Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Category Archives: Consultations


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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

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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.


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IP Fees & Regulation Consultation: Have Turkeys Voted for Christmas?

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Faced with an apparent government vision of heavy-handed oversight over the RPBs and some peculiar restrictions on the time cost basis for IP fees, how have the RPBs and R3 responded? Have they resisted the pressure to offer some kind of compromise? Have they offered anything that might “solve the problems”? Here I have attempted to compare and contrast the responses of ACCA, ICAEW, ICAS, IPA and R3 to the key proposals of the recent consultation.

The government consultation page is at: https://www.gov.uk/government/consultations/insolvency-practitioner-regulation-and-fee-structure

The bodies’ responses are located at:

• ACCA: http://www.accaglobal.com/content/accaglobal/zw/en/technical-activities/technical-resources-search/2014/march/cdr1267.html
• ICAEW: http://www.icaew.com/en/technical/insolvency/insolvency-reps
• ICAS: http://icas.org.uk/Technical-Knowledge/Insolvency-Technical/Submissions/
• IPA: in the members’ area>public consultations>other consultations
• R3: https://www.r3.org.uk/media/documents/policy/consultation_subs/R3_response_-_Strengthening_the_regulatory_regime_and_fee_structure_for_IPs.pdf

In particular, I would recommend reading the R3 response in full, as there is not the space here to do it justice and it includes some valuable member survey results.

Regulatory Objectives

The government has proposed regulatory objectives for the statute-books, “framed” as follows:

1. Protecting and promoting the public interest

2. Having a system of regulating persons acting as IPs that:
(i) delivers fair treatment for persons affected by their actions and omissions,
(ii) reflects the regulatory principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed, and any other principle considered to represent best regulatory practice, and
(iii) delivers consistent outcomes

3. Encouraging an independent and competitive IP profession whose members:
(i) deliver quality services transparently and with integrity, and
(ii) consider the interests of all creditors in any particular case

4. Promoting the maximisation of the value of returns to creditors and also promptness in making those returns

5. Ensuring that the fees charged by IPs represent value for money

ACCA seemed alone in considering most of the above to be “uncontentious”, even going so far as to suggest what it felt would be a useful addition to them. However, none of the proposed objectives avoided the other bodies’ critical eyes. Many of the comments revolved around the thought that any such objectives will need to be supported by detailed guidance so that everyone was clear on the standards by which IPs and the RPBs are being measured.

Here are some other fruitier comments:

• Why stop at “having a system of regulating IPs” that delivers fairness etc.? Aren’t some of these objectives appropriate to the insolvency regime itself? (ICAEW, IPA)
• Shouldn’t the regulation system “deliver fair treatment” also to IPs? (ICAEW)
• Fixing IP fees on a prescribed scale (reference to another of the consultation’s proposals) would not “encourage a competitive IP profession”. (ICAEW)
• Statute already sets out how office holders should consider creditors’ interests (ICAEW, R3), although not uniformly in all cases (IPA). Setting it as an objective may raise false hopes of some expecting greater weight to be given to their interests than provided by statute. (ICAEW)
• Promoting the “promptness of returns” could threaten consideration of longer term gains, thus encouraging a culture of “quick kills” rather than thorough investigation and pursuit of claims. (IPA)
• “You should recognise that to perform a ‘value for money’ assessment in a case will require a detailed audit… which will be a very time consuming (and therefore expensive) process.” (ICAEW)
• Setting “value for money” as a regulatory objective simply shifts the responsibility for finding a solution onto the RPBs, rather than helping to overcome the difficulties in ascertaining what actually represents value for money. (IPA)
• The regulatory process cannot alter the facts that creditors will suffer losses, but enshrining objectives 4 and 5 risks over-inflating creditors’ expectations and thus may have a detrimental effect on public confidence. (IPA)

R3 kicked back more robustly on the concept as a whole: “the proposals… prompt us to suggest that now is the time to look at, in a fundamental way, the role of the Insolvency Service, as presently structured, funded, resourced and whether it is the most appropriate body to direct and oversee as important a part of the UK’s financial support service sector as the insolvency profession”.

Oversight Regulator’s Statutory Powers over the RPBs

The government proposes to introduce statutory powers to enable the Insolvency Service/Secretary of State to take a variety of actions against RPBs and, in certain cases, to make their own enquiries of, and apply to court to decide sanctions on, IPs directly. Unsurprisingly, the RPBs – and perhaps a little surprisingly, R3 – expressed concerns over some of the proposals as well as questioning whether the powers were truly necessary (again with the clear exception of ACCA, which had few specific comments on the proposals).

• “The ‘oversight regulator’ should take care to avoid ‘micro-managing’ RPBs and their disciplinary processes. Effectively running a ‘shadow’ regulatory system on top of the existing established processes would be confusing and damaging for the insolvency profession and those it serves.” (R3)
• “The increased powers of sanction by the oversight body seem to be little more than window dressing to address non-existent illegal actions… In our view, the system of regulation operates at its most effective when the oversight regulator and the RPBs work together, as demonstrated through the introduction of the complaints gateway.” (ICAEW)
• “It is worrying that the Secretary of State would wish to acquire the ability to control individual enquiries, which could undermine the fairness of the procedure.” (ICAEW)
• “The fundamental problem… is that the proposed legislation does not envisage there being any stage at which a proper disciplinary hearing will be held to allow the IP to deal with and refute the findings of the Insolvency Service investigation and it is envisaged that the Secretary of State, through the good offices of the Insolvency Service would be investigator, prosecutor and judge (determining both guilt and sanction).” (ICAEW)
• “We wonder whether this process could be susceptible to challenge on the basis of human rights legislation given that there appears to be no provision for a fair trial by an independent tribunal.” (ICAEW)
• “Who picks up the likely significant costs?” If these are to be passed on to the RPBs, then licence fees will increase significantly, with the likely consequences of increased costs on insolvent estates and IPs leaving the market. (ICAEW and R3)
• “There are several proposals… that would see IPs potentially punished twice for the same transgression. It is both inequitable and a position that few other professionals could find themselves in.” (R3) The IPA also stated that such a process “would introduce a degree of double jeopardy and be contrary to principles of natural justice”. Although apparently the Service has clarified, in a meeting with the IPA, that it is not intended to subject an IP to a second disciplinary process, the IPA has questioned how, and in what circumstances, would the Service conduct such enquiries independent of the IP’s licensing body.
• “The power for the Secretary of State to sanction an IP directly calls into question the point of the regulation of the profession being delegated to RPBs in the first place.” (R3)
• As regards the proposed power to issue a direction to an RPB in the context of a disciplinary matter: “it would be wholly inappropriate for the Insolvency Service to mandate that a particular decision be reached.” (ICAS)
• Will the Service be adequately resourced – financially and with skilled staff – to exercise these new powers, particularly in regard to the proposed investigations and prosecutions? (R3 and ICAS)

A Single Regulator?

It seems that there has been a slight convergence of opinions of R3 and the RPBs on this question. Setting aside ACCA, which “endorsed” the proposal, the regulatory and trade bodies now seem united in their objection to the proposed reserve power to enable the Service to designate a single regulator.

However, whereas R3 brought attention to the “regulation gap” that would result as a single regulator got up to speed, the RPBs had other reasons for their objections:

• Whatever could be achieved by the Insolvency Service overseeing a single regulator equally should be achievable with multiple RPBs. Effective oversight is the key. (ICAS and ICAEW)
• “There seems to be a failure to recognise that many IPs are already members of bodies which operate with the best regulatory models for professionals.” (ICAS)
• “Competition between regulators has driven down licensing costs and led to improvements in RPBs’ offerings to their members. There would be no such incentive to innovate, were there to be a single regulatory body.” (IPA)
• The government is also proposing to introduce a formal process to de-recognise an RPB if it fails to perform, but how would that work with a single regulator? We could hardly be left with no regulator! (IPA)
• Providing even a reserve power “could be seen to demonstrate on the part of the Insolvency Service a lack of commitment to the changes proposed for the regulatory regime and a lack of confidence in its part in the RPBs.” (ICAEW)

R3 suggested a third way: a “Single Regulatory Process”, which “would reduce significantly the inconsistencies that currently exist in the insolvency profession’s regulation” and “would also be a chance to take a fresh look at the profession’s regulatory processes and standards”.

Restriction of Use of Time Cost Basis

I wonder if the Service had any inkling of the floodgate they were prising open with the suggestion that the option of seeking fees on a time cost basis be limited to certain cases. Even ACCA is opposed to this one!

The core objections will not come as a surprise:

• If the primary issue is lack of creditor engagement, then the solution should lie in improving creditor engagement, starting with the Crown creditors. (ACCA, ICAS, ICAEW)
• “Some IPs may feel minded for their own commercial protection to factor in more work than might in the event be necessary, in which case fees could end up being over-estimated.” (ACCA; similar comments made by R3)
• In 2013, only 2% of all complaints related to fees, so perhaps creditors’ concern is not so acute as perceived by the government, and any action taken to change the existing regime must be proportionate. (ACCA, R3, ICAEW, ICAS)
• Plenty of criticisms of the OFT study: out of date, limited scope (which is now being extrapolated far beyond its remit), confusion between fees and costs, assumption that engaged creditors are the only constraint on fees, etc… (primarily R3 and ICAEW)
• IPs will avoid small and risky cases, as a fixed/percentage fee would not be economical. (R3, ACCA) [Although I have heard this many times, personally I don’t get it (unless people have in mind a prescribed rate): for a case with assets of £10,000 (net of non-IP costs), how does an IP’s recovery differ, if he is paid on a time cost basis, a fixed fee of £10,000, or a fee of 100% of the first £10,000 (net) realised?]
• This would burden the public purse, as uneconomic cases will remain with the OR. Some IPs also would leave the market, resulting in reduced competition and fewer options for debtors seeking help, which would seem contrary to the public interest. (R3, ICAEW)
• Fixed fees do not incentivise IPs to pursue tricky assets or to carry out non-profitable tasks. What does an IP do when he reaches the limit but still has work to do; is he expected to work for no pay? (ACCA, R3, ICAS, ICAEW, IPA)
• As recommended by the Cork Report, percentage-based fees were largely dropped in the 1980s, as they were viewed as unfair and inequitable to creditors. (ACCA, R3) “There is nothing inherently fair in a basis of charging where the results depend upon the amount and quality of realisable assets, rather than the work required.” (ICAEW) Arguably, time costs are the fairest fees mechanism (ICAEW), whereas fixed/percentage fees will invariably result in an element of cross-subsidisation of cases. (IPA)
• There is no evidence – or reason – to support the assumption that adopting fixed/percentage fees will reduce fee levels (IPA) or creditors’ returns (ICAEW).

But here are some of the more impassioned and novel comments:

• This specific proposal has no grounding in the Kempson review nor has there been any evidence-based research. “The Insolvency Service has disclosed the rationale behind this decision is solely ‘because two methods of remuneration are simpler than three’.” (R3)
• “R3 is not aware of anywhere else in the world where fee restrictions as outlined in the consultation are in operation. In effect, the Insolvency Service proposes to introduce an untested system of IP remuneration in the UK.” (R3)
• Secured creditors have the power to negotiate discounts from IPs, but why must that mean that unsecured creditors are ‘over-charged’? If a large customer (such as the government via its own procurement policy) sought to obtain discounts, that does not mean that other buyers of the goods and services are automatically being ‘over-charged’. (R3)
• Is a 9% differential in costs (the OFT study’s conclusion) really concerning? “The differential, for instance, between prices charged for consumer goods to wholesale or retail customers could be expected to be much higher (and still not exploitative of consumers).” (ICAEW)
• Restricting fees could result in outsourcing of parts of the job to unregulated entities, shifting the cost rather than reducing it and resulting in less transparency and control. (R3)
• “It is simplistic to think that changes introduced in the personal insolvency market can be imported into the corporate sector; this view demonstrates a complete lack of understanding of corporate insolvency, This market cannot be ‘commoditised’ in the same way.” (R3)
• If creditors have difficulty assessing the reasonableness of fees based on time costs, they will have the same, if not greater, difficulty judging fixed/percentage fees, something acknowledged by Professor Kempson. (R3)
• There is no reason to believe that restricting the use of the time cost basis in this manner will impact on creditor engagement or complaints about fees. (R3)
• RICS abolished fee scales for valuations after the Monopolies and Mergers Commission concluded that “they restricted competition and worked against consumers and were against the public interest”. (ICAEW)
• It is difficult to reconcile the government’s apparent determination to improve public confidence in the insolvency regime with the World Bank’s report that shows the UK currently as one of the most effective jurisdictions for resolving insolvency. (ICAEW)
• “If the aim of the Insolvency Service is to reduce IPs’ fees in aggregate to a break-even level, it seems unlikely that a high quality profession will be sustained.” (ICAEW)
• The Impact Assessment identifies the risk that the OR might be left with more small-value cases, but the Assessment’s suggestion “that the concerns will be ‘overcome’ through regulatory objectives of RPBs and monitoring is fanciful. The consequences would result from a fee regime imposed upon the profession by the government and RPBs would not be in a position to do anything about it.” (ICAEW)
• Professor Kempson recommended greater use of mixed bases for fees, but the government is proposing to abolish this. (IPA) [Mixed bases were only introduced in 2010!]
• The government wishes RPBs to engage more actively in monitoring and assessment of fees, but this will be more difficult in non-time cost cases. (IPA)
• The 2010 reforms and revised SIP9 are still fresh, but “the Insolvency Service appears already to have concluded that those reforms failed.” (ICAEW)
• Proposals to provide different fee bases for different case types, recovery prospects, and UK jurisdictions will do nothing to clarify an already-confusing picture for creditors. (ICAEW)

The bodies’ suggestions of alternative approaches are a mixed bag (some of which, personally, I find a bit scary! But hey, a bit of brain-storming is no bad thing.):

• Greater engagement by Crown creditors (pretty-much everyone’s idea).
• Reduce the constraints on creditors’ committees, e.g. smaller quorum. (ICAS)
• Encourage committee members, e.g. small payments for attending meetings. (ICAEW)
• Introduce a Scottish-style Reporter mechanism across the UK (the consultation stated that the Scottish system’s checks and balances appeared to work reasonably well). (ICAS)
• Require IPs “to justify to creditors and regulators their use of the hourly rate, by reference to prescribed criteria”. (ACCA)
• “More targeted support… to creditors to enable them to assess the reasonableness of the amounts being claimed.” (ACCA)
• “Improved management of creditor expectations, through creditor guides, fee estimates and estimated outcome statements.” (IPA)
• “Enhanced capital requirements and/or direct financial contribution by directors to the basic costs of insolvency processes.” (IPA) [Interesting idea, but isn’t there a risk of conflict with this..?]
• Fixing a minimum fee for those statutory elements of an insolvency administration that will generally not be of direct financial benefit to creditors.” (IPA, similar suggestion by R3)
• “Data collection and benchmarking of fee data.” (IPA) [And..?]
• “Guidance and/or compulsion of IPs to make greater use of mixed fee bases for different elements of the work involved within an insolvency administration. The onus could be put on the IP to justify why the basis sought is appropriate to the nature of assets, the complexity of the task and the value that it is estimated will result.” (IPA) [But does this follow, given some of the arguments against fixed/percentage fees..?]
• Better explanation by IPs up-front of the likelihood (or not) of dividends and of the work that will need to be carried out that will not generate direct financial benefits. (IPA)
• Adjusting the requisite voting majorities so that greater creditor participation is required. (IPA) [Why penalise IPs for creditors’ inactivity?]
• Encouraging cheaper ways of conducting “meetings”, e.g. by telephone, e-meetings, or resolutions by correspondence. (ICAEW)
• Drop the Red Tape Challenge proposal to remove the requirement to hold creditors’ meetings. (R3)
• More/better guides for creditors, similar to those that the Insolvency Service already provides for debtors facing bankruptcy. (ICAEW, R3)
• More transparency/information regarding the costs to insolvent estates by the Insolvency Service, as creditors/debtors often confuse these with IPs’ fees. (R3)
• Trade bodies should help members to understand insolvency – and how to avoid it or becoming a creditor in an insolvency – better. (ICAEW)
• All relevant Insolvency Service officials should work in an IP firm for a minimum of two weeks per year as ‘on the job/CPD training’ to plug the apparent knowledge gap, given the lack of understanding of the insolvency profession evidenced by the consultation proposals. (R3) [Ooh!]
• Greater use of cost-saving measures of 2010 Rules and more time to allow them to have effect. (R3)
• “IPs should also be required to report work with more transparency, e.g. break down time-use clearly into constituent parts such as ‘communicating with x number of creditors to establish a meeting’.” (R3) [Ooer! Can we try to keep it relatively simple and proportionate..?]
• “Introducing elements of a Code of Practice for IPs (based on the model in Australia) plus changes to SIP9 could be introduced to ensure that IPs’ records of time spent (and corresponding fees on a case) are transparent and accountable.” (R3) [In what ways is the current SIP9 deficient in this area..? R3 points to the Australian part of the MF Global case report as a good example; this report provides a fee estimate of $1 million for the first month – is R3 sure this is an appropriate model for typical (non-secured creditor) cases?] R3 suggests that in this way IPs would explain the work done “in more detail” and “reporting would be clearer”.

The most widely-made suggestion as regards fee-setting is the mandatory use of fee estimates (ACCA, IPA, ICAEW, R3), with some bodies suggesting express creditor approval for exceeding an estimate could be required (IPA, R3; ACCA: “perhaps”). I’m attracted to this idea as well, but, although I agree with the idea of seeking creditors’ approval for fees in excess of an estimate, I would hope that this could be done without necessarily positive creditor response; if creditors do not respond to an invitation to vote, then is it fair to penalise the IP? It could also impact on creditors’ returns, as silence may force the IP to take further measures, perhaps by court application, to achieve approval. It might also be more likely to encourage a poor habit of over-estimating fees in the first instance, so that IPs can avoid the hassle of seeking approval to more fees later. There are many issues with this suggestion – some will complain that it is well-nigh impossible to estimate fees with any degree of confidence at an early stage – but it has to be the lesser of several suggested evils, hasn’t it? In addition, isn’t it a standard and professional way of approaching fees? After all, don’t we usually seek fees estimates – with subsequent approval for uplifts – from many suppliers, from solicitors to garage mechanics?

Regulatory Intervention in Matters of Remuneration

The consultation also sought views on proposals to have the RPBs take a greater role in assessing and deciding on fees issues, via both enhanced monitoring and dealing with complaints about the quantum of fees. Most RPBs pointed out that IP fees are already considered to a significant extent; the ICAEW described it this way: “reviewers already look in detail at the insolvency practitioner’s time records. They will question the time recorded against specific tasks, where it doesn’t appear commensurate with the work evidenced on the case files; where it appears to have been carried out by a more experienced member of staff than we would consider appropriate; or where it appears excessive.”

As regards the suggestion that RPBs should do more than look at clear regulatory breaches:

• “To suggest that RPB bodies should step into the breach – even if one exists in relation to IP remuneration – will not address the issue without a sincere attempt by the UK Government to review the legislation. Regulators should not be asked to circumvent or overrule the law and to do so will inevitably expose the regulators to legal challenge.” (ICAS; ICAEW also highlighted the risks of Court challenge of RPBs’ judgments)
• “We are unclear on what basis an RPB could interject when the fee basis has been approved by a statutory process. This would be a usurpation of Court’s powers.” (IPA)
• “If 90% of creditors have approved as IPs fees, it does not appear reasonable to allow a minority financial interest to delay the administration of an estate.” (IPA)

Whilst the IPA is “opposed to routine regulatory involvement in fee assessment”, it seems more open to the idea that more could be done practically: it suggested that, if the idea of fee estimates were taken up, it could engage in “routine monitoring of practitioner performance” against these estimates. It also stated: “we can see no reason why, in a case of apparent excessive charging, the RPB could not direct the practitioner to repay such fees as exceed the original estimate provided or else direct the IP to have their fees assessed by a Court”, although the IPA does seem to be alone in this view.

It seems clear from the responses that there is much confusion amongst the bodies as to exactly what the government is proposing; simply dropping in a “value for money” regulatory objective and telling RPBs to get on with it will not work. The IPA remarked: “The regulatory challenges presented flow from the entirely subjective nature of establishing what value for money is and in whose opinion such value should be ascertained. The government has been singularly unable to define these concepts and appears now to expect the RPBs to be able to do so on their behalf… Will a full review of time spent and how this compares to the fixed or percentage fees charged be required? Will on-site visits to review practitioners’ files be expected?” The ICAEW also stated that, if the idea is for “RPBs to effectively conclude on each file reviewed that the IP’s costs represent value for money, we would expect there to be a significant impact on our monitoring costs; potentially doubling them.” However, the ICAEW seems to have been party to a meeting with the Consultation Policy Lead that has led them to conclude that all that is envisaged of RPBs as regards “enhanced monitoring” is pretty-much what they are already doing. One would hope that the Service could do better at communicating their desires to the bodies that they directly oversee!

In summary, I don’t think the turkeys have voted for Christmas. I think they have resisted well the pressure to seek a compromise, but have endeavoured to keep their eye focussed on what truly appears to be the issue – creditor engagement – and what practically might be done to improve the situation.


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The Perilous Neglect of the Fragile Insolvency Service Enforcement Directorate

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“Trust is essential to every commercial transaction. We neglect its fragility at our peril”, says Vince Cable in his foreword to the “Transparency & Trust” Government Response. Having read the Government’s proposals, I am inclined to repeat the often-cried warning that we neglect the ever-decreasing resources of the Insolvency Service at our peril. Although some of the Government’s proposals have the veneer of reducing the costs of disqualifying directors, whatever small gains are achieved will be wiped out by the hidden burdens that look to be added the Directorate.

It’s not all about the Insolvency Service, however. The Government has tagged on what appear as afterthoughts some ideas that will impact on IPs’ approaches to antecedent transaction challenges. These ideas are poorly covered in the Government Response – they escape all the Impact Assessments – and thus it is not surprising that R3 immediately commented on its “specific concerns” regarding these proposals (http://www.r3.org.uk/index.cfm?page=1114&element=19780).

The key objective of Cable’s “Transparency & Trust” drive is the creation of a public register of beneficial owners, but in this post I have summarise the more material plans that will affect insolvency work. The Government’s full response can be found at https://www.gov.uk/government/consultations/company-ownership-transparency-and-trust-discussion-paper.

Changes to the CDDA

The original proposals suggested that Schedule 1 of the CDDA, Matters for Determining Unfitness of Directors, might be added to in order to ensure that the following are taking into account in relation to disqualification orders and undertakings:

• Material breaches of “sectoral” regulation (especially the banking sector);
• The “wider social impacts” of a failure;
• Whether vulnerable creditors or those who had paid deposits had lost out in particular; and
• The director’s previous failures, possibly with a finite number of failures being allowed before unfitness is presumed.

The Government response accepts that simply adding to the Schedule 1 is not the solution, as directors might conclude that any factor not explicitly listed will not be taken into account. The response states: “we will recast a more generic set of factors that the court must take into account” (paragraph 222), although it also lists pretty-much the items described above, but with the exception of the X strikes and then you’re out idea, which does not appear to have made it through.

However, the paper does state that the court (or the Insolvency Service) will need to take into account “any previous positions as director of a company that has become insolvent and any relevant aspect of the director’s track record in running these companies… We are sympathetic to concerns we heard about the possible unwanted effect the inclusion of a ‘track record’ could have on those involved with early stage companies, or in rescuing companies that are in difficulties”, although I wonder at the depth of their sympathy: “We are clear that a director will, of course, be able to present any argument he or she might have (for instance as a business rescue professional or that the insolvency was not due to any element of unfit conduct on the director’s behalf)” (paragraph 225).

The consultation also sought views on whether – in fact, the consultation asked which – other “sectoral” regulators (again, looking mainly at the banking sector) should have the power to apply to court, or accept an undertaking direct, to disqualify a director. Although the ICAEW felt that this was appropriate, the Government’s response aligns more closely with R3’s response: disqualifications will remain with the Service, but the CDDA and gateways will be amended so that information might be exchanged more effectively, and there might be greater collaboration, between regulators. It has also suggested that expertise might be shared between regulators, which might include secondments.

The consultation proposed that the time period within which disqualification proceedings need to be commenced be increased from two years to five. The response explains that “views were mixed” (paragraph 279). However, I note that there was no support for any extension of the time period from R3, ICAEW or ICAS (the IPA did not respond – well, not the Insolvency Practitioners Association, but the Institute of Practitioners in Advertising did) – all three bodies noted that the BIS consultation document had stated that the two year timescale did not pose a barrier in the vast majority of cases and that the court can consider extensions. R3 also observed that five years would be a long time for an investigation to ‘hang’ over an individual and the ICAEW noted the potential difficulties if office holders needed to keep a case open for a long period. Despite these views, the Government proposes to increase the time limit to three years.

“Better Compensating Creditors for Director Misconduct”

The Transparency & Trust paper runs to 283 paragraphs, but this section, which contains the meaty proposed changes for IPs, runs to only 17 paragraphs! I don’t like that heading either…

The Government has expressed dissatisfaction with the fact that so few actions have been taken to challenge antecedent transactions. “Since 1986, there have only been

• around 30 reported wrongful trading cases;
• around 50 preference claims; and
• around 80 reported cases arising from undervalue transactions” (paragraph 260).

However, the response does not acknowledge that, as R3 pointed out in its response, many more cases are settled out of court. Neither does it acknowledge in any meaningful way that, in a great deal of other cases, the disqualified director simply has no money!

The Government’s proposed remedies are:

• To allow such causes of action to be sold or assigned to a third party “to increase the chances of action being taken against miscreant directors for the benefit of creditors” (paragraph 272); and
• To empower the Secretary of State to apply to court for a compensation order against, or to accept a compensation undertaking from, a director who has been disqualified.

The Government response barely makes a passing comment at some of the objections to these proposals raised by R3, the ICAEW, and ICAS, such as:

• Insolvency practitioners already have the means – and the duty and expertise – to pursue monies from errant directors, although the future of these is at risk when the insolvency exemption from the Jackson reforms ends.
• Why would a third party be any better equipped to take action than a liquidator?
• The possibility of a liquidator assigning their right to a claim already exists in Scotland.
• IPs are also limited in what they can achieve, as too few cases are being passed to IPs from the OR.
• Creditors’ returns may end up being lower, because a third party would only buy a claim in the expectation of making a profit.
• Third parties will not have the same investigative powers as liquidators.
• It would be impossible to prevent directors – or a friend etc. – from acquiring a claim with the intention of quashing it.
• It is difficult to see how assigning claims away from a liquidator to a third party intent on making a profit would increase confidence in the insolvency regime.
• It is difficult to see how compensation might be paid to anyone other than the company’s creditors via the office holder.
• If the Service were to distribute monies to creditors, it could duplicate the work done by the IP in adjudicating on claims, and the costs to the Service would be prohibitive. “The Insolvency Service would be better focusing its resources on disqualifying more directors rather than seeking to take on new activities such as distributing monies, which is already performed efficiently by insolvency practitioners” (R3).
• A compensatory award could prejudice civil claims being brought by the office holder (and, in my personal view, I could see a race develop between the IP and the Secretary of State, to see who gets their hands on the director’s limited purse first).
• “We do not think that the Insolvency Service has the resource to provide the evidence required to ensure a fair compensatory award upon which the Court can rule” (R3).
• The Service’s costs for bringing disqualification actions likely will increase substantially, and with fewer undertakings offered, given that directors will risk being pursued for compensation.

Despite these concerns, the Government is going to bring in these two remedies “when Parliamentary time allows”. Sales or assignments will be allowed of the following causes of action: fraudulent and wrongful trading – both of which will be extended to administrators to pursue (per the Red Tape Challenge outcomes); transactions at an undervalue; preferences; and extortionate credit transactions. The compensation awards/undertakings will be allowed by the court or the Secretary of State “to a particular creditor or group or class of creditors, or the creditors as a whole” (paragraph 274), although there is no mention as to how this may work in practice.

I shall leave the final word to the ICAEW, which, in its response to the consultation question on whether the proposal would improve confidence in the insolvency regime, stated: “We consider that confidence would be more likely to be improved if the Insolvency Service were resourced adequately to take disqualification action in every case where it appears to be justified.”


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IP Fees Consultation: a case of failing to see the wood for the trees..?

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Unfortunately, my case law reviews have become a bit log-jammed, so I’m afraid all I can offer at present is my response to the Insolvency Service’s IP fees and regulation consultation: MB IP fees response Mar-14

Normal service will be resumed as soon as possible.


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Who knew the Insolvency Service had a sense of humour?

0434 Santa Fe

Well, if I didn’t laugh, I’d cry!

I am conscious that my top ten jokes below make this a fairly destructive, not constructive, post about the Insolvency Service’s “Strengthening the regulatory regime and fee structure for insolvency practitioners” consultation. In addition, I do not cover many of the common concerns about the proposals, nor do I suggest here any real solutions. Nevertheless, I do think that it’s important, not to dismiss the proposals out of hand, but to think seriously about what might work. Our own ideas may not be what the Service has in mind, but we become the joke, if we plough on claiming that we see no ships (even if, yes I know, it may look as though that’s what I’m saying below… but rarely does public opinion concern itself with facts).

I have one week left to chew over my own suggestions before setting pen to paper in my formal response. Therefore, in the meantime, here are my top ten jokes told by the Service in its consultation document and two impact assessments (“IA”), which can be found at: https://www.gov.uk/government/consultations/insolvency-practitioner-regulation-and-fee-structure.

1. “Each year IPs realise approximately £5bn worth of assets from corporate insolvency processes, and in doing so charge about £1bn in fees, distributing some £4bn to creditors” (paragraph 88 of the consultation document)

The Insolvency Service has repeated this most absurd statement from the OFT’s market study. So, I ask myself, who is paying the solicitors’ fees, the agents’ fees, all the necessary costs of insolvencies such as insurance, advertising, bond premiums etc., and finally what about the Insolvency Service’s own fees that are payable from the assets in all (bankruptcies and) compulsory liquidations in priority to everything else? This statement just cannot be true!

It also grossly distorts the position and perception of IP fees: are we really talking about £1bn of IP fees here or costs on insolvent estates? The OFT’s explanation of how they came up with the £1bn (footnote 11 at http://www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245) mixes up fees and costs, so it is difficult to be sure. However, as this debate has built up momentum, few seem bothered any longer about the facts behind the fees “problem”.

2. “Cases where secured creditors will not be paid in full and so remain in control of fees. The market works well in this instance so we do not want to interfere with the ability for secured creditors to successfully negotiate down fees” (paragraph 113 of the consultation document)

Both Professor Kempson’s report and the OFT market study drew conclusions about the effectiveness of secured creditors’ control. However, the OFT’s study looked only at Administrations and Para 83 CVLs (which are so not S98s) and Professor Kempson built on this study and therefore concentrated on the effect of IPs obtaining appointments via bank panels. And, from this relatively narrow focus, we end up with the conclusion above that the Service proposes to apply to all insolvencies (except, it is proposed, for VAs and MVLs, where it is suggested other fees controls work well… so maybe those cases have a different lesson for us about the level of engagement of those responsible for authorising the fees..?).

But, I ask myself, what about other cases involving secured creditors? What about less significant liquidations or even bankruptcies where the mortgaged home is in negative equity? Do the secured creditors really control the level of fees in these cases? It seems highly unlikely, when you remember that the bases of liquidators’ and trustees’ fees are fixed by resolutions of the unsecured creditors. And let’s not worry too much about the effectiveness (or not) of non-bank secured creditors…

Some might react: let it lie. If the Service wants to leave well alone all cases where secured creditors will not be paid in full – regardless of whether or not, in practice, they control fees – why make a fuss? The same could be said about my next point…

3. “The basis of remuneration must be fixed in accordance with paragraph (4) where… there is likely to be property to enable a distribution to be made to unsecured creditors…” (draft Rule 17.14(2)(b))

This is supposed to be the way the objective mentioned in 2 above is achieved, i.e. that fees may only be fixed on the bases described in “paragraph (4)” (i.e. percentage or set amount, but not time costs) where secured creditors are not in control of fees (plus in some other circumstances).

I am sure it has taken you less than a millisecond to work it out: “where a distribution to unsecured creditors is likely” is patently not the same as “where secured creditors do not remain in control of fees”. What about the vast majority of liquidations, which must represent by far the greatest proportion in number of insolvencies, where the asset realisations are not enough to cover all the costs (including IPs’ time costs)? In these cases, the Service’s proposal is that they would like the IP’s fees to be on a percentage or set amount, but in fact the draft Rules would entitle the liquidator to seek approval on a time cost basis. That must be a joke!

The problem for me in leaving these flaws alone is that IPs could be lumbered with Rules that do not implement the Government’s policy objectives, which may result in the Service/RPBs pressing for behaviours and approaches that are not supported by the statutory framework, which will do no one any good.

4. The use of the Schedule 6 scale rate for fees “ensures that there are funds available for distribution and not all realisations are swallowed up in fees and remuneration” (paragraph 117 of the consultation document)

Firstly, I object to “swallowed up”. It seems to me an emotive phrase, generating the image of an enormous whale greedily scooping up trillions of helpless krill in its distended maw. In fact, this image – and the reference to “excessive” fees/fee-charging, even though the consultation document acknowledges at one point that Professor Kempson did not interpret over-charging as deliberate but as largely related to inefficiencies – seems a constant throughout.

Secondly, and more fundamentally, as explained in (1) above, simply reverting to office holder fees being charged as a percentage, even the relatively low percentages of Schedule 6, will not ensure there are funds available for distribution. But this objective seems to be the raison d’etre of the fees proposals (and not just the Schedule 6 default), as Ms Willott MP explains in her foreword: “[The consultation document] also includes proposals to amend the way in which an insolvency practitioner can charge fees for his or her services, which should ensure that there will be funds available to make a payment to creditors” (page 2). This can only feed into some creditors’ misconceived expectations, not only about the post-new Rules world, but also about the insolvency process in general. If every insolvency were required to result in a distribution, there would be far more work for the OR and far fewer IPs in the country.

5. “The transfer of returns from IPs to unsecured creditors has the potential to deliver a more efficient dynamic economic allocation of resources as these creditors are more likely to reinvest these resources in growth driving activities” (paragraph 17 of the IP fees IA)

Actually, this isn’t funny; it’s just insulting. Even if you imagined a typical IP as a beer-bellied pin-striped man smoking a cigar of £50 notes, with more spilling out unnoticed from his pockets (which was the image in an Insolvency Service presentation to IPs last year), his ill-gotten gains are still going be passed on to the home sauna builders or the Michelin Star restaurants, aren’t they? But, of course, that’s beside the point; as someone who has worked decades in the insolvency profession, I take exception to the suggestion that the UK would be better off if my wages were paid to unsecured creditors.

6. “The OFT report states that some unsecured creditors say that if their recovery rate from insolvency increased, they would extend more credit. While this effect is likely to be slight, even a small increase in the £80bn of unsecured credit extended by SME’s will amount to many millions of pounds” (paragraph 56 of the IP fees IA)

How much better-off does the IA suggest unsecured creditors will be if the alleged “excessive fee charging” is passed to them? At the top end, 0.1p in the £ (paragraph 52) – will they even feel it..? Talk about a “slight” effect!

7. “We would estimate that familiarisation would take up to 1.5 hours of an IP’s time based on the assumption that this change is not complex to understand and would only need to be understood once before being applied… IPs are already required to seek the approval of creditors for the basis on which their remuneration is taken and it is anticipated that at the same time they will seek agreement to the percentage they are proposing to take. We do not therefore anticipate any additional costs associated with this” (paragraphs 35 and 43 of the IP fees IA)

1.5 hours once and nothing more? Ha ha!

For IPs to switch to a percentage basis (but only in certain circumstances/cases) will require days – weeks, perhaps months – of organising changes to systems, procedures and templates and a greater time burden per case. The challenges for systems, procedures and staff will include:

• Assessing a fair percentage of estimated future realisations to reflect the value of work done. This seems an almost impossible task on Day One. For example, book debts: will the money just fall in or will it be a tough job, involving scrutinising and collating records and re-buffing objections and procrastinations? How much do you allow for the SIP2 investigations, what if you need to follow a lead? So many questions…

• Ongoing monitoring to check if/when fees can no longer be fixed on a time cost basis. You’d think this would be relatively easy, until you read how the draft Rules deal with the tipping point for a dividend: a time cost basis falls away when “the office holder becomes aware or ought to have become aware that there is likely to be property to enable a distribution to be made to unsecured creditors” (draft R17.19(1)(b)). Hours of fun!

• Reverting to creditors when a revised fee basis needs to be sought, whether that be because the time costs basis is no longer available or because the case hasn’t progressed as originally anticipated or potential new assets are identified during a case, thus warranting a change in the percentage or set amount, with the potential for court applications if creditors don’t approve the revision.

• Calculating fees on a percentage basis. Again, it sounds easy, but… what about VAT refunds (will the use (or not) of VAT control accounts make it easier or more difficult?), trading-on sales (which are excluded under the draft Rules’ statutory scale), “the value of the property with which the administrator has to deal” (per the draft Rules)?

• Dealing with creditors’ committees, which the consultation document suggests will be encouraged under the proposed regime.

• More complex practice management to ensure that percentages are pitched correctly and potentially greater lock-up issues where IPs do not have the security of realisations in hand to fund ongoing efforts.

But these measures are intended to reduce IPs’ fees..?

8. Professor Kempson “highlights that the starting point for reforms in this area should be on providing greater oversight, therefore reducing the numbers of complaints and challenges relating to fees… Currently there are very few fee related complaints handled by the RPBs… Complaints about the insolvency profession are relatively low given the nature of insolvency, the number of creditors (and other stakeholders) involved in cases and the extent of financial losses that can be incurred” (paragraphs 29 and 46 of the IP fees IA and 1.60 of the regulation IA).

To be fair, I should put paragraph 46 in context: “Currently there are very few fee related complaints handled by the RPBs, but this is likely to be a result of RPBs stating publicly that they do not consider fee-related complaints and does not reflect the current level of concern around fees. In the past 6 months 23% of all IP related ministerial correspondence has been in relation to fees”, which admittedly does put a different colour on things.

The difficulty as I see it is: if an aim is to reduce the number of fees complaints and challenges, but the IA estimates 300 (new) fee complaints per annum and 50 appeals post-implementation of the proposals. Would such an outcome mean that the measures are hailed as a success or a failure?

9. Not taking the steps proposed by the Insolvency Service as regards regulatory objectives and oversight powers proposals “would not address concerns around an ineffective tick-box prescriptive type of regulation… The same prescriptive type of regulation would continue to exist whereas the intention is to move to a principles and objectives based regulatory system as suggested by the OFT report” (paragraphs 1.49 and 1.51 of the regulation IA)

Ooh, I could relate some stories from my time at the IPA about who was usually at the forefront in driving tick-box regulation! There were times when I had to be dragged kicking and screaming down that road. Still I should stay positive: maybe this signifies a new commitment to Better Regulation – after all, the draft regulatory objectives do not refer to ensuring that IPs meet prescriptive statutory requirements that do not contribute to delivering a quality service or maximising returns to creditors, and if value for money is an objective..?

The Service puts it this way: “As an example, rather than targeting regulatory activity to where there may be only potentially small losses to creditors from any regulatory breach, the regulators will focus attention on areas where creditors are likely to suffer larger losses” (paragraph 1.71). Oh well, that’ll put me out of a job! 🙂

10. “We do recognise that giving the RPBs a regulatory role in monitoring fees will increase the burden on them when dealing with complaints around the quantum of fees and have therefore included the estimated cost of this” (paragraph 100 of the consultation document)

Since when was “monitoring” all about dealing with complaints? The IAs provide nothing for the additional costs to RPBs of dealing with anything but complaints.

It would seem that a typical monitoring visit in the eyes of the Service would have the objective of aiming “to ensure that fees charged by IPs represent value for money and are ‘fair’ and valid for the work undertaken, by requiring the RPBs to provide a check and balance against the level of fees charged… The regulators will be expected to take a full role in assessing the fairness of an IP’s fees, including the way in which they are set, the manner in which they are drawn and that they represent value for money for the work done. This would be done via the usual monitoring visits and complaint handling processes” (paragraph 101). The Service believes that this is possible as the RPBs have “access to panels with the relevant experience, to adjudicate on fees” (paragraph 102).

Are they serious?! Do they have any idea how impossible it would be to achieve this practically, not least within the confines of the current visit timetable? And how are the “panels”, presumably the Service means committee members, going to engage in this process: is the Service really expecting them to adjudicate on fees? You might as well forget about the rest of the Act/Rules, SIPs and Ethics Code: the inspectors’/monitors’ time will be spent entirely looking at fees and RPBs’ committees/secretariat will be hard-pushed to make any adverse findings stick.

Oh, it’s alright for the Service, though; they’ve incorporated the cost of two new people in-house to handle their enhanced RPB supervisory functions. But they don’t think that this will add to RPBs’ costs in dealing with the Service’s queries, monitoring visits, demands for information on regulatory actions in general and in specific cases (apparently)?

The biggest joke of all is: where will all these costs land? In IPs’ laps, when their levies and licence fees increase. Remind me, what was the key objective of these proposals..?

Although the Service doesn’t mince words about its/the Government’s sincerity on these issues – e.g. “given the clear evidence of harm suffered by unsecured creditors, the Government feels strongly that reforms are required in order to address the market failure” (paragraph 93 of the consultation document) – I can’t help but hope that I’ll wake up a couple of days after the consultation has closed to a new announcement from the Insolvency Service: “April fool!”


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The Insolvency Rules “2015”: A Moveable Feast

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I realise that talk of the Insolvency Service’s IP fees consultation has pretty-much smothered the draft Rules consultation. However, I’ve yet to get to grips with that one, so here are my thoughts – and a copy of my response – on the (already superceded!) draft “2015” Rules.

The consultation closed on 24 January and it seemed to me that, despite the enormity of the task, many IPs and associates went to a lot of effort to make thorough responses. Regrettably, personally I only managed to review a few of the sections in detail – and only then did I look at the consultation questions (yes, I know, that was a pretty stupid way of doing things!). I attach my response here: MB response 24-01-14. The Government’s consultation homepage is: https://www.gov.uk/government/consultations/modernisation-of-the-rules-relating-to-insolvency-law.

This is not meant to be an overview of the proposed changes – I’ve not covered the non-controversial aspects (that would be too boring!) – but I consider (but I don’t really answer – sorry!) the following:

• Just how draft are the Draft Rules and are we going to get to see how current/future initiatives impact on them?
• How huge a task will it be to absorb the changes and is there anything that can be done to make the job easier?
• Does the Consultation Document cover all the changes or do we have to look closer at the detail?

The condition of the Draft Rules

The Insolvency Service is between a rock and a hard place, but personally I think they have made the right decision in releasing these draft Rules even whilst they are draft to a greater degree than we’re accustomed for statutory instruments opened to consultation.

The Service acknowledges that the draft is a work in progress document and that there are inconsistencies across the different insolvency processes. The Service did pre-empt the outcome of the Red Tape Challenge somewhat and included within the draft Rules some of the proposed measures, such as removing more statutory meetings (which seems very odd now in the context of the fees consultation) and enabling creditors to opt out of receiving communications, but other measures arising from the Red Tape Challenge exercise – such as avoiding the payment of small dividends and effectively communicating by website alone – are not reflected in the draft Rules. Given that the RTC outcome had not been revealed when this consultation commenced, this is not surprising, but it demonstrates the moveable feast of insolvency legislation and the difficulties in seeking to set in stone – at pretty-much any point in the next half-decade or so – a revised set of Rules.

In the face of this continually moving conveyor belt of legislative proposals, it is understandable that the Service does not wish to hold up the process of revising the Rules and, personally, I am pleased that we have been given this work-in-progress look at the draft. In reading the draft, I have suppressed any nagging concern that much of my effort has already been wasted in view of more recent proposals and yet more of the draft will be overtaken by future events, because the alternative – that we don’t get to see a draft until the last minute – doesn’t bear thinking about.

But what are the Insolvency Service’s plans now? Will they continue to work on the draft, absorbing the responses to this consultation, the further RTC outcomes, the IP fees conclusions, the fall-out from Teresa Graham’s review of pre-packs, perhaps the rules around the S233 changes (which are yet to be the subject of a consultation, right?), and give us little opportunity to review a further draft on the basis that we’ve had our chance? I hope not. I hope we get to have another opportunity to comment on a draft. Whilst matters of agreed policy may not be up for debate in the Rules arena, my review of only a few sections of these draft Rules has demonstrated to me the value of having others input on the practicalities of the processes set out.

The Big Picture

I pity the first JIEB students after the Rules are enforced, although it will be a fantastic opportunity to get ahead of the pack and become the go-to person in one’s practice. How us old’uns with our rubbery neurons are going to get the hang of it all, I don’t know!

I shudder to think about the amount of time – and (non-chargeable) money – that will be expended to get internal systems, diaries, and templates new Rules-compliant… and the inevitable mistakes that will be made; after all, templates always require a bit of fine-tuning after the first (second… third…) version, don’t they? One way that firms can cushion the blow right now is to future-proof standard documents, strip out all those Rules references: after all, do readers really need to know that something has been produced pursuant to Rule xxx?

The Consultation Document is silent on a key issue, I think: are the Rules going to apply to all cases existing as at R-Day or only to new appointments after the new Rules begin to take effect? I appreciate that it would be a rare thing for the new Rules to apply to all cases, rather than just new cases, but it is not entirely unheard-of, and think of the safeguards that would need to be put in place if a firm’s case-load were a mixture of pre- and post-new Rules cases. It’s been tough enough for practices to handle the complexities of running a portfolio of mixed pre/post-2009 and pre/post-2010 Rules cases, but these changes go so much further, it will make our heads spin!

Little has been said of making any changes to the Act. I am sure there is a reluctance to go there, given the more significant difficulties in seeking changes to primary legislation. However, I think it undermines some of the effort made to modernise the Rules, if we cannot fix the Act provisions at the same time. In particular, I think the practical difficulties arising from the Enterprise Act 2002 have now become evident and it seems a wasted opportunity not to tweak those whilst we’re at it. And aren’t there Act changes, such as extending the phoenix provisions to companies that don’t survive Administration, that have been given an airing but seem to have now gone quiet? It would also seem useful to wrap in some of the other statutory instruments that involve significant overlap with the Rules, such as the Insolvency Practitioners Regulations (which will need to be revisited in view of the RTC anyway) and what about Insolvent Partnerships? Then again, I guess the Service has enough on its plate already!

The Detail

Although pretty-much all of the Rules have been re-jigged, the Consultation questions focussed around some of the more fundamental changes, such as the overall structure, which is a massive change, but well worth doing, in my view.

They invited us to comment on the format of setting out in the Rules the prescribed content of notices, forms etc., rather than prescribing a statutory form, the suggestion being that this makes “it easier to enable documents to be delivered by electronic means, preparing the system for moving to electronic delivery of information when the forms would become redundant”. I appreciate that the aim is to future-proof the process, but I don’t think we have to accommodate any transmission process other than textual, do we? We’re not exactly future-proofing for Elysium-style neural downloads, are we? Therefore, I really don’t think that it helps to do away with prescribing forms, as it just means that someone else is going to have to create them (and get paid for it). Even if every IP in the country only goes to a handful of suppliers, that’s still an unnecessary amount of duplication in my books, and micro-businesses will be burdened with a disproportionate expense. Perhaps a middle-ground would be to provide forms, but prescribe only that the information set out in the forms need be delivered? Anyway, do we know whether Companies House will stomach just any old form..?

The Consultation Document lists ten “minor and technical changes” (paragraph 42) – and I think they’re right: they are pretty minor. However, what I think is a little disingenuous is the fact that, if you have the time and the determination to scrutinise the detail of the draft Rules, I’m sure you’ll find far more technical changes that aren’t quite so minor!

I knew there was no way I’d get through the complete draft Rules, so I decided to focus on the sections that will impact mostly on Administrations – Parts 3 and 17. I managed to shoe-horn my thoughts into the consultation’s question 20 (“Do you have any other suggestions or comments on the structure or the content of the rules?”). My full response (MB response 24-01-14) lists my observations, but here are a select few:

• The current R2.48 Conduct of Business by Correspondence for approval of the Administrator’s Proposals is to be replaced by a new correspondence-based process whereby creditors can lodge a “notice of objection” (the only other option appearing to be that they keep silent) and, if 10% or more of the creditors by number or value object, the Administrator “may convene a meeting of creditors to seek their approval or seek approval of a revised statement of proposals” (R3.37). My thoughts are: what is wrong with the current process? What if a creditor just wants to modify the Proposals? How is an IP supposed to calculate whether the 10% threshold has been over-reached? This 10% threshold – of creditors by value (and sometimes by number) of the total – is repeated throughout the Rules. Research has shown that lack of creditor engagement is a recurring problem, so why erode the process whereby creditors who actually make the effort to vote are most influential?

• The Service has made yet another attempt to tidy up the filing and reporting processes when a Paragraph 83 move from Administration to CVL form is filed. This time, they are suggesting a return to the issuing of a final report simultaneously with the ADM-CVL form. However, they have drafted a requirement that, “if anything happens between the sending of the notice to the registrar of companies and its registration which the administrator would have included in the report had it happened before then”, the (former) Administrator must file and circulate “a statement of appropriate amendments to the report”. My issue is that, technically, “anything” could include the crediting of additional bank interest or even the incurring of time costs, so this could result in IPs needing to issue – at some cost – pretty meaningless statements. Ideally, I would prefer the Act (if only!) to be amended so that the date when the ADM-CVL move takes effect is the date that the form is signed, not registered, so that we can escape all this nonsense. After all, I can think of no other event such as this where the timing is in the hands of Companies House. Alternatively, if we are stuck with Companies House controlling the conversion date, couldn’t the Liquidator report on “anything” that had happened in that small window when he issues his annual report?

• The Service has made a big deal about the savings that will be made from reducing the requirements to have creditors’ meetings – and indeed the draft Rules include a general process for conduct by correspondence (in addition to R3.37 for Administrators’ Proposals). However, this excludes fees decisions, which need to be dealt with either by a committee or resolution of creditors (apart from Para 52(1)(b) cases, the provisions for which, disappointingly, are left unchanged). Given that this is pretty-much the only matter to be addressed at creditors’ meetings, I cannot see that many meetings will be avoided, other than final ones (which, let’s face it, already are a complete non-event and cost nothing other than a Gazette fee, as all the expense arises from the need to issue a final report etc.). Of course, if the IP fees consultation proposals are taken forward, we may find IPs trying harder to generate creditor interest in meetings, which erodes to some extent the Service’s message that great savings will be made by these Rules/RTC measures.

These are just a few of the intriguing changes I’ve spotted. I do sympathise with those who have the job of revising these Rules. I’ve only had to deal with few-pager SIPs and the Ethics Code before and they were tough enough. In those cases, we certainly didn’t please all the people all of the time and I am sure the same will be true of the Rules. All that I ask is that we’re kept informed, so that we can manage the transition as best we can… and, if questions continue to be raised about whether IPs are giving “value for money”, that the critics remember that it’s the enormous costs associated with these kinds of changes that IPs have no choice but to pay.


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Last Chance to Speak Up on Partial Licences

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In December, I reported on the current position of the Deregulation Bill (http://wp.me/p2FU2Z-4Z) and the Parliamentary Committee’s irritation at the apparent lack of formal consultation on the Insolvency Service’s plan to introduce partial licences for insolvency practitioners to take on either only personal or only corporate insolvency appointments.

I am sure that most of you will have become aware of the Insolvency Service’s letter, dated 23 January, inviting comments on the draft Bill, with a deadline of 21 February (http://www.bis.gov.uk/insolvency/news/news-stories/2014/Jan/Clause10).

Having exchanged views with my fellow R3 Smaller Practices Group Committee members, I had assumed that almost all IPs consider it essential to have the full spread of insolvency knowledge and preferably experience, so that they can react competently to whatever walks in through the door. Possible exceptions to this model would be the very few that really do live the life of a personal or corporate insolvency specialist, and it could be thought that even they may come a cropper when faced with an atypical client. I had assumed that the opinion of R3 vice-president, Giles Frampton (http://www.r3.org.uk/index.cfm?page=1114&element=19677), was pretty-much the norm, with others being even more vociferous, e.g. Frances Coulson’s “Don’t dumb down the profession” http://www.moonbeever.com/category-blog-entry/696-don-t-dumb-down-the-profession). However, other IPs on a Scottish Insolvency LinkedIn discussion seem to be far more in favour of the measure, seeing it as more realistic for the world we live in, so maybe it isn’t so black-and-white.

Given that Clause 10 is already in the Bill, which claims to be designed around the noble motive of reducing regulation, it is likely that those not in favour of the measure will need to generate quite a swell in order to turn the tide. Therefore, if you do feel strongly about this, I recommend that you make your views heard. You have just over two weeks!

The Insolvency Service’s View

The Insolvency Service’s letter highlights what they believe are three advantages of the change. They say it will:

• “reduce the barriers to entry to the IP market and thereby increase competition.

• “give rise to savings on training fees, which are likely to be of proportionally greater benefit to smaller firms of insolvency practitioners, including new entrants to the market

• “remove a burden from existing IPs who already choose to specialise in a particular area but are required to study areas that have little or no relevance to their work or benefit to their clients.”

“Reduce the barriers to entry to the IP market and thereby increase competition”

Personally, I don’t feel qualified to comment on the Service’s assumptions. I’m not in business as an appointment-taker and I only really witness the business end of insolvency from the side-lines. However, what I have seen in recent years are many more IPs and other insolvency professionals changing their LinkedIn profiles to “consultant” or “available”. I have also heard far more stories recently of cases being taken off the S98 floor and undercutting for MVLs than I have since the 1990s and I certainly don’t think that the IVA market is crying out for any fast-tracked personal insolvency specialists to compete for IPs’ meagre returns.

Does the profession really suffer from a lack of competition or is this an outdated view persisting from the OFT’s market study into corporate insolvency, which was generated from 2006 data when the world was a far different place?

“Give rise to savings on training fees, which are likely to be of proportionally greater benefit to smaller firms of insolvency practitioners, including new entrants to the market”

I assume that the Service’s thought-process is that there is likely to be a lower head-count of staff per IP in a smaller practice than in a large multi-national and therefore the smaller practice will gain a greater relative benefit from reduced training costs (on the assumption that it will cost less to train and qualify as a partial licence-holder).

However, has it not occurred to the Service that the smaller practice will have next to no use for a partial licence-holder? A key to most smaller practices’ success is that their doors are open to anyone in the locality in need of help whether they be individuals, business partners, or corporate entities. They are not regimented into “centres of excellence”, but have the breadth of knowledge and experience to deal with almost anything. Their case portfolios are, almost without exception, a mixture of corporate and personal insolvencies and usually their staff, some of whom will be the appointment-takers of the future, are exposed to a variety of insolvency types. Therefore, I cannot see why any smaller practice IP would want to take on a partial licence-holder or encourage their staff to study for such a licence.

The only profile of practice that might be a home for a partial licence-holder is the volume IVA provider or the corporate department of a large multi-national. Therefore, contrary to the Service’s view, I believe that the only beneficiaries of any reduced training fees may be large firms and that the corollary could be increased fees for those training for full licences, if demand for these drops, which would be felt disproportionately by smaller practices. This doesn’t sound like a sensible measure for a pro micro-business government to introduce.

“Remove a burden from existing IPs who already choose to specialise in a particular area but are required to study areas that have little or no relevance to their work or benefit to their clients”

This is an odd one?! Has the Insolvency Service not read its own Regulations regarding CPD for IPs authorised by the Secretary of State? Even they do not specify that CPD needs to cover the range of insolvencies; it is merely “any activities which relate to insolvency law or practice or the management of the practice of an insolvency practitioner” (IP Regs 2005) and I believe that most RPBs’ views of CPD/CPE are, in a nutshell, whatever would help the licence-holder practise better as an IP. Therefore, I cannot see that IPs at present are under any pressure to study areas that have little or no relevance to their work or benefit to their clients. Hence, I can see no advantage in providing partial licences and I very much doubt that any existing IPs will downgrade to a partial licence.

Consultation

There are many more arguments against partial licences, such as those described by Giles Frampton and Frances Coulson, and no doubt R3 will be responding loudly to the consultation.

I think it is very important that the smaller practices’ voices are heard, particularly as the Service has claimed support for its plan in the expected savings to be felt by this group. I would encourage you to respond to the consultation and to R3’s Smaller Practices Group’s imminent invitation to send in your views, so that you can contribute to R3’s own response.

(UPDATE 04/03/14: The ICAEW has submitted, in my view, a storming response to the consultation: http://www.icaew.com/~/media/Files/Technical/icaew-representations/2014/icaew-rep-36-14-partial-authorisation-of-insolvency-practitioners.pdf. It reads like a gentle sledgehammer, maintaining a sense of calm reason throughout. I particularly liked the reference to the Government’s recently-disclosed proposed objectives of insolvency regulation and how partial licences may act contrary to at least one of them. The ICAEW response is unequivocal in its conclusion: “We have received through our own consultation process no indications of support at all for the proposed partial qualification regime”.)


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Thank you, Santa, for delivering Red Tape Cuts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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A Janus View of Developments in Insolvency Regulation

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I thought I would take a look at where we’ve got to on a few of the current developments in insolvency regulation:

• The Deregulation Bill: who says limited IP licences are a good idea?
• SIP3.2 (CVA): a preview of the final SIP3 (IVA) or an ethical minefield?
• The JIC Newsletter: grasping the nettle of the commissions issue
• Insolvency Service update to the BIS Committee: promises, promises!

It’s by no means a complete list, but it’s a start!

The Deregulation Bill: when is a consultation not a consultation?

The Joint Committee of the Houses of Lords and Commons published its report on the draft Deregulation Bill on 19 December 2013, available here: http://www.parliament.uk/business/committees/committees-a-z/joint-select/draft-deregulation-bill/news/draft-deregulation-bill-report/.

Insolvency features relatively insignificantly in the wide-ranging draft Deregulation Bill, the so-called Henry VIII Power attracting far more attention, so in some respects it is quite surprising that insolvency got a mention in the Committee report at all. However, the background to this report included oral evidence sessions, one of which was attended by Andrew Tate representing R3’s Small Practices Group. A recording of the session can be accessed at: http://www.parliamentlive.tv/Main/Player.aspx?meetingId=14073&player=windowsmedia – insolvency pops up at c.50 minutes.

Andrew had a chance to express concerns about the draft Bill’s introduction of IP licences limited to personal or corporate insolvency processes. He raised the concern, which I understand is shared by many IPs, that IPs need knowledge of, and access to, all the tools in the insolvency kit, so that they can help anyone seeking a solution, be they a company director, a practice partner, or an individual, and some situations require a combination of personal, corporate and/or partnership insolvency solutions.

What seemed to attract the attention of the Committee most, however, was learning that there had been no public consultation on the question. It’s worth hearing the nuanced evidence session, rather than reading the dead-pan transcript. It fell to Nick Howard, who was not a formal witness but presumably was sitting in the wings, to explain that there had been an “informal consultation”, which had revealed general support, and I thought it was a little unfair that a Committee member seemed sceptical of this on the basis that they had not heard from anyone expressing support: after all, I don’t think that people tend to spend time shouting about draft Bills with which they agree.

Personally, I do not share the same objections to limited licences, or at least not to the same degree. I see the value of all IPs having knowledge of both personal and corporate insolvency, but even now not all fully-licensed IPs have had experience in all fields, so some already start their licensed life ill-equipped to deal with all insolvency situations. I believe that there are more than a few IPs who have chosen a specialist route that really does mean that practically they do not need the in-depth knowledge of all insolvency areas, and, given that they will not have kept up their knowledge of, and they will have little, if any, useful experience in, insolvency processes outside their specialist field, does it really do the profession or the public any favours for them to be indistinguishable from an IP who has worked hard to maintain strong all-round knowledge and experience? Surely it would be more just and transparent for such specialists to hold limited licences, wouldn’t it?

From my perspective as a former IPA regulation manager, I believe that there would also be less risk in limited licences. As things currently stand, an IP could have passed the JIEB Administration paper years’ ago (even when it was better known as the Receivership paper) and never have touched an Administration in his life, but (Ethics Code principle of professional competence aside) tomorrow he could be talking to a board of directors about an Administration, pre-pack, or CVA. Personally, I would prefer it if IPs who specialise were clearly identified as such. Then, if they encountered a situation that exceeded their abilities, which they would be less likely to encounter because everyone could see that they had a limited licence, at least they would be prohibited from giving it a go.

Clearly, with so many facets to this issue, it is a good thing that the Committee has recommended that the clause proposing limited licences be the subject of further consultation!

The other insolvency-related clauses in the draft Bill have sat silently, but presumably if limited licences stall for further consultation, the other provisions – such as fixing the Administration provisions that gave rise to the Minmar/Virtualpurple confusion and modifying the bankruptcy after-acquired property provision, which allegedly is behind the banks’ reluctance to allow bankrupts to operate a bank account – will gather dust for some time to come.

SIP3.2 (CVA): a preview of the final SIP3 (IVA)?

I found the November consultation on a draft SIP3.2 for CVAs interesting, as I suspect that this gives us a preview of what the final SIP3 for IVAs will look like: the JIC’s winter 2013 newsletter explained that the working group had reviewed the SIP3 (IVA) consultation responses to see whether there should be any changes made to the working draft of SIP3 (CVA). Consequently, it seems that there will be few changes to the consultation draft of SIP3 (IVA)… although that hasn’t stopped me from drawing from my own consultation response to the draft SIP3 (IVA) and repeating some of those points in my consultation response to the draft SIP3 (CVA). I was pleased to see, however, that few of my issues with the IVA draft had been repeated in the CVA draft – it does pay to respond to consultations!

I’ve lurked around the LinkedIn discussions on the draft SIP3.2 and been a bit dismayed at the apparent differences of opinion about the role of the advising IP/nominee. Personally, I believe that the principles set out in the Insolvency Code of Ethics and the draft SIP3.2 handle it correctly and fairly clearly. In particular, I believe that an IP’s aim – to seek to ensure that the proposed CVA is achievable and strikes a fair balance between the interests of the company and the creditors – as described in Paragraph 6 of the draft SIP3.2 – is appropriate (even though, as often it will not be the IP’s Proposal, this may not always be the outcome). In my mind, this does not mean that the IP is aiming for some kind of mid-point between those interests, as the insolvent company’s interests at that time necessarily will have particular regard for the creditors’ interests, and so I do not believe that the SIP supports any perception that the advising IP/nominee sides inappropriately with the directors/company. However, given that apparently some have the perception that this state exists, perhaps it would be worthwhile for the working group to see whether it can come up with some wording that makes the position absolutely clear, so that there is no risk that readers might misinterpret the careful responsibility expected of the advising IP/nominee.

I would urge you to respond to the consultation, which closes on 7 January 2014.

The JIC Newsletter: all bark and no bite?

Well, what do you think of the JIC’s winter 2013 newsletter? I have to say that, having been involved in reviewing the fairly inconsequential reads of previous years whilst I was at the IPA, I was pleasantly surprised that at least this newsletter seemed to have something meaningful to say. Personally, I wish it had gone further – as really all it seems to be doing is reminding us of what the Ethics Code already states – but I am well aware of the difficulties of getting something even mildly controversial approved by the JIC members, their respective RPBs, and the Insolvency Service: it is not a forum that lends itself well to the task of enacting ground-breaking initiatives. And anyway, if there were something more than the Ethics Code or SIPs that needed to be said, a newsletter is not the place for it.

Nevertheless, I would still recommend a read: http://www.ion.icaew.com/insolvencyblog/post/Joint-Insolvency-Committee-winter-2013-newsletter (I’d love to be able to direct people to my former employer’s website, but unfortunately theirs requires member login).

Bill Burch quickly off the mark posted his thoughts on the Commissions article: http://complianceoncall.blogspot.co.uk/2013/12/dark-portents-from-jic-for-commissions.html, which pretty-much says it all. Personally, I hope that this signifies a “right, let’s get on and tackle this issue!” attitude of revived enthusiasm by the regulators, but similarly I fear that some offenders may just seem too heavy-weight to wrestle, at least publicly, although that does not mean that behaviours cannot be changed by stealth. Many would shout that this is unfair, but it has to be better than nothing, hasn’t it?

My main concern, however, is how do the regulators go about spotting this stuff? Unless a payment is made from an insolvent estate, it is unlikely to reach the eyes of the monitor on a routine visit. It’s all well and good asking an IP where he gets his work from, if/how he pays introducers, and reviewing agreements, but if someone were intent on covering their tracks..? I know for a fact that at least one of the examples described in the JIC newsletter was revealed via a complaint, so that would be my personal message: if you observe anyone playing fast and loose with the Ethics Code, please take it to the regulators, and if you don’t want to do that personally, then get in touch with R3 and they might help do it for you. If you don’t, then how really can you cry that the regulators aren’t doing enough to police your competitors?

However, the theoretic ease with which inappropriate commissions could be disguised and the multitude of relatively unregulated hangers-on to the insolvency profession, preying on the desire of some to get ahead and the fear of others of losing out to the competition, do make me wonder if this issue can ever be tackled successfully. But the JIC newsletter at least appears to more clearly define the battle-lines.

Insolvency Service Update to the BIS Committee: all good things come to those who wait

Jo Swinson’s response to the House of Commons’ Select Committee is available at: http://www.parliament.uk/documents/commons-committees/business-innovation-and-skills/20131030%20Letter%20from%20Jo%20Swinson%20-%20Insolvency%20Service%20update.pdf. It was issued on 30 October so by now many items have already moved on, but I wanted to use it as an opportunity to highlight some ongoing and future developments to look out for.

Regarding “continuation of supply”, which was included in the Enterprise and Regulatory Reform Act 2013 but which requires secondary legislation to bring it into effect, Ms Swinson stated: “We intend to consult later this year on how the secondary legislation should be framed”. I had assumed simply that the Insolvency Service’s timeline had slipped a bit – understandably so, as there has been plenty going on – but I became concerned when I read the interview with Nick Howard in R3’s winter 2013 Recovery magazine. He stated: “We are in the process of consulting on exactly how that [the supply of IT] works because the power in the Act is fairly broad and we want to ensure we achieve the desired effect”. Have I missed something, or perhaps there’s another “informal consultation” going on?

I’m guessing the Service’s timeline has slipped a bit in relation to considering Professor Kempson’s report on fees, however, as Ms Swinson had planned “to announce the way forward before the end of the year” in relation to “a number of possible options for addressing this fundamental issue [that “the market does not work sufficiently where unsecured creditors are left to ‘control’ IP fees”], by both legislative and non-legislative means. Still, I imagine this isn’t far away, albeit that Ms Swinson is now on maternity leave.

This might be old news to those with their ears to the ERA ground, but it was news to me that the Insolvency Service will be implementing the Government’s Digital by Default strategy in the RPO “with a digital approach to redundancy claims anticipated to be launched in the autumn of 2014”. My experience as an ERA administrator may date back to the 1990s when people were comforted more by the feel of paper in their hands, but I do wonder how well the news will go down with just-laid-off staff that they need to go away and lodge their claims online. A sign of the times, I guess…

Finally, don’t mention the Draft Insolvency Rules!

No summary of regulatory goings-on would be complete without referring to the draft Insolvency Rules, on which the consultation closes on 24 January 2014. And no, I’ve still not started to look at them properly; it feels a bit futile even to think about starting now. But then, if we don’t pipe up on them now, we won’t be able to complain about the result, even if that may be yet years’ away…