of any business relationship.

So what do you do if the daughter of a domestic Supreme Court judge wants you to help wind up her insolvent company? Does she really present a high risk? Do you really need to go through all those steps?

  • FCA enlightenment on UK PEPs

The FCA has produced some useful guidance on dealing with PEPs: https://goo.gl/WW2WY1

Understandably, the FCA emphasises the value of the first step: the risk assessment. Helpfully, the guidance states:

“A PEP who is entrusted with a prominent public function in the UK should be treated as low risk, unless a firm has assessed that other risk factors not linked to their position as a PEP mean they pose a higher threat”

This demonstrates to me the pointlessness of this MLR17 change wrapping in domestic PEPs: it has added to the nonsensical bureaucracy, as we now need to (i) note UK PEPs; (ii) consider whether they are low risk; (iii) decide in most cases that they are low risk; (iv) but nevertheless work through the other steps listed above.

If a PEP is low risk, then how practically should we work through the other steps? The FCA suggests:

  • “Senior management” approval need not be at board level; it could be the MLRO.
  • “Take less intrusive and less exhaustive steps” to establish the sources of wealth and of funds; “only use information available to the institution… and do not make further inquiries of the individual unless anomalies arise”.
  • Ongoing monitoring could be, “for example, only where it is necessary to update customer due diligence information or where the customer requests a new service or product”.

Oh well, that’s alright then! Thank you FCA, for bringing a note of reasonableness to the proceedings.

Of course, if a PEP is considered high risk – based, as the FCA points out, on who they are, where they are, and what they want from you – it is only right that additional measures are applied. But, I think that, unless you work in a market that means you encounter PEPs relatively frequently, other than ensuring that staff are alert to the complications arising from PEPs and giving them a place to go when one is spotted, practically on a day-to-day basis there is little point in layering on procedures to deal with PEPs.

 

Reliance on other people’s due diligence: made easier or tougher?

On the one hand, relying on another MLR-regulated person’s customer due diligence checks has been made easier. There is no longer a two-tier supervisory body system, which under the MLR07 meant that an ICAEW-licensed IP could be relied upon, but an IPA-licensed IP could not. Now, the work of any MLR-regulated persons (e.g. including casinos), as well as some overseas equivalents, may be relied upon.

However, there is one new requirement that almost entirely negates this advantage: Reg 39(2) states that the person seeking to rely on another:

“must immediately obtain from the third party all the information needed to satisfy the requirements of regulation 28(2) to (6) and (10) in relation to the customer, customer’s beneficial owner, or any person acting on behalf of the customer”

In other words, you must obtain from the person on whom you are seeking to rely all the information that you would otherwise gather yourself to complete customer due diligence. It also doesn’t avoid the need to carry out a risk assessment or deal with ongoing monitoring. So what is the point of relying on someone else to do some of the work for you, especially when you remain liable for any failure of the relied-on person to conduct appropriate due diligence? You might as well collect the due diligence information yourself, mightn’t you?

 

Additions to engagement letters… and more?

Reg 41(4) states that;

“Relevant persons must provide new customers with the following information before establishing a business relationship or entering into an occasional transaction with the customer:

(a) the information specified in paragraph 2(3) in Part 2 of Schedule 1 to the Data Protection Act 1998 (interpretation of data protection principles);

(b) a statement that any personal data received from the customer will be processed only for the purposes of preventing money laundering or terrorist financing, or as permitted under paragraph (3).”

In other words, the required information is:

  • The identity of the data controller;
  • The identity of any representative nominated by the data controller; and
  • The purposes for which the data are intended to be processed (including the statement required by Reg 41(4)(b) above).

Complying with this requirement seems fairly straightforward when appointments are preceded with an engagement letter to the insolvent/MVL-seeker: the above information likely would feature in the engagement letter.

  • Is a bankrupt a “new customer”?

What if there is no engagement letter with the “customer”? Does this requirement still apply in bankruptcies, compulsory liquidations and creditor-led Administrations?

Who is the customer in a court or creditor-led process? The old CCAB guidance states: “In the context of insolvency work, the person or entity entering into the business relationship is considered to be the insolvent.” Although I think this was generally accepted and just-about manageable for the MLR07, the shoe-horning of regulations designed for a client-provider relationship into an insolvency context becomes a little more painful with the MLR17.

Are we really expected to view a bankrupt as a “new customer” for the purposes of Reg 41(4)? Do we really need to provide them with the above information? I guess we can add the information to our on-appointment letters to insolvents, but we cannot write to them before establishing the business relationship, i.e. before being appointed as office holder, can we?

Ah but doesn’t the CCAB Guidance give us a back-stop guide of 5 working days after appointment to complete the due diligence? This is true, but this provision related to the timescale for completing the CDD in view of the fact that the MLR07 had stated that in some circumstances the due diligence could be completed as soon as practicable after first contact – a concession that is repeated in the MLR17 – but we’re not talking about the due diligence process here. The MLR17 do not provide an asarp exception to providing the above information before establishing the business relationship, so I cannot see a practical way for us to comply with Reg 41(4) in most court or creditor-led appointments.

 

Not written with IPs in mind

The MLR17 repeat their predecessor’s deficiency in demonstrating ignorance of the mechanisms of the insolvency regime. I have always objected to the assumption that the insolvent is an IP’s “customer”, especially when I remember that technically under the MLR07/17 an IP is only carrying out regulated activities when s/he is formally appointed. Further questions about the drafter’s knowledge came to my mind when I read the new definition of an IP in the MLR17: not only an individual, but also “any firm… who acts as an insolvency practitioner within the meaning of section 388 of the Insolvency Act 1986” – that would be a clever trick!

In my view, the MLRs’ concept of a “business relationship” also has never really worked: what “business relationship” does the IP form with the insolvent when s/he takes office? And the suggestion that an IP engages in an “occasional transaction” when s/he sells an insolvent’s assets is another cruelty on the English language: is it the insolvent or the IP that is carrying out the transaction? An “occasional transaction” is defined as “a transaction which is not carried out as part of a business relationship”, but the IP is considered to have a “business relationship” with the insolvent, so where does the asset sale fit in?

Is there no useful guidance for IPs? In my view, the CCAB Guidance touches on insolvency far too lightly and the Insolvency Service’s and R3’s Guidance notes are showing their age; both have the air of guidance written when the MLR07 were little more than theory. Let’s hope that we will one day receive some authoritative guidance that demonstrates a proper and practical understanding of how the MLR17 should be applied to the insolvency regime.


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Money Laundering Regulations 2017 – Part 1: Infrastructure Changes

 

“For Insolvency Practitioners there is relatively little change” stated one RPB’s notice to members on the Money Laundering Regulations 2017, but another RPB stated that the new regs “will have wide-reaching changes for accountancy firms and IPs”.   If two RPBs have such polar views on the overall impact of the new regs, this doesn’t bode well for a common approach to compliance with the MLR17.

I have great sympathy for the RPBs, though. The final regulations were only released late on Thursday 22 June and they came into force on Monday 26 June. They also contained some well-hidden changes from the draft regulations and there was no quick way of understanding their consequences. I suspect I was not the only one who spent their weekend scrutinising 116 pages of new legislation and thinking: this is an impossible task for us all!

In this first post on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR17”), I review the regulations’ impact on the systems involved in managing an insolvency practice:

  • The different approaches expected of large and small firms
  • The appointment of a new person responsible for compliance
  • The need to screen relevant employees
  • The independent audit function
  • Drafting policies, controls and procedures
  • The expanded syllabus for staff training
  • Timely destruction of certain records
  • Drafting a firm-wide risk assessment
  • Seeking “approval” from your Supervisory Authority

The MLR17 can be found at: https://goo.gl/ei8ZB1

Some useful guides on the topic:

 

“Size and nature” matter

In six places, the MLR17 require relevant persons (i.e. those carrying out MLR17-regulated activities) to have regard to the size and nature of their business when seeking to comply with the regs. For example, Reg 19(2) requires relevant persons to adopt policies, controls and procedures that are “proportionate with regard to the size and nature of the relevant person’s business”.

Reg 21 states that, “where appropriate with regard to the size and nature of its business, a relevant person must:

  1. appoint one individual who is a member of the board of directors… or of its senior management as the officer responsible for the relevant person’s compliance with these Regulations;
  2. carry out screening of relevant employees..;
  3. establish an independent audit function…”

What are the RPBs’ expectations here? I cannot see any grey area in complying with Reg 21: either you endeavor to meet all (or some?) of these requirements or you determine that the measures are not appropriate having regard to the size and nature of your business. Where does the threshold between complying with Reg 21 and justifiably ignoring it lie?

I suspect that, at least in the short term, the regulators will say: you demonstrate to us how you’ve come to a conclusion. But they are the ones with the helicopter view of the profession(s) and they are the ones in direct contact with HM Treasury and all the other Supervisory Authorities. Can they not guide their regulated members?

To determine what is appropriate and proportionate, the MLR17 specifically refer to following guidance issued by the FCA or by any other Supervisory Authority or appropriate body and approved by HM Treasury. At present, all that IPs have is the 2008 CCAB Guidance, which I think is woefully inadequate in view of the shift from MLR07 to MLR17.

At the moment, different RPBs seem to be suggesting different expectations on compliance with Reg 21, which is not surprising given how swiftly the MLR17 were enacted. Whilst, understandably, the RPBs stick to the strict wording of Reg 21, they elaborate the idea with phrases such as:

  • IPA: “Large firms must…”
  • ICAS: “requirement for firms of a certain size…”
  • ICAS: “requirements don’t apply to sole practitioners with no staff and no subcontractors”
  • ICAEW: “Sole practitioners with no employees are exempt from this requirement”

Thus, it seems to me that all we can glean is that “large firms” definitely need to comply with these Reg 21 items, “sole practitioners with no employees” (and possibly no subcontractors either) do not, but everyone in between..? Your guess is as good as mine.

 

Reg 21: Infrastructure Changes

It is evident from the Reg 21 quote above that infrastructure changes are necessary for at least some firms:

  • Board/senior level appointment of someone responsible for compliance

All three RPBs have asked to be informed of the appointment of such a person, as is required under the MLR17. Reg 21 also requires firms to notify their RPB of the identity of the first-appointed MLRO (I have not seen any RPB ask for this, so I assume MLR17-appointed MLROs are viewed as simply carrying on from their MLR07 appointment) and any change in identity of the MLRO or other Reg 21 appointed person within 14 days of the change.

This may be, but does not have to be, the same person who acts as MLRO, a position that is repeated in the MLR17. ICAS is calling this person the BSMLP (board or senior management level person) and ICAEW is calling them the MLCP (money laundering compliance person). The IPA has not given them a name.

  • Employee-screening

“Relevant employees” are those involved in the firm’s compliance with the MLR17 as well as those “capable of contributing” to the identification, prevention, detection or risk-mitigation of money laundering or terrorist financing – so, for insolvency practices, I would think about all those working in compliance, cashiering, case administration and take-on. As employee-screening and staff-training are themselves MLR17 requirements, anyone involved in those activities would also be “relevant employees”.

The draft regs had included “agents” in this screening process, but “agents” were removed from the final version (which might explain why the IPA’s notice to members still referred, I think incorrectly, to screening agents).

“Screening” means “an assessment of the skills, knowledge and expertise of the individual to carry out their functions effectively and the conduct and integrity of the individual”. I suspect these items are generally covered in recruitment and appraisal processes, but they will need to be adequately documented in future specifically with the MLR17 in mind.

Reg 21 requires “relevant employees” to be screened, both before they are appointed and whilst so employed.

  • Independent audit function

Two questions came immediately to my mind: how independent is “independent” and what constitutes an “audit”?

  • What is an “audit”?

Reg 21 describes it as entailing the following:

  1. An examination and evaluation of the adequacy and effectiveness of the policies, controls and procedures adopted (see below)
  2. recommendations in relation to those policies, controls and procedures; and
  3. monitoring compliance with those recommendations.

This sounds very much like the process followed for the ICAEW’s Insolvency Compliance Reviews. Indeed, the ICAEW believes that firms’ money laundering compliance reviews, which they should already be performing, address the MLR17 requirement. ICAS is awaiting confirmation on how their current compliance review requirement stacks up against this audit requirement. The IPA has not made any comment, although I cannot see that the self certification process bears any resemblance to what is required here.

  • How independent is “independent”?

As far as I can see, the ICAEW is the only RPB that has made any comment: “you should make sure that your Money Laundering Compliance Principal is responsible for performing this review”. The Law Society explains: “the regulations do not state that the independent audit function has to be external to your firm, but it should be independent of the specific function being reviewed”. It seems to me, therefore, that if the “MLCP” is heavily involved in, say, the customer due diligence process, then they might not be the right person for the job.

 

Reg 19: Policies, Controls and Procedures

I’ll skip through this section quickly, not because it is unimportant – I accept that it is vital and I suspect it will feature heavily in monitoring visits – but because it is so dull! Sorry, it had to be said.

All firms will need to maintain written policies, controls and procedures covering pretty-much all relevant areas of compliance with the MLR17. I think that anyone drafting these would do well to tick off every Reg 19 item plus carry out an overall sense-check, much as we would double-check a SIP16 Statement.

These policies, controls and procedures must also:

  • be approved by the firm’s “senior management” (defined, I think quite widely, in Reg 3);
  • be regularly reviewed and updated, with all changes made being documented in writing; and
  • be communicated within the firm, with such steps taken (and steps to communicate any changes) being documented in writing.

Regs 19 and 20 adds further requirements for firms with overseas subsidiaries or branches.

 

Reg 24: Staff Training

Of course, the MLR07 required regular staff training, so have things changed under the MLR17?

Setting aside the vague “size and nature” references to what “appropriate measures” might look like, the material changes are that:

  • measures must include making relevant employees aware of, not only the usual MLR matters, but also of “the requirements of data protection, which are relevant to the implementation of these Regulations”

Data protection newly features elsewhere in the MLR17, most practically around record-keeping (see below) and in the client take-on process (which I will cover in a future blog), although it would also be relevant to make employees aware of the principles around handling personal data gathered for the purposes of complying with the MLR17 (Reg 41).

  • a written record must be maintained of the “measures taken” and “in particular, of the training given”.

I’m sure we’re used to documenting evidence that staff have completed regular MLR training, but the above quote indicates that we should document other measures taken to make staff aware, perhaps for example the receipt of induction training, staff handbooks and manuals.

 

Reg 40: Record-Keeping

Although the MLR17 have retained the MLR07’s basic standard of 5 years for record-keeping, there is a problematic change in emphasis.

Both MLRs require customer due diligence records to be retained for “at least” 5 years, but the MLR17 require any personal data contained in these records to be deleted after 5 years from the completion of an occasional transaction or the end of the business relationship. The MLR17 also put the same record-keeping requirements on documents to support transactions that are the subject of customer due diligence measures or ongoing monitoring.

Although there are some exceptions to this deletion requirement, e.g. where the records need to be retained for legal proceedings, this could add a burden to firms whose systems are set up to store records to a 6- or 10-year standard. To be fair though, the data protection principles have for a long time now included that personal data should not be kept for longer than is necessary, so the implementation of smarter archiving practices may be long overdue.

 

Reg 18: the Relevant Person’s Risk Assessment

Personally, I think this Reg may present the greatest challenge: a relevant person must “take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its business is subject”. This is not referring to the risk assessment carried out as part of the customer due diligence process. This is a risk assessment of the relevant person’s business, i.e. where do the risks lie in the work undertaken by the IP?

  • What is the purpose of this risk assessment?

It needs to feed into:

  • the design and maintenance of the policies, procedures and controls;
  • decisions regarding employee-screening and the independent audit function; and
  • the extent of customer due diligence measures taken in each case, including (but not only) whether enhanced or simplified due diligence should apply.

The MLR17 state that relevant persons must provide their risk assessment to their Supervisory Authority on request. Supervisory Authorities must review firms’ risks assessments (on a risk-based approach) and the IPA has stated that it will be reviewed as part of routine monitoring visits.

  • How do you write the risk assessment?

The IPA and the ICAEW direct members to the CCAB’s current Guidance: https://goo.gl/LBgRKX. It’s true, Section 4 of the Guidance provides some pointers, but personally I think the Guidance is showing its age, as the MLR17 add more to the statutory list of risk factors that you need to consider than are covered by the Guidance. Therefore, if you do refer to the Guidance, I would also recommend cross-checking against Reg 18 itself to make sure that you have captured everything relevant.

The Reg 18 risk factors that you need to consider (although there could be others) are:

  • your “customers”;
  • the countries or geographic areas in which you operate;
  • your products or services;
  • the transactions you engage in or handle; and
  • your delivery channels.

The task requires some lateral thinking to see these risk factors through an IP’s eyes, but I think it is a valuable exercise: one of the problems with MLR07 is that it all became process-driven, it soon boiled down to ticking boxes seemingly with the sole purpose of confirming identities. I think these new regs are an opportunity for us to take a fresh look at the risks: in what areas of our work are we most – and least – likely to encounter money laundering or terrorist financing? What services or transactions could be attractive – or prohibitive – to potential money launderers? Simply considering these questions could help us and staff to be more alert to strange potential clients, behaviours or requests.

Admittedly, this still doesn’t help much in drafting the risk assessment. If it is any consolation, the ICAEW has stated that, as the risk assessment will depend on the size and nature of your firm, the overall risk assessment of a small firm “may be quite succinct”.

 

Reg 26: Seeking the Approval of the Supervisory Authorities

The MLR17 give the Supervisory Authorities a great deal of new work to do. (I wonder how all this extra work is going to be paid for..?) For example, they need to conduct their own risk assessment and must create risk profiles of their members to inform their monitoring activities.

Reg 26 creates a whole new “approval” process, not only for licensed IPs, but also for firms’, beneficial owners, officers and managers (which include MLROs). The Supervisory Authority’s approval must be granted unless the person has been convicted of a “relevant offence” (Schedule 3 to the MLR17 lists 35 such offences).

  • What if we’re not yet “approved”?

Those requiring approval can act as IPs, beneficial owners, officers or managers of relevant firms provided that they apply for approval before 26 June 2018. Although Reg 26(4) states that “a relevant firm must take reasonable care to ensure that no-one is appointed, or continues to act, as an officer or manager of the firm unless they have been approved or have applied for approval and the application has not yet been determined”, my enquiries to the main RPBs suggest that they are not viewing this provision as being triggered until 26 June 2018 (and who can blame them, given the lack of notice we have all had?!), i.e. provided that we take steps before 26 June 2018 to become approved, there should be nothing to worry about.

Indications from the main RPBs are that the approval application process will become clear around licence-renewal time.

  • Who is my Supervisory Authority?

Under the MLR07, I think the answer to the above question gradually became clear. The MLR07 had stated that each professional body was the Supervisory Authority for relevant persons regulated by it. Therefore, for example, if I held my insolvency licence with the ICAEW, but I was also an ordinary member of the IPA, the ICAEW would be my Supervisory Authority, as ordinary membership of the IPA carries no real regulation with it (I just need to make sure I comply with the membership rules).

However, the MLR17 introduced a small but significant change. Reg 7(1)(b) states that:

“each of the professional bodies listed in Schedule 1 is the supervisory authority for relevant persons who are members of it, or regulated or supervised by it”.

Therefore, it seems to me that, under the above scenario, I would now have two Supervisory Authorities. I suspect there are lots of members of professional bodies who look to a different body to act as its regulator, especially considering the wide range of activities falling under the MLR17.

Whilst having two Supervisory Authorities is nothing new (as IPA-licensed IPs working in an accountancy practice know well), I think that these developments – the widened scope from solely regulated members to members generally, the introduction of new approval processes (which may require applications to more than one body?) and the additional expensive burdens falling on Supervisory Authorities – may lead members to question the value of paying annual subs to more than one body.

Alternatively, perhaps we will get some clarification on the interaction of multiple Supervisory Authorities. Both MLRs encourage cooperation between bodies so that regulatory efforts are not duplicated, but we have seen little such cooperation to date.

 

Your to-do list

In summary, I think you might tackle the practice-level changes brought about by the MLR17 as follows (depending, of course, on what is proportionate and appropriate with regard to the size and nature of the business):

  1. Document the appointment of a principal as the person responsible for the firm’s MLR17 compliance and inform your Supervisory Authority/Authorities of the appointment
  2. Create/refresh the firm-wide risk assessment based on Reg 18
  3. Create/revisit policies, controls and procedures for meeting all aspects of the MLR17 based on Reg 19 (including revised due diligence measures etc., which I have not covered above) and document their approval by the firm’s senior management
  4. Included in (3) should be incorporation of MLR-specific assessments in staff recruitment and appraisal processes per Reg 21
  5. Also included in (3) should be a revisit of the firm’s archiving processes to ensure that due diligence documentation is held in line with Reg 40
  6. Carry out a staff training session to communicate 2, 3, 4 and 5 above and retain evidence of who has received what training and what new documentation
  7. Schedule a review of the procedures etc. (the “independent audit”) for a few months after the new processes have been rolled out
  8. Ensure that the annual and induction MLR staff training provisions reflect the MLR17, including relevant data protection matters; if a suitable product is available (and if (6) above did not update staff on the MLR17 changes), consider running it early for existing staff

 

More Changes

Although this is a meaty to-do list already, I have not even started on the MLR17 changes impacting on our day-to-day business, such as the customer due diligence measures and ongoing monitoring.

In my next post, I will examine the changes from an engagement basis.


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The New Rules: Part 1… of many

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

 

Starting at the start

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

 

New Rules, new approach to transitional provisions

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

 

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

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

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

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

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

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

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

 

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

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

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

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

 

Other transitionals

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

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

 

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

How long is one month?

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

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

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

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

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

 

Reporting transactions on a period-end date

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

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

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

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

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

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

 

So what is the deadline for sending out progress reports?

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

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

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

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

 

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

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

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

 

Opting out

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

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

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

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

 

Wider website use

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

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

 

Part 1: just the beginning

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

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

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


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The new Insolvency Rules: is the wait almost over?

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The last published .gov.uk update on the new Insolvency Rules was July 2015, when the expectation was that the Rules would be made in “Spring 2016 with a commencement date of 1 October 2016”. As that day fast approaches, where are we..?

Is there a light at the end of the tunnel?

At the ICAEW’s London roadshow last week, Simon Whiting, Senior Policy Advisor of the Insolvency Service, gave us the news:

“we are aiming to lay the Rules before Parliament in the week commencing 10 October 2016”

“commencement will be 6 April 2017”

“… all subject to Ministerial approval”

Technical and compliance directors, managers and consultants have been fearing and dreading this day for several years now. Although my stomach still turns when I think of all the candle-burning days and nights ahead, personally I feel like I’ve done enough waiting: I’m ready!

 

Spare a thought for colleagues

This is a short plea to all appointment-taking and practice-heading IPs in England & Wales: please try to avoid giving your technical and compliance staff any other projects over the next six to twelve months.

The new Rules will be well over 400 pages long and they will introduce changes from the blinding to the subtle. Okay, many changes will be neither here nor there; if some changes are overlooked, the worst effect will be a red flush at the next monitoring visit. However, some crucial processes – such as how to get appointed and how to obtain fee approval – will change fundamentally and you will want to get these correct from the start.

Also, don’t be misled into thinking that the changes won’t matter until you get your first new appointment after 6 April 2017. The plan is that, with the exception of a few common-sense items, the new Rules will apply across the board, to both existing and future appointments. This does have an advantage – we won’t have to devise and endure dual processes, as we have done since 2010 – however, it will be impossible to introduce the changes gradually: when we wake up on 6 April 2017, we will have to be ready to implement the new Rules for cases at any stage from cradle to grave.

 

The headline changes

Deborah Manzoori summarised some of the planned changes in an earlier post on the Compliance Alliance’s blog (https://goo.gl/qGLZWv). We’ve known about these ever since the Small Business Enterprise and Employment Act 2015 and the Deregulation Act 2015 came into being. These changes are set in stone and we’ve simply been waiting for the new Rules to tell us “how to”.

They include:

  • Abolition of physical meetings (unless requested by creditors who meet prescribed criteria)
  • Introduction of decisions approved by “deemed consent”
  • “Qualifying decision procedures” – i.e. the methods by which positive responses to proposed decisions can be sought
  • Allowing small debts without proofs
  • Official Receiver immediately being appointed as Trustee in Bankruptcy

If you want to learn more about these changes as set out in the two Acts, which are good foundations to the detailed changes to come, my partner Jo Harris will be recording a webinar in a week’s time. Email info@thecompliancealliance.co.uk for more information.

 

The “how to”s… and more

If you have a chance to attend one of the ICAEW’s roadshows – or indeed one of the IPA’s – I would recommend it. Hearing first-hand how the Insolvency Service plans to implement the Acts’ changes is quite an experience: I challenge you not to leave the room feeling baffled and just a little depressed!

I’m sure things will become crystal clear when we finally get to see the new Rules… won’t they?

I don’t want to steal the roadshows’ thunder, but here are some items that furrowed my brow:

  • Complicated S98s

I am very keen to see how S98s will work: Centrebinds will still be 14 days max, but creditors will have some time after receiving notices (for a virtual meeting or a proposed deemed consent) to request a physical meeting… for which directors (/IPs) then will need to issue notice. I am sure it can be done, but timescales will be very tight (perhaps it will mean that more company meetings will be adjourned) and companies/IPs will need to manage unexpected hiatus periods.

  • Complicated Statements of Affairs

It will take some careful managing to comply with the requirement for statements of affairs submitted to Companies House to exclude details of “consumers and employees”, whilst ensuring that creditors receive the full schedules. Will this mean a new creditor code in IPS etc.? What about cases where the director submits a hard copy SoA (e.g. Administrations); will insolvency staff need to type up separate schedules for RoC? Will “consumers” always be obvious, e.g. will they be easily distinguishable from other individual creditors? What is the risk if an IP gets it wrong..?

  • Complicated ADM-CVL Conversions

The Insolvency Service has made several attempts in the past to manage the move from Administration to CVL. Their latest method sounds better, but still not ideal. It seems that the conversion will happen when the final Admin report is filed at RoC… and, if in the meantime “anything” has happened, the Administrator will inform the Liquidator. So the final Admin report won’t actually present the final position and IPs will still be on tenterhooks waiting for the RoC to bring down the shutter.

These are only some of the meaty changes. There are many, many more, affecting every part of what we do, even to the extent of changing some of our language: you may think that it is not before time that “defray” is being removed from Notices of No (Further) Dividend, but think of the template-editing to be done as a consequence.

 

Standing on the starting blocks

As we take our places on the starting blocks – working (/support!) groups are created, timetables are formulated, and we wave goodbye to holidays – we steel ourselves for the next six months: bring it on!

We at the Compliance Alliance are planning a suite of progressive webinars and document pack updates to help clients prepare for the big day. Call us sceptical, but we’re reluctant to set out exactly what we’re planning until we see the new Rules land – we’ve been here before! However, if you want me to explain to you what we think we’ll be doing, please do get in touch with me.

 


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Digital D-reporting: the Devil is in the Detail

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Many of us have been on tenterhooks, waiting to see the detail of the new D-reporting process… which comes into effect in two days!

I lost patience and got in direct contact with the Insolvency Service, who graciously allowed me an audience to convey many of my concerns and to learn more about how it is all intended to work.

We have been promised a Dear IP imminently, but here are the Service’s answers to my questions.

The Basics

I’m sure we’ve all learned the basics by now:

  • D-reporting for new appointments on or after 6 April 2016 will be carried out online via a .gov.uk portal and will need to be completed within 3 months.
  • IPs will have access to an online “dashboard” listing all their post-6 April (CDDA-relevant) appointments with the due dates for D-submissions using a traffic light system of flags.
  • The Service’s plan is that the system will allow IPs to delegate cases to staff to complete the D-report, although these will still be subject to approval by the IP. Staff access is hoped to be functional by mid/late April.
  • Submitted D-reports will remain accessible by the IP, fellow office-holders (only one submission is expected on joint appointments) and any subsequent office-holders.
  • Liquidators of Para 83 CVLs following from post-6 April Administrations will not be required to submit D-reports.
  • D-reporting for appointments prior to 6 April 2016 will continue under the old system.

The Question Bank

The new process has been “sold” to us on the basis that it will be so much simpler to complete as IPs will no longer need to decide whether, in their opinion, the directors’ conduct renders them unfit. Consequently, the Question Bank for the new D-report seeks to convey facts.  The questions are all multiple choice, the majority “simple” Yes/No, although some involve selecting from a range, e.g. regarding the number of creditors.  This is so that the answers can be processed through a rules engine to sift cases not requiring a human review.

In his webinar for the ICAEW last month, Mark Danks of the Insolvency Service did reveal some valuable information about the Question Bank, but I was left with the impression that the Service’s target was to have the process settled in June 2016, so that it is ready for receipt of the first online D-reports.

I expressed my concern to the Service that this is just not good enough. IPs would get criticised if they did not put their minds to the D-reporting task until the deadline was almost upon them and in any event it is not efficient to do so, not least because crunch-time falls in the middle of the summer holidays, so it would be ideal if IPs could get ahead of D-reporting deadlines.  How are IPs and staff supposed to prepare for the changes, if the Question Bank is not fixed and made available now?  There are checklists to amend and there is training to organise.

I was assured that the Service’s work with their IP panel indicates that the Question Bank is on the lines of current CDDA checklists and so they did not envisage (many) changes would be necessary. Now that I have seen the Question Bank, I regret to say that this is patently not the case.

If you want to revisit checklists to mirror the questions – which is how The Compliance Alliance’s revised checklist is being structured and which would be my recommendation so that you make sure that staff do the leg-work to get ready all answers before logging in – beware the following.

How can I access the Question Bank?

Unless the Service makes the Question Bank widely available, you will only be able to see it when you get a post-6 April appointment added to your dashboard. You should then be able to start the D-reporting process and click through the pages of questions.  Of course, this is not user-friendly for anyone trying to manage the work within the practice.

The Service has made available its current Question Bank to its test panel of IPs (and to others, like me, who asked). I am reluctant to provide the link here (it’s a bit too public!), but if you would like a copy of the questions, please drop me a line (insolvencyoracle@pobox.com).

I do fear, however, that the Service’s current Question Bank is not as valuable as we would hope in any event.  The Service expects these questions to change, not only before July but also thereafter, particularly when they start to see how IPs answer and react to the questions on live cases.

As Gareth Allen stated in the R3 magazine article (spring 2016): “this development is an ongoing process and we continue to refine and develop the system in response to continuous user input”. In other words, if you create a checklist to mirror the questions today, it seems to me that the chances are very high that the questions will have changed by the time your staff log in to complete the form!  I tried to stress to the Service person that I spoke to how unhelpful this would be.  I don’t want to be negative about the Service’s drive for continual improvement, but please do warn us all when/what changes are planned so that we can make appropriate changes internally in good time.  My personal preference would be that all of us on the Dear IP list (i.e. not just IPs) are given at least 3 months warning of any changes.

I know that my job is to pick at details, but I am surprised at quite how many issues I have with the current questions – some are poorly worded (e.g. “does the company appear to have ever kept records sufficient to show and explain its transactions..?” Ever? Well, yes, probably immediately on incorporation…); some are impossible for IPs to answer unless they undertake unnecessary investigation; I think that there’s a risk that some might generate false positives (e.g. “is there evidence that not all creditors have been treated equally?” Probably yes, but maybe for good reasons); and some items that I would expect to see (e.g. general misfeasance) are not covered at all.

Is the D-report just a string of multiple choice questions?

The prototype that has been made available is just this. The Service is keen to ensure that the Question Bank remains this way as far as possible so that their evaluation can be an automatic process.  If your answers hit their rules engine’s target, it will trigger a human review of the information and likely will involve an Insolvency Service staff member contacting you to ask further questions in order to decide whether it is a case worthy of taking forward.

At present, the prototype does not allow IPs to inform the Service online of any recovery actions that they intend to take/are taking, although the Service is very keen to receive this information. I understand that the ability for IPs to provide such information will form part of the online form (eventually).

What do we do if misconduct is discovered after the D-report has been submitted?

Personally, I think this is a serious disadvantage of the new process over the old. Firstly, I think that the need to submit D-reports in 3 months instead of 6 greatly increases the chances that you will discover or learn new information that would have affected your report.

However more importantly I think, the removal of the IP’s decision about unfitness removes the IP’s ability to act as any kind of filter: if you learn “new information”, you have to report it, whether or not you think it is material.  Therefore, it doesn’t mean you need only consider newly-identified “misconduct” – it goes much further than this.

What is “new information”?

The new rules define “new information” as “information which an office-holder considers should have been included in a conduct report prepared in relation to the company, or would have been so included had it been available before the report was sent”. If new information comes to the IP’s attention, he must provide this to the Insolvency Service as soon as reasonably practicable.  A failure to do so constitutes an offence.

I pointed out to the Service that, technically, “new information” could involve a wide range of immaterial changes to an IP’s original report. For example, the current questions include “what is the value of the likely dividend?”  If you answer “not known at this stage”, do the rules mean that you need to submit “new information” when this changes?

That may be an extreme example, but many other director-related questions may lead to “new information”. For example: “can all the company’s transactions with directors and any associated parties be identified?”  Just because your original “no” can later be changed to “yes”, does that mean you need to report it to the Service?  One would hope that IPs could exercise discretion in deciding whether technically “new information” is of any interest to the Service, but I do wonder if the rules prohibit this.

I am not certain how this issue can be overcome – the rules are the rules. The Service person gave me the impression that the process for delivering “new information” has not yet been formulated.  However, I hope that the Service sees – and will somehow deal with – the need to avoid burdening IPs (and Service staff) with a requirement to inform them of all “new information”.

What practically can we do to prepare for the new process?

Your to-do list might include these:

  • amend diaries for new appointments to reflect the 3-month timescale.
  • consider changing internal checklists. I guess that you don’t have to, but in my view it would be best to structure internal checklists so that every online question (and preferably no others) is addressed in turn. Certainly, this is how we at The Compliance Alliance are revising our CDDA checklists. Then the IP could review the staff’s completion of the checklist, agree the results and leave the staff member to upload the results into the online form. Ensuring that checklists mirror the online D-report will also help you make revisions whenever the Service makes changes.
  • consider staff resources. D-reporting on pre 6 April 2016 cases will continue as previously. Therefore, you are likely to see roughly double the number of D-reports falling due during July to September 2016, as you will have both 6-month deadlines on old cases and 3-month deadlines on new cases falling simultaneously. I recommend that you consider the effect on your staff resources, particularly as there will be a learning curve associated with the new process… and not to mention that most staff will want summer holidays!
  • ensure that staff are trained. Staff will need to be confident in dealing with the new process, but also important is embedding an awareness of the need to submit “new information” as and when it is discovered.
  • consider also adding a prompt to case review templates to reflect on whether all “new information” has been sent to the Service

I believe that the “new information” provisions present a particular challenge. You will need to ensure that “new information” is identified and reported as soon as reasonably practicable (even if, somehow, it is accepted by the Service and the RPBs that we need not report immaterial “new information”).  Being alert to report new information would seem to be particularly important where you have submitted a D-report before getting access to company records and where your later efforts identified misconduct.  It would also be relevant where you suspected misconduct – and answered “uncertain” or “no” where questions asked about the existence of evidence – and only later did you discover evidence.

Some other consequences of the new statutory provisions

The main statutory provisions are located in:

  • Section 107 of the Small Business Enterprise and Employment Act 2015 (http://goo.gl/NmcRlp);
  • The Insolvent Companies (Reports on Conduct of Directors) (England and Wales) Rules 2016 (http://goo.gl/6OORQn); and
  • The Insolvent Companies (Reports on Conduct of Directors) (Scotland) Rules 2016 (http://goo.gl/wZUj1K)

The Service has widely reported that old-style D-reports will continue to be received until October 2016, but in my view this overlooks the fact that there will be old-style D-reports due later than this.  For one thing, CVLs following from pre 6 April 2016 Administrations are subject to the old regime.  This will also affect old cases where you have submitted an interim D-return with the expectation of submitting a full D1 or final D2 after 6 October 2016.  Therefore, don’t delete all your old templates until you’re sure that you have reported every last old-style D-report.

From my reading of the rules, it seems to me that they provide a transitional period only up to 6 October 2016, but after this date the old D-forms will not be acceptable under the rules.  Presumably, the Service will devise a solution by October!

UPDATE 03/08/2016: I understand that the Insolvency Service would like IPs appointed on Para 83 CVLs after 6 April 2016 either (i) to send a copy of the D1/D2 submitted in the prior Administration with a letter confirming that this form presents the picture also for the CVL; or (ii) to notify the Service of developments since the Admin D1/D2 via the online DCRS system, as they would for “new information” under the new regime – a bit of a fudge, but what can one do if the legislation does not work?!  My thanks for Victoria L for sending me this information.

Liquidators following from post 6 April 2016 Administrations will not be required to submit a D-report.  Whilst this will be good news to any Administrators who keep hold of their Para 83 CVLs, I don’t think it is great for Liquidators who are new to the case.  From my reading of the legislation, it seems to me that these liquidators will be subject to the “new information” requirements and therefore will need to review what the Administrators had reported earlier.

The old rules are revoked in full (apart from the transitional provisions covering old appointments). As far as I can see, this means that there is no longer a 14-day timescale for IPs to submit a report on vacating office.  Presumably, this is because it was felt unlikely that an IP would vacate office before the 3-month deadline.

“Quicker and easier” for whom?

In theory, the move to a simple online form should be quicker and easier for everyone: IPs, their staff and the Insolvency Service alike. However, completing a D-report is more like filling in a self-assessment tax return than completing a passport application: you won’t have all the information at your finger-tips unless you do the prep work.

Most practices have their own tried-and-tested ways of gathering information, following trails, and reaching conclusions on CDDA and SIP2 matters. Structuring a D-report on a string of questions forces our hands.  To reach 4 April and not to have given all IPs access to the detail is, in my view, irresponsible.  Either it shows how little understanding the Service has of IPs’ work or it indicates that the Service has been chasing its tail with a near-impossible deadline.  Personally, I think that it’s a bit of both.


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October starts with a bang!

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Wow! We all knew that there was a lot landing today, but in the past few hours we’ve received more news on Fees/SIP9, SIP16 and another Dear IP!

Although I’m reluctant to add to your in-boxes, I would like to highlight today’s post on The Compliance Alliance blog: http://thecompliancealliance.co.uk/blog/uncategorized/oct_changes/

I hope that that post provides a brief (for me, anyway!) summary of the bare essentials for your immediate needs on this unusual day.

Right, I’d better get back to reading..!


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October Fees Rules FAQs: more Qs than As

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Earlier this year, each of the three R3 SPG Technical Reviews was opened by John Cullen’s* fantastic presentation on the October fees rules and the draft revised SIP9.

The presentation generated many questions from delegates and a few controversial answers, which I’ve been bursting to recount here. Regrettably, work demands – and, tomorrow, my holiday – have frustrated my attempts to get blogging.

Thus, I’m being a bit cheeky, setting out here the questions… and leaving the answers for another day! I will try to get back here in a couple of weeks.

  • When can/should a CVL Liquidator seek approval for his fees: (i) prior to being appointed by the shareholders; (ii) after the general meeting but before the S98 meeting (via a Centrebind); or (iii) after the S98 meeting?
  • Would it be sufficient to provide a fees estimate to attendees of the S98 meeting? How else can an IP who takes the appointment from the floor of the S98 meeting deal with a fees resolution?
  • What level of breakdown is needed to comply with the new rules’ requirement to provide the (time cost) fees estimate broken down by “each part of the work”? For example, is “asset realisation” sufficient, or does it need to be broken down into book debt collection, sale of business/assets, etc.?
  • Given that the new rules require the (time cost) fees estimate to be broken down by “each part of the work”, does the IP need to revert to creditors if the time costs are exceeded for one part of the work, but the total estimate is not exceeded?
  • Can a (time cost) fee estimate provide a range of likely costs or does it need to be a single figure? If the latter, how should IPs estimate, for example the costs of realising the interest in a bankrupt’s property, at an early stage of the case?
  • What consequences does the expenses estimate have for the future administration of the case?
  • Can an IP stop working on a case if creditors vote against an exceeding of the fees estimate?

The Draft Revised SIP9

My swift read-through of the draft revised SIP9 has prompted a few more questions in my mind:

  • The draft revised SIP9 suggests time cost categories different from those of older SIP9s. How is this going to interact with firms’ time-recording systems and the administration of pre-October cases?
  • If an IP were to change his time-recording system in the future, would he risk falling foul of SIP9’s requirement that he “should use a consistent format throughout the life of the case”?
  • How will the SIP9’s blended rates work in practice?
  • The draft new SIP9 is not amended as regards pre-appointment costs. Given that there had been suggestions in the past that this section may apply only to pre-administration costs, where does this leave treatment of pre-CVL and pre-VA costs?
  • The draft new SIP9 is not amended as regards payments to associates, but continues to state that these should be approved “in the same manner as an office-holder’s remuneration or category 2 disbursements”. Does this mean that, where payments to associates are to be based on time costs, the estimate acts effectively as a cap so that the office-holder would need to seek creditors’ approval for any excess? As statute does not strictly require such approval to be sought, would an office-holder’s time costs incurred in reverting to creditors be justified? If an associate’s costs were treated instead as a category 2 disbursement, would this avoid the estimate acting as a cap?

 

* John Cullen is the ACCA’s representative on the JIC and an IP and partner of Menzies.

 

 

 

 


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Digging deeper into the new Acts & Rules

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I am delighted to say that I’ve had some productive exchanges with people at the Insolvency Service on the practical applications of parts of the SBEE Act, the Deregulation Act and the new fees Rules.  I have found them generally very reasonable and pragmatic.  That’s not to say, however, that it’s all good news!

Small Business Enterprise and Employment Act 2015

I’ve not covered the Small Business Enterprise and Employment Act 2015 since it was just a draft in autumn 2014.  Even now, considering that several provisions take effect from 26 May 2015, I don’t see the need to repeat the detail here.  Most of you will have received R3’s Technical Alert by email on 17 April 2015, which I think did a pretty good job of telling us all what we need to know right now.  However, there is one item that I think deserves more explanation.

CVLs – Progress Reports

As you know, the words “continuing/continues for more than one year” will be removed from S92A and S104A.  This means that, where a liquidator ceases to act at any time during a liquidation, he/she will need to issue a progress report in compliance of R2.47(3A) (for E&W only; I can see no equivalent in the Scottish Rules).

Although this may seem fairly innocuous, it now encompasses one circumstance that occurs quite frequently: the replacement of the members’ liquidator with the creditors’ choice at the S98 meeting.  The Insolvency Service has confirmed to me that this change does indeed mean that any members’ liquidator who leaves office at the S98 meeting will need to issue a progress report on his/her term in office.  There is no reason why this will not apply where the company general meeting immediately precedes the S98 meeting, although it is very difficult to see what the members’ liquidator will have to report other than an hour or so of time costs!

If the company general meeting is held on a different day to the S98 meeting, the creditors’ liquidator will also need to remember that R2.47(3A) resets the progress reporting clock and so, rather than issue a progress report for the first 12 months of the liquidation (i.e. from the date of the members’ meeting), the creditors’ liquidator will need to report every 12 months from the date of his/her appointment.

Although this seems a bit of a nonsense, I am optimistic that the progress reporting rules will become much simpler when the new Insolvency Rules come into force, which is the plan for April 2016.  Although there is still much work to be done on the draft Rules, the ones that are currently on the .gov.uk website (https://goo.gl/kr1CSR) hint that progress reports on office-holder switches will be far more flexible.  See, for example, draft Rule 18.8(4).

Deregulation Act 2015

This is an odd Act: it began life far earlier than the SBEE Act, but its progress seemed to stall when all eyes turned to the SBEE Act.  Thus, it is not surprising that it contains some items that, I think, are far more pressing for IPs than the 26 May provisions of the SBEE Act.

Correcting Minmar

Oh dear!  How long will we have to put up with the Minmar state of affairs where Notices of Intention to Appoint an Administrator (NoIA) have to be issued even on some cases where there is no floating charge holder?!

The answer is: not much longer.

The answer is in the Deregulation Act: its paragraph 6 of schedule 6 will amend Para 26 of Schedule B1 so that the need to issue an NoIA is restricted to cases only where there is a floating charge holder.  This will then flow through nicely to the existing Insolvency Rules.  The problem is that unfortunately it doesn’t yet have a commencement date.

I have been told that it is the Insolvency Service’s current intention to commence this provision in October 2015 (although, of course, that was under the previous Business Secretary).

New Fees Rules (The Insolvency (Amendment) Rules 2015)

A month ago, I blogged on this subject – see http://wp.me/p2FU2Z-a3 – and now I’m able to update some of my queries.

When is a liquidator not a liquidator?

As mentioned previously, R4.127 will be amended to state that “where the liquidator proposes to take [remuneration on a time costs basis], the liquidator must prior to the determination… give to each creditor… the fees estimate”, but does this mean that the IP needs to be in office as liquidator when he/she issues the fees estimate?

The Insolvency Service does not believe this is limited to the liquidator once he/she is in office.  In other words, the prospective liquidator may provide the fees estimate before the members’ meeting.  This means that, provided the IP can produce an early estimate, these new rules should not impact on the current practice of holding members’ meetings and S98 meetings on the same day.

It is worth noting that the new rules do not stipulate how long before the creditors’ meeting (or postal decision) the fees estimate should be sent: thus, it could be sent along with the S98 notice or at any time before the meeting is held.  As the fees estimate needs to be provided to all creditors, however, it will not be sufficient to hand out the fees estimate only at the S98 meeting.

Exceptional treatment needed for SoS-appointed liquidators

As noted in my previous blog, the transitional provisions operate so that, generally, if an IP takes office (as administrator, liquidator, or trustee) after 1 October 2015, he/she will need to follow the new rules in fixing the basis of his/her fees.  However, whilst the rules cover compulsory liquidations where the liquidator is appointed by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140), they do not refer to appointments by the Secretary of State (S137).

The consequence of this is that the new rules will apply to all SoS-appointment liquidations, irrespective of when the liquidator was appointed.  However, the Insolvency Service has stated that, if the basis of the liquidator’s fees has already been approved before 1 October 2015, then the new rules will have no effect on that case (unless the liquidator seeks to change the basis of his/her fees).

Thus, you may want to look to get your fees fixed on all existing SoS appointment compulsory liquidations before 1 October 2015; otherwise you will need to have some system in place to ensure that you follow the new rules, despite your appointment commencing before 1 October.

Block transfers

As the transitional provisions define that the new rules apply generally wherever there is an administrator/liquidator/trustee appointed after 1 October 2015, I wondered how this would impact, say, cases involving block transfer orders after 1 October 2015: does this mean that the new office-holder would need to go through the fees estimate etc. process?

The answer I received was: not where the new office-holder is continuing to draw remuneration under any prior approval.  Only where a new office-holder seeks to change the basis of his/her fees will the new rules kick in.

I look forward to meeting some of you, and hearing more on these and other developments, at R3’s SPG Technical Review series, the first one being held on Tuesday 12 May 2015 in Manchester.  There’s a lot going on!


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New IP Fees Rules: Simples?

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With little more than benign overviews of the new fees rules out there, I thought I would examine them a bit closer.  What are the practical implications of the rules and do they contain any risky trap-doors?

My overriding thoughts are similar to those I have on the pre-pack changes: in an apparent effort to improve transparency, is the whole process becoming so unwieldy that it will turn IPs off altogether?  Maybe that’s the plan: make it so difficult to seek time costs that IPs switch to fixed/% fees.

As you know, the new rules take effect from 1 October 2015.  They can be found at: http://goo.gl/mekR5j.

Stephen Leslie, for Lexis Nexis, has produced a good basic summary of what they contain at: http://goo.gl/eqs9Aq.  R3’s Technical Bulletin 109 and Dear IP 65 also cover the subject.

S98s: same problem, different solutions

For CVLs, when should the liquidator set out his fees estimate?

R4.127(2A) will state that “the liquidator must prior to the determination of” the fee basis give the fees estimate (and details of expenses) to each creditor.  It seems to me that reference to “liquidator” requires the IP to be in office – so the fees estimate cannot be provided, say, along with notice of the S98 meeting.

But am I reading too much into this?  After all, R2.33 currently refers to pre-administration costs incurred by the “administrator”, when clearly the IP isn’t in office as administrator when the costs are incurred.  Therefore, maybe reference in the new rules to “liquidator” similarly is sloppy-hand to include “the person who would become liquidator”.  If that is the case, then maybe the expectation is that IPs will provide fees estimates along with S98 notices with a view to running S98 meetings along the same lines as they are at present.

Of course, then there’s the argument about how an IP is supposed to come up with a sensible estimate before he knows anything about the case.  Ok, he will have a better idea – but still not a great one – when the Statement of Affairs is drafted, but that’s little more than a few scribbles on a page, if that, at the stage when the S98 notices are issued.  So how long “prior” to the resolution should the liquidator “give” the information?  Given that S98s are pretty swift events anyway, would it be acceptable to send estimates the day before the S98 meeting..?

A confabulation of compliance consultants, especially with nothing more to guide us than a handful of new rules, is bound to generate a variety of proposed solutions.  Here are just three of them:

(i)         The return of the Centrebind

A Centrebind would overcome the problem of the IP being in office at the time of issuing the estimate and 14 days or thereabouts would seem sufficient to provide creditors with a reasonable estimate before the S98 meeting.

Of course, Centrebinds went out of fashion because of the limited powers the members’ liquidator has before the S98 meeting is held.  It’s not a great place to be as an office holder.  Do we really want to return to that practice wholesale?  And given the Cork Committee’s dissatisfaction over Centrebinds, would the regulators take a dim view if the practice were taken up again just to ensure that the IP could get his fees approved at the S98 meeting?  Some might argue that it’s the most practical way of working with the rules, but are there alternative solutions..?

(ii)        A second creditors’ meeting

This was my first thought when I read the rules: why seek a fees resolution at the S98 meeting?  Would it really be such a chore to convene another creditors’ meeting soon after appointment?

True, it would add another chunk of costs to the estate, but would IPs be criticised for taking this approach?  After all, how much of a solid estimate can an IP give before he truly knows what is involved in the case?  In my view, the costs of convening a second meeting would be entirely justifiable, as it seems to be the way the rules are pushing IPs.  Indeed, the rules as a whole are hardly cost-saving, given the additional work IPs will need to undertake to provide estimates and seek increases, if necessary later on.

Of course, in having a second meeting, IPs run the risk that the creditors already will have lost interest and they’re left with inquorate meetings and no resolution.  Also, as the liquidator (or an associate) will be chairman of the second meeting, they won’t be able to rely on the director-chairman’s vote or his use of general proxies.  However, the practice of looking to the director to approve the liquidator’s fees is viewed with scepticism anyway – many observers don’t recognise that, with so little creditor engagement, it’s sometimes the only practical way – so maybe it is a practice that we should be distancing ourselves from in any event.

(iii)       Fixed fees

This wasn’t my idea, but I see the attraction of it, particularly for “burial jobs”.

Given all the hassle of providing a detailed estimate of time costs, why bother, especially on jobs where in all likelihood the time costs incurred will outstrip the asset realisations net of other costs?  If liquidators were to seek a fixed fee, they would still need to provide, prior to the fees resolution, “details of the work the liquidator proposes to undertake and the expenses the liquidator considers will, or are likely to be, incurred”, but they could avoid providing the full estimated time costs breakdown.

Thus (provided that the IP doesn’t need to be in office as liquidator at the time), along with the S98 notices or just before the meeting, the IP can provide a pretty standard summary of tasks to undertake in any liquidation and set out the proposal to seek fees of £X.  If the SoA shows assets of, say, £15,000, the SoA/S98 fee is £7,500 of this and there are a few £hundreds of standard expenses, a fixed fee of £10,000 would seem reasonable to cover everything that a liquidator needs to do and, 9 times out of 10, there would be no need to seek an increase.

I guess that the proxy forms should list the proposed fee resolution in full, which would suggest that the IP knows what he wants to charge at the point of issuing the S98 notices.  As mentioned above, this would involve a degree of uncertainty, but for IPs working in the burial market, I can see that the risk is outweighed by the simplicity of this approach.  With Reg 13 ditched, IPs might not need to maintain time records* – what could be simpler?! – and they wouldn’t suffer the closure Catch 22 of billing time costs at a point when they haven’t yet spent the time closing the case.

But does this solution have legs for anything other than the simplest of jobs, where the IP would always be looking at a time costs write-off from the word go?  On its own, I don’t think so.  However, I don’t think it would be beyond the realms of possibility to devise a fairly standard formula for seeking fees on a combination of a fixed sum and a percentage basis.  This might help address any unexpected asset realisations, for example antecedent transactions or hidden directors’ loans.  Seeking percentage fees of such asset realisations would also deal with the concerns that it may be both impractical and indiscrete to propose fees estimates detailing what investigatory work is anticipated and how much that is likely to cost.

With several possibilities available, evidently S98s will require some thought and planning in readiness for 1 October.

* Although the Insolvency Practitioners (Amendment) Regulations 2015 are removing the Regulation 13 IP Case Record and thus, with it, the specific requirement to maintain “records of the amount of time spent on the case”, I do wonder whether an IP will be expected to continue to be prepared to meet the requirements of R1.55, R5.66 and Reg 36A of the 1994 Regs as regards providing time cost information to pretty-much any interested party who asks.  I know that no one asks, but with the continued existence of these Rules and Reg, does the abolition of Reg 13 really mean the abolition of time cost records in fixed/percentage fee cases?

Administrations: confusing

Of course, when tinkering with fee approval, it was always going to prove confusing for Administrations!  Here are a few reasons why:

Para 52(1)(b) cases

The current Act & Rules do not prescribe the process for seeking fee approval from secured (and preferential) creditors in Para 52(1)(b) cases.  Therefore, particularly where the Administrator has been appointed by a secured creditor and so will be reporting to his appointor outside of the statutory process, often a request is made very early on for approval for fees.

In future, if the Administrator is looking for time costs, he will need to “give to each creditor” the fees and expenses estimates before “determination” of the fee basis.  This indicates to me that an Administrator will not be able to seek approval for fees from a secured creditor before he has issued his Proposals to all creditors… unless he sends the estimates to all creditors in something other than his Proposals (unlikely)… or unless approval rests with other creditors in addition to his appointor – i.e. another secured creditor or also the preferential creditors – because it would seem to me that the basis of his fees is not “determined” until all necessary creditors have approved it.

This also means that an Administrator’s Proposals will have to include the fees and expenses estimates even for Para 52(1)(b) cases.  I can see some sense in this, as unsecured creditors can always requisition a meeting to form a committee that will override the secureds’/prefs’ approval of fees.  However, it seems quite a leap in policy, given that the full SIP9 information is not currently required in Proposals in these cases.

Changed outcomes

I am not surprised that the Service has introduced a new rule to deal with some Administrations where the prospective outcome has changed so that a different class of creditors is now in the frame for a recovery.  The Enterprise Act’s dual mechanism for obtaining fee approval depending on the anticipated outcome was always meant to have ensured that fees were approved by the party whose recovery was reduced because of the fees.  It’s true that the Act & Rules often do not deliver that consequence (not least because Para 52(1)(c) cases aren’t dealt with at all properly), but that has always been touted as the policy objective.

Sure enough, Dear IP 65 repeats this objective: “the new provision revises to whom the office holder must make a request or application in such circumstances [as described below] to make sure that such matters are determined by parties with the appropriate economic interest”.  Yes, but does it..?

In future, if fees have been approved on a Para 52(1)(b) case by secureds/prefs and the Administrator wants to draw fees in excess of the previous estimate, but he now thinks that a (non-p part) unsecured dividend will be made, he will need to seek approval from the unsecured creditors.  Fine.

However, there is no new provision to deal with outcomes changing in the other direction.  For example, if an Administrator originally thought that there would be a (non-p part) unsecured dividend – so he sought approval for fees by a resolution of the unsecured creditors – but now he thinks that there won’t be a dividend and maybe even that the secureds/prefs will suffer a shortfall, to whom does he look for approval of fees in excess of the previous estimate?  From what I can see, he will still go to the unsecured creditors.

[Theoretically, he might be able to issue revised Proposals in which he makes a Para 52(1)(b) statement, so that the secureds/prefs have authority to approve his fees.  In any event, the changed outcome might make revised Proposals appropriate.  But then what?  Would that result in the basis of his fees not being “determined” with the consequence that he has to issue fees and expenses estimates again to every creditor before he can seek the secureds’/prefs’ approval to the basis of his fees?]

Given that the OFT study concluded that secured creditors are so much better at controlling fees than unsecureds are, why not hand the power to secured creditors automatically by means of the new rules when the outcome deteriorates, in the same way that they shift the power automatically from the secureds to the unsecureds when the outcome improves?

Transitional provisions

This is more just a headache than confusing: one more permutation to accommodate in systems.

In general, the transitional provisions are designed so that, if an IP takes office after 1 October 2015, he will need to go through the new process to get his fees approved.  In effect, they treat Para 83 CVLs as new appointments, so the new rules disapply R4.127(5A) for Para 83 CVLs beginning after October in relation to Administrations that began before October.  Thus, Para 83 CVL Liquidators will not be able to rely on any fee approvals in the Administration.  Instead, they will have to go through the new process.

However, R4.127(5A) kicks back in for Para 83 CVLs following Administrations that begin after 1 October.  This is because, in these cases, the Administrator will have already gone through the new process in order to get fee approval, so it seems reasonable that the Liquidator can continue to rely on this approval.  Of course, the Liquidator will be subject to the Administrator’s fee estimate, so if he wants to draw fees in excess of the estimate, he will need to go through the new process for approval.

It might seem a bit much to expect an Administrator to be able to estimate a subsequent Liquidator’s fees.  For once, I think that the Insolvency Service has been sensible: the rules state that the Administrator’s estimates may include any subsequent Liquidator’s fees and expenses, not must – it’s good to see office holders left with a choice for a change!  Thus, where the Administrator’s estimates have not provided anything for the Liquidator, an increase in the estimate is probably going to be one of his first tasks.

I wonder if an Administrator’s estimate might be devised so that, if he has not used up his estimate in full, then it can be treated as the Liquidator’s estimate..?  I suspect the regulators might take a dim view of that…

Compulsory Liquidations: inconsistent treatment?

I didn’t spot this one, but it was passed to me by a Technical & Compliance Manager (thank you, D).

As explained above, the transitional provisions seem to be designed so that the critical date is the date of the IP’s appointment, rather than the more commonly-used insolvency event date.

It gets complicated, however, when one tries to define every way that an IP can be appointed.  For compulsory liquidations, the transitional provisions cover appointments (post-1 Oct) by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140).

What about appointments by the Secretary of State (S137)?

I cannot see why these appointments should be treated differently.  Does this mean that no Secretary of State appointments will be subject to the new rules?  Or does it mean that all SoS appointments will be subject to them..?

I have asked the Insolvency Service for comments.

Practical difficulties

Of course, there are practical difficulties in devising fee and expenses estimates for each case.  The Impact Assessment for the new rules (http://goo.gl/vCOsnS) state: “Based on informal discussions with IPs and internal analysis by the Insolvency Service it has been estimated that the costs of learning about the new requirements will be relatively moderate as in many cases IPs produce estimates of the work they will be undertaking for their own budgeting purposes. Therefore the industry has the pre existing infrastructure in place to produce estimates and so there will no additional set up costs for business. All the information that will be needed for the estimates is already available to IPs so there will be no additional costs of gathering information” (paragraph 34).  What nonsense!  Even if IPs do estimate fees at the start of a job, they are little more than finger-in-the-air estimates and are way less sophisticated than the new rules envisage.

The Insolvency Service followed up this nonsense with the suggestion that it would take IPs 1 hour to get their systems up to scratch for the changes!  Personally, I feel that such a fantasy-based statement is an insult to my intelligence.

In relation to generating fee and expenses estimates, the Impact Assessment states: “The work is likely to be an administrative task extended from the existing practice to produce estimates for business planning so we believe the work is likely to be completed by support staff within practices. It is estimated that the task will take around 15 minutes per case” (paragraph 36).  This is just so much nonsense!

Anyway, back to the practicalities…

The Insolvency Service has explained that it is working with the JIC to tackle “the key challenge… to present this information [the fees and expenses estimates] in a clear, concise format that the creditor, i.e. the end user, finds both useful and informative” (Dear IP 65, article 55).  I guess we are talking here about a revised SIP9.

Given that it has taken the IS/JIC ten months (and counting) to complete a revised SIP16 following Teresa Graham’s report, how close to the 1 October deadline do you think we’ll get before we see a revised SIP9?  I know that the SIP16 revision has been dependent on the pre-pack pool being set up, but I reckon it’s all going to get a bit tense towards early autumn.

The issue is: do we gamble now on what we think the regulators will want or do we sit and wait to see?  The new rules require that time costs fee estimates specify:

“details of the work the insolvency practitioner and his staff propose to undertake… [and] the time the insolvency practitioner anticipates each part of that work will take”. 

Is it a safe bet to assume that the regulators will expect a SIP9-style matrix, classifying work as Admin & Planning, Investigations, Realisation of Assets etc.?  Will they also want the estimate to list, not only the total time costs per work category, but also the time costs per staff grade, i.e. the hours plus time costs?  Will they also want a greater level of detail, say breaking down the Admin & Planning etc. categories into sub-categories, for cases where time costs are anticipated to exceed £50,000?  Conversely, what level of detail will they expect for cases with time costs estimated at less than £10,000, given that at present SIP9 requires only the number of hours and average hourly rate to be disclosed for fee-reporting purposes? Finally, will these expectations be, as they are now, set out as a Suggested Format, or will there be required disclosure points?

Given that the rules refer to “each part of that work”, personally I would get cracking now to devise systems and models to produce fees estimates styled on the table in the SIP9 appendix.  I might run some analyses of past cases to see if I could come up with some sensible tables for “typical” cases, maybe examine some outliers to see, for example, how much it costs to realise some difficult assets or pay dividends, depending on the class and number of creditors.  Setting up such templates and systems to capture the key elements of each case is going to take time.  We have less than six months.

Not quite so urgent, but just as systems-based, is the need to design mechanisms for monitoring fees estimates.  It would be useful to know if the major software-providers are designing tools to compare fees estimates to fees taken – much like the bond adequacy review – and whether these tools can be used to identify cases where fees are approaching estimates.

And of course, the rules provide loads more work on creating and revising standard documents and checklists *sigh*!

Finally, an obvious practical difficulty will be ensuring that creditors are still sufficiently engaged some way down the insolvency process to put pen to paper and approve additional fees.

Techies’ corner

I know that the following points are nit-picky, but, as we’re talking about fees approval, I felt that they were important to get right.

When does remuneration arise..?

We’ve had drummed into us that “remuneration is charged when the work to which it relates is done” (R13.13(19)).  This definition was introduced with the new progress reports so that IPs disclose time costs incurred, not just remuneration drawn.

But how does this definition fit with the new rules that state that “the remuneration must not exceed the total amount set out in the fees estimate without approval”?  Does this mean that we need to ask creditors to approve an excess before the time costs are incurred, i.e. before the work is done?  And what if the IP is prepared to write off the excess, does he still need to seek approval?

Yeah, I know, it’s pretty obvious what the intention of the rules is, but I asked the Insolvency Service anyway.  Their lawyer’s view was that the “court would resolve any tension” between the rules by coming to the conclusion that the new rules make it “sufficiently clear that the office holder is permitted to incur additional fees above the level of the estimate, before securing further approval”, because the same rules state that a request for approval must specify the reasons why the office holder “had exceeded” (or is likely to exceed) the fees estimate.  It’s the drawing down of additional fees that would be prohibited without approval, not the incurring of them.  Fair enough.

What “creditors” should be asked in Para 52(1)(b) Administrations..?

I have drafted the article above on the basis of the Insolvency Service’s answer to my second question, although I have to say that I think they could have done a better job at drafting the rules on this one.

New R2.109AB(2) explains which party/parties the Administrator should approach for approval of fees in excess of the estimate.  There are three choices, dependent on who fixed the fee basis in the first place:

“(a)  where the creditors’ committee fixed the basis, to the committee;

“(b)  where the creditors fixed the basis, to the creditors;

“(c)  where the court fixed the basis, by application to the court”.

My question was: if a secured creditor alone fixed the basis, who should approve the excess?  It can hardly be said that “the creditors” approved the basis.  Also, given that the OFT study had concluded that secured creditors seem to control fees quite adequately, perhaps it was felt that there was no need to add another layer of control in these cases…

The Insolvency Service’s response was: “it would be for the secured/preferential creditors to approve if the para 52(1)(b) statement held good. We think the wording of the Rules is sufficiently clear in this regard”.  Well, I’m glad I asked!

 


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Regulatory Hot Topics: (2) Administration Technicalities

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I’m itching to blog about the new legislation, but that’s all a bit taxing so close to the Easter weekend.  Therefore, I’ll continue with my summary of points made in the R3 webinar.  This week: Administration Technicalities.

For my clients, this post may sound all very familiar, as I’ve pulled most of this from my last newsletter.  However, I’ve added some new points about the SBEE Act at the end of this post.

Matthew Peat and I agreed that failing to meet the statutory provisions for administrations is one of the most common issues identified on review visits.  I’m not at all surprised, as the legislation is extraordinarily (and in many respects, I think, unnecessarily) complicated… and it’s only going to get even more complicated with the Small Business, Enterprise & Employment Act and the Insolvency (Amendment) Rules 2015 (the IP fees rules) – but that’s for another day.

Areas that seem to cause difficulties include:

Pre-administration costs

It should be remembered that the requirement to disclose in the Proposals (and seek approval of any unpaid) pre-administration costs relates, not only to the charges of the IP, but to other costs incurred pre-appointment such as the solicitors’ or agents’ fees.

It is also evident that the RPBs do not believe that estimates of pre-administration costs comply with the Rules and they expect you to contact third parties and establish the quantum of their pre-administration costs in order to disclose them properly in the Proposals.  Also, if any payments from the estate to third parties exceed the (estimated) pre-administration costs as they appeared in the Proposals, do not be surprised if an RPB monitor suggests that the excess is unauthorised.

Most IPs have cottoned on by now that the Rules specifically state that approval of pre-administration costs does not form part of the Administrator’s Proposals (even though R2.33 requires that the Proposals include details of pre-administration costs).  However, there seem to be still the odd flawed template or two in circulation that do not present a separate specific resolution for the approval of pre-administration costs.

Statement of affairs

There have occasions when a statement of affairs (“SoA”) has not been submitted by the director(s), but the Proposals haven’t included the alternative required by R2.33(2)(g) of details of the financial position of the company (which usually takes the form of the Administrator’s own estimated SoA).

It is perhaps worth adding that this rule also requires a list of creditors (names, addresses, debts and any security) – whether or not the directors have submitted an SoA – and “an explanation as to why there is no statement of affairs” (although personally I cannot see that any explanation is going to be likely, other than “it has been requested but the director has not yet provided one”, particularly where Proposals have been issued swiftly after appointment).

How the purpose of the administration is to be achieved

If the Proposals explain that the Administrator thinks that the second administration objective is achievable, then the Proposals should explain why you believe that the result for creditors as a whole is going to be better than if the company were wound up (without first having been in administration).

Statement of expenses

Progress reports – not only in administrations, but in all other cases (apart from VAs and Receiverships) – all need to include a statement of the expenses incurred by the office holder during the period of the report, whether or not payment has been made in respect of them during the period.

It is important to remember that this includes more than simply the office holder’s time costs and disbursements, so this again means that solicitors, agents etc. need to be contacted to establish what is on their clocks.  Also, do not forget items such as insurance premiums and statutory advertising.  In addition, the Rules do not set a de minimis: all and any expenses incurred must be disclosed.  There have been some suggestions that the regulators might take a proportionate view of the disclosure of expenses, but personally I wouldn’t risk it.

Extensions

If seeking an extension via creditors’ consent, make sure that you approach the right creditors.

In every case, you will need to obtain the consent of all the secured creditors.

Whether you approach also the preferential or unsecured creditors as a whole will depend on what you wrote in the Proposals: per Para 78(2), if you have made a Para 52(1)(b) statement, you need to approach preferential creditors, if you think that a distribution to them will be made.  This is different from seeking approval to fees: in that case, under R2.106(5A) you need to seek preferential creditors’ approval to fees, not only if you intend paying a distribution, but also if you have paid a distribution.

However, events could have moved on since you issued the Proposals: by the time you contemplate an extension, the anticipated outcome might have changed.  What if your Proposals did not include a Para 52(1)(b) statement, but now you don’t think that a dividend will be paid to non-prefs?  Who do you approach for approval of an extension?

Assuming that your Proposals have accommodated alternative outcomes (such that you don’t believe you need to issue revised Proposals), Para 78 still indicates that whether you go to prefs or unsecureds in general depends on what you stated the anticipated outcome was in your Proposals.  However, to show consideration for the apparent spirit behind the provisions, it would seem prudent to consider also which creditors are in the frame at the time that you seek an extension, to ensure that you achieve the requisite majority from them too.

Extension Progress Reports

Whichever way you seek consent to an extension, you will need to issue a progress report (which is one reason why I am nervous about including in Proposals the power for the Administrator to extend without further recourse – because Proposals are not a progress report).  The usual one month deadline applies to these extension progress reports, so if you have only asked secureds/prefs to consent to the extension, make sure that you circulate the progress report to all other creditors – as well as send a copy to the Registrar for filing – within the month.

The same goes for court extensions: you will have produced a progress report to accompany your court application and, in the event that the court does not grant your extension before the month-end, you will need to send a copy of the report to all creditors and for filing and then send another circular (for the Notice of Extension) once you have received the order for the extension.

Finally, remember that the 6 month cycle for progress reports is counted from the period-end of the last report.  Therefore, where a progress report to accompany an extension request has been issued – which can be at any time – diaries will need changing so that the next progress report is 6 months after that report (i.e. no longer 6-monthly from the date of appointment).  This can prove a nightmare for automated diary systems… and, as you need to provide sufficient lead-time before any extension period ends in order to consider whether to apply for a further extension, make sure that you don’t leave diary prompts for progress reports too tight on the 6-month deadlines.

Exits

RPBs appear to be expecting decisions over exit routes to be clearly and contemporaneously evidenced.  This is also valuable in the event that things do not turn out the way you had hoped, e.g. where you moved to CVL because you had thought that there would be sufficient realisations to pay a dividend to unsecured creditors, but something happened later to scupper that outcome.

I also understand that it is generally accepted that Para 83’s reference to an Administrator thinking that a distribution will be made to unsecured creditors is a reference to non-preferential unsecured creditors only.  Thus, if you are nearing the end of the administration and you think that only a preferential distribution will be paid, you will need to seek an extension and pay it through the administration.  Alternatively – and if HMRC (or, of course, any other creditor) has modified the Proposals so that the exit must be by liquidation – you will need to seek a compulsory winding-up order.

Small Business, Enterprise & Employment Act 2015

I couldn’t resist one point on this new Act.  Although some items come into force on 26 May 2015, there are no transitional provisions (yet).  In other words, unless a new Order changes things, the provisions will apply to all existing insolvency appointments, not only future ones.

The Act amends Para 65 to the effect that, from 26 May 2015, administrators may pay a prescribed part dividend without the court’s permission.  However, the Act also amends Para 83 so that it will read that an administration may move to CVL only where the administrator thinks (“that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him” – no change there – and) “that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”, i.e. a prescribed part distribution.  In other words, from 26 May 2015, the Para 83 move to CVL cannot be used to pay a prescribed part dividend (unless you also think there is going to be a non-prescribed part dividend as well).

Thus I would strongly recommend that you revisit your standard Proposals template to make sure that they do not run contrary to the post-May position: you do not want to be stuck with approved Proposals requiring you to exit by CVL to pay a prescribed part dividend, when the Act won’t allow you to do it.  Having looked at some standard Proposals, I reckon many will have sufficient wriggle-room to avoid you having your hands tied, but it would be worth checking the Proposals of any cases where you anticipate a prescribed part dividend: you still have a month or so during which you can do a Para 83 move to CVL before the Act takes effect.

My thanks to Deborah Manzoori and Jo Harris for pointing out this issue to me.

My thoughts on more wrinkles in the new legislation will follow soon.  In the meantime, have a lovely long weekend.