Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Category Archives: Changes in statute


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

1229 Port Douglas

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

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

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

About-Face

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

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

Further Progress

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

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

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

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

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

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

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

Unsettled Policy

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

Creditors

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

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

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

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

Progress Reports

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

The Service is currently considering the following proposals:

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

 

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


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The Future is… Complicated

 

 

1933 Yosemite

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

Statutory Instruments

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

Consultation Outcomes

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

Revision of SIPs etc.

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

 

Enterprise & Regulatory Reform Act 2013

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

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

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

The Deregulation Bill

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

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

The Deregulation Bill contains other largely technical changes:

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

The Small Business, Enterprise and Employment Bill

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

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

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

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

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

IP Fees

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

Revision of SIPs etc.

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

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


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The Small Business, Enterprise and Employment Bill: Part 3 – Regulation

1115 Swakop

In my final post on the Bill, I summarise the prospective changes to the IP regulatory landscape: by what standards will IPs be measured in the future? What will be the Insolvency Service’s role? And for how long will we continue with the multi-RPB model?

Regulatory Objectives

A key element of the Bill portrayed as the potential solution to several perceived problems is the introduction of regulatory objectives “as a framework against which regulatory activity can be measured and assessed”.

There has been a little refining of the objectives as originally proposed in the consultation document. They now appear (S126) as follows:

“‘Regulatory objectives’ means the objectives of:
(a) having a system of regulating persons acting as insolvency practitioners that
(i) secures fair treatment for persons affected by their acts and omissions,
(ii) reflects the regulatory principles, and
(iii) ensures consistent outcomes,
(b) encouraging an independent and competitive insolvency practitioner profession whose members:
(i) provide high quality services at a cost to the recipient which is fair and reasonable,
(ii) act transparently and with integrity, and
(iii) consider the interests of all creditors in any particular case,
(c) promoting the maximisation of the value of returns to creditors and promptness in making those returns, and
(d) protecting and promoting the public interest.”

Thus, the consultation’s suggested “value for money” objective has been replaced with reference to “high quality services at a cost to the recipient which is fair and reasonable”. However, “value for money” continues to appear large in the IA, which swings wildly from, on the one hand, conveying the sense that the introduction of a “value for money” regulatory objective will cause a sea change in regulation to, on the other hand, stating that, as RPBs say that “they already carry out an assessment of fees in monitoring visits”, they “do not anticipate this objective will add additional costs to the RPBs in terms of monitoring”.

Fees Complaints

The IA also states that “the objective makes it explicit that fee related complaints should be dealt with by the regulators”, but it states it is leaving the “how” entirely in the hands of the RPBs: “it will be for the RPBs, to create a system (whether within the existing complaints process or by combining resources to create a joint system) which adjudicates on fee issues”.

The IA sets a “high scenario” of 2,000 additional fee complaints (but with a best estimate of 300): that would be an average for each appointment-taker of three complaints every two years. However, despite this doom-saying, the IA factors in zero additional costs to the Service (in managing the Complaints Gateway) and to IPs. The IA states that the changes “should have minimal impact for individual IPs, particularly for those who already act in compliance with the existing legal and regulatory framework”. The Service does not seem to appreciate how the most compliant of IPs attracts complaints – it’s in the nature of the work – and how enormously time-consuming it can be to respond to RPB investigations, even when they end in “no case to answer”. I wonder how much work will be required to satisfy one’s RPB that the fees charged are a fair and reasonable exchange for the high quality services provided.

One consultation respondent estimated that the IP licence fee could increase by £950 pa, which prompted the IA drafter to write: “given the increased confidence and credibility to the industry which will result from a strengthened regulatory framework, is a proportionate cost for an industry which generates an estimated £1bn per annum”. In addition, the IA’s assessment of costs to the RPBs (for complaints-handling alone) shows a best estimate of £1,074 per IP, which increases to £7,184 per IP under the “high scenario”. Is this still considered a proportionate cost? It continues to sicken me that the Service seems to fail to understand the spectrum of environments within which IPs work. Yes, some do make a tidy living, but I know IPs for whom an extra £1,000 bill (let alone £7,000) would be the straw that breaks their back. For a Minister who seems so intent on “reducing a little the high bar on entry to the profession” (per her speech at the Insolvency Today conference) by introducing partial licences, which, allegedly, will encourage competition in the profession, she seems all too blind to the likely impact of burdening IPs with yet more costs; I think it will certainly threaten some sole practitioners’ survival in the industry. And for those IPs who can, inevitably the cost increase will be passed onto the insolvent estates – well done, Minister!

Will this “strengthened regulatory framework” really increase confidence in, and credibility of, the industry? Does the government feel that confidence will only increase once we see a few heads resting on platters? Well, public confidence had better improve, because the Bill will result in the Service’s hand hovering over the red button of the Single Regulator.

Partial Licences

The Small Biz Bill already makes obsolete the Deregulation Bill, which has yet even to complete its journey through the House of Lords, although principally only by adding to the Deregulation Bill’s requirements for RPBs – whether recognised for full or partial IP-licensing – by referring to the need to have rules and practices designed to ensure that the regulatory objectives are met.

Does this mean that the partial licensing debate over? The clause in the Deregulation Bill emerged intact from the House of Commons after a vote on a motion for its removal of 273 to 213. There has been some debate at the Bill’s second reading in the House of Lords, but it seems to me not nearly enough to turn the juggernaut. I find it quite striking how, on the one hand, there have been some very strong submissions against partial licensing primarily from R3 but also from the ICAEW* (which has stated that, through its own consultation process, it received “no indications of support at all” for partial licences), but on the other hand… Actually, who is fighting the “for” partial licensing corner? Why is it seen as such a great idea, where is the evidence that good people are being shut out of the market by the need to sit three exams (how many exams does it take to qualify as an accountant these days?), and has anyone with experience and knowledge of these things been arguing that partially licensed IPs will be just as skilful and competent as full licence-holders, only they will be cheaper?

* Responses on Clause 10 consultation, February 2014:
R3’s: http://goo.gl/vkqYvR
ICAEW’s: http://goo.gl/lhVNo8

Oversight Regulator’s Powers

The Bill introduces a range of powers, which will enable the oversight regulator (aka the Secretary of State, acting by the Insolvency Service) to influence an RPB’s actions – by means of directions, compliance orders, fines, reprimands, and ultimately the revocation of recognition – but also to leapfrog the RPB in its regulatory action against a licensed IP.

The Bill’s Explanatory Notes discloses the type of conditions that might prompt the Secretary of State to issue directions to an RPB: “if the RPB has failed to address the Insolvency Service’s concerns following a review of the way the RPB handles its complaints or a RPB’s failure to carry out a targeted monitoring visit of its IPs where the Insolvency Service has requested that it be done”. The Memorandum adds: “the Secretary of State will also be able to apply to the court to require an RPB to discipline an insolvency practitioner if disciplinary action appears to be in the public interest”.

When would the SoS apply to court directly to sanction an IP, rather than leave it to the IP’s RPB? The IA summary states: “where public confidence in the regime is undermined and could have serious consequences for the reputation of the profession. An example is where the activity undertaken impacts across all regulators and is so serious that action is required immediately, rather than wait for each regulator to investigate the case and come to potentially different findings”.

Personally, I find these moves worrying. In every Insolvency Service Annual Review of Insolvency Regulation, there is reported a clutch of complaints made to the Service about RPBs and, almost without exception, the Service’s investigations reveal nothing untoward. In addition, the Reviews disclose complaints made by the Service to the RPBs about individual IPs: these complaints appear to be processed by the RPBs adequately. Is this not the way things should be handled? It seems to me to be wholly inappropriate to side-step due process on the simple ground that public confidence appears to be undermined. Considering that the objective is to shore up public confidence in the existing regulatory regime, it seems to me that taking an issue out of the RPB’s hands is one sure way of destroying any confidence the public may have. If the Service were ever tempted to exercise such a power, it would seem to me that the nuclear option of a single regulator could become almost inevitable.

Single Regulator

What would prompt the SoS to designate a single regulator? The Bill’s Explanatory Notes state: “the power to move to a single regulator will only be used if the changes proposed by clauses 125 to 131 [i.e. including the regulatory objectives and the Service’s powers to sanction or direct the RPBs] do not succeed in improving confidence in the regulatory regime for insolvency practitioners”. The Memorandum also states: “the changes proposed by clauses 125 to 131 will be reviewed with a reasonable time of commencement. If there is still a lack of confidence in the insolvency practitioner regulatory regime, then the Secretary of State will consider whether to act to bring an end to the system of self-regulation by creating a single independent regulator which will apply consistent standards of regulation and will not be perceived to act in the interests of insolvency practitioners over creditors.”

I appreciate that often members of the public – and not a few IPs – express bemusement that the regulation of such a small industry should be shared amongst seven bodies and that there tends to be a natural scepticism towards the idea that a body funded (even in part) by IPs, some of whom also sit on regulatory committees, can be sufficiently independent to regulate its members satisfactorily (although I wonder how else anyone expects an insolvency regulator to be funded). However, whatever one’s criticisms are of the existing regulatory structure, I struggle to see how a single regulator would be certain to do a better job. But maybe it’s only the perception that’s important.


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The Small Business Enterprise and Employment Bill: Part 2 – insolvency odds and sods

IMGP5554

My second post on the Small Business Enterprise and Employment Bill focuses on the proposed changes to the Insolvency Act as a consequence of the Red Tape Challenge… with a couple of sneaky additions thrown in.

Changes to the Insolvency Act 1986

The Red Tape Challenge proposals require changes both to the Act and the Rules. Therefore, this Bill is not the whole story and many of the practicalities of the new processes will only become evident when the Insolvency Rules are changed.

The Insolvency Service’s current targets on the Rules consolidation exercise appear to be finalisation of the statutory instrument in October 2015 so that it has an effective date of April 2016.

The Bill’s Impact Assessment (“IA”) summarises the changes as follows:

1. “Removing meetings of creditors as the default position in insolvencies
2. Abolition of final meetings
3. Removal of requirement for liquidator to be present at a S98 meeting
4. Opting out of further correspondence
5. Administration extensions
6. Allowing an office-holder to pay a dividend in respect of a debt of less than £1,000 without the need for the creditor to submit a formal claim
7. Removal of requirement to seek sanction for certain actions in liquidation and bankruptcy
8. Crystallisation of Scottish floating charges
9. Abolition of Fast Track Voluntary Arrangements
10. Official Receiver to be appointed trustee on the making of a bankruptcy order
11. Clarification that a court application under paragraph 65 of Schedule B1 is not required where an administrator intends to make a prescribed part payment to unsecured creditors
12. Clarification that a progress report must be issued to creditors where the liquidator changes within the first year of a CVL
13. Alignment of the time limit for an appeal against the outcome of an IVA where there is no interim order with that where there is an interim order in place”

“Deemed consent” and non-physical meetings

The savings that will result from complete removal of “physical” meetings seem to be built on the premise that all IPs are charging room hire of £64 and 1.5 hours of administrator/manager time each time a meeting is “held”. Although the vast number of circulars still refer to a place and time for meetings, I suspect that rarely does this involve any more cost than if the business were conducted by correspondence.

Firstly, the Bill introduces a “deemed consent procedure” (S110 and 111) that seems to work like this:

• The office holder provides creditors with written notice of his “proposed decision” on a matter.
• If less than 10% (or perhaps “10% or less” – the IA does not make it clear and the Rules will prescribe this) of total creditors by value object to the proposed decision, the creditors are treated as having made the decision.
• If more than 10% (or “10% or more”) object to the proposed decision, then the office holder must follow a “qualifying decision procedure”.

The Bill lists several decisions that cannot be handled by the deemed consent procedure:

• “Any matter relating to a proposal” for a VA;
• Removal of an office holder;
• “Any matter relating to the remuneration of an office holder”, which I guess will wrap in S98s and consideration of Administrators’ Proposals (unless Para 52(1)(b) applies);
• Where the court so orders; and
• “Any matter prescribed as an excluded matter by the Rules”.

The IA suggests that the process will not disadvantage small-value creditors, as “they will still have the facility to object to [the proposals] and raise any concerns with the office holder, who will in turn have a duty to consider whether deemed consent is the most appropriate mechanism to use”, which seems most odd: does the Service expect office holders to start the deemed consent process and, even if the 10% threshold has not been passed, they might decide that minority objecting creditors deserve a voice and thus they can spend estate monies in following a more inclusive decision-making process? This also seems contrary to the Bill, which states that, if less than the prescribed proportion of creditors object, the creditors are to be treated as having made the proposed decision (S246ZF(4) under S110).

The IA does point out that use of the deemed consent procedure is discretionary; it states that “office holders will be able to use their experience to identify situations where the creditors are unlikely to agree with its use” and thus go straight to an alternative decision procedure. However, the Service also waves the stick of regulatory action, if it seems that an IP has lost sight of achieving “value for money”.

The Bill’s memorandum states: “in most cases the intention is that the office holder will be able to use a process of deemed consent”. However, given the exclusions listed above, how many opportunities will there be for the deemed consent procedure in any event? How many meetings (other than final meetings, which are dealt with elsewhere) do not include a resolution on fees?

The Bill doesn’t prescribe the qualifying decision procedures – the Rules will “prescribe examples of procedures” – but the IA indicates that these will not include a physical meeting, unless 10% or more request a physical meeting. The procedures will include business by correspondence, remote meetings, and electronic voting.

Given that most meetings are convened at present to deal with the excluded matters listed above and that physical meetings will not be an option unless creditors ask for one, I really cannot see why the IA has estimated a reduction of only 50% in the number of physical meetings. It states that “50% was seen as prudent, given because this will be ‘new ground’ for office holders and creditors, who may feel decide (sic.) that they would prefer to have meetings in some cases”. Don’t you get it, Insolvency Service? How many times do we have to say it? On the whole, creditors don’t vote! Why on earth would they – in 50% of cases! – ask for a physical meeting?!

The IA states that “it is not anticipated that the time taken to undertake a virtual meeting will be any more or less than the time taken to undertake a physical meeting” – I agree – but it then states “where a physical meeting is not being held the proportion of instances where a virtual or remote meeting is held is likely to be small, given that deemed consent will be available as well as other cheaper methods”. The IA then applies a best estimate of 50% reduction in meetings, whether virtual or physical, and eliminates entirely the time costs of an estimated 1.5 hours for holding a meeting. Crazy! As is clear above, there will barely be an opportunity to use deemed consent and, as the time incurred in completing unattended meetings is mostly about collating and considering proofs and proxies and drafting minutes, these pretty-much will still need to be spent in any other decision procedure. Okay, business by correspondence will be cheaper than a physical or virtual meeting where people actually turn up, but it is not cost-free!

Is it any wonder that the Service has managed to come up with savings for this measure alone of £50 million over ten years?!

Final meetings

The IA states that the proposal “scraps all final meetings of creditors where they occur”, although the Bill (S114) provides only that the SoS be empowered to remove Insolvency Act meetings, so I think there is another step required to amend S106 etc. It is not clear whether the Service envisages that the deemed consent procedure will apply to a proposed resolution for release, or whether the draft final report simply will be issued and creditors will need to request a meeting, if they want to object to the office holder’s release.

The IA suggests that this measure will save £6 million per year (in addition to the £50 million above), based on room hire of £64 per meeting and 45 minutes of time, although, if the deemed consent procedure were necessary, it will carry with it some costs to wrap up. The Bill does not refer to any requirement to tell creditors the outcome of any attempt at obtaining deemed consent; hopefully the Rules changes will add nothing, as this would return any costs saved in abolishing final meetings.

S98 meetings

The Bill and IA seem confused over the fate of S98 meetings: are they being abolished? If not, who gets to decide how they should be held? And practically, how can such decisions be managed?

One thing is clear: the need for the company’s liquidator to be present at the S98 meeting will be removed (although it is not in the Bill, as it is a Rules provision). The IA states that “in most cases it will be an insolvency manager who has best knowledge of the intricacies of a CVL rather than the office holder themselves and it represents much better value for the creditors for that person to attend the meeting” – charming! Don’t they think that creditors will want and deserve to see the liquidator in person? The IA does acknowledge that, if there is significant creditor interest in the proceedings, suggestion of director misconduct or “negotiations that the office holder in person may wish to lead”, the IP may “feel that their presence would be necessary or beneficial”. The IA estimates this may occur in 30% of cases.

I know that some have aired grave concerns over the prospect of creditor disengagement by abolishing physical S98 meetings. Chuka Umunna MP commented on this when the Bill had its second reading – see column 922 at http://goo.gl/VGOE07.

But are physical S98 meetings being abolished? The IA estimates there will be a 50% reduction in physical S98 meetings, which suggests that they aren’t. However, from my reading of the Bill, it seems that S98s will be subject to the “qualifying decision procedure” rules, which means that a physical meeting could only be held where over 10% of creditors request one, so, without this, an IP may only decide to “attend” a meeting remotely. Also don’t directors technically convene S98 meetings..? So a director who doesn’t want to face creditors – even remotely – can decide to conduct business by correspondence..?

Given that creditors only receive seven days’ notice of S98 meetings, I am not sure how a creditor’s request for a physical meeting will work practically. Presumably, directors/IPs may do well to predict cases where there is likely to be sufficient creditor interest and set up a meeting room in advance (although this will be wasted if the requisite creditors do not request a meeting). Otherwise, they could be looking at expensive last-minute conference room bookings – and you would need to give timely notice to all creditors of the venue – or a postponed S98 meeting, albeit not for long given the need to get on with the liquidation and the Centrebind restrictions.

So much for saving costs!

Creditors’ circulars

The Bill provides (Ss 112, 113) that creditors may opt out of receiving correspondence from office holders (excluding notices of (proposed) distributions, which presumably include notices of intended dividends).

Again, I think the Service has over-estimated the savings to be made: personally, I cannot see their assumption of 20% of creditors deciding to opt out becoming reality, although apparently “a representative of a leading firm of insolvency practitioners, a partner in a large regional firm, and a major creditor representative all said that they agreed that the assumption was reasonable and two of them thought the 20% figure to be conservative”, so what do I know..? I also note the IA assumption that no creditors will opt out where the OR is in office: if this provision is such a cost-saver, why is it only being imposed on IPs? They have also provided no provision for the costs to the office holder of managing two creditor databases.

What I want to know is: where has the other Red Tape Challenge proposal gone? If the Service is serious about IPs’ saving costs, then they should progress the proposal to allow office holders to post everything on a website without the need to write to each creditor every time notifying them that the document had been released. Maybe this will turn up in the Rules revision…

Extending administration extensions

Para 76(2)(b) of Schedule B1 is to be changed so that an administration may be extended by up to one year by consent (S115).

It is a shame the Service has not taken this opportunity to change the consent requirements, so that it does not require the administrator to seek the approval of every secured creditor, irrespective of their recovery prospects. Oh well. This may mean that the Service’s prediction that all administrations set to last up to two years will be extended by consent in future may prove to be an over-estimate also.

Dividend processes

Ss119 and 120 of the Bill provide for creditors who have not proved small debts (to be prescribed, although the IA proposes a threshold of £1,000) “to be treated as having done so”. The IA points out that, as with any proving creditor, this does not stop the office holder asking for further evidence from the creditor if thought necessary, although it states that this measure will “permit the insolvency office holder to rely upon the debtor’s own records”. Also, a creditor can always submit a proof, if it is owed more than the debtor’s records indicate.

I must admit that I have often struggled with the office holder’s duty as regards adjudicating on claims and I have even more difficulty with it in this “value for money” world: on the one hand, an office holder is expected to be diligent to ensure that he distributes the estate’s monies to those who are entitled to it; however, on the other hand, every minute he spends on scrutinising claims, asking for, and examining further evidence, eats away at the funds available to distribute. I guess this provision sets out more clearly the government’s expectation: just take small claims as read… unless you have reason to doubt them, e.g. if you think that the director who swore the SoA has added all his friends and neighbours to the list of creditors.

A Red Tape Challenge proposal that would really help put this measure into context is that small dividend payments – £5 or £10 were mentioned – would not be sent to individual creditors, but would be pooled for use by the disqualification unit or the Treasury. If this also were introduced, then, yes indeed, don’t waste any time considering whether to admit small claims, as the chances are that those creditors will not see their dividends anyway. However, this proposal hasn’t made it to the Bill. Is it another one for the Rules or will we never see it again..? (UPDATE 02/11/2014: I understand this proposal has now been dropped, as the Service had received advice that it would prove too contentious to deprive certain creditors of the right to receive a dividend, however small that might be.)

The Bill includes two measures affecting administration distributions. The IA describes them as clarifications and as removing ambiguities, although personally I think that the provisions change the Act, which seems pretty clear-cut to me.

S116 contains two parts:

• To Paragraph 65(3) will be added the power to distribute the prescribed part in an administration.
• Paragraph 83 will include a further restriction on moving from administration to CVL: this will only be possible where the administrator thinks that a non-prescribed part distribution will be made to unsecured creditors.

It is a shame that Schedule B1 of the Act is not being amended so that dividends generally can be paid through administration. The IA hints at why this is not considered appropriate: it states that liquidation “provides for more engagement” of unsecured creditors. Personally, I see no difference in creditor engagement in administrations and liquidations: there are the same powers to form a committee and to approve fees (as we are not talking about Para 52(1)(b) cases here), and the changes to liquidators’ powers mentioned below bring the office holders’ needs to seek sanction on a par. The IA has estimated a cost of £8,250 on converting an administration to liquidation, so why not save by eliminating the need to move to liquidation?

Pre-packs

S117 of the Bill is the Dear IP 62 threat to “ban ‘pre-pack’ administration sales to connected parties if certain criteria are not met”. The Bill’s memorandum elaborates, referring to Teresa Graham’s recommendations: “Clause 117 is in response to the recommendation to take a legislative power to legislate in the event that the recommendation to establish third party scrutiny is not adopted on a voluntary basis… It is considered that by taking a legislative power, this will act as an incentive to encourage connected parties to adopt the voluntary proposals set out in the Graham Review”. Hmm… I can’t see that the threat of future legislation is going to matter one jot to connected parties presently contemplating a sale! However, “the Government is fairly confident that voluntary reforms backed by this ‘backstop’ power will act as sufficient incentive to change behaviours and so it will not be necessary to exercise the power.” I know that R3 and others are working frantically to see what can be done with the Graham recommendations and I will not list my own views and concerns, as there have been plenty of other loud critics.

The Bill empowers the SoS to make regulations “prohibiting or imposing requirements or conditions in relation to the disposal hiring out or sale of property of a company by the administrator to a connected person in circumstances specified in the regulations”. Note that regulations may not be limited to pre-packs, but may affect any transaction involving a connected person (which is also defined by the section), whenever they occur and however large or small the property transferred. This fits in with Teresa Graham’s recommendations, although I haven’t seen any commentary refer to this wider scope.

S117 provides that, in particular, future regulations may require approval (or provide for the imposition of requirements/conditions) by creditors, the court, or “a person of a description specified by the regulations”.

Other fixes

The Bill also contains:

• S107: the proceeds of claims or assignments arising from Ss213, 214, 238, 239, 242, 243, and 244 are not to be available for floating charge holders, i.e. they will not be part of the company’s net property. I believe that some have expressed concern over this, but doesn’t this simply put case precedent into the Act?

• S108: liquidators may exercise any of the powers in Parts 1 to 3 of Schedule 4 of the Act without sanction (S109 provides similarly in relation to trustees and Schedule 5)… although I’m wondering why the Parts need to exist at all.

• S118: provides that, when an administrator of a Scottish company obtains permission from the court to pay a dividend to unsecured creditors, floating charges crystallise.

• S121: the OR will become trustee on the making of a bankruptcy order (if an IP isn’t made trustee at that time). The IA explains that the motivation for this is to improve the efficiency of asset realisations by not restricting the OR’s immediate activities only to protecting the estate. I can see some value in having the bankrupt’s estate vest in the OR immediately on bankruptcy, avoiding some of the confusion illustrated in the Pathania v Adedeji case (http://goo.gl/AcktAk), although there is obvious concern that this process disenfranchises creditors, as this erodes creditors’ opportunities to make a decision on who they want to administer the estate.

• S122: changes S262(3)(a) of the Act so that the 28 day time period for challenging an IVA meeting decision counts from the decision where there is no interim order and from the filing of the report to court in interim order cases… although I’m wondering why the time of the meeting’s decision could not work for all cases; it’s hardly “alignment”, as the IA suggests.

• S124: removes reference to producing progress reports only for (E&W) VLs that last longer than one year. This deals with the nonsensical position that, if the liquidator changes during the first year, it seems that he must predict if the case will last longer than one year in order to decide whether to issue a progress report on the change-over – an issue highlighted by Bill Burch (http://goo.gl/6K4a4E) – although it does not deal with the unnecessary costs of issuing progress reports mid-year and the re-setting of deadlines caused by changing liquidators. Courts usually deal with these matters in block transfer orders, but let’s hope that the revised Rules will effect a change.

That’s almost the whole of the Bill’s insolvency measures covered. It just leaves the provisions impacting on IP regulation… for another day.


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The Small Business, Enterprise and Employment Bill: Part 1 – Directors

IMGP0277 This “Small” Bill will have a big impact on IPs. Not only does it include the widely-publicised reserve powers to ban pre-packs and appoint a single insolvency regulator, but it will result in a completely new D-reporting process and will relegate physical creditors’ meetings to something that only creditors can request. The Bill contains many other smaller items that will require significant overhauling of templates and checklists… far more than the 7 hours estimated in the Impact Assessment!

The Bill’s government webpage is at http://goo.gl/VwKvPe and I have sketched out (to help myself get an overview) the clauses that will impact IPs here: Insol relevant provisions Jul-14

In this first post, I cover the key changes to reporting on directors and actions arising from directors’ misconduct. My next post will deal with the changes to the IP regulation regime, pre-packs, and the numerous technical changes to the Act.

D-Reporting

I know that R3 spins this as a success – the move from burdensome paper reports to something far speedier online – but I have to say that I am more sceptical about the advantages of this process for IPs.

The Impact Assessment (“IA”) describes the present problem as delayed reporting because “the IP must be satisfied that there is evidence of unfit conduct… The proposed design of the new form would require the IP to highlight (at an earlier stage) information or behaviour which may indicate unfit conduct as opposed to providing a significant amount of justification and evidence at that stage.” The Bill sets the timescale for submitting a report to within three months of appointment – the rationale, it says, being that “the SoS would be able to better consider behaviour identified by the IP” at this earlier stage [why?] and “the quality of information should improve due to the return being submitted with greater proximity to events” [really?] – although I thought it was charming that, in the same breath, the Bill is providing the Service with an extra year in which to commence disqualification proceedings.

Personally, I expect that this change will result in a greater number of ‘clean’ reports, as IPs will have less knowledge of past events at three months than at six months. However, as IPs will be “under an ongoing obligation to report any new information that he/she considers should have been included in the return”, I cannot see that this will result in less, or even the same amount of, work for IPs in the long run. The forms themselves might also require more work, as “there are also other pieces of information not currently requested which R3 states that IPs could usefully provide”.

The IA estimates only one hour for IPs (nothing for other staff) to familiarise themselves with the new process and one hour per director in completing the new return where misconduct is indicated, which I can see, depending on the final form of the return, would be a reduction over the present demand, although the IA has provided no time costs in relation to providing additional information to the SoS after a return has been submitted.

One sentence that really got my goat was: “Analysis undertaken on a sample of 250 cases where D1 reports were submitted but not proceeded with indicated that a significant percentage of them should not have been submitted”. Should not have been submitted?! What can the government mean? Are IPs failing to meet their statutory obligations?

I am reminded of a question raised by the House of Commons BIS Select Committee when it interviewed Richard Judge and Graham Horne in 2012 about the apparent disparity between the number of D1s filed – around 5,000 per year – and the number of disqualifications. I remember Dr Judge stating that this meant there were “5,000 indications of misconduct… there are people that are innocent in that” and Mr Horne chipping in quickly to clarify that IPs are required by statute to report directors who, by analogy, drove at 31 mph in a 30 mph zone; technically, the conduct might be reportable, but of course not all such directors will be pursued to disqualification. Although switching to a system in which IPs simply provide the facts and leave the SoS to decide whether the director’s behaviour merits action may avoid future discomfort in answering such questions, it seems to me that nothing here changes the statutory obligation for IPs to waste time reporting on the 31 mph drivers.

Compensation Awards

The IA gives us a clear hint at what has driven this measure. It states that “a frequent complaint in Ministerial correspondence from creditors is that although disqualification can prevent a director acting as a director in future, it provides no compensation to those who have suffered from their misconduct”. What types of cases might attract compensation awards? The IA states that “it is reasonable to believe that compensation could be sought from, at least those cases where there has been an identifiable loss to creditors, for example: misapplication of assets, transactions to the detriment, criminal matters and accounting records” – that’s quite a list! The IA continues: “it is also reasonable to assume that whatever the allegation, the SoS will also seek compensation for those cases where there are a lot of unsecured creditors or ‘vulnerable’ members of the public who have lost out”.

However, the IA presents a confusing picture as to how the government envisages the process of seeking compensation awards against disqualified directors working – in tandem? – with the activities currently carried on by office holders in challenging antecedent transactions. For example, the IA states: “the option of the SoS seeking a compensation order or agreeing a compensation undertaking from a miscreant director will enable greater financial redress for creditors, where the office holder (IP) has not taken any of the available actions him/herself or it is considered that further action in addition to that taken by the IP is merited”. Fair enough, as the IA points out, this may be because the office holder has insufficient funds to pursue the case (although I am irritated by the comment that an IP might feel “they don’t have the specialist expertise to bring a claim”). But, I wonder, will this exacerbate the difficulties in reaching settlements with directors who, notwithstanding any settlement agreed with the IP, could then be pursued by the SoS? At least the IA recognises that there are likely to be fewer disqualification undertakings under the future regime, as directors are less likely to give in without a fight.

Do you wonder whether this could result in the SoS and IP fighting between themselves as to who might chase after the director’s finite pot first? The IA states that IPs “should be able to proceed with any action they deem appropriate before the SoS”. Well, that’s alright then.

The Bill also indicates that compensation may be awarded to a particular creditor or creditors, a class or classes of creditors, or it may form a contribution by the director to the assets of the company. However, the IA states “the compensation award will be awarded direct to creditors” (although it makes no provision for the Service’s costs in collecting the monies from the director, adjudicating on creditors’ claims, or paying a distribution). This quote appears in the context of “free-riding amongst liquidators”! It seems that some consultation responses suggested that office holders might not pursue claims themselves, but they might sit back, wait for the Service to do the work, and then pop up to collect the funds and take a fee. The IA does nothing to counter this libellous title and simply states that, because the award is direct to creditors, they “do not think the risk of ‘free-riding’ is high” and “no evidence exists on the likely number of cases of free-riding by liquidators”. Come on, Insolvency Service, we expect better of you than that!

I am also puzzled by the repeated references to improving gateways so that the SoS and IPs might share information better, for example, “to better enable successful recovery actions to be taken forward by the office holder”. As far as I can tell, the gates only swing one way (unless there is something in the OR’s handover) and will continue to do so; there are no proposals in the Bill to help IPs have greater access to information, although the IA suggests that things may change “through updating internal guidance used by Insolvency Service staff”.

I was also puzzled at the IA highlighting a “risk” that “this will result in compensation orders being made for the benefit of HMRC as they are the major unsecured creditor in the majority of insolvencies”. Personally, I don’t see that a bit of recompense to the public purse is a bad thing. Instead of the IA pointing to the Bill’s reference to factors that the court/SoS would consider – the amount of loss, nature of misconduct, and any recompense already paid – it answered this by referring to the fact that the court/SoS could determine that compensation be awarded to a particular creditor or class or group of creditors “taking into account what is equitable in all the circumstances”. Could the prospect of deviating from the pari passu rule, especially if HMRC might not get a look-in at all, result in some creditors calling for office holders to resist taking action and leaving it to the SoS?

Power to assign certain rights of action to third parties

The apparent “problem” that the government is seeking to fix is the lack of court applications as regards wrongful and fraudulent trading (which are both extended under the Bill to Administrators), transactions at undervalue etc. However, the IA acknowledges that “a lot” of claims are settled out of court (they have heard upwards of 90%) and it reports that the other principal reasons for lack of court actions given in the consultation responses were the targets’ lack of assets and the high evidential bar necessary, so the government acknowledges itself in the IA that the Bill’s provisions are unlikely to result in many more cases going to court.

The IA does not mention the issue for an IP who agrees to share in the proceeds of any action assigned to a third party: won’t the risk of an adverse costs order deter IPs from entering into some assignments? The IA points out a risk “of speculative or opportunistic claims being brought against directors who may be ill placed to defend themselves. However, this risk should be small as we expect insolvency professionals to have regard to existing professional and ethical standards in judging when to assign causes of action.” But in the next paragraph the IA refers to the IP’s duty to maximise returns to creditors: could an IP really be justified in turning away third parties offering to pay for rights of action, if it represented a good deal for creditors?

The IA appears more thoughtful in relation to the justification for IPs selling to a third party, who after all is looking to make a profit from the action: they feel that IPs may be justified as the third party’s greater appetite for risk and economies of scale in taking the action forward compensate for the discount on the action suffered by the estate. The IA also makes the sensible point that simply opening the way for third parties may improve IPs’ negotiating position in pursuing claims directly from directors.

My part 2 on the Bill will follow in a week or so (once I’ve done some real work!)

(UPDATE 25/09/14: I read an excellent blog on the subject of the director provisions of the Bill from Neil Davies & Partners – http://goo.gl/uYp3RU.  I was particularly intrigued by the observations on the complications that could arise from the provision to empower the SoS to pursue compensation orders.)


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Thank you, Santa, for delivering Red Tape Cuts

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I owe the Insolvency Service an apology. I must have sounded like an ungrateful child at Christmas when I tweeted that we’d heard all their Red Tape-cutting measures before. Such is the disadvantage of having lived with my list for Santa for several months already and such is the immediacy of Twitter. Sorry, Insolvency Service!

The Insolvency Service’s release on 23 January 2014 – http://insolvency.presscentre.com/Press-Releases/Reforms-to-cut-insolvency-red-tape-unveiled-69853.aspx – announced that several measures, aired in its consultation document in July 2013, are to be taken forward, either via primary legislation changes “when Parliamentary time allows” or via changes to the Rules, which are “due for completion in 2015/16”. I’d blogged about the consultation document’s proposals on 16 August 2013 at http://wp.me/p2FU2Z-3Q. Here, I try to decipher exactly which of the consultation’s proposals are being taken forward, which is not as simple a task as it may sound!

“Allowing IPs to communicate with creditors electronically, instead of letters”

The consultation had set out a proposal that IPs could use websites to post creditors’ reports etc., as they do now, but without the need to send a letter to each creditor every time something is posted to the website. The proposal was that there would be one letter to creditors informing them that all future circulars would be posted to the website.

In my view, this really would save costs. I see quite a few IPs are now posting reports to websites, so it would be lovely to avoid even the periodic one-pager to creditors informing them of the publication of something new, although I’d love to see the statistics on how many people (other than us insolvency people) actually look at the reports on websites…

Of course, the Rules already provide that an IP can post everything onto a website, but at present only with a court order. Thus, I’m wondering, is the next bullet point simply another way of describing this first of Santa’s gifts..?

“Removing the requirements for office holders to obtain court orders for certain actions (e.g. extending administrations, posting information on websites)”

It’s not exactly clear what the Service has in mind on administration extensions. The consultation document suggested that administration extensions might be allowed with creditors’ consent for a period longer than 6 months. It suggested that creditors could be asked to extend for 12 months (with a 6-month extension by consent still an option), although it asked whether we thought that creditors should be allowed to approve longer extensions. So is the plan that creditors be allowed to extend a maximum of 12 months or longer?

And I’d like to know if the Service is persuaded to make any changes to the consent-giving process: are they going to stick to the requirement that all secured creditors must approve an extension (whether it is a Para 52(1)(b) case or not and no matter what the security attaches to or where the creditor appears in the pecking order), as is currently the case, or could they – please?! – lighten up on this requirement? And are they going to clarify that once a creditor is paid in full, they do not count for this, and other, voting purposes? So many questions remain…

The consultation document contained several other proposals for avoiding the court, such as “clarifying” that administrators need not apply to court to distribute a prescribed part to unsecured creditors (although I’m not sure why administrators should not be allowed also to distribute non-prescribed part monies to unsecured creditors). Coupled with changes to the extension process, administrations are no longer appearing to be the short-term temporary process that the Enterprise Act seemed to present them as.

“Reducing record keeping requirements by IPs which are only used for internal purposes”

I’m not entirely sure what this means. Does this refer to the current need to retain time records on all cases, including those where the fees are fixed on a percentage basis? These are internal records (even though they probably serve no purpose), but does that also mean that Rules 1.55 and 5.66, requiring Nominees/Supervisors to provide time cost information on request by a creditor, will be abolished?

Or does this statement relate to the maintenance of Reg 13 IP Case Records in their entirety? These are, in effect, records for internal purposes (in fact, they’re not even that, are they? Does anyone actually use them?), although the Regs provide that the RPBs/IS are entitled to inspect the Reg 13 records. So does that still make them an internal-purpose record?

I would like to think that the Service has accepted that the Reg 13 record is a complete waste of time and is planning to abolish it entirely. However, as I flagged up in my earlier post, the consultation document proposed that “legislation should require IPs to maintain whatever records necessary to justify the actions and decisions they may have taken on a case. It is not expected that such a provision would impose a new requirement, but rather codify what is already expected of regulated professionals.” Does this recent announcement mean that the Service will not seek to implement this measure? Let’s hope so!

“Simplifying the process of reporting director misconduct to make the process quicker by introducing electronic forms to ensure timely action is brought against them in a timely way, providing a higher level of protection to the business community and public”

Electronic D-forms? Lovely, we’ll have those, thank you, although in my view it’s not a big deal: it just avoids a bit of printing.

What makes me a little nervous is the use of “timely” twice in this statement. The consultation proposed to change the deadline for a D-form to 3 months and the Service believed that this would not be an issue for IPs if its other proposal – to drop the requirement for IPs to express an opinion on whether the conduct makes it appear that the person is unfit to be a director and replace it with a requirement to provide “details of director behaviour which may indicate unfitness” – is also taken up.

As I explained in my earlier post, personally I don’t see this as a great quid pro quo for IPs and I don’t think it will help the Service catch the bad guys much quicker. When faced with slippery directors, 3 months is a very short time to gather all the threads.

“Allowing office-holders to rely on the insolvent’s records when paying small claims, reducing the need for creditors to complete claim forms”

The consultation document proposed that IPs could admit claims under £1,000 per the statement of affairs or accounting records without any claim form or supporting documentation from creditors (although creditors would still be free to submit claims contradicting statements of affairs).

It doesn’t seem right to me – there’s a sense of fudginess about it, particularly in view of the shabbiness of most insolvents’ records just before they topple – but I guess that, in the scheme of things, it’s not a big deal if a creditor receives a few pounds more than he’s entitled to on one case, but a bit less on another. It might be academic anyway, given the final measure…

“Reducing costs by removing the requirement to pay out small dividends and instead using the money for the wider benefit of creditors”

The Service had proposed that, where a dividend payment would be less than, say, £5 or £10, it would not be paid to the creditor, but would go to the disqualification unit or the Treasury. The consultation document had asked whether the threshold should be per interim/final dividend or across the total dividends. Given the likely difficulties of keeping track of small unpaid dividend cheques, I do hope that the Service has its eye clearly set on saving costs and will stick with a threshold for each dividend payment declared. As with the previous measure, although it brings in a sense of creditor equality that seems more suited to Animal Farm, we are only talking about small sums here, so I guess it makes practical sense.

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Thank you, Insolvency Santa, for giving us a peek into your big red sack of goodies. It’s great to see some really promising outcomes from the Red Tape Challenge, even if we have to see at least one more Christmas pass by before we get to open our prezzies.


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Changes to TUPE: Clear as Mud

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The Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2013 are set to come into force on 31 January 2014. The draft Regulations can be accessed at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/254738/bis-13-1272-draft-tupe-regulations-2013.pdf. (UPDATE 04/04/2014: On reading R3’s Technical Bulletin 106, I realised that I had not updated this to provide a link to the final regs: http://www.legislation.gov.uk/uksi/2014/16/contents/made. BTW R3, as imitation is the sincerest form of flattery, I will take your article 106.6 as a compliment (although I’d still be interested in learning who on GTC was behind it)!)

These Regulations affect the Transfer of Undertakings (Protection of Employment) Regulations 2006 and the Trade Union and Labour Relations (Consolidation) Act 1992 and came about as a result of the Government’s early 2013 consultation. The Government’s response on the close of the consultation can be found at https://www.gov.uk/government/consultations/transfer-of-undertakings-protection-of-employment-regulations-tupe-2006-consultation-on-proposed-changes.

From what I can see, the changes that may impact insolvency contexts are:

• The wording around unfair dismissals connected with transfers is being changed. The TUPE Regulations 2006 state that an employee is treated as unfairly dismissed “if the sole or principal reason for his dismissal is the transfer itself or a reason connected with the transfer” (where that is not an ETO reason etc.) (Regulation 7(1)). This is to be replaced with: “if the reason for the dismissal is the transfer” (other than ETO reasons). It would seem to me that this cleaner and more specific description may take a lot of the uncertainty out of how Tribunals might view dismissals – we can only hope!

• The definition of ETO reasons “entailing changes in the workforce” will include a change to employees’ place of work.

• Pre-transfer consultation may be carried out either by the transferor or, under these Regulations, by the transferee (with the transferor’s agreement), and this may count as consultation towards subsequent redundancies. However, a transferee will not be able to claim “special circumstances rendering it not reasonably practicable” to consult on the basis that the transferor had failed to provide information or assist the transferee.

• The time period within which a transferee must provide employee liability information to a transferor has been increased from not less than 14 days to not less than 28 days before the transfer.

• Employers of fewer than 10 employees – micro-businesses – no longer need to invite employees to elect representatives to consult on transfers, although if there are already recognised employee representatives, the employer needs to consult with them. If there are no representatives, the employer simply consults directly with the employees.

What has not changed?

Not unsurprisingly given that it is still the subject of an appeal, the Regulations continue to refer to “at one establishment”, although the current position of the Woolworths Tribunals process suggests that this does not implement adequately the EC Directive (http://wp.me/p2FU2Z-3I).

The Government had also sought views on whether a transferor could rely on a transferee’s ETO reason to dismiss an employee prior to a transfer. Although 57% of all those who responded to the consultation supported the concept (and only 26% were opposed), the Government has decided not to take this idea further, pointing out that it hadn’t actually put forward a proposal to change the Regulations, it had merely asked an open question! It felt that such a change could result in an increase in “general unfairness in the labour market” and could be challenged in the courts, as the suggestion had been made that it would be contrary to CJEU judgments and perhaps to the spirit of the Acquired Rights Directive (see Government response, section 11).


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It’s all happening in Scotland!

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Over the past few months, I have accumulated a pile of papers annotated as if they belonged in a 1970s stellar observatory, although most of my Wow!s have arisen from a feeling of horrific incredulity.

I apologise in advance if I have got any details wrong; this post is nothing more than an English-person’s reaction to the Scottish Government’s proposed changes to the personal insolvency landscape across the border. I’m sure that Scottish IPs are well-acquainted with the changes, but some Englanders might like to scan this; it might make you feel more grateful for the current state of affairs down here!

Here are the key new pieces of legislation affecting the Scottish personal insolvency regimes:

• The Debt Arrangement Scheme (Scotland) Amendment Regulations 2013, which came into force on 2 July 2013.
• The Protected Trust Deed (Scotland) Regulations 2013, which are due to come into force on 28 November 2013. The draft Regulations can be found at: http://www.legislation.gov.uk/sdsi/2013/9780111021361/contents.
• The Bankruptcy and Debt Advice (Scotland) Bill, which is working its way through Scottish Parliament, Stage 1 oral evidence sessions having concluded on 6 November 2013.

In this post, I deal with the first two items. In a later post, I hope to cover the Bill.

Debt Arrangement Scheme (“DAS”)

The Chief Executive of the Accountant in Bankruptcy (“AiB”), Rosemary Winter-Scott, is quoted to have said: “DAS is the only Scottish Government-backed scheme that offers a way for people who are in debt to regain control of their finances again” (http://www.scottishfinancialnews.com/index.asp?cat=NEWS&Type=&newsID=7331#7331).

That article also publicises the amount of money that has been paid via DAS: £13m in six months. Whilst that is pretty impressive, I am not entirely convinced that this is evidence enough that DAS is the success that the Scottish Government (“SG”) and AiB would have us believe. How many debtors have exited DAS debt-free? May we have some figures on that, AiB, please? If DAS is simply a statutory debt management plan (“DMP”) with no end date, is it really the solution for all the thousands of debtors that are being encouraged down that route?

The AiB’s 2012 DAS review stated that the average duration of all Debt Payment Plans (“DPPs”) is 7 years 2 months (http://www.aib.gov.uk/sites/default/files/publications/DAS%20Review%202012%20-%20published%203%20December%202012.pdf), although I noted that this is the original scheduled duration and the review shows a few DPPs scheduled to last over 20 years, even the odd one or two over 30 years! Given that this statutory process does not have the flexibility of a non-statutory DMP that might be used as a temporary stop gap, I do wonder how this can be considered the “fair and reasonable” solution.

In my mind, the DAS Regulations 2013 at least have provided a light at the end of the tunnel for some debtors. Before the Regulations, the debts had to be paid in full (less up to 10% in fees). The Regulations introduced an element of composition (actually, “re-introduced”, as it had been an original provision back in 2004): where a debtor has been making payments for 12 years (excluding any payment breaks) and has repaid at least 70% of the total debt outstanding when the DPP was approved, the debtor would be eligible to make an offer of composition to creditors. Of course, creditors don’t have to accept – and the offer takes effect only with the acceptance or silence of every creditor – but if a debtor has been paying for 12 years, one would hope that they’d show some mercy..?

Much has been said also of the Regulations’ bringing-forward of the point when interest and charges on debts is frozen: to the date at which the DPP is applied for by the debtor, “potentially saving people in debt up to six weeks interest” (http://www.aib.gov.uk/news/releases/2013/07/new-regulations-place-debt-arrangement-scheme-das). Some commentators had hoped that the Regulations could have been amended so that it occurred earlier than that, but I was interested to read what might have been the real motivation behind the change: the DAS newsletter 3 points out that the change should avoid the “high volume of applications for variations to correct the level of debt included in a DPP where interest and charges have accumulated over the application process” (http://www.dasscotland.gov.uk/news/debt-arrangement-scheme-newsletter-edition-3), so maybe it hasn’t been all about debtors…

Still, I shouldn’t be surly. However, it’s not all good news for debtors: the DAS newsletter 4 reported that some banks have reacted to this change by restricting or suspending debtors’ access to bank accounts on receipt of a DPP proposal (http://www.dasscotland.gov.uk/debt-arrangement-scheme-newsletter-edition-4). Now who’s being surly..?!

Alan McIntosh brought attention to the numbers of DPPs that have been revoked (http://www.firmmagazine.com/scotlands-bankrupt-debt-strategy/) and the numbers just keep going up: the number of approved applications to revoke in Q1 2013/14 was up 31.5% on the previous quarter and up 93.8% on the quarter of the previous year. I guess it’s not surprising that the figures are increasing, given the current squeeze on consumers and that the numbers agreeing DPPs are generally also on the rise. I just think it’s a bit rich that the Enterprise Minister, Fergus Ewing, continually hails DAS as a success in view of the fact that more and more people are accessing it, but there seems to be no attention given to the people that are (or are not) leaving it.

Protected Trust Deeds (“PTDs”)

Proposed changes to the PTD process have been rumbling on for a number of years with the SG’s express motivation being to “drive up the performance of PTDs”. Although it has sought to do this by tackling “the trend of rising costs associated with delivering PTDs alongside disappointing dividend returns” (http://www.aib.gov.uk/protected-trust-deed-update), it seems intent on achieving this by dealing with what it seems to see as rip-off costs, but it does nothing tangible to help address the real costs. What I mean is: the SG seems to think that, by relegating pre-TD costs to the status of unsecured claims, outlawing fees on a time costs basis, and layering yet more requirements on the Trustee, the “trend of rising costs” will be reversed. Aren’t we all facing a trend of rising costs in every aspect of our lives? The AiB experiences rising costs – of course, the statutory costs on PTDs continue to increase – but somehow IPs are supposed to have a magic cure for this problem..?

Having said that, I’m not completely blind to the effects of the market in debtors, the anecdotal stories of which suggest a crazy world of surely unviable sums being sought. I do wonder if the situation isn’t so grim in England because creditors have exerted more pressure on fees in IVAs. However, personally I don’t see a statutory bar on pre-TD costs as a panacea. After all, that only controls the monies in the insolvency estate.

Fergus Ewing does not see PTDs “as a sustainable debt relief solution for either creditors or debtors if more than half of all the receipts are spent on costs”. Unfortunately, the Chinese whispers have led to this message becoming even more extreme in front of the Scottish Parliament’s Economy, Energy and Tourism Committee: “A key issue with PTDs in recent years has been that, in some cases, they offer insufficient returns to creditors because most of the value in the debtor’s estate is used to pay the trustee’s fees” (http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/68799.aspx). Please, will someone start talking some sense?! Firstly, the AiB’s statistics focus on total costs, not just Trustees’ fees. And we’re not talking mainly about DAS candidates here, are we? How many bankruptcies return more than half the pot to creditors? Does the lack of such a dividend make them unfair?

I also find some of the fantastically biased AiB releases staggering. They repeatedly quote ABCUL, which refers to Trustees having “so often pocketed” the vast bulk of realisations and welcomes the “new measures to clamp down on abuses of protected trust deeds” (http://www.aib.gov.uk/news/releases/2013/09/changes-protected-trust-deeds). They absurdly misrepresent statistics, such as quoting Fergus Ewing in the same release: “the costs of protected trust deeds… are increasing by more than 25 per cent. The latest figures show this is happening in up to 84 per cent of cases”, when the figures show that this is happening in only 25% of cases! (The 84% comes from one firm’s figures alone. You could say it is “up to 100% of cases”, if you’d picked the right cases!) Thank goodness that IPs are strong professionals that will not let this kind of criticism demoralise them into stopping doing a decent job. Sometimes cases that appear straightforward on day one just get complex or assets appear – such as PPI refunds – that weren’t originally envisaged and the effort just needs to be expended, by IPs, agents and solicitors… to improve returns! Or would Mr Ewing prefer Trustees to walk away from tricky or new assets for fear that their costs might increase?

Right, I must start getting objective about this. Otherwise, I’ll never get to the end of this article!

Some of the PTD Regulation changes detailed in the AiB releases are:

• A trust deed will be ineligible to be protected if the debtor’s total debts can be repaid in full within a 48 month period (i.e. from the full amount of the debtor’s surplus income, as calculated by means of the Common Financial Statement).
• “Pre-trust deed fees, such as fact-finding fees,” will be excluded “so that these can no longer be charged separately and will be treated the same as other debts”. The AiB release refers to “fees”, but I think this should be “outlays”, shouldn’t it; I don’t think that even the AiB is expecting an IP to prepare a Trust Deed free of charge, is she?!
• Trustees’ fees will be charged on the basis of a single fixed upfront fee and a percentage of funds ingathered. The fixed fee may be increased either with a majority in value of creditors (that is, an absolute majority, not a majority of those voting) or by the AiB.

But other changes have not been given top-billing by the AiB:

• The acquirenda period for Trust Deeds will be 4 years. Considering that, at least for a couple of years until the Bill becomes Act, bankrupts will only have to pay for 3 years (, are discharged after 1 year and are only exposed to a 1 year acquirenda period), some are predicting that PTD candidates will choose Sequestration. Personally, I doubt this, as it did not happen in England when 5-year IVAs became commonplace, but then IVAs are seen as some debtors’ best efforts to do the right thing by their creditors; I’m not sure that PTDs have the same image.
• Debtors’ contributions will be determined using the Money Advice Trust’s Common Financial Statement.
• Irrespective of creditors’ wishes regarding the Trust Deed achieving protected status, the AiB will have the power to refuse to register the Trust Deed, if she is not satisfied that the debtor’s expenditures and contributions are at appropriate levels.
• The Regulations fix the equity of heritable property as at the date that the Trust Deed is granted, but they raise all kinds of questions about how equity realisation or contributions in lieu of equity are to work.
• The AiB will have power to give directions, whether on the request of the Trustee, debtor, or creditors, or on the AiB’s own initiative. The Scottish Parliament Committee report mentioned above notes ICAS’ concerns that “the AiB is not best placed to take decisions in place of and over-ruling highly experienced and qualified IPs”, but all that it records the Minister saying in response is that “the AiB was undergoing significant restructuring to ensure that certain staff who would be involved in such decisions and appeals would be ring-fenced from those taking the original decisions” – that doesn’t deal with the concerns!

The (brief) Regulatory Impact Assessment suggests that, whilst the AiB will incur costs of £1.3m over the first 5 years, which will be recovered through a statutory fee, the Regulations are not expected to impact on IPs’ costs, as the Regulations are not expected to restrict the level of IPs’ fees, just revisit the basis on which they are calculated. Does the SG truly believe that the Regulations will result in no additional expense on IPs?!

For more details on the issues with the Regulations, I’d recommend ICAS’ written evidence, accessible at: http://icas.org.uk/Current_Insolvency_Issues.aspx (thank you, ICAS, for making available such an enlightening summary).

Phew! Right – those are the imminent changes. The Bill proposes some more incredible changes and I know that ICAS and others are expending a lot of effort in an attempt to refine its contents. You have my sympathy!


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Proposed changes to Scotland and EU insolvency legislation gain clarity

In this blog, I compare the responses to the EC Insolvency Regulation consultation – including: should Schemes of Arrangement be included? – and comment on today’s AiB release on planned changes to Bankruptcy. Also hidden within the BIS consultation responses is a view of great improvements to Gazette searches planned for this year…

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Unanimous support for opting in to amended EC Insolvency Regulation

As I tweeted a week ago, the UK government has announced recently that it has decided to opt in to the proposal to amend the European Commission’s Regulation on insolvency proceedings, following unanimous support by those who responded to BIS’ consultation.

The ministerial statement and responses to the call for evidence can be found at: http://www.bis.gov.uk/insolvency/news/news-stories/2013/Apr/EUCallForEvidence

I noticed that the consultation responses were almost unanimous in one other respect; I thought that the voice for excluding Schemes of Arrangement from the Regulation’s scope – which would be possible under the revised Regulation, as currently proposed by the Commission – came through particularly loud and clear. Respondents cited the success stories that would not have been possible had Schemes been included in the Regulation; the fact that Schemes are often used for purposes other than insolvent restructurings; and that they are not always fully collective processes and thus do not really meet the criteria for proceedings included in the Regulations in any event.

There was a lone voice suggesting an alternative, however: appreciating the contentious nature of the issue, Paul Omar of Nottingham Trent University suggested a compromise whereby the jurisdictional bases for Schemes might be tightened up so that there should be more than just an arguable connection with the UK or benefit for creditors in order for UK courts to sanction such Schemes. I suspect that the other respondents will hope that such a compromise will not be necessary.

Other areas of apparent agreement between the respondents included a request for clarity over the proposed not-less-than 45 days timescale for foreign creditors to lodge claims; several parties had spotted that it was not clear whether this would apply, not only to submitting claims for dividend purposes, but perhaps also for voting purposes, which would be quite impractical, particularly for votes invited to commence proceedings. Several also asked for consideration to be given to providing mechanisms to avoid frivolous challenges to the opening of main proceedings, as these could create uncertainty and delays, which could de-rail some rescue or recovery plans.

Finally, I was interested in the response by the National Archives, which reported positively on the Gazette Platform project to improve free access to insolvency information “due for launch later this year”. The response included an illustration of one aspect of the planned new service: a timeline of insolvency events, so that all the key dates identified in Gazette notices for a single company (or insolvent individual?) appear on the same page – I like it!

More on the Scottish Bankruptcy Bill

The AiB’s equality questionnaire issued today (http://www.aib.gov.uk/publications/bankruptcy-bill-new-bankruptcy-scotland-act-2013-equality-questionnaire) includes a summary of the proposed changes in policy that are intended to materialise in the “New Bankruptcy (Scotland) Act 2013”. I haven’t cross-referred them to previous missives – and I am sure that readers who have attended an AiB stakeholder event will know these inside out – but I thought I would list those that made me raise an eyebrow:

• The AiB is continuing with the “No Income/No Asset” product for people who have been on income-related benefits for at least 6 months – and presumably this will have some benefits over LILAs, e.g. cheaper entry, swifter exit? Whilst I can see the advantages, it seems a shame that people in very low-paid employment might be barred access to a NINA.
• Mandatory advice from an approved money adviser prior to applying for any form of statutory debt relief – personally, I’m pleased to see this proposal repeated.
• “Altering the process for discharge of debtors so the trustee applies, showing cooperation with creditors (subject to appropriate appeals)” – how will this work? Does that mean that there will be no such thing as an automatic discharge period?
• Creditors will have to submit claims within 120 days of the trustee giving notice. “Where creditors do not submit their claims by this deadline, they would have to justify late submission or risk losing their dividend.” I see the advantage of putting some pressure on creditors to react more quickly, although personally I am not sure what is wrong with the current process (I’m guessing that Scotland is the same as E&W in this respect?) whereby a late-proving creditor cannot disturb a dividend, but can hope to catch up when the next dividend is declared. I also suspect that most of the difficulties in paying out complete dividends lie in creditors who have submitted claims but based on current information the trustee does not feel able to admit them.

Still, in general it’s all good stuff to see the AiB’s proposals gaining clarity and momentum.


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Legislative changes on the horizon: PTDs, TUPE, and gift vouchers

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Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:

• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors

AiB’s proposed changes to PTDs and DAS

28/02/2013: The AiB published some welcome (by me, anyway) fine-tuning to her developing “vision of a Financial Health Service” (http://www.aib.gov.uk/news/releases/2013/02/bankruptcy-law-reform-update).

She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: http://wp.me/p2FU2Z-V (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.

The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate: http://wp.me/p2FU2Z-w).

So what now does she propose to introduce? Some new significant items for PTDs:

• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.

The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.

BIS TUPE Consultation

17/01/2013: The BIS consultation on proposed changes to the Transfer of Undertaking (Protection of Employment) Regulations 2006 was issued and closes on 11 April 2013 (https://www.gov.uk/government/consultations/transfer-of-undertakings-protection-of-employment-regulations-tupe-2006-consultation-on-proposed-changes – a 72-page document that takes some reading!).

Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.

The proposals do include some elements that may be more useful:

• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).

Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.

Gift Voucher Creditors

15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (http://www.r3.org.uk/index.cfm?page=1114&element=17990&refpage=1008), but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.

MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 (http://www.youtube.com/watch?v=53_fN8c1f8Q&feature=youtu.be). Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:

“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.

(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”

As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.

To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, http://www.lexology.com/library/detail.aspx?g=8298e876-f998-4777-bacf-ce781f312242 – the clue is in the name…)

There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (http://www.11sb.com/pdf/insider-gift-vouchers-jan-2013.pdf).

(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS.  R3 summarised the difficulties in dealing with gift vouchers in an insolvency at https://goo.gl/eN20mN.  This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at https://goo.gl/GJDbNO.)

 

Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…