Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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2017: it’s not all about the Rules

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

 

A Review of the Bonding Regime

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

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

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

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

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

 

Complaints-handling by the RPBs

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

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

Three other main recommendations emerged from the review:

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

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

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

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

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

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

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

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

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

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

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

 

Action on Anti-Money Laundering

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

“Consent” SARs no more

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

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

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

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

Allowing “joint” SARs and other proposals

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

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

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

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

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

The Fourth Money Laundering Directive

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

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

Items with the potential to affect IPs include:

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

 

More and More Changes in Scotland

Imminent changes

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

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

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

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

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

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

Future changes to PTDs and DAS

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

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

 

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

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

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

The introduction of a pre/extra-insolvency moratorium

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

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

Essential suppliers to be held to ransom?

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

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

A new restructuring plan with “cram down”

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

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

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

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

 

Further Education Insolvencies

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

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

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

 

Recast EC Regulation on Insolvency Proceedings

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

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

 

SIP13, SIP15… and many others

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

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

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The Proposed New Moratorium: the responses are in, but will the Government listen?

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I believe we can be proud of R3 and the RPBs. Given only 6 weeks for the Government’s summer consultation, they generated robust and reasoned responses with plenty of variation to evidence that each had been created independently of the others.

Having read every published response I’ve been able to find, I am left with a reasonably strong sense of consensus on many of the big questions. However, I suspect that not all will be welcome news to the Government or the Insolvency Service, so the question is: will they listen?

The original consultation, A Review of the Corporate Insolvency Framework, can be found at: https://goo.gl/Cf0LWK.

In this post, I pick through the 14 responses that I discovered, including those from bodies such as R3, some of the RPBs and turnaround professionals. I don’t envy the Insolvency Service’s job of working through 70 submissions.

 

A New Moratorium: why?

Almost everyone saw some value in the principle (if not in the detail) of the Government’s proposals to introduce new moratorium provisions, although several questioned the Government’s apparent motives: from the consultation document, it does seem that a desire to get the UK up the ladder of the World Bank’s “Doing Business” rankings is the main driver, which does not seem a sensible policy-making foundation.

Dentons solicitors believe that “the UK has one of the most flexible insolvency regimes, unburdened by high costs and lengthy court procedures and, perhaps most importantly, one of the best recovery rates for creditors worldwide”, so it is difficult to see what advantages the proposed new process will bring. The City of London Law Society went further by not supporting the wider moratorium proposals, failing to see how a potentially costly process that may not adequately protect creditors’ interests would be useful.

The FSB expressed concern at the apparent move towards a US-style Chapter 11 system, feeling that this shift “could result in the UK regime’s strengths being watered down for little demonstrable gain elsewhere”. Several noted that the absence of a specialist insolvency court was a serious obstacle in any attempts to move towards a workable Chapter 11 style regime.

Most struggled to see how the moratorium could be used successfully by SMEs. Even the turnaround professionals were forced to admit that “there will always be some businesses that are too small to avail themselves of such help”.

A few responders felt that more effort should be made to encourage directors to seek help early and the turnaround professional felt that the moratorium would be a useful tool in this regard.

 

A New Moratorium: how long?

Here is a summary of the responses to the Government’s proposals for an initial 3-month moratorium:

Mora

It should be noted that many answers on this question were dependent upon other changes being made to the proposed moratorium set-up. For example, whilst the City of London Law Society felt that 3 months may prove to be too short for larger or more complex restructurings, it also recognised the risk that the extensive nature of the 3-month moratorium as proposed may “simply encourage directors to put off dealing with a company’s financial difficulties. This could, in turn, lead to creditor anger and frustration should the company’s financial position deteriorate during the moratorium period.”

A similar point was made by R3, which referred to the risk that “providing companies with an entire financial quarter free from creditor pressure could lead to ‘drift’ rather than action.” Instead, R3 stated, a shorter moratorium would make clear that it was the company’s ‘last chance’ to avoid insolvency, thus “requiring concentrated effort and a clear direction of travel”.

 

Will it simply be jobs for the boys?

The Government proposed that a new moratorium be introduced, which would be “supervised” by anyone with relevant expertise in restructuring who is also either an IP, solicitor or accountant.

However, in general the cry for supervisors to come only from the IP population was made loud and clear. You might think this was inevitable from the likes of R3 and the IPA, but even the accountancy and solicitor bodies were generally strong on this point.

  • Not for solicitors?

The City of London Law Society pointed out that the SRA had only recently dropped regulating solicitors as IPs, so it would seem an odd development to have solicitors return to supervising something tantamount to an insolvency process.

  • Not for accountants?

The ICAEW pointed to the facts that “accountant” covers a wide range of people and that there is already “a large pool of [insolvency] practitioners and a competitive market”, so it would seem an unnecessary risk to widen the pool to include others who are not subject to such heavy regulation as IPs. ICAS made a similar observation, noting its understanding that “at least one third of the [accountancy] sector in the UK has not undertaken any training or possess a formal qualification” and repeating its call on the Government to designate accountancy as a regulated profession.

  • What about turnaround professionals?

Predictably, the EACTP and BM&T, turnaround consultancy, welcomed widening the role to more than just IPs, suggesting that the Certified Turnaround Professional qualification could qualify someone for the role.

Interestingly, these two responses were almost word-for-word the same in many respects, but they differed on one important point: BM&T believes that it is critically important for the supervisor to be clearly seen to be acting in the best interests of all stakeholders, whereas EACTP believes that the supervisor should act in the best interest of the company. I think this betrays one of the tensions in the proposals: is the moratorium intended for solvent companies that may be facing future insolvency or for insolvent ones? The City of London Law Society noted that the consultation document conflicts with the Impact Assessment on this fundamental point.

BM&T seemed alone in expressing the view that, in order to keep costs low, “supervisors should be subject to low levels of regulation”. I appreciate their point that the supervisor is not running the business, merely advising. However, given that a primary duty proposed for supervisors is ensuring that the moratorium – and not a formal insolvency process – remains appropriate, it does seem to me too high a risk activity to be largely unregulated. The ICAEW mentioned that, “if supervisors are not to be regulated persons, then greater court supervision may be required to minimise risks of abuse by directors and unfair prejudice of creditors”, which of course would increase costs and which in turn could have an altogether different impact on the World Bank rankings!

  • The case for IPs

R3 believes that a clear commitment to protecting creditors’ interests is important. The Government’s proposals put creditors firmly in the back seat, offering them only the power to take court action to challenge the moratorium or their status as an essential supplier, a status assigned them by the moratorium company. If the company’s use of a moratorium to give it time to see a way out of its troubles is to earn the trust of creditors, the obvious choice is regulated IPs, and certainly not, as currently seems possible, the company’s in-house lawyer or accountant.

R3 reminded the Insolvency Service of the efforts the profession has made to tackle the problem of ambulance chasers and unregulated advisers. If not carefully structured and controlled, the moratorium could appear an attractive tool for abuse by some.

  • A new professional?

Some responses highlighted the difficulty in ensuring that proposed supervisors meet the expertise criteria: the Government isn’t considering yet another different licence with potentially a whole new (and expensive) regulatory system, is it?

The IPA noted that the Government’s Impact Assessment made no mention of any costs of ensuring regulatory consistency in the event that the role is opened up to other professionals. It also reminded the Government of the new corporate-only insolvency licences, which would seem to lend themselves well to be used by non-IPs who want to develop in this area.

 

Consequences for Administrators

The Government’s proposals include two striking consequences for Administrations that are preceded by a moratorium:

  • An IP who had acted as the company’s moratorium supervisor would be prevented from taking the appointment as Administrator (or indeed any other insolvency office holder); and
  • The duration of the Administration would be 12 months minus the length of the moratorium.

Conflict of interest?

Few responded directly on this point. As you might expect, the ones that did respond fell into two distinct camps:

  • There may be clear benefits in having the same person throughout, which would reduce costs, and the creditors should have a say in who they want as Administrator (ICAEW, ICAS, R3); and
  • There would be a clear conflict of interest in having the IP supervisor also act as Administrator (EACTP, BM&T).

Personally, I cannot really see how the situation is different from a CVA Supervisor later being appointed as Administrator or Liquidator and I would expect the Insolvency Code of Ethics to be amended to treat the proposed subsequent appointment of a moratorium supervisor similarly.

Shorter Administrations?

Personally, I thought this second proposal was nonsense. Where is the logic behind giving Administrators less time to do their job simply because the company has had a moratorium? I appreciate that the perception may be that an Administration is all about exploring the company’s/business’ options, so if these are all but exhausted in the moratorium, then it should be time saved in the Administration. However, Administrators still need to get the job done and now must pay out any prescribed part dividend, which is by no means a 5-minute task. The ICAEW also made the point that at present the 12 months period “can be problematic, not least because of delays within HMRC and applying for extensions adds to work and cost”.

Although none of the consultation questions invited comments on this proposal, I was very pleased to see that several bodies managed to shoe-horn in their objections to shorter Administrations as a consequence of a moratorium. For heaven’s sake, Administrations are complex and costly enough as it is, please don’t make them any worse!

Having said that, the Law Society posed the sensible recommendation that the relevant date for excluding insolvency set-off and for voidable transaction claims should be measured from the start of the moratorium… although I would also suggest that, in that case, an insolvency office holder should be able to challenge certain dispositions occurring during a moratorium.

 

Directors’ liabilities

The consultation proposed that, provided the moratorium conditions continued to be met, directors would be protected from liability, e.g. in relation to wrongful trading, but that, should the conditions not be met and the moratorium fail, exposure for liability would resume.

This seemed a curious approach to me and the Law Society explained it well: “during a moratorium, directors will only be at risk once the company has reached the point at which they ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation’. Plainly, directors should also terminate a moratorium at, or before, that point, so that it is unnecessary to relieve the directors of liability whilst the conditions for a moratorium are maintained. Indeed, to do so would simply introduce unnecessary complexity into the law”.

The City of London Law Society also observed that suggesting that directors may avoid personal liability “could lead to inappropriate risk taking, particularly if directors believed that they could entirely rely on the views of the supervisor, rather than making their own assessment of the company’s prospects”.

 

Ranking of costs and expenses in the moratorium

Although a company would be required to have enough capital to discharge all debts incurred during the moratorium, what if the worst should happen?

Several responders agreed with the Government’s proposal that any unpaid debts incurred in a failed moratorium and the supervisor’s costs should enjoy a first charge in any subsequent insolvency (although there was no comment on the priorities between these categories).

However, R3 disagreed, noting that a company could stack up debts to connected parties during the moratorium, which would end up having priority, and so R3 believed that unpaid debts should rank alongside other claims in the subsequent insolvency. Personally, I don’t see that this potential abuse is sufficient reason to push moratorium creditors down the queue, especially in view of the other proposals regarding pressing “essential suppliers” into service during a moratorium.

The City of London Law Society also queried how it is proposed such costs and expenses would be approved for payment from a subsequent insolvency. Perhaps it would be something akin to the current pre-administration costs regime?

Several responders objected to the Government’s proposal that supplies during the moratorium should be paid for under the supplier’s usual terms of credit. BM&T made the connection that, if instead moratorium supplies are paid on a cash up-front basis, there should be no risk that debts would spill over into any subsequent insolvency.

 

Creditors held to ransom?

The “essential suppliers” proposals generated whole new lines of debate, such as the possible effects on the supplier’s trade credit insurance or debt factoring, which is material for another blog post.

Suffice to say, as worded in the consultation it seems that any supplier (…or only those with a contract? One example in the consultation is of a paper supplier) could be designated by the company as essential (by means of a court filing) with the result that the supplier would be required by statute to continue to supply on the existing terms, whilst its pre-moratorium arrears would be frozen, irrespective of the impact this might have on the supplier’s own solvency.

 

What’s wrong with the CVA moratorium?

The consultation claimed that the CVA moratorium is rarely used because it is limited to small companies. However, instead of proposing simply to widen the scope of the CVA moratorium (as ICAS has suggested), a new kind of moratorium is the proposal. This would be fine if the plan was simply to adapt the CVA moratorium to allow other restructuring solutions to flow from it, but the proposed new moratorium is different in many unconnected respects.

It is true that there are few CVA moratoria. Both the ICAEW and R3 suggested that the onerous responsibilities (and associated liabilities) of the CVA moratorium nominee deter use of the existing regime. Although we only have a skeleton proposal to judge at the moment, personally I don’t see that the new moratorium would deal with this obstacle any more successfully.

The ICAEW recommended that, to avoid any new moratorium suffering the same fate as the CVA moratorium, the reasons for its apparent lack of use should be analysed.

 

What’s wrong with CVAs?

As the only debtor in possession formal insolvency tool, you’d think that the Government might be interested in encouraging greater use of CVAs, but it seems to be missing the point.

The consultation stated that “the Government believes that the under utilisation of CVAs is largely caused by the inability to bind secured creditors”, however neither it nor its accompanying Impact Assessment provided any evidence to support this. The Impact Assessment stated that “the consultation will seek to understand fully the reasons behind” the under-utilisation of CVAs and the apparent fact that many fail (2014: 60%), but the consultation didn’t really address this at all. It simply stated that “many CVAs fail because of a failure to maintain agreed payment” – you don’t say!

R3 believes that “the most common reasons why CVAs fail is not because there is a problem with secured creditors but because the management is overly-optimistic in its financial assessment of the company, or the environment in which the company operates changes during the CVA.” The IPA makes a similar observation, suggesting that the CVA process is not at fault, but often the issue is with the underlying viability of the business. ICAS also reported that “anecdotally it is suggested that a significant proportion of CVA proposals will focus on financial/debt restructuring without addressing more fundamental and underlying operational restructuring or management change”.

In its response, R3 asked the Government to work with the profession and the creditor community to “to find ways to improve CVAs so that they can become a much more effective business rescue tool”, especially for SMEs, a request that also seems to have the support of the ICAEW and IPA.

 

And there’s much more

Some other meaty questions considered by the responders included:

  • Do the Government’s proposals achieve the right balance of debtor-in-possession and creditor protection?
  • If the balance swings too far away from creditors, as many responders fear, what will be the effects on lending?
  • What exactly are the supervisor’s role and duties?
  • How exactly should the moratorium entry criteria be defined and measured?
  • How will notice of the moratorium be publicised or even should it be publicised?
  • How would an extension to the moratorium be achieved and for how long should an extension be?
  • Who would be required to provide information to creditors during the moratorium and what kind of information should be provided?
  • Is there really a need to incentivise rescue funding, particularly by introducing contentious statutory provisions affecting existing secured creditors’ rights?

 

The consultation responses evidence that, within only a few summer weeks, a great deal of effort has been spent deliberating over the proposals, but the fun has only just begun.

 


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The draft revised SIP13: has it sold out to SIP16?

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The consultation release explained that the SIP13 revision involved using “(wherever possible) language which is consistent with SIP16”. The resulting draft gives me the impression that the working group started with a blank sheet of paper and asked themselves: how can we adapt SIP16 for on-liquidation sales?

I agree that much of the current SIP13 is redundant, as it simply reproduces principles from the Code of Ethics (albeit that the Code rarely makes such direct applications), it does seem to me that the diversity of scenarios for connected party sales in and around insolvency processes has been lost in this redraft. This SIP’s primary focus clearly has become post-appointment connected party sales that are contemplated prior to appointment.

Why chop out so many connected party sales that are caught by the current SIP13? Will this improve perceptions?  Will we lose valuable transparency if we assume that the only connected party transactions worthy of disclosure are quasi pre-packs?

Requirements on office holders

The only requirements that the draft revised SIP13 puts on IPs in office are:

  1. “If an office holder subsequently relies on a valuation or advice other than by an appropriate independent valuer and/or advisor with adequate professional indemnity insurance this should be disclosed along with the rationale for doing so and the reasons why the office holder was satisfied with any valuation obtained, explained.”
  2. “When considering the manner of disposal of the business or assets the office holder should be able to demonstrate that their duties under the legislation have been met.”
  3. “The office holder should demonstrate that they have acted with due regard to creditors’ interests by providing creditors with a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered. Such disclosure should be made in the next report to creditors after the transaction has been concluded, which should be issued at the earliest opportunity.”

Item 2 is pointless: a SIP should not have to state that IPs need to be able to demonstrate that they have complied with legislation.

The other two items are generally reasonable, but I think the application of these requirements is confused by the preceding section headed “Preparatory Work”. In fact, item 1 above appears in the “Preparatory Work” section, which adds to the perception that the entire SIP relates only to quasi pre-packs.

“Preparatory Work” – a confusing context

This section states:

“An insolvency practitioner should keep a detailed record of the reasoning behind both the decision to make a sale to a connected party and all alternatives considered.”

“An insolvency practitioner should exercise professional judgement in advising the client whether a formal valuation of any or all of the assets is necessary.”

The SIP’s “principles” explain that “insolvency practitioner” is to be read as relating to acting in advisory engagements prior to commencement of the insolvency process.

The “preparatory work” heading and the reference to the pre-appointment “decision to make a sale” lead me to wonder whether the sections that follow – “after appointment” and “disclosure” – apply only to sales where pre-appointment preparatory work has been undertaken.  Another issue with the heading – and the fact that the first sentence above is a copy of para 10 of SIP16 (with the omission of “pre-pack”) – is that it suggests that SIP13 does not capture sales completed pre-appointment.

But does it make sense to reduce SIP13 to a SIP16 baby brother?

Does the SIP work for liquidation sales?

Often business and/or asset sales to connected parties are conducted in or around a CVL process. Sometimes the sale happens pre-liquidation: sometimes without the advising IP’s involvement, but sometimes with their knowledge and assistance.  In other cases, the IP takes no steps to sell the assets until his/her formal appointment as liquidator; indeed, in some cases the IP will not even have met or spoken with the directors before the S98 meeting as they replace the members’ choice of IP as liquidator.

What are the disclosure requirements for pre-liquidation sales? This draft revised SIP13 omits all such disclosure.  True, at present SIP8 requires some disclosure, but:

  • SIP8 only requires disclosure of transactions in the year before the directors resolved to wind up the company, so there remains a crucial reporting gap;
  • SIP8 only requires disclosure to the S98 meeting, so technically it need not be in the post-S98 report that is circulated to creditors; and
  • SIP8 will be changed enormously by the 2016 Rules and rumour has it that SIP8 might even disappear completely.

How many companies go into CVL having sold/lost all their chattel assets already? I reviewed the filing of 10 one year old CVLs chosen at random:

  • 6 had no chattel assets at the point of liquidation, although the previous accounts of 3 of these attributed some value to chattel assets (and one of the others had no filed accounts);
  • 3 involved post-CVL connected party sales; and
  • 1 involved a post-CVL unconnected party sale.

Of course, there can be all kinds of reasons why a company goes into CVL with no chattel assets, but if the revised SIP13 is issued, how many connected party transactions will go entirely unreported in future? Might it even influence more directors to dispose of assets before an insolvency office holder is appointed so that the sale falls under the radar?

Perceptions

Of course, the insolvency office holder will make appropriate investigations into a pre-liquidation (or any other insolvency process) sale. Therefore, is there really any harm done if the details of the sale are not provided to creditors?

I guess not, but doesn’t the omission de-value the efforts to ensure that office holders disclose post-appointment sales? What are the chances that the distinction between a pre and post sale will be lost on some creditors?  If they see solely a cash at bank lump sum received by the liquidator of a once asset-rich company and few details, what might their sceptical minds conclude?

Not quite SIP16

As I mentioned at the start, this draft revised SIP13 seems to have been produced from a blank sheet of paper and a copy of SIP16. However, fortunately, this SIP seems to have avoided the prescriptive shackles of its fellow.

The consultation release referred to SIP13 having been drafted “in a proportionate way and without being onerous, recognising that it may apply to low value transactions”. Notwithstanding that some liquidation business/asset sales may be as hefty as some pre-packs, I think this is good news: the draft SIP13 does not contain a SIP16-style shopping list of disclosure items (bravo!) and sticks to the principle of providing “a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered”.

Therefore, whilst I suspect that disclosure of material business sales may be expected to contain a number of SIP16 elements, at least selling an old computer to the director for £50 will not require a chapter-and-verse account. However, it will take diligence on the part of those drafting and reviewing creditors’ reports to ensure that an adequate explanation, depending on the specific circumstances, is given. As with the new SIP9, formulaic approaches to report-writing will not work.

Wider scope?

Assuming that the pre-appointment “preparatory work” context is not meant to rule out disclosure of cold post-appointment sales, the draft revised SIP13 would have a wider reach than the current SIP13 in some respects:

  • Sales with connected parties (or at least as they are defined by statute), not just with directors, are caught; and
  • Personal insolvency processes are caught, so for example it would include a bankrupt’s family member buying out the Trustee’s interest.

Consultation deadline

I agree that a revision of SIP13 is long overdue: for one thing, its reference to a Rule 2.2 report lost all relevance in 2003!

The consultation – available at http://goo.gl/D91QMo – ends on 11 May 2016. I’ll be submitting a response, so if you want to counter my opinions, you’d better getting writing.

 

By the way, if you’ve been wondering how the picture relates to the story: there’s no connection, it’s just that I’ve recently returned from a spectacular trip to Bolivia and Chile.


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SIP9 – Reading Between the Lines

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How are we coping in this (new) SIP9 vacuum? Well, nature abhors a vacuum and it seems to me that we’re all plugging the gap in our own ways.

One IP told me that he had incurred time costs of c.£4,000 producing his first fees estimate and I heard another IP say that he was not going to seek fees approval on any case until the new SIP9 is in force. Having raised some questions about the RPBs’ recent announcement on SIP9, I was told that I was reading too much into it, but what do they expect given the dearth of guidance?

We have learnt that the new SIP9 will not contain a suggested format. IPs seem almost unanimous in their belief that this is counter-productive (not to mention costly!).  We are led to believe that it’s what the major creditors want, but the comments I have heard and seen from creditors are far from clear: they seem to want simultaneously more information but shorter reports, more prescription (even more legislation?  Give me strength!) but also a bespoke approach!  It will be interesting to read R3’s promised guidance.

I am sympathetic to the IP who is not even going to propose fees resolutions until he sees the new SIP9. Alternatively, we could gamble on what the final SIP9 will look like or we could just concentrate on making fees estimates rules-compliant for now and live with the prospect of having to revisit systems in November.  Both approaches are unattractive and make a mockery of the Insolvency Service’s Impact Assessment that estimated it would take each IP only 1 hour to become rules-ready!

So what are we expected to do now in applying the new rules?

The Consultation Draft SIP9

The draft rules were laid before Parliament on 3 March 2015. The draft SIP9 consultation was issued 5 months later.  It is perhaps not surprising therefore that, 2 ½ months further on, we’re still waiting for a SIP9.

Why does it take so long to finalise SIPs?  Having sat around the JIC table, I think I know why.  But it’s just not acceptable, is it?  This is especially so in view of the fact that the consultation draft SIP9 threatened to introduce new standards that would involve fundamental changes to time-recording systems and reporting formats.

I will save further breath on saying any more about the consultation draft, but if you are curious about what I had to say about it, you can see my consultation response here: SIP9 consult response and my mark-up of the draft SIP here: SIP9 markup.

Whilst I don’t have any idea how the final SIP9 will compare with the consultation draft, I do wonder how we are to read the R3’s recently-released Creditors’ Guides to Fees.

New Creditors’ Guides to Fees

R3’s new Creditors’ Guides to Fees were released on its website on 1 October without fanfare. At first glance, it is easy to assume that nothing has changed (I made that mistake and, as a result, asked R3 to return the old Guides to their page and date the Guides clearly, which R3 very swiftly did – thank you).

However, a closer look at the new Guides reveals that, not only do they incorporate the new rules of course, but they include much of the draft SIP9.  I am sure that the Guides will attract few (if any!) readers, but isn’t it a nonsense that the Guides are intended to explain to creditors what IPs do, but at present they describe standards that are not even enshrined in the statute or SIPs?!

The Guides include a number of new “should”s that appeared in the draft SIP9 but that IPs are probably not following completely at present. For example, the Guides repeat the draft SIP9’s list of “key issues of concern”, about which office holders should explain “in a way which facilitates clarity of understanding”:

  • the work the office holder anticipates will be done, and why that work is necessary;
  • the anticipated cost of that work, including any expenses expected to be incurred in connection with it;
  • whether it is anticipated that the work will provide a financial benefit to creditors, and if so what benefit (or if the work provided no direct financial benefit, but was required by statute);
  • the work actually done and why that work was necessary;
  • the actual costs of the work, including any expenses incurred in connection with it, as against any estimate provided; and
  • whether the work has provided a financial benefit to creditors, and if so what benefit (or if the work provided no direct financial benefit, but was required by statute).

Other “should”s appearing in the Guides include:

  • Where it is practical to do so, the office holder should provide an indication of the likely return to creditors when seeking approval for the basis of his remuneration.
  • When approval for a fixed amount or a percentage basis is sought, the office holder should explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken.

Fortunately, the Guides do not repeat the draft SIP9 in all aspects.  For example, they do not repeat para 10 of the draft SIP9, which recommended new divisions of work: Statutory Compliance; Asset Realisation; Distribution and Investigation.  They also omit draft SIP9 para 11’s references to the use of blended rates.  I suspect these paras have been omitted precisely because they were not “should”s in the draft SIP9 (although the language used in the draft suggests a stick is waving in the shadows).

Thus, the Guides give the creditors the impression that IPs are working in compliance with the draft SIP9’s standards, but what message have we received from the RPBs?

The RPBs’ Announcement

On 30 September, the IPA emailed its members on “SIP9 Transitional Arrangements” and the ICAEW made the same announcement publicly on 9 October (http://goo.gl/MrExtE).  I assume that the other RPBs/IS conveyed the same message to their members/IPs.

The key message was that, until the new SIP9 is issued (est. on or before 1 November) and/or it becomes effective (est. 1 December), the “principles” of the current SIP9 should be applied “as these remain ostensibly unchanged in the new SIP”.

However, I have some questions on the announcement:

  • “Insolvency Practitioners should apply the principles of the current SIP” – does this mean that IPs will not be taken to task if they do not apply the Key Compliance Standards of the current SIP? Some might argue: if IPs were complying with the letter of SIP9 prior to 1 October, why would they take the time to deviate from the SIP9 detail now? My answer would be: because fixing systems to comply with the new rules is disruptive enough, so much has needed to change. Therefore, if we could remove some of the detail of the old SIP9 – a lot of which doesn’t sit well in our apparent new world of narratives good, numbers bad – life could be so much easier.
  • “The existing SIP9 will be withdrawn” – does this mean that the new SIP9 will apply to new and old cases? If so, this is even more reason to try to avoid right now maintaining (and for some IPs, changing) systems to ensure that the letter of the current SIP9 is met.
  • “IPs should refer to the new Rules and also to Dear IPs 65 and 68… should they need to issue an estimate of their fees in advance of the implementation of the new SIP” – who needs to issue a fees estimate? Does this mean that IPs are doing the right thing, if they refrain from seeking fee approval at all in this hiatus period? Are the RPBs telling IPs for example to hold S98s, get the jobs in, but wait until December before proposing postal resolutions? This would seem to run contrary to the draft “Explanatory Note” that accompanied the consultation draft SIP9, which stated that fees requests should be considered “at the earliest opportunity”… but then of course that was only draft.

Dear IPs

To be fair, I think the Insolvency Service has done a reasonable job with Dear IPs 65 and 68.

Yes, of course, we all knew they would seek to “clarify” the rules’ reference to the “liquidator” providing fees-related information and have stated: “The use of the word ‘liquidator’ is not intended to preclude an insolvency practitioner from providing this information ahead of a s98 meeting at which s/he is subsequently appointed”… but from what I have heard, it seems that this is convincing very few IPs.

Also, whilst I can see what the Service is getting at, I do feel a little nervous about using the ‘unused’ part of an Administrator’s fees estimate to enable the subsequently-appointed Para 83 CVL Liquidator to draw fees. I think it is wonderfully pragmatic of the Insolvency Service and the rules seem to allow it, but I just wonder what the regulators would say if they saw it.  I don’t fancy being the first one to debate the subject with a monitor.

I also wish the Service would take greater care when referring to “fees”, because sometimes I think they mean “time costs” (or “remuneration charged”, as the rules put it, although this phrase is behind some of the confusion, I think). For example, Dear IP 68 states “as work cannot stop on a case, there may be instances where an office-holder exceeds the fees estimate before approval is sought/obtained”.  Err… I don’t think the Service exactly means this, but rather that the office holder may incur time costs in excess of the fees estimate, don’t you think?

But the Dear IPs have stuck pretty-much to the rules – which is to be expected and for which I am thankful – so, if IPs are hoping to read more about how to put the rules into practice, the Dear IPs probably will leave them wanting.

A Pig’s Ear

In summary, we are currently navigating our way through:

  • The Insolvency Rules 2015, which are not without flaws (see my previous posts, http://goo.gl/9mrWl4 and http://goo.gl/inIYEd);
  • Dear IPs 65 and 68;
  • The existing SIP9, which was drafted a world ago when the focus was on explaining what work you had done, not what work you anticipate doing;
  • The RPBs’ announcement, which seems to advise a business-as-usual approach despite the new rules being so different;
  • New Creditors’ Guides to Fees that include some requirements of the draft SIP9, which have not yet made their way into a publicly-available final SIP; and
  • If you feel like gambling, the consultation draft SIP9 and Explanatory Note.

I understand that some delegates to last week’s R3 SPG Forum were hoping for much more guidance on the new rules, but I am struggling to see what could possibly have been said. R3 has promised additional guidance, but understandably they want to wait to check that this is compatible with the final SIP9.

Personally, I have tried to help spread some knowledge by presenting a free-access webinar for the ICAEW on the detail of the new rules (http://goo.gl/93nDb0) and presenting at other ICAEW and R3 events in an attempt to highlight some practical steps.  I have also recorded a webinar for the Compliance Alliance on the practicalities and written much of this down for my clients.  I’m sure that other compliance consultants have been doing much the same, but we all have been working with the suspicion that, once we see the final SIP9, we may have to have a rethink.  I would also not be surprised if monitors’ “recommendations” evolve over time and we see a further revised SIP9 a year or so down the line.

So much for greater transparency!


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A Call to shout about the obstacles to employee consultations

IMGP3301

 

As the deadline for the Call for Evidence comes to a close, do we have any hint of what might come of it?  Can we grab this opportunity to rescue the rescue process?

Rob Haynes, in ICAEW’s economia, summarises the key issue perfectly: how does government expect IPs (and insolvent businesses pre-appointment) to meet the statutory employee consultation burdens when they must act in the best interests of creditors?  Haynes’ article ends depressingly with thoughts that the EU might influence the protection pendulum to swing even further towards employees.

As I haven’t worked on the front-line for several years, I confess that my point of view is fairly theoretic.  But if we are to persuade government to make the legislation work better for this country’s insolvencies, we need to respond to the Call and I would urge those of you with current experience to put pen to paper, please?

The Insolvency Service’s Call for Evidence, “Collective Redundancy Consultation for Employers Facing Insolvency”, which closes on 12 June, can be found at: https://goo.gl/PW2AOa.

The economia article can be found at: http://goo.gl/Jfp8CX.

 

Answering the Call

As you know, this is all about the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”), which requires employers to consult with employee representatives where they are proposing to make redundant 20 or more employees at an establishment.

Personally, I’ve always wondered what government hopes the employee consultation requirements will achieve, especially in insolvency situations.  The foreword to the Call states:

“The intention of this legislation is to ensure that unnecessary redundancies are avoided and to mitigate the effects of redundancies where they do unfortunately need to occur.”

Setting aside for now the realities of whether this can be achieved, if this is the intention, why does TULRCA tie in only establishments where 20 or more redundancies are proposed?  Aren’t these intentions just as valid for smaller businesses?  Does this threshold seek to recognise micro-businesses?  Maybe, although it also lets off large businesses where a relatively small number of redundancies are proposed, which bearing in mind the intention seems illogical to me.

Assuming that the threshold is intended to avoid micro-businesses carrying the cost burden of complying with consultation requirements, then this does seem to acknowledge that, in some cases, the cost to the employer is a step too far.

But who carries the cost burden in insolvency situations?  At present, the NI Fund.  If the government were to act on calls to elevate the priority of these claims, it would impact on the recoveries of creditors, or perhaps even the Administrators’ pockets if it were made an Administration expense.  Would that persuade insolvent companies/IPs to continue trading in order to consult, even if there were no realistic alternative to redundancy?  Even if trading-on were possible, it still doesn’t make it right to continue trading at a loss simply to meet the consultation requirements.

And would a change in protective award priority achieve the intention described above?  Would it avoid unnecessary redundancies or result in more redundancies, as IPs run shy of taking appointments where their options boil down to: achieve a going concern sale with most of the employees intact (but we’d rather you didn’t do a pre-pack to a connected party without an independent review) or you don’t get paid at all?  And where does this leave the skills of IPs to effect rescue and restructuring strategies?

 

City Link Stokes the Fire

The House of Commons’ Committees’ report, “Impact of the closure of City Link on Employment”, just pre-dated the Service’s Call for Evidence.  Although the subject had been bubbling away for many years, this case may have been the light on the blue touch paper leading to the Call.

The report – at http://goo.gl/BNx5MH – covers much more ground than just TULRCA, but here are some quotes on this subject:

“It is clearly in the financial interest of a company to break the law and dispense with the statutory redundancy consultation period if the fine for doing so is less than the cost of continuing to trade for the consultation period and this fine is paid by the taxpayer…

“We are greatly concerned that the existing system incentivises companies to break the law on consultation with employees.”

These reflect comments by the RMT (City Link went into Administration on 24 December):

“They… were preparing contingency plans from November. Surely at that point they should either have made the thing public, in which case it would have given more prospective buyers time to come forward, or at least given the Government bodies and the union time to consult properly with their members and represent their interests. None of this was done.”

“they deliberately flouted that [the consultation period]. They can do that, because you and I as taxpayers pick up the tab for the Insolvency Service. It is absolutely disgraceful.”

But Jon Moulton’s comment was:

“The purpose of the consultation period was consultation. These are circumstances where no consultation is reasonably possible.”

Fortunately, the Committees acknowledged the position of Administrators:

“Once a company has gone into administration, it is likely to be the case that they will be, or will be about to become, insolvent and the administrator will not have the option to allow the company to continue to trade for the consultation period.”

The Committees’ conclusion was:

“When considering the consultation period in relation to a redundancy, company directors may feel they have competing duties. We recommend that the Government review and clarify the requirements for consultation on redundancies during an administration so that employees understand what they can expect and company directors and insolvency professionals have a clear understanding of their responsibility to employees.”

Does this conclusion suggest that the Committees were swayed by the RMT’s argument, that, although directors may feel they have competing duties, in fact their duties are aligned as there may be advantages in coming out with the news earlier?  The Committees also seem to be questioning IPs’ levels of understanding of their responsibility to employees.  Although they seem to recognise an Administrator’s limited options, they also believe that the system incentivises curtailed consultation, rather than seeing it as entirely impractical.

I hope that sufficient responses to the Call for Evidence address these misconceptions.  If they don’t, responses in the vein of the RMT’s comments may monopolise ministers’ ears.

 

The Call’s Questions

Here are some of the more spicy questions in the Call for Evidence:

  1. How does meaningful consultation with a ‘view to reaching agreement’ work in practice?
  2. What do you understand to be the benefits of consultation and notification where an employer is facing, or has become insolvent?
  3. In practice, what role do employees and employee representatives play in considering options to rescue the business and to help reduce and mitigate the impact of redundancies?
  1. What factors, where present, act as inhibitors to starting consultation or notifying the Secretary when an employer is imminently facing, or has moved into an insolvency process?
  1. What factors, where present, negatively impact upon the quality and effectiveness of consultation when an employer is facing insolvency, or has become insolvent?
  2. Are advisors (accountants, HR professionals, or where an insolvency practitioner is acting as an advisor pre-insolvency) informing directors of their need to start consultation when there is the prospect of collective redundancies? How do directors respond to such advice?
  3. Are directors facing insolvency starting consultation, and notifying the Secretary of State, as soon as collective redundancies are proposed and at the latest when they first make contact with an insolvency practitioner? If not, how can this be encouraged?
  4. Normally are employee representatives already in place? What are the practicalities of appointing employee representatives when no trade union representation is in place?
  1. The current sanctions against employers who fail to consult take the form of Protective Awards. Do you think these are proportionate, effective and dissuasive in the context of employers who are imminently facing, or have become insolvent? Is the situation different as it applies to directors and insolvency practitioners respectively?

 

As this is a Call for Evidence, the Insolvency Service is looking for examples and experiences, even when they are asking for an opinion.  I am sure that many IPs and others in the profession can report a host of examples illustrating powerfully the realities and justifiable strategies in trying to make the most of an insolvent business, demonstrating that efforts to avoid redundancies certainly do feature highly in IPs’ minds.

 


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“Ransom” Payments – seeing things from the other side

4609 Sydney

 

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

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

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

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

 

Energy Suppliers

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

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

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

Personal guarantees

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

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

Timescales to termination

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

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

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

 

Merchant Services

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

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

Carve-out

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

 

The Insolvency Profession

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

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

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

Personal guarantees again

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

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

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

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

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

Other flaws

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

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

 

The Order

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

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

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


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Pre-packs: an oxbow lake in the making?

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

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

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

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

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

To Market or Not to Market?

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

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

“Comply or Explain”

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

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

Hindsight is a Wonderful Thing

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

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

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

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

Improving Confidence

Will the revised SIP improve confidence in pre-packs?

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

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

Cutting off the Flow

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

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

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

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

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

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

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


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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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Keeping the lights on for insolvent businesses

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It is 13 days and counting until the Insolvency Service’s consultation on the extension of the IA86 provisions regarding essential supplies to insolvent businesses closes. R3 pretty much said it all in its autumn 2014 magazine (pages 8 and 9), so I shall be brief – honest!

The Insolvency Service’s consultation, impact assessment, and draft statutory instrument are at: http://goo.gl/N4Tg3c

Personal guarantees in IVAs and CVAs?

As I’m sure you know, the changes seek to wrap in to the existing S233 and S372 suppliers of a number of IT services and goods. Thus, these suppliers may not hold the IP to ransom in relation to their pre-appointment debts in order to agree to supply post-appointment… but they can seek a PG from the office holder, just as utility suppliers can do at present.

The draft statutory instrument also sets out restrictions on IT/utility suppliers’ powers to terminate pre-appointment contracts (or “do any other thing”, which the Service envisages would prevent actions such as increasing charges simply because of the administration or VA). A supplier would be entitled to terminate if, within 14 days of the commencement of the VA (or administration), the supplier has asked for a PG and one has not been provided within a further 14 days.

How likely is it that a Supervisor will agree to personally guarantee the payment of IT or utility supplies to a company or an individual in a VA?! Although I think that this is an entirely unrealistic prospect, VAs at present only work if the company/individual can reach agreements with their suppliers, so I don’t think the insolvent will be any worse off – and at least this might give them a 28 days breathing space in which to get things sorted.  It is perhaps not surprising, therefore, that the impact assessment takes a cautious approach and puts no monetary benefit on the impact of this provision on companies/individuals trading whilst in VAs.

Pre-Administration/VA events

The draft SI lists aspects of what is described as “an insolvency-related term”, which ceases to have effect if a company enters administration or CVA (or an individual in business enters an IVA). One of these ineffective features of an insolvency-related term is:

  • “the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect”

I guess that “insolvency”, i.e. being unable to pay one’s debts as and when they fall due, is an event that occurs before administration or VA, isn’t it? Given that this frequently appears in termination clauses, could this be a catch-all that avoids termination in all cases where an administration or VA results?  Well, surely the problem with this is that, when insolvency first rears its head, who knows what the final outcome will be?  What if a creditor, petitioning for a winding-up order, is tussling with a company hoping to be placed into administration?  It seems that suppliers might be entitled to terminate, but only if the company does not end up in an administration or VA.  A statutory provision that seeks to impact on a past event is no provision at all, is it?

So does the draft SI have anything else to say about the pre-Administration/VA periods, e.g. when a Notice of Intention to Appoint an Administrator has been issued or when a Nominee is acting? The Explanatory Note indicates that a termination clause would not have effect when a VA is proposed, but this is not what the draft SI says. It states that the insolvency-related term ceases to have effect if “a voluntary arrangement approved… takes effect”.

The impact assessment uses the expression, “the onset of insolvency”, which is something else again. It uses this expression to describe the starting point of the 14 days in which the supplier can ask for a PG.  However, the draft SI states that this period begins with “the day the company entered administration or the voluntary arrangement took effect”.

Therefore, it would seem to me that, in more ways than one, the period during which a Nominee is acting or when a company is preparing to go into administration falls between the cracks of the draft SI that can only work, if at all, in hindsight: are supplies assured during this period?

£54 million more to unsecured creditors

The impact assessment calculates the benefits on the basis of R3’s August 2013 survey, which suggested that 7% of liquidations could be avoided. The Service has extrapolated this to mean that these liquidations instead may be tomorrow’s administrations… and, as the OFT 2011 corporate insolvency study indicated that on average unsecured creditors recovered 4% more in administrations than in liquidations, they conclude that this could result in an additional £54 million being returned to unsecured creditors.

Personally, I would have thought that the key insolvency shift that is likely to occur from these measures – especially given the Government’s appetite to act on Teresa Graham’s recommendations – is that some pre-packs may be replaced by post-appointment business sales, as IPs’ hands are freed up (if only a little) to continue to trade the business. I think it odd, therefore, that the impact assessment does not assume there would be any change in the proportion of administrations that will involve trading-on: the Service works on an assumption – both before and after the proposed changes – that 10% of administrations involve post-appointment trading-on.

Then again, didn’t Teresa Graham’s review conclude that pre-pack sold businesses are more likely to survive than post-appointment sold businesses? If this is so, is it a good or a bad thing that there could be fewer pre-packs and more post-appointment sales?  That really does depend on one’s view of pre-packs.  Still, as it seems inevitable now that the hurdles to pre-packs are going to be raised, I guess that we should welcome any lowering of the high jump bar for post-appointment trading.

Over 2,000 businesses could be saved each year

That was R3’s “Holding Rescue to Ransom” tagline. Is it realistic?

Personally, I think not. However, I don’t think I’m alone: the R3 article does remind us that its original campaign highlighted the need for all suppliers of essential services to be brought into the net, not just IT services.  Therefore, it remains to be seen if these provisions will provide enough breathing space to enable insolvency office holders to help more businesses to survive.

(UPDATE 24/02/2015: for a summary of the outcome of this consultation, go to: http://wp.me/p2FU2Z-9w)


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Moving Thresholds: DROs and the Creditor’s Bankruptcy Petition

Peru252

Having finally drafted my presentation for the SWSCA course later this week, I can turn to reviewing the Insolvency Service’s consultation on DROs and the creditor’s bankruptcy petition threshold. There’s still time for you to respond: the deadline is 9 October 2014.

I have to confess that my practical experience is corporate insolvency-heavy, so personally I don’t feel in a great position to comment, but, of course, that won’t stop me!

Strictly-speaking, it is not a consultation, but a call for evidence. Thus, whilst there are hints of the direction in which the Government/InsS might take the issues forward, it’s all (supposed to be) pretty open at the moment.  This also means that the emphasis is on providing data, rather than opinion – another reason why I do not feel well-placed to comment.

The call for evidence can be found at: http://goo.gl/UhT52U.

DROs: Key Questions

Fundamentally, the Service is asking: are the criteria (and the publicity/delivery of DROs) blocking out people who should be able to benefit from a DRO?  Much of the Service’s arguments seem to focus on how many people would move from bankruptcy to DRO if thresholds were moved.  I guess this helps to explore the potential consequences of any changes on suppliers who may react by raising the hurdles for people at the margins from accessing their supplies.  However, what I’m interested in is: at what stage does a bankruptcy become beneficial to creditors?  Surely, this is a key factor in deciding the DRO/bankruptcy threshold, isn’t it?  I don’t think the Service’s consultation document explores this sufficiently.

Debts and Assets

As we know, the thresholds for accessing a DRO are:

  • Total debts less than £15,000;
  • Total assets less than £300 (excluding certain items); and
  • Surplus income less than £50 per month.

Are these at the “right” levels?

The consultation illustrates these thresholds adjusted for inflation:

  • The threshold for total debts would move to between £16,200 to £18,900;
  • Total assets threshold: £325 to £380; and
  • Surplus income threshold: £54 to £63 per month.

Hmm… assuming that the 2009 levels were valid, that appears to suggest that change should be minimal.  The world seems to have changed more than this, doesn’t it?  Or is it our attitudes to debt that have changed?

The consultation also looks to the recently statute-enshrined Scottish Minimal Assets Process (“MAP”) levels:

  • Debts between £1,500 and £17,000 (and I recall that many fought to persuade the Minister to increase this from £10,000);
  • Assets less than £2,000 (again, I think this was proposed originally at £1,000); and
  • Zero disposable income (or income entirely from benefits).

The Service then examines the levels of debts and assets of the 2013/14 bankruptcies, which suggest that, if the two thresholds were adjusted in line with inflation, up to 5% of those who became bankrupt would have qualified for DROs (assuming they met the other DRO criteria). They haven’t done the same comparison to the MAP thresholds, but have illustrated that, if the asset threshold were £2,000 and the debt threshold £30,000 (interesting number to pick!), 23% of last year’s bankrupts could have had a DRO (again, assuming they met the other criteria).  That’s all very interesting, but what is the logic behind the thresholds?

Personally, I cannot see the rationale for imposing a low debt threshold. The Service states that the threshold “was designed to limit the scheme to those with low levels of unsecured debt rather than allowing debtors to discharge ‘excessive’ sums”.  What is an “excessive” sum?  I’m in no position to answer, but, from my corporate insolvency perspective, I don’t see much of the “debt-dumping” that seems to inflame the Daily Mail reader.  I suspect that the personal insolvency world is similar: individuals are in a sorry state when they have accumulated more debts than they can afford; they’re not trying to scam their creditors, simply escape from the hole.  Does it really help to make this endeavour difficult for them?

Ah, but wouldn’t an increase in the debt threshold dissuade lenders etc.? I’m guessing that some debtors suffer a substantial change in circumstances, leaving them unable to support high levels of debt, but I guess there are other debtors who manage to build up fairly high levels of debt whilst having little assets/income to back it up.  Whichever way it is, don’t suppliers at the moment accept the risks that they might not see any recovery from a proportion of those to whom they extend credit?  If these individuals simply move from a nil-return-to-creditors bankruptcy to a nil-return-to-creditors DRO, where’s the harm?  It is far more expensive for the Insolvency Service (i.e. the public purse) to administer a bankruptcy than a DRO and, if the debtor doesn’t have the assets/income to cover those costs, that’s a loss to everyone.  So who is winning from this whole process?

I hear much support for R3’s call to raise the debt threshold to £30,000 and I can see no real argument against that.

As to the level of assets, I also see no reason why it should not be £2,000 (Debt Camel – http://debtcamel.co.uk/dro-consultation/ – makes the sensible observation that computers and the like are generally accepted to be necessities in this day, especially for job-seekers).  However, I’d like to ask the question: how high do the assets and surplus income need to be in order to generate a material return to creditors?  I’ve not done the sums, but there must be a relatively simple answer, mustn’t there?

Surplus Income

The Service’s analysis of surplus income levels is a bit cloudier. Firstly, I’m surprised to read that the Service has no income data for bankrupts who are not subject to an IPO/IPA – why not?  Surely they need to have known what the debtor’s income was in order to decide not to pursue an IPO/IPA, don’t they?  Secondly, later the Service states that “under bankruptcy, an Income Payments Order will be put in place taking the whole surplus income if a bankrupt has a surplus income of more than £20 per month, subject to an allowance for emergencies and contingencies of £10 a month for each family member.”  So presumably, all bankrupts for which they have no data fall below this threshold, don’t they?  The consultation discloses 22,044 “blanks”, i.e. no data cases, which is 93% of the total bankruptcies, but the Service estimates that only 25% of all bankrupts had incomes below the DRO level.  But shouldn’t all those “blanks” be below the DRO threshold?  If not, then why isn’t the OR pursuing IPOs/IPAs from them?

The Service’s argument against increasing the surplus income threshold is pretty-much that, apart from the emergency/contingency factor mentioned above, all the debtor’s surplus income is taken in an IPO/IPA, so why should a debtor in a DRO get to keep any of it?  Well I’m sorry, Insolvency Service, but your stats indicate to me that IPOs/IPAs are so not the norm for bankrupts; it seems that there are plenty of bankrupts getting to keep at least some surplus income, so I don’t see that debtors in DRO generally are better off than their bankrupt contemporaries.

I was also surprised to read that the Insolvency Service uses the “Living Costs and Food Survey” for calculating surplus income. Considering the Service was a body that was heavily involved in the IVA and DMP Protocols, I’m wondering why they chose this tool, rather than the CFS or Step Change guidelines.  I notice that “a consultation is ongoing to produce a Common Income and Expenditure Calculator to use as an industry standard” – presumably this will be rolled out for IVAs and DMPs too and presumably these industries are engaged in this consultation?  Personally, I’ve not seen it…

Debt Camel illustrates the disparity that using different tools can generate. She states that many IPs use guidelines that are stricter than the CFS (I guess she’s referring to the Step Change guidelines?) with the result that an IVA can be proposed for £70 or £100 per month for an individual who would meet the current DRO £50 per month threshold.  Personally, I’m not surprised at this, as an individual’s actual I&E might be very different from what any model predicts they should be.  Also, just as some debtors have chosen an IVA over bankruptcy – even though, from a purely economic perspective, bankruptcy might appear the best way to go – an individual’s choice to go for an IVA over a DRO does not make it wrong.  However, given the substantial differences in downsides for the debtor, I expect that IPs dealing in low contribution IVAs would be fanatical about giving and recording thorough advice on all the options available to avoid mis-selling complaints down the line.

However, back to my question: do creditors get to see anything from £50 per month IPOs/IPAs? That’s only £1,800 over three years.  What’s the current bankruptcy admin fee: £1,715 for starters..?  If creditors only start seeing a real recovery on IPOs/IPAs at, say, £70 per month, then shouldn’t that be the threshold – for DROs and bankruptcies?

The Debtor’s Experience

The consultation then moves to examine the debtor’s experience of DROs: how much it costs them; whether it is right that they should be able to access a DRO only once in a 6 year period; whether the competent authority/intermediary model can be improved on. Personally, I cannot really add to these issues, so I won’t attempt to.

I was intrigued by Debt Camel’s comments (sorry, DC, from drawing so heavily on your post) regarding the paucity of publicity given to DROs, including on some IPs’ websites. I can see how this situation may have arisen: when DROs were introduced back in 2009, IVAs and DROs were poles apart.  IVAs were often marketed with a surplus income threshold some way above the £50 DRO limit.  Therefore, it was perhaps understandable that IVA websites rarely signposted DROs as a potential option for readers.  However, the disposable income threshold for proposing an IVA has dropped in recent times, so I can well understand that IVA providers may now look to advise individuals with a DI of c.£50.  Given this environment, it is appropriate that IP/IVA provider websites (and, of course, advisers) that purport to set out debtors’ options cover DROs.  From my own spot-check of the websites of some of the major providers, I’d say that c.50% covered DROs, although some did seem to trail after the bankruptcy blurb, which didn’t seem entirely fair and transparent.

Any lack of DRO coverage by IPs can only give weight to arguments that someone who appears to be in the region of a potential DRO candidate should be referred to an Authorised Intermediary. I also ask myself if the DRO calculator is accessible by non-Authorised Intermediaries: if IPs are to cover well DROs in possible options for a debtor, it seems to me that they must have access to it – this is another reason for addressing the lack of consistency in the tools currently in use.

DRO Revocations

The number of DROs revoked has been running consistently for the past three years at c.300 per year. Revocations most often occurred at the OR’s discretion when he felt that the debtor’s change in financial circumstances meant that he could deal with his creditors – that is how the consultation describes it anyway.  Given that the document continues to explain that 154 revocations occurred because the asset limit had been exceeded and 29 because the surplus income level had been exceeded, it seems to me that it was more all about hitting the DRO thresholds.

Interestingly, one debtor was successful in challenging the OR’s discretion. The document states that since this, “the decision to revoke following a change of circumstances is no longer being so strictly applied, with revocation now only occurring if the creditors could be expected to benefit if the DRO was revoked”.

The consultation asks whether the revocation system could be improved. My questions would be: what happens to the debtor next; are they thrown back out into the cold?  Could they not be “switched” into a bankruptcy, if the debtors consent?

DRO Discharge

The consultation asks if the Scottish MAP discharge provisions should be adopted for DRO.

Personally, I don’t understand why MAPs have different timescales: six months for discharge from debts, but with a restriction on credit for a further six months after discharge with an option to extend this restriction for a further six months. I expect that the impact of a MAP or DRO on a debtor’s credit file restricts access to credit more than the statutory provisions anyway and, if six months is considered an appropriate timescale within which windfalls should be caught for the benefit of pre-DRO/MAP creditors (although, personally, I think that one year is not too much to ask), then why not stick with that single line in the sand?

Becoming employed

Understandably, some wonder whether being in a DRO might discourage some from taking up opportunities that risk bringing them out from under that safety net – for example, taking up employment that might take their surplus income over the £50 threshold.

I think that only those who have experienced DROs – more specifically perhaps, revocations on the basis of increased income – can really answer this question. However, I wonder if such a risk might be mitigated by allowing a greater level of surplus income once someone is in a DRO.

Bankruptcy Creditor Petition Limit

Having contemplated 25 pages of DRO territory, it seemed odd to switch to this topic for the final three pages, but good on the Insolvency Service for including it. It is a simple question: the bankruptcy creditor petition limit has been £750 since 1986, so what should it be now?

The consultation sets out these facts:

  • If it were increased in line with inflation, it would now be £1,600 to £1,700.
  • Germany, Italy, The Netherlands and Spain have no limit.
  • Australia’s is £2,700.
  • Scotland’s is £3,000.
  • Republic of Ireland’s is £15,900.
  • If the limit had been £2,000, there would have been 404 (3%) fewer creditor petitions last year.
  • If the limit had been £3,000, there would have been 979 (8%) fewer creditor petitions last year.

Personally, I don’t know where I’d put the level. I sympathise with the debtors who find themselves with a hefty bankruptcy annulment bill on the back of a small petition debt.  At the same time, I can see that creditors (even Councils) are entirely justified in using the statutory tools to pursue their debts.

Clearly, an increase is well overdue, and I hope that those with evidence-based views will help the Government decide on an appropriate level.