The Companies Act 2006 (Amendment of Part 25) Regulations 2013 are set to come into force on 6 April 2013 (subject to Parliamentary approval). The most direct impact for IPs is the introduction of new forms for receivership appointments. I set out below these, and other, changes to the regime for registering charges.
• RM01 – Notice of appointment of administrative receiver, receiver or manager (replaces form LQ01)
• RM02 – Notice of ceasing to act as administrative receiver, receiver or manager (replaces for LQ02)
Unfortunately, these forms will only be available from the Companies House website from 6 April 2013 (thanks, guys!). They will apply to all appointments and ceasings to act (except for Scottish cases, the filing for which remains unchanged) occurring after 6 April 2013, i.e. regardless of the date of the charge to which the appointment relates. Ceasings to act will need to provide either more information on the charge relating to the appointment or the Unique Reference Code (explained further below). There are also new forms for registering new charges, satisfactions and releases, which should all be used after 6 April 2013. 08/04/13 EDIT: for new forms, go to http://www.companieshouse.gov.uk/pressDesk/news/april2013DraftForms.shtml.
There will be a UK-wide regime for registration, so there will no longer be separate filing requirements for charges created over Scotland-registered companies. There is one exception: alterations to Scottish floating charges via Form 466 (S859O(4)) – there will be some changes to S466 of the Companies Act 1985, but it seems that they only affect the information required.
Consequences of Non-Registration
The criminal offence for failing to register a charge has been removed and there will no longer be a requirement for companies (except for overseas companies, which are governed by different legislation) to keep registers of their charges, although they need to keep copies of the full instruments available for inspection (S859P and Q).
Companies House’s press release states that the 21-day limit for filing the particulars of a property acquired which is subject to a charge has been removed. However, the removal of this mandatory requirement seems unlikely to have much practical effect in the world of insolvency, because, if a charge is not delivered for filing in the period of 21 days from creation (excepting where the period is extended by court application), it is void against liquidators and administrators (S859H).
Registering New Charges
A certified copy of the instrument will need to be sent to the registrar, so in future this copy instrument will be available for viewing from Companies House. Certain sensitive information, e.g. personal information, bank account numbers, can be omitted (S859G). Instruments need to be accompanied by particulars (S859D) and one advantage of the fuller particulars is that they will enable a Companies House searcher to identify whether any other UK register, e.g. the Land Register, also holds information on the charge. Companies House is also introducing Unique Reference Codes to identify each charge and these URCs (allocated by the Registrar when a new charge is registered) should be used on all forms (including the receivership forms) relating to post-6 April 2013 registered charges.
Finally, a significant change introduced by the Regulations is that, instead of listing all charges that are covered by the registration regime, they include a list of exceptions – at S859A(6) – and thus the Regulations are assumed to apply to all other charges.
I present a bit of a mixed bag here:
• The Enterprise & Regulatory Reform Bill – developments since my blog post of 12 January
• Nimmo – the Scottish Court of Session takes more than a passing interest in a provisional liquidator’s fees
• Secretary of State v Potiwal – despite the seeming absence of a technical argument, the court saves the taxpayers’ money in proving a case a second time
Update on the Enterprise & Regulatory Reform Bill
New Bankruptcy Application Process
On 12 January, I posted to this blog my thoughts on the insolvency parts of the ERR Bill. Last week, some interesting tweaks to the Bill had been proposed: that the adjudicator be allowed to apply to the court for directions (which might have helped if the adjudicator had been presented with a bankruptcy application with tricky COMI dimensions); and that, if the adjudicator felt that an alternative remedy were more suitable, the individual be given ten days to seek advice and potentially withdraw the bankruptcy application. Unfortunately, both these proposals were withdrawn following the House of Lords’ debate.
In relation to the subject of applying to court for directions, Viscount Younger of Leckie said: “Persons appointed as adjudicators will have the skills they need to do the job without the need for recourse to the court. It is acknowledged that the court still has a role to play. Where the adjudicator refuses to make a bankruptcy order because the criteria are not met, the debtor will have the right to appeal to the court. That provides a route to court in those cases where it is needed” (Lords Hansard on House of Lords Grand Committee 16 January 2013, http://www.publications.parliament.uk/pa/ld201213/ldhansrd/text/130116-gc0002.htm).
With regard to allowing the individual time to explore alternative solutions, Viscount Younger said: “I reassure noble Lords that before making their bankruptcy application, applicants will be strongly encouraged to take independent debt advice to ensure that bankruptcy is really the right option for them. My officials will work with the Money Advice Service and providers within the debt advice sector to ensure that applicants have the information they need to make an informed decision. Furthermore, within the electronic application process itself, we propose to include a series of warnings to ensure that applicants are made fully aware of the serious implications of bankruptcy before they make their application. We will also ensure that the process flags up any alternative debt remedies that may better suit their circumstances. The Government consider that these safeguards are sufficient to ensure that debtors are empowered to make an informed decision as to whether or not bankruptcy is the right option for them before they take the serious step of making a bankruptcy application. The Government believe that these amendments would unnecessarily complicate the process by requiring the adjudicator to exercise discretion on a case-by-case basis. That would increase administration costs with an impact on the application fee. It would also delay access to debt relief for the debtor, who would have elected for bankruptcy in full knowledge of their other options.”
Whilst I understand the government’s intention to formulate a simple administrative process to replace the current court-led debtor’s bankruptcy petition process (although those IA86 provisions are not being repealed via the Bill, presumably so that individuals who cannot/do not wish to apply online can still instigate their own bankruptcy), it seems inevitable to me that such a process will be ill equipped to deal with out-of-the-norm cases.
Continuation of contracted supplies in corporate insolvencies
It seems that R3’s “Holding Rescue to Ransom” campaign is paying off! Added to the list of proposed amendments to the Bill are the following proposed changes to S233 of IA86:
• To include “a supply of computer hardware or software or infrastructure permitting electronic communications” as another utility that must continue to be supplied (subject to the current S233 conditions) on request by the office holder.
• Utility supplies to be caught by the provisions irrespective of the identity of the supplier.
• To include that “any provision in a contract between a company and a supplier of goods or services that purports to terminate the agreement, or alter the terms of the contract, on the happening of any of the events specified in subsection (1) [i.e. administration, administrative receivership, S1A moratorium, CVA, liquidation, or appointment of a provisional liquidator] is void” – this does not seem to be limited only to utility supplies.
It remains to be seen, however, if these proposed changes survive the debate in the House of Lords (next sitting is scheduled for 28 January 2013).
Scottish Court of Session not content to take as read the court auditor’s and reporter’s recommendations of approval of provisional liquidator’s fees
Nimmo, as liquidator of St Margaret’s School, Edinburgh, Limited [2013] ScotCS CSOH 4 (11 January 2013)
Summary: Despite both the reporter and the court auditor recommending that the provisional liquidator’s remuneration of c.£120,000 be allowed, the court sought further information in justification of the fee. Whilst IPs can take some comfort in the result that the judge allowed the fees in full, his comments suggest some lingering concern and hinted at a desire for a review of the court procedures.
The Detail: Over 20 days, a provisional liquidator managed “a high profile and extremely sensitive appointment” (paragraph 9) over a school and incurred time costs of c.£120,000. Later, the IP was appointed liquidator of the same company with his fees for the liquidation being approved by the liquidation committee. Interestingly, Lord Malcolm disapproved of the use of the word “cost” when referring to as yet unauthorised remuneration: “For the future I would advise that in reports to committees the proposed fee should not be described as ‘a cost’ already incurred by the liquidator. It should be made clear that the committee is being asked to exercise a judgment as to whether the proposed remuneration is reasonable and appropriate (or words to that effect). A proposed fee is in a different category from outlays. The scope for disagreement or questioning should be obvious to the readers of the report” (paragraph 31). The IP’s fees as provisional liquidator remained to be approved by the court.
Both the reporter and the court auditor considered that the provisional liquidator’s fees were reasonable, but the judge requested further information. Despite learning of the complexities handled by the IP, Lord Malcolm stated: “nonetheless I retain a sense of surprise and concern at a proposed fee of over £120,000 (exclusive of vat) for 20 days work, and I suspect that many will find it remarkable that the winding up of a middling size private school can generate fees of over £620,000 (again exclusive of vat)” (paragraph 31). However, the judge allowed the fee, noting that “the court cannot simply reject the clear advice of the reporter and the auditor of court without cogent and objectively justifiable reasons for doing so” (paragraph 35).
Lord Malcolm’s closing comments suggest a desire for more widespread consideration of the issue of insolvency office-holders’ remuneration: “Perhaps it is no bad thing that, now and again, an opinion is issued which shows how these matters are presented to, and addressed by the court. Generally they are resolved without any public hearing or publicity. There is at least a risk that the fee levels and general practices and procedures seen as normal in the corporate insolvency world become, when the court is asked to adjudicate, in a sense self-fulfilling. This highlights the important role of the auditor of court in the current system, given that he is not directly involved in such work. It may also be that, from time to time, and in the light of experience, the judges should review current practice to check whether there is room for improvements in the court’s procedures which might help it to exercise its jurisdiction under the insolvency rules” (paragraph 38).
Court avoids “unpardonable waste of scarce resources” by striking out director’s evidence in disqualification proceedings
Secretary of State for Business, Innovation & Skills v Potiwal (Rev 4) [2012] EWHC 3723 (Ch) (21 December 2012)
Summary: In relation to disqualification proceedings, the Secretary of State (“SoS”) sought to rely on the fact that a VAT Tribunal had already proven a director’s knowledge of his company’s fraud. The court found that, although the SoS’ argument that the director was estopped from denying knowledge failed because the SoS and HMRC were not privies, it agreed that it would be manifestly unfair and it would bring the administration of justice into disrepute to require the SoS to prove the director’s knowledge a second time.
The Detail: An earlier VAT Tribunal had concluded that the director knew of the company’s VAT fraud, but in evidence to defend disqualification proceedings the director denied having such knowledge. The SoS sought to have that part of the director’s evidence struck out on the grounds that he was estopped from denying that he had this knowledge; or that his denial was an abuse of process, as it would be manifestly unfair for the SoS to be put to the substantial cost and delay of proving the allegation; and/or that to permit the issue to be re-litigated would bring the administration of justice into disrepute.
For the argument of estoppel to win out, the parties to the disqualification proceedings – the SoS and the director – had to be in privity with the parties to the earlier VAT Tribunal – HMRC and the insolvent company. Given the director’s role in the company and in the VAT Tribunal proceedings, the judge had no difficulty in concluding that the director and his company were privies. However, he decided that the SoS and HMRC were not privies: “I consider that it would therefore go against the grain of the development of the law about abuse of process to identify for the first time a new class of privity of interest between two very different arms of government pursuing different aspects of the public interest, and being motivated in particular cases by different policy and funding considerations when doing so” (paragraph 21). Consequently, in relation to the first ground, Mr Justice Briggs concluded that, because there was no privity of interest between the SoS and HMRC, the proven position in the VAT Tribunal could not be carried forward into the disqualification proceedings.
However, Briggs J then considered whether “hundreds of thousands of pounds” of tax-payers’ money should be used to prove the allegation a second time. Having considered the circumstances of the VAT Tribunal, which was funded by the taxpayer throughout, the judge concluded that it would be manifestly unfair to impose the cost of re-litigating the issue on the SoS. With regard to the argument that re-litigation would also bring the administration of justice into disrepute, Briggs J stated: “Where, as here, the issue as to a director’s knowledge of a complex MTIC fraud has been fully and fairly investigated by an experienced tribunal and the director found to have had the requisite knowledge, it seems to me that right-thinking members of the public would regard it as an unpardonable waste of scarce resources to have that issue re-litigated merely because, by a simple denial and without deducing any fresh evidence, Mr Potiwal seeks to require the complex case against him to be proved all over again” (paragraph 29). Thus, he ordered that parts of the director’s evidence be struck out as an abuse of process.
We seem to have avoided major changes in 2012: no new/revised SIPs, no significant changes to legislation… does that mean it is all being stored up for 2013?
Here are a few developments that I’ll be looking out for next year:
• HM Treasury’s review of the Special Administration regime for investment banks – report to the Treasury by the end of January 2013 with a fuller report expected by end of June 2013: http://www.hm-treasury.gov.uk/press_124_12.htm
• Outcome of the Red Tape Challenge on insolvency – Insolvency Service to set out proposals to be considered by Ministers in early 2013: Dear IP 56 (not yet posted to the Service’s website)
• Revised SIP3 and SIP16 to be issued for consultation (per IPA autumn roadshows)?
• The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 come into force on 2 January 2013 (thanks to Jo Harris for pointing these out) – I guess they are what they are, but I would like to see a user-friendly summary of them: http://www.legislation.gov.uk/uksi/2012/3013/pdfs/uksi_20123013_en.pdf
• The Financial Services Act comes into force on 1 April 2013… with what direct impact on IPs? I confess that it is not something that I know a lot about, but I do know that from it is created the Financial Conduct Authority, which (from 1 April 2014) will take on consumer credit regulation from the OFT so it may well affect IPs’ (and RPBs’ group) consumer credit licences: http://www.hm-treasury.gov.uk/press_126_12.htm
I’ll also take this opportunity to mention that I reproduce my blog posts into pdfs every couple of months or so – I have added these to a new page on this blog, but I email them direct to those who have asked. If you would like to be added to this emailing list, please drop me a line at insolvencyoracle@pobox.com. I have also started on twitter (@mbmoving); I am a complete novice, but I am hoping to use it to make immediate reference to news items on subjects such as those above (but I’ll continue to blog). Finally, I have given my blog a new look for the New Year – a photos from my trip to Patagonia in January 2012.
Have a lovely few days/weeks off, everyone, and I hope I get to meet up with some of you again sometime in the next year, when I emerge finally from all my unpleasant experiences of 2012.
In July 2012, the Government published its response to the 2011 consultation on proposed changes to the Money Laundering Regulations 2007 (“MLR07”) – see http://www.hm-treasury.gov.uk/press_61_12.htm. I describe below the aspects of the response that in my view may affect IPs (and some that more directly impact the RPBs), although it should be noted that there are other changes to the MLR07 (and please note the end of “About” for the basis of any of my comments made on this blog).
Reliance
The MLR07 allow businesses to rely on customer due diligence (“CDD”, i.e. identity checks) carried out by certain regulated third parties, provided certain conditions are met. The reliance conditions have always appeared to me to be almost as onerous to the newly instructed regulated business as those required simply to conduct CDD via the new client direct (see paragraph 5.33 et seq of the CCAB Anti-Money Laundering Guidance, available on www.ccab.org.uk). However, in some insolvency circumstances, I can see that it would be useful to rely on the CDD of the client’s bankers, solicitors, accountants or a previously-instructed IP who either was involved in the pre-insolvency period or who was a previous office-holder. Nevertheless, I get the feeling that few IPs use the reliance provisions and I doubt that the subtle distinction between which regulated businesses/persons can be relied upon is well-known either.
The MLR07 separate Supervisors into Part 1 and Part 2 – businesses/persons who are supervised by Part 1 bodies can be relied upon but those supervised by Part 2 bodies cannot. This has resulted in a peculiar situation – and in my view an unfair distinction – that, for example, a successor IP can rely on checks made by an ICAEW-licensed IP but not by an IPA-licensed IP. I am pleased that the Government plans to correct this position.
In its response, the Government has stated that “based on recent and continuing work with Supervisors, it is considered that they are discharging their role satisfactorily and that the proposed change [in removing the distinction between Part 1 and Part 2 Supervisors] is advisable” (paragraph 2.21). It also acknowledges (2.23) that “while liability remains with the business placing reliance, some businesses may be reluctant to take advantage of this provision”. Whilst this may suggest that there is some acceptance that use of the reliance provisions will not be widespread, given the Government’s emphasis on saving costs (it is noted that the Impact Assessment accompanying this response states that there is “agreement that the change will save both businesses’ and customers’ time” (page 13), something that personally I would dispute for regulated businesses given the conditions attached to the reliance provisions) and not making consumers’ lives unnecessarily burdensome, I would not be surprised if there is more emphasis put on using reliance more in the future.
The draft Money Laundering (Amendment) Regulations 2012, which are proposed to take effect on 1 October 2012, will replace the schedule of Part 1 and 2 professional Supervisor bodies with a single list.
Information Gateway between Supervisors
The draft Regulations introduce an information gateway between Supervisors “for purposes connected with the effective exercise of the functions of either supervisory authority”.
The insolvency RPBs long ago signed up to a Memorandum of Understanding with the Insolvency Service that in some respects meets a similar purpose in the regulation of IPs. For example, it is usual practice for an RPB to provide regulatory information to another RPB where an IP seeks to move his/her licence. Clearly, this makes good sense for effective regulation and thus it makes sense to me to extend such information-sharing to regulated businesses’/persons’ track records on MLR07 compliance.
One issue that bothers me a little is how this new MLR provision will interact with the Freedom of Information Act (“FoIA”). Whilst this is not an issue when information is shared between RPBs as they are not public bodies under the FoIA, many of the MLR07 Supervisors are public bodies, thus there may be a possibility of regulatory information becoming more widely disseminated. However, perhaps some might consider this a positive!
Records on Beneficial Owners’ Identity Checks
This was not a subject of the consultation, but in my view the proposed change makes perfect sense and I would not be surprised if the omission of this matter from the MLR07 has passed most people by, as it had me.
Regulation 19(2)(a) of the MLR07 requires the retention of a copy of, or references to, the evidence of customers’ identities obtained but not that for beneficial owners. The draft 2012 Regulations, to take effect from 1 October 2012, widen this requirement to retaining records on the checks made on the identities of beneficial owners (although peculiarly the current wording of the draft Regulations is “or”, not “and”). I suspect that many IPs’ systems incorporate the retention of such records anyway, but it might be worth checking this out.
Consultation Proposals Abandoned
I was heavily involved in drafting the IPA’s response to the consultation, so I was interested to read about the proposals that, post consultation, the Government has decided not to pursue.
The Government had contemplated removing the criminal sanctions attached to some of the MLR07 breaches. It has decided not to do so as the consultation responses highlighted a number of risks in dropping the sanctions. In response to the Law Society’s comments that the current threat of criminal sanctions burden legitimate businesses due to the procedural/administrative nature of the MLR07 requirements and because criminal breaches may occur through inadvertent mistakes (paragraph 2.9), the Government highlights that the Crown Prosecution Service has made it clear that “it is not in the public interest to prosecute employees of regulated businesses for minor, procedural or accidental regulatory failures” (paragraph 2.12). However, I suspect that this is cold comfort for businesses and individuals who are nervous about falling foul of the MLR07 requirements particularly those carrying a threat of criminal action.
Another proposal was to exempt very small businesses, the suggestion being those that turn over less than Euros15,000 pa, from some of the MLR07 requirements. Some consultation responses suggested that criminals may target small businesses – and certainly the risk would be greater if they were to be made exempt from some MLR07 requirements. The proposal has been dropped because the Government acknowledges that there is no correlation between the size of a business and the money laundering risk it represents. Paradoxically it seems to me, the Government response follows this with the words: “Supervisors are encouraged to ensure that the risk-based approach translates into effective, differential treatment in terms of the burden of requirements and, where possible, the fee levied”. I understand that some non-insolvency Supervisors already operate tiered fees for members, but given that most, if not all, of the MLR monitoring carried out by the RPBs/Insolvency Service sits alongside monitoring IPs’ compliance generally, I suspect it is unlikely that small IP practices will see a drop in fees in response to the Government’s encouragement.
Insolvency Oracle 