My thanks to Mr Cable for re-appearing in the headlines and making this two month old consultation suddenly seem current again. The proposal in his “Transparency & Trust” paper that got everyone talking was the attempt to curb future excesses of the banks and demand by legislation that their directors take care to be socially responsible, but is there anything in the paper for IPs..?
I’ve been doing a bit of work recently on compliance with the Money Laundering Regs and it has reminded me of the rigmarole around identifying, and verifying the identities of, an insolvent company’s beneficial owners. Identifying the >25% shareholders is the easy bit (although, of course, it gets a bit more complicated where the shareholders are corporate entities), but how, on day minus-one of an insolvency appointment, are you supposed to identify other beneficial owners, those who “otherwise exercise control over the management of the company”? People don’t often stand up and introduce themselves as shadow directors. The consultation describes other complications to identifying the beneficial owners, such as where a number of shareholders have agreed to act in concert.
BIS’ suggested solution: let’s make it a requirement for companies to disclose their beneficial owners. The consultation considers the details of such a system: when companies would be required to make such disclosure; to which companies it would apply; what about trusts; what powers would need to be granted and to whom to ensure compliance; whether such a registry would be publicly available or restricted only to law enforcement and tax authorities… but what I cannot help asking myself is: if a company is being misused for illegal purposes by some hidden beneficial owner, would the company really have complied with the legislation and disclosed him/her? Or is it more likely that such requirements would just put more burden on law-abiding companies in ensuring that their registers of beneficial owners, in which no one is really interested (the information only really has any value if money laundering has taken place, doesn’t it?), are kept up-to-date?
Although, personally, I cannot see such a system doing anything much to help prevent illegal activity, at least if IPs are able to see information on companies’ beneficial owners, it might help in their Anti-Money Laundering checks, and I think that anything that helps with that chore would be a bonus. So how likely is it that the information would be made public? It seems from the consultation that it is the Government’s preference and, even if that doesn’t happen, the second option is that it might be accessible to “regulated entities”, i.e. anyone who is required to make MLR checks.
There’s a sting in the tail, however. Slipped into the consultation is: “If they were given access to the registry, regulated entities would incur additional costs if they were required to check and report any inconsistencies between their own data and that held on the register” (paragraph 2.74). Can you imagine? Would they seriously require office holders to inform whoever that a defunct company’s register of beneficial owners was not up to date? My perception is that IPs do not really feature as a separate group in the minds of those who oversee the MLR, so I doubt that they would see the pointlessness of such a task.
Changing Directors’ Duties
Okay, this proposal won’t directly affect IPs, but I couldn’t help passing a quick comment. As no doubt you’ve heard, the proposal is to amend the directors’ duties in the CA06 “to create a primary duty to promote financial stability over the interests of shareholders” (page 61). It is noticeable that more consultation space is taken up listing the potential drawbacks of the proposal than its advantages. In addition to the described issues of how to enforce such a duty, how shareholders would react, how UK corporate banks would fare competing against banks not caught by the CA06, I was wondering how you could measure promoting financial stability: it seems to me that it would depend on whether you were to ask Vince Cable or George Osborne.
The consultation includes many other proposals, which would affect the disqualification regime – some of these are:
• whether the regime should be tougher on directors where vulnerable people have suffered loss (is the absence of a jubilant Christmas for a Farepak customer a more worthy cause than that for a redundant employee who’d worked hard up to the end of an insolvent company’s life?)
• whether the courts should take greater account of previous failures, even if no action has been taken on them (surely the just and socially-responsible solution would be to fund the Service adequately to tackle any misconduct of the first failure?)
• whether to extend the time limit for disqualification proceedings from two to five years (what about the Service’s method of prioritising cases? I appreciate that this is a gross simplification, but don’t they hold a big pile of potentials and progress those that they feel are in the public’s greatest interest, leaving the rest in the pile until it gets to the critical time when they have to make a decision one way or the other? Won’t the extension to five years simply mean that their potential pile holds four years’ worth of cases, rather than one year’s? Again, unless the Service is granted more resources, I cannot see that this measure would really help. I also object to the consultation’s comment that “it can quite easily be several months before the relevant insolvency practitioner reports to the Secretary of State detailing the areas of misconduct that may require investigation. In such cases, the limitation period might mean that misconduct is not addressed” (paragraph 12.2))
• whether “sectoral regulators”, such as the Pensions Regulator, FCA and PRA, should be granted the ability to ban people from acting as a director in any sector.
• whether directors who had been convicted/restricted/disqualified overseas should be prevented from being a director in the UK.
“Improving Financial Redress for Creditors”
The Government anticipates that, if liquidators and administrators (as the Red Tape Challenge outcome proposes to extend the power to take S213/4 actions to administrators) were entitled to sell or assign fraudulent and wrongful trading actions, a market for them would develop. Do you think so..?
BIS has thought about the possibility that directors (or someone connected to them) might bid for the action and, although they suggest an, albeit not water-tight, safeguard, they also point out that, if the director did buy the right of action, at least the estate would benefit from the sale consideration. Although, personally, I’d feel uncomfortable with that – and I’m not sure what the creditors would say (but, of course, the office holder could ask them, and maybe that would be a better safeguard?) – I guess it makes commercial sense.
The consultation also proposes to give the court the power to make a compensatory award against a director at the time it makes a disqualification order. The consultation states: “This measure could potentially affect the timeliness of obtaining disqualifications if it deterred directors from offering a disqualification undertaking and therefore resulted in more disqualification cases needing to be taken to court” (paragraph 11.16), but personally, I would have thought that this measure would increase exponentially the number of director undertakings, as there seems to be no suggestion that an undertaking would expose a director to the risk of an award.
It is envisaged that the award would not be used to cover the general expenses of the liquidation and “there is a question as to who should benefit from any compensatory award. This could be creditors generally or it could be left to the court to determine based on the facts of the case” (paragraph 11.14), although I assume that, if it were for the general body of creditors, the office holder would be expected to pay the dividend. I wonder how the office holder’s fees and costs would be viewed, if he had to keep the case open purely for the purposes of seeing through the outcome of any such action.
The consultation also states that “Liquidators would still be expected to consider whether there are any actions they could bring themselves, as they ought to now” (paragraph 11.15). Could liquidators be criticised for taking actions, the proceeds of which would settle first their costs, when, if it were left to the court on the back of a disqualification order, the creditors would see the full amount? It is a liquidator’s function to get in and realise the assets, so probably not, but administrators..?
The same paragraph states: “If by the time the disqualification action comes before the court, liquidators have successfully recovered monies from the directors, that is something the court would be expected to take into account when deciding whether or not to make a compensatory award (or in setting the amount of it)” – it could get fun if the actions were running in parallel.
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Despite my quibbles, generally I think the proposals are a step in the right direction. However, I wonder how those in the Service’s Intelligence and Enforcement Directorate feel about the proposals, which would lead to so much more work and high expectations laid upon them. Let’s hope that these proposals give them a sound case for increasing their access to funds and people.
Any measures to reduce insolvency regulation are most welcome and, apart from the odd item that threatens to increase the burden on IPs, the proposals of the Insolvency Service’s Red Tape Challenge consultation promise to bring in a brave new world where website communication is the norm and meetings are a thing of the past. Whether these proposals will be seen as working against the tide of opinion seeking greater creditor engagement remains to be seen, but, for me, some of these changes cannot come soon enough.
Ever conscious that my articles are getting longer and longer, I have described my Top Seven proposals from the consultation document.
1. Abolition of Reg 13 Case Records, but there’s a sting in the tail
The first proposal in the document is a belter: let’s abolish the Reg 13 Case Record – yes, please! I remember spending what seemed so much wasted time ensuring that the Reg 13 (or Reg 17 in my day) schedules were complete and accurate – far more overall, I suspect, than the 1 hour per case estimated in the Impact Assessment (which strangely is assumed to apply to only 80% of all cases).
However, it seems the Service is twitchy about leaving IPs to their own devices and is recommending that “legislation should require IPs to maintain whatever records necessary to justify the actions and decisions they 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” (paragraph 32). Scary! So instead of a simple, albeit useless, two-pager listing key filing dates etc. of the case, legislation will require IPs to retain certain records. This could go one of two ways: either the provision will be so bland (e.g. as the CD describes it: records to justify actions and decisions) as to be pointless, or it will be in the style of the 2010 Rules on Progress Reports, which will introduce a whole new industry of compliance workers whose job will be to cross-check case files against a statutory list.
Why does the Service see a need to “codify” this matter? If an IP is not already retaining a sensible breadth of records (and such an IP will be rare indeed), if only to protect themselves from the risk of challenge, do they think that a statutory provision is going to force them to do it? Do they think that there needs to be a statutory requirement to assist regulators in addressing any serious failures? Such a measure has the potential to increase the regulatory burden on IPs without, as far as I can see, bringing any advantage whatsoever.
2. Abolishing almost all meetings
Although I welcome these proposals, I do think that the Service has over-egged the savings. For example, the Impact Assessment suggests that £7m would be saved by abolishing final meetings. Although the Service recognises that there will be negligible saving in relation to drafting the final documentation – even if there is no final meeting, a final report etc. will still need to be produced – they have estimated that each case will save on room hire of £64, 1 hour of an administrator’s time, and half an hour of a manager’s time. Personally, I would be very surprised if any IP makes provision for anyone attending a final meeting – does the Service picture IP staff sitting in an empty hired room twiddling their thumbs just in case someone turns up? Ok, so IP staff will save time on drafting minutes of the meeting, but that’s little more than churning off a standard template; it’s hardly 1.5 hours worth.
So if most meetings are abolished, is everything going to be handled in a process similar to the Administration meeting-by-correspondence process? Not quite, although it seems that almost all matters that will require a positive response from creditors – approval of VAs and of the basis of remuneration in any insolvency process – may be handled either as a physical meeting or by correspondence votes. The CD indicates that in other circumstances, “deemed consent” may occur: “the office-holder will issue documents to the creditors informing them of an event (as happens now) and that the contents of these documents are approved (if approval is required for that document/event) unless 10% or more by value or by number of creditors object in writing” (paragraph 64). In what kind of circumstances might this apply? I’m struggling to come up with many instances. I am aware that several IPs seek approval of R&Ps, although personally I do not believe that they need to. The CD also proposes to revise the Act’s Schedules so that Liquidators can exercise more powers without consent, but I guess that, if that does not go ahead, they might be other instances. I guess there might also be case-specific events, e.g. to pursue an uncertain asset, which might be referred to creditors. But there’s nothing wholesale that in future might be handled by “deemed consent”, is there? Unless…
Although the CD excludes office-holder’s fees from “deemed consent”, it makes no mention of SoA/S98 fees. If under the present statute, these need creditors’ approval, might they be deemed approved in future. Personally, I think this is another area, if the fees are due to the IP/firm/connected party, that also needs positive creditor approval.
Professor Kempson reported that IPs estimated that 4% of creditors attended meetings. It is not clear in the report what kind of meetings these are, but I bet they are S98s in the main. Personally, I have always viewed S98s as good opportunities for IPs to communicate something to trade creditors about the insolvency process and to convey face-to-face something of the professionalism, competence, and integrity of IPs. If it is true that no one goes to these any more, then fair enough, but even if it is only the rare S98 that attracts an audience, I feel it could just widen the gap further between IPs and creditors if no S98 meeting were ever held again. Having said that, the Service estimates that there will be only 30% fewer meetings, but if statute no longer requires physical S98s, would they be held; could the cost be justified?
3. Communication by website
The Impact Assessment does not quantify the estimated savings from these proposals, suggesting that they will be smaller than those related to the proposals to allow creditors to opt out of receiving correspondence, but, unless I have misunderstood their proposal, personally I could see this provision being used extensively.
Firstly, a bit more about creditors opting out: the Service estimates that, if they could under statute, 20% of creditors would notify office-holders that they did not wish to receive any further information on a case. I’m sorry, but I really cannot see it: this would require creditors to take action to disengage from the insolvency process – if they’re not already engaged, why would they send back such a notification? And would some then worry that they might miss out on important news, e.g. that miraculously there’s a prospect of a dividend, even though statute might be designed to ensure that Notices of Intended Dividend (“NoID”) etc. be issued notwithstanding any creditor opt-out?
As I say, much more promising I think is the Service’s suggestion that office-holders could write once to creditors to tell them that all future documents are going to be accessible on a website, which is something that office-holders can do presently but only with a court order. Wouldn’t that be great? No more need to send one-pagers to creditors informing them that a progress report has been placed on the website – you’d just put in on the website, job done. I wonder how many hits the web page would get… On second thoughts, I don’t think I want to know; I think it would only make me cry at the realisation of the huge amount of money, time and trees that had been wasted over the decades in sending reports that almost no one read.
There are a couple of catches: the Service proposes that the office-holder could do this only when he/she “considers that uploading statutory documents to a website, instead of sending hard copies, will not unfairly disadvantage creditors” (paragraph 95). I would have thought that creditors might only be unfairly disadvantaged if they are unable to access the website, no? So are we talking here about a particular profile of creditor? Or is the Service thinking, not about the creditors, but about the importance of the documentation? I could see that it might be unfair to place a NoID on a website with no announcement, leaving it to creditors’ pot luck as to whether they spotted the notice in time to lodge a claim – and I’m guessing that NoIDs would be excluded from this provision. But in what other circumstances could creditors be unfairly disadvantaged?
In another section of the CD, which covers a proposal to reduce the number of statutory circulars (which has not made it to my Top Seven), the Service states that: “Important information is being passed – to attend a meeting, to know of its outcome – which we would not want dissipated” (paragraph 102). So does the Service believe that a notice of meeting needs to be circulated, rather than pop onto a website, for fear that creditors might not see it until the meeting had been held? Ok, but then what about progress reports, the issuing of which sets the clock ticking for challenges to fees: are these similarly too important to pop onto a website unannounced? Could creditors be considered to be unfairly disadvantaged by this action? But where would that leave us: what documents would be appropriate to post to a website unannounced?
4. Extend extensions by consent
The Service proposes to extend the period by which Administrations may be extended by consent of creditors to 12 months. They also invite views on whether this should be extended further.
My personal view is that it would seem practical, whilst not making it too easy for Administrations to stagnate, to allow creditors to extend Administrations indefinitely but only by, say, 6 months at a time.
I can think of few circumstances where an Administration should move to a Liquidation, particularly if another of the Service’s proposals – that the power to take fraudulent or wrongful trading actions be extended to Administrators – is implemented. The CD also suggests empowering an Administrator to pay a dividend from the prescribed part, although I would like to see the power extend to a dividend of any description (what’s so special about the prescribed part?). These changes would seem to remove the need to move a company from Administration to CVL (although I wonder if these changes will persuade HMRC to drop its practice of modifying proposals to require that the company be placed into liquidation of some description – why do they do that?!), but then some Administrations might need to be extended for significant periods – adjudicating on claims can be a lengthy business.
I think the Enterprise Act envisaged Administrations as a holding cell, allowing the office-holder to do what he/she could to get the best out of the situation, but once the end-result was established, the idea was that the company would move to liquidation, CVA, or even escape back to solvency. But that all seems a bit over-complicated and costly when, in many respects (e.g. specific bond, R&P and currently D-report/return), the successive CVL is a completely separate insolvency case. Why does the company need to move to CVL to pay a dividend?
5. Scrap small dividends
The Service proposes that, where the dividend payment to a creditor will be less than, say £5 or £10, the dividend is not paid to the creditor. The Service suggests that these unpaid dividends might be passed to its disqualification department or to HM Treasury.
The Service has spotted the key difficulty: should the threshold apply to each interim/final dividend payment or to the total dividend? Although it would not be impossible, it could be tricky applying the threshold to the total dividend – the office holder would need to keep a tally of small unpaid dividends at each interim payment and monitor when the sum total crossed the threshold. To be fair, I guess there are few insolvencies that involve interim dividends – I am assuming that this provision would not apply to VAs (unless the debtor specifically provided for it in the Proposal), but I believe that any increased burden on declaring interim dividends should be avoided.
6. “Minor” changes
The CD provides some annexes of so-called “minor” proposals for change:
• Extend the deadline for proxies up to, and including at, the meeting. Granted very few meetings are physical meetings, but I remember the days of holding CVA meetings and having someone stand by the office fax machine just in case any last-minute proxies came in – it’s not exactly cost-free.
• Apply the VA requisite majorities rule on connected party voting to liquidations and bankruptcies. Personally, I think this is quite a naughty proposal to slip in to this consultation, particularly at the tail-end of a “minor” proposals annex – it hardly seems in keeping with the Red Tape Challenge objective of abolishing unnecessary regulation! Why isn’t it already in liquidations and bankruptcies? I don’t know for sure, but I wonder if it is something to do with the fact that the resolutions taken at VA meetings decide the fate of the insolvent entity, whether to approve the VA or not. The provision is also in Administrations, which is a bit more difficult to rationalise (as are a lot of Administration rules!): perhaps it is because Administrators’ Proposals might also decide the fate of the company, whether the Administrator pursues its rescue by means of a CVA or otherwise (see, for example, Re Station Properties Limited, http://wp.me/p2FU2Z-3I). These decisions are fundamentally different from those taken at liquidation and bankruptcy meetings, where any connected party bias is far less relevant.
• “Clarify that, where ‘creditors’ is mentioned in insolvency regulation, only those creditors whose debts remain outstanding are being referred to. Currently, if a creditor has received payment in full, they would still be classed as a creditor in the insolvency (as they would have been a creditor at the commencement of the procedure, which fixes the use of that term legally). As the legislation refers to actions that can be carried out by or with the consent of creditors, engaging with those ‘creditors’ who have already received full payment (and may not consider themselves creditors any longer) can be difficult” (annex 6(a)). Well, I’m glad we got that cleared up! It makes a joke of the current position, though. For example, the ICAEW blogged that creditors need to receive copies of MVL progress reports (http://www.ion.icaew.com/insolvencyblog/26779). Although I dispute that this is the only interpretation of the Act/Rules, the consequence of the Service’s stance described above is that, despite what the Service apparently has told the ICAEW, even if creditors have been paid, they still receive copies of MVL progress reports – what nonsense! To my mind, however, the key issue arising from this conclusion is the application of R2.106(5A) – not only would paid secured creditors’ approval to the basis of fees need to be sought, but also paid preferential creditors. I wonder what the court would say if a paid creditor applied on the ground that the Administrator had failed to include them in an invitation to approve fees? I suspect: ”Go away and stop wasting the court’s time!” And don’t forget that the Administrator needs to seek all secured creditors’ approvals of the time of his/her discharge – personally, this seems unnecessarily burdensome to me anyway, but do we really need to seek the approval of creditors who are no longer owed anything? Also, the Act/Rules do not seem to allow the Administrator to get his/her discharge by means of anything other than a positive consent from all secured creditors. It’s a shame that this CD does not propose that silent secured creditors could be ignored, when seeking approval for discharge or for fees.
• “Consider the efficiency of the process by which administration can exit into dissolution or CVL and clarify them, if necessary” (annex 6(f)) – yes, please! Despite being tweaked and being the subject of much debate and consultation, it seems that the move to CVL process defies simplification. Now we have the unsatisfactory position that the Administrator needs to sign off and submit to Registrar of Companies (“RoC”) a final report covering the period up to the date that the company moves to CVL, but, because Administrators only learn of this event when they see it appear on the register at Companies House, they have already vacated office by the time they can sign and submit the report. Whilst Administrators can get the report pretty-much ready for signing before they vacate office – so at least they can be paid for the work! – there must be a way of avoiding this fudge, mustn’t there? I ask myself, why should the RoC be in control of the move date? Why couldn’t the Administrator sign a form with the effect that the company moves to CVL and statute simply provide that the form must be filed within a short time thereafter? After all, the dates of commencement of all other insolvency processes are fixed outside of RoC’s hands and the appropriate notices/resolutions are filed after the event.
7. Changes to D-report/return forms
I know that R3 has expended a lot of effort into seeking changes to the D-report/return forms and in putting them online, so I hope that I’m not dissing the Service’s proposals unduly out of ignorance. However, the CD left me puzzled.
Instead of asking IPs to express an opinion on whether the director “is a person whose conduct makes it appear to you that he is unfit” – because the Service believes that this can delay submission of the form, as the IP takes time to gather evidence – it proposes to ask IPs to provide “details of director behaviour which may indicate misconduct” (paragraph 209). From what I can gather, it seems there will be a tick-box list of behaviours that may indicate misconduct. But IPs will still be working on the basis of evidence in ticking the boxes, won’t they? So all that will be removed is the need for the IP to decide whether a D-return or report is appropriate (the Service’s plan is to have only one form). In fact, it could be more burdensome to IPs, as currently they use their own judgment in deciding that an action or behaviour does not, or is unlikely to, cross the threshold of misconduct, which would lead them to submit a clean return, end of story. However, under the proposed system, it seems to me that the IP would tick the box regarding the particular behaviour and the Service would then have to decide whether it warranted further investigation. Would that help anyone?
I appreciate IPs’ reluctance in expressing an opinion on misconduct, but I suggest that the main rationale for dropping this requirement is that, as currently, the Service will make its own mind up anyway, so what does it matter what the IP thinks? However, what will be lost under the new system will be the IP acting as a first-level filter, which I guess achieves the Red Tape Challenge objective, but it seems unhelpful in the greater scheme of things.
And is this tick-box approach going to be an improvement? Although the Service has promised a free text box (woo hoo!), it all sounds a bit restrictive to me.
One promising proposed change is that the Service will pre-populate returns with information that is already available (presumably from RoC). Not only will this make IPs’ lives a little easier, but also the receipt of a pre-populated return may act as a useful prompt to complete the task.
BIS is pursuing its “Digital by Default vision” and so views are sought on whether electronic submission of D-returns could be mandatory. Although personally I think it would not be a huge leap for all IPs to do this – provided the return was a moveable document that could be worked on and passed around a number of people in the IP’s office before finalisation and submission – I dislike the suggestion that there would be no other way of complying with the legislation and I did have to laugh at the image of an IP typing up his D-return in a public library (paragraph 205)!
The Service is also proposing to change the deadline to 3 months, on the assumption that this would be doable if IPs were not required to express an opinion and on the basis that “all of the information required for completion of the return will be available to the office-holder within that reduced period in the vast majority of cases” (paragraph 212). I’m not so sure, particularly if the IP encounters resistance in retrieving books and records and if directors are slow in submitting completed questionnaires – and these likely will include the cases where some misconduct has gone on. The CD does not mention what an IP’s duty would be in relation to any discoveries after the 3 months, but presumably a professional IP will go to the expense of informing the Service of material findings. I realise that resources are stretched extraordinarily within the Investigations department, but I’m not convinced that this is the best way to tackle the issue.
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Well, I had intended to avoid prattling on for too long, but I think I failed! Hopefully, this is a reflection of the interest I have in the Service’s proposals: despite my criticisms, Insolvency Service, I am grateful for your efforts in seeking to improve things – thank you.
Whilst this atypical British weather may have brought out the Aussie in many of us, as we settle down to sipping a stubby over the barbie, Professor Kempson seems to be gazing at the Southern Cross a little more completely.
Kempson’s report to the Insolvency Service was tagged quite unceremoniously to the foot of the page, http://www.bis.gov.uk/insolvency/news/news-stories/2013/Jul/transparency-and-trust, which headines Mr Cables’ Transparency & Trust Paper. Her report even had to follow the uninspiring terms of reference of the pre-pack review and so here I will follow the antipodean theme and blog about the bottom item of that press release first.
I’ll also start from the back of Kempson’s report and summarise her recommendations, uncontaminated by any personal opinion (for the moment):
• Consideration of the potential for limited competitive tendering (section 6.1.1)
• A radical revision or replacement of SIP9 (section 6.1.2)
• Consideration of the Australian approach of providing a costs estimate at the outset of the case with an agreed cap on fees (section 6.1.2)
• The creation and adoption of a Code on the lines of the Insolvency Practitioners Association of Australia Code of Professional Practice (section 6.1.2)
• Some contextual information from an independent body to help creditors assess the reasonableness of the remuneration and disbursements (section 6.1.2)
• Greater oversight exercised by the Crown creditors, HMRC, RPS and PPF, working together (section 6.1.3)
• Consideration of Austria’s model of creditor protection associations acting on creditors’ committees (section 6.1.3)
• Reconsideration of the circumstances in which creditors’ meetings need not be held in Administrations (section 6.1.3)
• Exploration of non-time cost bases or a mixture of bases for fees (section 6.1.4)
• Increasing the debt threshold for bankruptcy petitions (section 6.1.5)
• Extending S273 to creditors’ petitions (section 6.1.5)
• Provision of information (e.g. Insolvency Service booklet) to debtors regarding the likely costs of bankruptcy (section 6.1.5)
• Provision of generic information (e.g. Insolvency Service booklet) to directors subject to personal guarantees as well as case-specific information, e.g. by treating them on a par with creditors (section 6.1.5)
• A single regulator, perhaps the Financial Conduct Authority, for IPs (section 6.1.6)
• A simple low-cost mediation and adjudication service for disputes about low-level fees, perhaps by means of the Financial Ombudsman Service (section 6.1.7)
• Alternatively, some form of independent oversight of fees, such as that used in Scotland via court reporters and the AiB (section 6.1.8)
Charge-out rates – a surprisingly positive outcome!
Given the “how much?!” reaction often resulting from a disclosure of charge-out rates, I was ready to wince at this section, but actually I think the insolvency profession comes out of it fairly well.
The report details the charge-out rates gathered via the IP survey (which was responded to by 253 IPs):
Partner/Director: average £366; range £212-£800
Manager: average £253; range £100-460
Other senior staff: average £182; range £75-445
Assistants/support: average £103; range £25-260
Encouragingly, Kempson reports that these charge-out levels “are not, however, unusual in the accountancy and legal professions to which most IPs belong” (section 3.1). From my experience, I’d also suggest that the firms that charge the top end for partners/directors usually charge junior staff at the lower end and vice versa, i.e. I doubt that any firm charges £260 for juniors and £800 for partners/directors.
Professor Kempson also acknowledges that these “headline rates” are not always charged because IPs normally agree lower rates in order to sit on banks’ panels and, in other cases, the time costs are not recovered in full due to lack of realisations. Setting aside panel cases, Kempson suggests that fees were below headline rates “in about a half of cases, including: the great majority of compulsory liquidations, about two thirds of administrations; half of creditors’ voluntary liquidations and a third of personal bankruptcy cases” (section 3.2). Putting those two observations together, is it arguable, therefore, that IPs provide a far better value for money service than others in the accountancy and legal professions?
Panel Discounts – not so great
The report states that, at appointment stage, secured creditors negotiate discounts of between 10% and 40% on IPs’ headline rates and that some banks may achieve a further discount by entertaining tenders. “The implicit sanction underpinning all negotiations was to remove a firm from the panel. None of the banks interviewed could remember a firm choosing to leave their panel because the appointments they received were un-remunerative. From this they surmised that (individual cases aside) work was being done on a lower profit margin rather than a loss” (section 4.1.1).
Kempson does not suggest it, but I wonder if some might conclude that, notwithstanding the comments made above about charge-out rates, this indicates that IPs’ headline rates could drop by 10-40% for all cases. Personally, I do wonder if banks’ pressuring for discounts from panel firms could be un-remunerative in some cases, but that firms feel locked in to the process, unable to feed hungry mouths from the infrequent non-panel work, and perhaps there is an element of cross-subsidising going on. If Kempson had asked the question, not whether firms chose to leave a panel, but whether any chose not to re-tender when the panel was up for renewal, I wonder if she would have received a different answer.
Seedy Market?
To illustrate the apparent clout of bank panels, the report describes a service “that is marketed to IPs, offering to buy out the debts of secured creditors, thereby ensuring that an IP retains an appointment and giving them greater control over the fees that they can charge” (section 4.1.1).
Is it just me or is there something ethically questionable about an IP seeking to secure his/her appointment in this manner? Presumably someone is losing out and I’m not talking about the estate just by reason of the possibly higher charge-out rates that may have not been discounted to the degree that the bank would have managed with a panel IP. Presumably there’s an upside for the newly-introduced secured creditor? How do their interest/arrangement/termination charges compare to the original lender’s? Is the insolvent estate being hit with an increased liability from this direction? And why… because an IP wanted to secure the appointment..?
Is the problem simply creditor apathy?
Reading Kempson’s report did give me an insight – a more expansive one than I’ve read anywhere else – into an unsecured creditor’s predicament. They don’t come across insolvencies very often, so have little understanding of what is involved in the different insolvency processes (so maybe I shouldn’t get twitchy over the phrase “problems when administrations fail and a liquidation ensues”!). How can they judge whether hourly rates or the time charged are reasonable? They receive enormous progress reports that give them so much useless information (I’m pleased that one IP’s comment made it to print: “… For example saying that the prescribed part doesn’t apply. Well, if it doesn’t apply, what’s the point in confusing everybody in mentioning it?” (section 4.2.3)) and they struggle to extract from reports a clear picture of what’s gone on. Many believe that they’re a small fry in a big pond of creditors, so they’re sceptical that their vote will swing anything, and they have no contact with other creditors, so feel no solidarity. Personally, I used to think that creditors’ lack of engagement was an inevitable decision not to throw good money after bad, but this report has reminded me that their position is a consequence of far more obstacles than that.
Progress Reports – what progress?
The report majored on the apparent failure of many progress reports to inform creditors. Comments from contributors include: “Unfortunately the nature of the fee-approval regime can lead to compliance-driven reports, generated from templates by junior-level staff, which primarily focus on ensuring that all of the requirements of the statute and regulation are addressed in a somewhat tick-box-like manner. This very often means that the key argument is omitted or lost in the volume, which in turn make it difficult for us to make the objective assessment that is required of us” and from the author herself: “there were reports that clearly followed the requirements of the regulations and practice notes (including SIP9 relating to fees) slavishly and often had large amounts of text copied verbatim from previous reports. Consequently, they seemed formulaic and not a genuine attempt to communicate to creditors what they might want to know, including how the case was progressing and what work had been done, with what result and at what cost” (section 4.2.3).
To what was the unhelpful structure of progress reports attributed? Kempson highlighted the 2010 Rule changes (hear hear!) but she also mentions that IPs “criticised SIP9 as being too prescriptive”. I find this personally frustrating, because long ago I was persuaded of the value – and appropriateness – of principles-based SIPs. During my time attending meetings of the Joint Insolvency Committee and helping SIPs struggle through the creation, revision, consultation, and adoption process, I longed to see SIPs emerge as clearly-defined documents promoting laudable principles, respecting IPs to exercise their professional skills and judgment to do their job and not leaving IPs at the mercy of risk-averse box-tickers. I would be one of the first to acknowledge that even the most recent SIPs have not met this ideal of mine, but SIP9?! Personally, I feel that, particularly considering its sensitive and complex subject matter – fees – it is one of the least prescriptive SIPs we have. I believe that a fundamental problem with SIP9, however, is the Appendix: so many people – some IPs, compliance people, and RPB monitors – so frequently forget that it is a “Suggested Format”. Most of us create these pointless reports that churn out time cost matrices with little explanation or thought, produce pages of soporific script explaining the tasks of junior administrators… because we think that’s what SIP9 requires of us and because we think that this is what we’ll be strung up for the next time the inspector calls. And well it might be, but why not produce progress reports that meet the key principle of SIP9 – provide “an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed [and so that creditors are] able to understand whether the remuneration charged is reasonable in the circumstances of the case” (SIP9 paragraph 14)? And if an RPB monitor or compliance person points out that you’ve not met an element of the Appendix, ask them in what way they feel that you’ve breached SIP9. Alternatively, let’s do it the Kempson way: leave the Insolvency Service to come up with a Code on how to do it!
I do wonder, however, how much it would cost to craft the perfect progress report. The comment above highlighted that reports might be produced by junior staff working to a template, but isn’t that to be expected? Whilst my personal opinion is that reports are much better produced as a free text story told by someone with all-round knowledge of the case (that’s how I used to produce them in “my day”), I recognise the desire to sausage-machine as much of the work as possible and this is the best chance of keeping costs down, which is what creditors want, right? Therefore, apart from removing some of the (statute or SIP-inspired) rubbish in reports, I am not sure that the tide can be moved successfully to more reader-friendly and useful reporting.
Inconsistent monitoring?
The report states: “During 2012, visits made by RPBs identified 12.0 compliance issues relating to fees per 100 IPs. But there was a very wide variation between RPBs indeed; ranging from 0 to 44 instances per 100 IPs. Allowing for the differences in the numbers of IPs regulated by different RPBs, this suggests that there is a big variation in the rigour with which RPBs assess compliance, since it is implausible that there is that level of variation in the actual compliance of the firms they regulate” (section 4.5). I also find this quite implausible, but, having dealt with most of the RPB monitors and having attended their regular meetings to discuss monitoring issues in an effort to achieve consistency, I do struggle with Kempson’s explanation for the variation.
Although I can offer no alternative explanation, I would point to the results on SIP9 monitoring disclosed in the Insolvency Service’s 2009 Regulatory Report, which presented quite a different picture. In that year, the RPBs/IS reported an average of 10.6 SIP9 breaches per 100 IPs – interestingly close to Kempson’s 2012 figure of 12.0, particularly considering SIP9 breaches are not exactly equivalent to compliance issues relating to fees. However, the variation was a lot less – from 1.3 to 18 breaches per 100 IPs (and the next lowest-“ranking” RPB recorded 8.1). Of course, I have ignored the one RPB that recorded no SIP9 breaches in 2009, but that was probably only because that RPB had conducted no monitoring visits that year (and neither did it in 2012). Kempson similarly excluded that RPB from her calculations, didn’t she..?
Somewhat predictably, Kempson draws the conclusion (in section 6.1.6) that there is a case for fewer regulators, perhaps even one. She suggests setting a minimum threshold of the number of IPs that a body must regulate (which might at least lose the RPB that reports one monitoring visit only every three years… how can that even work for the RPB, I ask myself). In drawing a comparison with Australia, she suggests the sole RPB could be the Financial Conduct Authority – hmm…
Voluntary Arrangements: the exception?
“We have seen that the existing controls work well for secured creditors involved in larger corporate insolvencies. But they do not work as intended for unsecured creditors involved in corporate insolvencies, and this is particularly the case for small unsecured creditors with limited or no prior experience of insolvency. The exception to this is successful company voluntary arrangements” (section 5). Why does Kempson believe that the controls work in CVAs? She seems to put some weight to the fact that the requisite majority is 75% for CVAs, but she also acknowledges that unsecured creditors are incentivised to participate where there is the expectation of a dividend. If she truly believes the situation is different for CVAs – although I saw no real evidence for this in the report – then wouldn’t there be value in examining why that is? If it is down to the fact that creditors are anticipating a dividend, then there’s nothing much IPs can do to improve the situation across cases in general. But perhaps there are other reasons for it: I suspect that IPs charge up far fewer hours administering CVAs given the relative absence of statutory provisions controlling the process. I also suspect that CVA progress reports are more punchy, as they are not so bogged down by the Rules.
But I don’t think anyone would argue with Kempson’s observation that IVAs are a completely different kettle of fish and that certain creditors have acted aggressively to restrict fees in IVAs to the extent that, as IPs told Kempson, they “frequently found this work unremunerative” (section 4.2.3).
Disadvantages of Time Costs
I found this paragraph interesting: “several authoritative contributors said that, when challenged either by creditors or in the courts, IPs seldom provide an explanation of their hourly rates by reference to objective criteria, such [as] details of the overheads included and the amount they account for, and the proportion of time worked by an IP that is chargeable to cases. Instead they generally justify their fees by claiming that they are the ‘market rate’ for IPs and other professionals. Reference is invariably made to the fact that the case concerned was complex, involved a high level of risk and that the level of claims against the estate was high. More than one of the people commenting on this said that the complexity of cases was over-stated and they were rarely told that a case was a fairly standard one, but that there were things that could have been done better or more efficiently or the realisations ought to have been higher so perhaps a reduction in fees was appropriate. They believed that, by adopting this approach, IPs undermined the confidence others have in them” (section 5.2.1). It’s a shame, however, that no mention has been made of the instances – and I know that they do occur – of IPs who unilaterally accept to write-off some of their time costs so that they can pay a dividend on a case.
But this quote hints at the key disadvantage, I think, of time costs: there is a risk that it rewards inefficiency.
Kempson first suggests moving to a percentage basis as a presumed method of setting remuneration, although she acknowledges that this wouldn’t help creditors as they would still face the difficulty on knowing what a reasonable percentage looked like. She then suggests a “more promising approach” is the rarely-used mixed bases for fees that were introduced by the 2010 Rules (section 6.1.4). She states that this should be “explored further, for example fixed fees for statutory duties; a percentage of realisations for asset realisations (with a statutory sliding scale as described above); perhaps retaining time cost for investigations”. Whilst I agree that different fee bases certainly do have the potential to deliver better outcomes – I believe that it can incentivise IPs to work efficiently and effectively whilst ensuring that they still get paid for doing the necessary work that doesn’t generate realisations – it does make me wonder: if creditors already feel confused..!
Lessons from Down Under?
Kempson is clearly a fan of the Australian regime. She recommends the scrapping or radical revision of SIP9 in favour of something akin to the IPAA’s Code of Professional Practice (http://www.ipaa.com.au/docs/about-us-documents/copp-2nd-ed-18-1-11.pdf?sfvrsn=2). At first glance (I confess I have done no more than that), it doesn’t look to have much more content than SIP9, but it does seem more explanatory, more non-IP-friendly, and the fact that Kempson clearly rates it over SIP9 suggests to me that, at the very least, perhaps we could produce something like it that is targeted at the unsecured creditor audience.
She also refers to a Remuneration Request Approval Report template sheet (accessible from: http://www.ipaa.com.au/about-us/ipa-publications/code-of-professional-practice), which she acknowledges “is more detailed than SIP9” (section 6.1.2) – she’s not kidding! To me, it looks just like the SIP9 Appendix with more detailed breakdowns of every key time category, probably something akin to the information IPs provide on a >£50,000 case.
Thus, whilst I can see some value in revisiting the UK documents (or producing different ones) so that they are more useful to non-IPs (although will anyone read them?), I am not sure that I see much in the argument that moving to an Aussie Code will change radically how IPs report fees matters. I am also dismayed at Kempson’s suggestion that “a detailed Code of this kind would be very difficult to compile by committee and would require a single body, almost certainly the Insolvency Service in consultation with the insolvency profession, to do it” (section 6.1.2). Wasn’t the Service behind the 2010 Rules on the content of progress reports..?
After singing Australia’s praises, she admits: “even with the additional information disclosure described above, creditor engagement remains a problem in Australia” (section 6.1.3) – hmm… so what exactly is the value of the Australian way..?
Other ideas for creditor engagement
Kempson recommends consideration of the Austrian model of creditor protection associations (section 6.1.3), which is a wild one and not a quick fix – there must be an easier way? I was interested to note that, even though creditors are paid to sit on committees in Germany, committees are only formed on 15-20% of cases – so paying creditors doesn’t work either…
The report also seems to swing in the opposite direction to the Red Tape Challenge in suggesting that the criteria for avoiding creditors’ meetings in Administrations should be reconsidered. Kempson highlights the situation where the secured creditor is paid in full yet no creditors’ meeting is held either because there are insufficient funds to pay a dividend or because the Administrator did not anticipate there would be sufficient funds at the Proposals stage. As I mentioned in an earlier post (http://wp.me/p2FU2Z-3p), in my view these Rules just do not work – something for the Insolvency Rules Committee…
However, raising these circumstances makes me think: whilst endeavours to improve creditor engagement are admirable, could we not all agree that there are some cases that are just not worth anyone getting excited about? There must be so many cases with negligible assets that barely cover the Category 1 costs plus a bit for the IP for discharging his/her statutory duties – is it really sensible to try to drag creditors kicking and screaming to show an interest in fixing, monitoring and reviewing the IP’s fees in such a case? Whatever measures are introduced, could they not restrict application to such low-value cases?
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The fact that the release of this report seems to have made fewer ripples than the Government’s announcement of its plan to conduct the fees review makes me wonder if anyone is really listening..? However, I’m sure we all know what will happen when the next high profile case hits the headlines, when the tabloids report the apparent eye-watering sums paid to the IPs and the corresponding meagre p in the £ return to creditors. Then there will be a revived call for fees to be curbed somehow.
In the meantime, we await the Government’s response to Professor Kempson’s report, expected “later this year”.
Even if you’ve been living in a cave for the past few weeks, you will not have escaped the flood of comprehensive legal updates on Eurosail. Consequently, I’m not even going to attempt to cover the case here.
Instead, something completely different: I thought I would convey my thoughts on the recent SIP re-drafts, now that the consultations are over.
SIP3A (Scotland)
I feel ill-equipped to comment on this SIP, so I am sure that my peripheral thoughts stack up poorly against those of you who deal with Trust Deeds on a daily basis.
Having seen the substantial tone change of the draft SIP3 (E&W), i.e. the stripping-out of a vast amount of prescription from the current SIP3, I felt that this new draft SIP3A stood in stark contrast, containing much of the existing prescription and even adding to it in some areas. I sense that a fairly large proportion of insolvency professionals prefer prescription to principles – as I mention below, personally I don’t place myself in that crowd – but I do wonder whether even those people would feel that this SIP3A draft has the balance wrong.
I had to chuckle at the SIP consultation response form mentioning that “matters being addressed in the PTD Regulations will not be included in SIP3A”; I counted at least 13 paragraphs that pretty-much simply repeat a statutory requirement. For example, what exactly is the point of including in a SIP: “Trustees should comply with the procedures for bringing the Protected Trust Deed to a close as detailed in the Regulations”?!
I understand that I was not alone in questioning the SIP’s directions regarding face-to-face meetings. Put into an historical context, I am not surprised to see this draft SIP3A require visits to the business premises in all cases where the debtor is carrying on a business. E&W followed a 2-stage process to drop physical meetings for IVAs: the current SIP3 (E&W) requires meetings in person for trading individuals, but – thankfully, in my opinion – the re-draft SIP3 has left this to the IP’s judgment. However, do PTD Trustees need to take the same incremental steps? Can we not focus on what is the purpose of a physical meeting? Are all debtors in business so untrustworthy and difficult to read that the IP/staff have to check out every story for themselves?
There seem to have been some unhelpful cut-and-pastes from the AiB Guidance, resulting in some contradictions and some matters, which I feel are not fit for a SIP (e.g. the purely procedural requirement to advise the AiB of the debtor’s date of birth). There seems to be a contradiction in that para 6.9 requires the IP to “quantify the equity in each property as accurately as possible before the debtor signs the Trust Deed”, but para 6.13 sets a deadline of the presentation of the Trust Deed to creditors. This para also prescribes how the equity should be assessed, but it seems to me that desk-tops and drive-bys might meet para 6.13 but not the (excessive?) accuracy criterion set out in para 6.9. And what if the equity is clearly hopelessly negative? Does the IP really have to go to the expense of quantifying it as accurately as possible before the Trust Deed is signed?
I have never been keen on SIP3A covering fees issues that I feel should be placed in SIP9. This historical mismatch has led to a fees process for PTDs that, to my mind, has never mirrored that for other insolvency processes as per SIP9. This issue is repeated in this draft. For example, SIP3A para 8.4 refers to payments to associated parties as defined in statute, whereas for some time now SIP9 has wrapped up, not only payments to statutorily-defined associates, but also payments “that could reasonably be perceived as presenting a threat to the office-holder’s objectivity by virtue of a professional or personal relationship” (para 25). SIP3A’s overlap, but not quite, of this SIP9 point is less than helpful: Trustees might be lulled into a false sense of security in feeling that they are complying with SIP3A whilst overlooking a breach of SIP9.
I also feel that it is a shame that this draft repeats the current SIP3A words: “all fees must be properly approved in the course of the Trust Deed and in advance of being paid” (para 8.6). I know what the drafter is getting at, but how is it that fees that are properly set out in a Trust Deed, which has subsequently achieved protected status, are not already “properly approved”? And why do Trustees have to go through an additional step in the process that is not required for any other insolvency process per SIP9?
SIP3 (IVAs)
I understand that some have taken issue with the draft SIP’s perceived more onerous tone. I can see that repeated use of words like “be satisfied”, “ensure”, “demonstrate”, and “assessment” seem more onerous than the current heavily-prescriptive SIP3, but, speaking from my perspective as formerly working within a regulator, I am not sure if it is intended to mean much more in practice. If IPs are not already recording what they do, how they do it, and what conclusions they come to, I would have thought they were at risk of criticism by their authorising body. In addition, many of the requirements relate to having “procedures in place” to achieve an objective, which is how I think it should be – IPs should be free to use their own methods applied to their own circumstances; I believe that it is the outcome that should be defined, not the process – but I do accept that this means more thinking-time for IPs and perhaps more uncertainty as to whether they have the processes right so that they’re not doing too little or too much.
Overall, I think that the draft SIP focuses attention where it is needed; it highlights the softer skills needed by an IP that draw on ethical principles rather than statutory requirements.
I also welcome the reduced prescription. Although I suspect that many IPs will not change their standards as regards, for example, content of Nominees’ reports and Proposals, at least they may find that they are picked up less frequently than in the past where a document has failed to tick a particular SIP3 box… provided, of course, that they meet the principle of providing clear and accurate information to enable debtors and creditors to make informed decisions.
There are a few areas where I feel that more careful drafting is needed. For example, there seems to be a difference in expectations as regards the advice received by a debtor depending on who gives the advice. Paragraph 11 d states that, if an IP is giving the advice, “the debtor is provided with an explanation of all the options available, and the advantages and disadvantages of each, so that the solution best suited to the debtor’s circumstances can be identified and is understood by the debtor”. However, the level of satisfaction required by an IP who becomes involved with a debtor at a later stage is simply that he/she “has had, or receives, the appropriate advice in relation to an IVA” (paragraphs 12 a and 13 a). It would seem to me that “appropriate advice in relation to an IVA” may be interpreted as being far more limited than that described in paragraph 11 d.
Although I applaud the move to freeing IPs to exercise their professional judgment as to how to meet the principles and objectives, I confess that there are a few current SIP3 items that I am sad to see go. And having griped about SIP3A’s interference with fees issues, I feel doubly embarrassed to admit that I quite like the current SIP3’s treatment of disclosure of payments to referrers, which is narrowed in scope in the draft new SIP3 (e.g. under the new draft, a referring DMC’s fees (whether the DMC is independent of the IP/firm or not) for handling the debtor’s previous DMP need not be disclosed). I also like the current SIP3’s requirement to disclose information in reports if the original fees estimate will be exceeded (para 8.2) and the current SIP3’s direction on treatment of proxies where modifications have been proposed (paras 7.8 and 7.9). But I accept that, as a supporter of the principles-based SIP, I should be prepared to let these go.
Talking of principles v prescription…
SIP16
Before the draft revised SIP16 had been released, I had been encouraged by the Insolvency Service’s statement dated 12 March 2013, reporting the Government’s announcement of a review of pre-packs, which stated: “Strengthened measures are being introduce (sic) to improve the quality of the information insolvency practitioners are required to provide on pre-pack deals” (http://www.bis.gov.uk/insolvency/news/news-stories/2013/Mar/PrePackStatement). I was therefore most disappointed to read a re-draft SIP16 adding 14 new items of information for disclosure – would this really improve the quality of information or simply the quantity?
For example, would the addition of “a statement confirming that the transaction enables the statutory purpose of the administration to be achieved and that the price achieved was the best reasonably obtainable in the circumstances” really improve the quality? And what exactly is meant by “best price”? Does that take account of, say, the avoidance of some hefty liabilities on achieving a going-concern sale or the security of getting paid consideration up-front rather than substantially deferred from a less than reliable source or the avoidance of large costs of disposal and risk of depressed future realisations?
There also seems to be a mismatch between the explicit purpose of the disclosure – justification of why a pre-pack was undertaken, to demonstrate that the administrator has acted with due regard for creditors’ interests – and the bullet-point list. For example, how exactly does disclosure of the fact that the business/assets have been acquired from an IP within the previous 24 months (“or longer if the administrator deems that relevant to creditors’ understanding”!) support that objective? Such an acquisition may raise questions regarding the way the business was managed prior to the sale or it might even raise some suspicions of a serial pre-packer at work (wherever that gets you), but I think it contributes little, if anything, to the justification of the pre-pack sale itself.
I understand that there has been some dissatisfaction at the introduction of a 7 calendar day timescale (counting from when?) for disclosure. Personally, I think that it is damaging to the profession if creditors are not made aware of a sale for some time, but I would have preferred for there to be a relaxation of the detailed disclosure requirements so that initial notification, even if it is not complete in all respects (surely much of the detail can be provided later?), is pretty immediate. There may be all kinds of practical difficulties in getting a complete SIP16 disclosure out swiftly, particularly with the proposed additions, and I think it would be an own-goal if this meant that some IPs relied on the “unless it is impractical to do so” words to delay issuing the disclosure until they were sure that their SIP16 disclosure was perfect in all respects. Fortunately, I feel that IPs generally are cognisant of the criticisms/suspicions levelled at the profession when it comes to pre-packs and most will pretty-much clear their desks to ensure that a complete SIP16 disclosure gets out on time.
Finally, returning to my point about unnecessarily repeating statute in SIPs: it is a shame that the drafters have not taken the opportunity to remove the words: “the administrator should hold the initial creditors’ meeting as soon as practicable after appointment”, which apart from omitting the word “reasonably” (is that intended?) is an exact repetition of Paragraph 51(2) of Schedule B1 of the IA86.
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I could go on, but I’m sure I’ve bored you all already. I am certain that many of you will have come up with many more thoughts on the drafts – after all, that is the purpose of sending them out for consultation – I do hope that you have conveyed them to your RPB so that the resultant SIPs can be well-crafted, practical, unambiguous documents that support the high ethical standards of the profession.
In this blog, I compare the responses to the EC Insolvency Regulation consultation – including: should Schemes of Arrangement be included? – and comment on today’s AiB release on planned changes to Bankruptcy. Also hidden within the BIS consultation responses is a view of great improvements to Gazette searches planned for this year…
Unanimous support for opting in to amended EC Insolvency Regulation
As I tweeted a week ago, the UK government has announced recently that it has decided to opt in to the proposal to amend the European Commission’s Regulation on insolvency proceedings, following unanimous support by those who responded to BIS’ consultation.
I noticed that the consultation responses were almost unanimous in one other respect; I thought that the voice for excluding Schemes of Arrangement from the Regulation’s scope – which would be possible under the revised Regulation, as currently proposed by the Commission – came through particularly loud and clear. Respondents cited the success stories that would not have been possible had Schemes been included in the Regulation; the fact that Schemes are often used for purposes other than insolvent restructurings; and that they are not always fully collective processes and thus do not really meet the criteria for proceedings included in the Regulations in any event.
There was a lone voice suggesting an alternative, however: appreciating the contentious nature of the issue, Paul Omar of Nottingham Trent University suggested a compromise whereby the jurisdictional bases for Schemes might be tightened up so that there should be more than just an arguable connection with the UK or benefit for creditors in order for UK courts to sanction such Schemes. I suspect that the other respondents will hope that such a compromise will not be necessary.
Other areas of apparent agreement between the respondents included a request for clarity over the proposed not-less-than 45 days timescale for foreign creditors to lodge claims; several parties had spotted that it was not clear whether this would apply, not only to submitting claims for dividend purposes, but perhaps also for voting purposes, which would be quite impractical, particularly for votes invited to commence proceedings. Several also asked for consideration to be given to providing mechanisms to avoid frivolous challenges to the opening of main proceedings, as these could create uncertainty and delays, which could de-rail some rescue or recovery plans.
Finally, I was interested in the response by the National Archives, which reported positively on the Gazette Platform project to improve free access to insolvency information “due for launch later this year”. The response included an illustration of one aspect of the planned new service: a timeline of insolvency events, so that all the key dates identified in Gazette notices for a single company (or insolvent individual?) appear on the same page – I like it!
More on the Scottish Bankruptcy Bill
The AiB’s equality questionnaire issued today (http://www.aib.gov.uk/publications/bankruptcy-bill-new-bankruptcy-scotland-act-2013-equality-questionnaire) includes a summary of the proposed changes in policy that are intended to materialise in the “New Bankruptcy (Scotland) Act 2013”. I haven’t cross-referred them to previous missives – and I am sure that readers who have attended an AiB stakeholder event will know these inside out – but I thought I would list those that made me raise an eyebrow:
• The AiB is continuing with the “No Income/No Asset” product for people who have been on income-related benefits for at least 6 months – and presumably this will have some benefits over LILAs, e.g. cheaper entry, swifter exit? Whilst I can see the advantages, it seems a shame that people in very low-paid employment might be barred access to a NINA.
• Mandatory advice from an approved money adviser prior to applying for any form of statutory debt relief – personally, I’m pleased to see this proposal repeated.
• “Altering the process for discharge of debtors so the trustee applies, showing cooperation with creditors (subject to appropriate appeals)” – how will this work? Does that mean that there will be no such thing as an automatic discharge period?
• Creditors will have to submit claims within 120 days of the trustee giving notice. “Where creditors do not submit their claims by this deadline, they would have to justify late submission or risk losing their dividend.” I see the advantage of putting some pressure on creditors to react more quickly, although personally I am not sure what is wrong with the current process (I’m guessing that Scotland is the same as E&W in this respect?) whereby a late-proving creditor cannot disturb a dividend, but can hope to catch up when the next dividend is declared. I also suspect that most of the difficulties in paying out complete dividends lie in creditors who have submitted claims but based on current information the trustee does not feel able to admit them.
Still, in general it’s all good stuff to see the AiB’s proposals gaining clarity and momentum.
Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:
• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors
She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: http://wp.me/p2FU2Z-V (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.
The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate: http://wp.me/p2FU2Z-w).
So what now does she propose to introduce? Some new significant items for PTDs:
• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.
The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.
Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.
The proposals do include some elements that may be more useful:
• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).
Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.
Gift Voucher Creditors
15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (http://www.r3.org.uk/index.cfm?page=1114&element=17990&refpage=1008), but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.
MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 (http://www.youtube.com/watch?v=53_fN8c1f8Q&feature=youtu.be). Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:
“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.
(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”
As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.
To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, http://www.lexology.com/library/detail.aspx?g=8298e876-f998-4777-bacf-ce781f312242 – the clue is in the name…)
There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (http://www.11sb.com/pdf/insider-gift-vouchers-jan-2013.pdf).
(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS. R3 summarised the difficulties in dealing with gift vouchers in an insolvency at https://goo.gl/eN20mN. This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at https://goo.gl/GJDbNO.)
Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…
If you, like me, were dissuaded from exploring the EC’s proposal on revising the European Regulation on Insolvency Proceedings, issued on 12 December 2012, by reason of its sheer length, you might find the Insolvency Service’s recent Call for Evidence useful in summarising its potential reach into the UK.
The Insolvency Service opened its Call for Evidence on 7 February 2013, with a closing date of 25 February. Whilst this may seem a tiny window in which to contemplate such a tome of proposals, I am certain that those for whom this holds most interest already will have spent quite some time over the last two months absorbing the proposals.
The fundamental question being asked by the Service is: should the Government opt in or out of the Regulation? Even with my zero personal experience and limited understanding of the work of cross-border insolvencies, it seems to me a no-brainer (well, the way the Service has argued it anyway). The Call for Evidence also asks questions on elements of the proposals likely to impact most on UK insolvency with a view to developing a negotiating mandate for the UK.
By opting in, the UK can engage in negotiations in order to finalise the proposals, but it will not be able to opt out subsequently and so the UK will be bound by the final Regulation, whatever its form.
If the UK does not opt in, it can only observe the process; it may decide to opt in later, but it will need the Member States’ consent. If the UK does not opt in to the final Regulation at all, it may mean that the UK will remain bound by the existing Regulation. This could cause much confusion when dealing with an insolvency that crosses the border of an opted-in Member State and, as the Impact Assessment puts it, “the UK is generally considered to be a good environment for cross-border insolvency resolution, and this scenario would undermine that position” (paragraph 30).
An alternative scenario if the UK does not opt in is that the European Council may decide that the existing Regulation in its current form could no longer apply to the UK. The Service describes the consequences as: disenfranchisement of UK stakeholders from EU cross-border insolvencies; UK insolvencies failing to have EU-wide recognition; and, whilst the Model Law might help, it might involve multiple court proceedings in the different relevant jurisdictions and thus increased costs and time to get results.
From scanning commentaries on the EC proposals, it appears to me that not opting in is very unlikely. The only seriously negative vibe I’ve picked up – although even this is by no means universal – is a desire to keep Schemes of Arrangement out of the Regulation. As the EC proposes to retain the power of each Member State to decide whether a national insolvency procedure should be included, it seems to me that this is a weak reason for not opting in. And in any event, I would have thought there would be value in having Schemes of Arrangement acquire recognition across the EU. (UPDATE 16/10/2013: okay, I can see now the value of keeping Schemes out of the Regulation – see, for example, the following article by Dentons extolling the virtues of Schemes for essentially foreign companies: http://www.lexology.com/library/detail.aspx?g=3fd5d9b8-3356-4dd4-86bf-aea8980a9311&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2013-10-15&utm_term=)
Scope of the Insolvency Regulation
As alluded to above, the EC proposes to extend the scope of the Regulation wider than just “liquidation”, as presently (albeit that the Annex to the 2000 Regulation already includes Administration, VAs, Bankruptcy and Sequestration). It proposes to include proceedings “in which the assets and affairs of the debtor are subject to the control or supervision by a court. Such supervision would include proceedings where the court has no real involvement unless a creditor makes an application to review a decision” (paragraph 21) and “proceedings which include the adjustment of debt and the debtor remains in control of any assets” (paragraph 22). This is where the idea that Schemes of Arrangement will be wrapped up in the Regulation comes from.
Also as mentioned above, the Member State can decide whether to notify a particular national insolvency procedure to be included, but it is proposed there will be a new mechanism whereby the EC then will scrutinise the procedure to ensure that it fits the defined scope of the Regulation.
Jurisdiction for opening insolvency proceedings
The concept of COMI is proposed to be retained, consistent with the body of case law that has developed. The proposals seek to extend the concept to individuals.
The EC proposes to introduce a duty on the court or IP that opens the insolvency proceedings to examine the COMI of the debtor and specify the ground on which their jurisdiction is decided. Creditors from other Member States shall have the right to challenge the decision.
Secondary proceedings
It is proposed that the court receiving an application to open secondary proceedings must inform the office-holder of the main proceedings and allow him/her to be heard before the court makes its decision. The main proceedings’ office-holder will be entitled to ask for the application for secondary proceedings to be stayed, if they are not necessary to protect the interests of local creditors.
The proposal removes the restriction that secondary proceedings must be winding-up proceedings; it is proposed that they can be any proceedings available under the law of that Member State, including restructuring.
In addition, it is proposed that the courts in the main and secondary proceedings be obliged to communicate and cooperate with each other and that a similar obligation will be on the office-holder to communicate and cooperate with the court in the other Member State involved in the proceedings.
Publicity of proceedings and lodging of claims
“Each Member State will be required to maintain a public register(s) of insolvency decisions relating to companies and self-employed individuals, which must be internet based and free of charge. This requirement does not extend to insolvency proceedings concerning non-trading individuals or consumers” (paragraph 32). The register will contain basic information on the insolvency (albeit more than is currently on Companies House; for example, the information must include the court and reference number) plus a date for lodging claims. “Each register will be searchable via the European e-justice portal, with an interconnected search facility” (paragraph 33).
The EC proposes the provision of two standard forms for foreign creditors – a notice of insolvency and claim form – which will be made available (by whom? I think by the European e-justice portal) in all official EU languages. Foreign creditors must be given at least 45 days to lodge a claim, irrespective of any national laws specifying shorter timescales.
Groups of companies
The EC proposes to retain the Regulation’s entity-by-entity approach to the insolvencies of group companies, but seeks to improve coordination of efforts. Thus courts and office-holders involved in different proceedings on group companies will be obliged to communicate and cooperate.
It is proposed that the office-holder of an insolvent group company will be entitled to be heard in any opening proceedings on any other group company and will have the right to request a stay. An office-holder will also be able to participate in any insolvency proceedings on other group companies, for example in creditors’ meetings. As the EC puts it, “these procedural tools enable the liquidator [i.e. office-holder] which has the biggest interest in the successful restructuring of all companies concerned to officially submit his reorganisation plan in the proceedings concerning a group member, even if the liquidator in these proceedings is unwilling to cooperate or is opposed to the plan” (page 9 of the EC proposal).
The proposals are not intended to interfere with a strategy of pursuing a single set of insolvency proceedings over a highly integrated group of companies when it is determined that their COMI is in one jurisdiction.
Of course, this is all subject to negotiation and time… probably lots of time…
. UPDATE: On 15 April 2013, it was announced that the Government has decided to opt in to the proposal. This followed a unanimous response in favour of opting in by those who responded to the consultation. The written ministerial statement and the consultation responses can be accessed from: http://www.bis.gov.uk/insolvency/news/news-stories/2013/Apr/EUCallForEvidence
I don’t know about you, but I could do with a break from all these case law blog posts, so I thought I’d catch up with insolvency’s appearance in the Enterprise & Regulatory Reform Bill (“ERR Bill”).
In brief, the Bill provides for an individual to apply to an “adjudicator” for a bankruptcy order, rather than petitioning the court. Adjudicators will hold office within the Insolvency Service, but will not be a role for Official Receivers. Once a bankruptcy order has been made under this route, the bankruptcy will be administered in the same manner as currently; the Bill includes consequential amendments to the Act so that the making of a bankruptcy application has the same effect as the presentation of a petition (e.g. S341 will be amended so that the relevant times for preferences and transactions at undervalue will be counted from the date the bankruptcy application is made).
To obtain a bankruptcy order, the individual must:
• be unable to pay his/her debts at the date of the adjudicator’s determination;
• not have a bankruptcy petition pending; and
• have a COMI in England/Wales or his/her COMI is not in an EC Regulation-relevant state, but he/she is: domiciled in E/W or, within the past three years, has been ordinarily resident, or has had a place of residence, or has carried on business, in E/W (the Bill also proposes to make changes to S265 so that the conditions for creditors’ petitions will be exactly the same).
The debtor must pay a fee, which Ms Swinson MP stated is anticipated to comprise an administration fee of £525, as presently, and an application fee of £70 (as compared with the current court fee of £175).
If the adjudicator is satisfied that the above criteria are met, he “must” make the bankruptcy order; if he is not so satisfied, he must refuse to make an order. During the “determination period”, the adjudicator may ask for more information to come to a conclusion, but he must either make or refuse to make an order before the end of this period.
If the adjudicator has refused to make an order, the debtor may ask him to review the information, provided the debtor’s request is made before the end of the “prescribed period”. If the adjudicator then confirms the refusal, the debtor may appeal to court before the end of the prescribed period.
The Bill does not prescribe the periods – presumably this is a detail for supporting rules to follow if/when the Bill obtains Royal Assent.
The Bill also removes S279(2) from the Act, so that bankrupts will no longer be able to be discharged early upon the filing of the Official Receiver’s notice.
Is it controversial?
A significant part of the Insolvency Service’s proposals – that consideration of creditors’ bankruptcy petitions also be moved away from the courts – proved particularly controversial and therefore has not been taken forward, demonstrating to me that responding to consultations does work!
I do not believe that it is the core principle that concerns some – after all, a company can resolve to wind itself up outside of any court procedure so, arguably, why should an individual not be granted a similar power? – but it seems to me there remain some questions surrounding the proposed process.
Will the individual always understand his/her options?
Of course, it could be argued that the current debtor’s petition process does not safeguard against individuals taking the so-called last resort without adequately considering the other options. However, I do wonder whether the apparent steps to improve access to bankruptcy detract from the seriousness of the act with the result that it risks losing its “last resort” status.
In the House of Commons’ debate, Ms Swinson recognised that “for many, other debt remedies will continue to be more appropriate. We will therefore encourage debtors to take independent debt advice before making their bankruptcy applications. We will work with the Money Advice Service and providers in the debt advice sector to ensure that all debtors have the information that they need in order to make an informed decision.” Thus, there will be no requirement for individuals to have obtained advice before applying for their bankruptcy; they will simply be encouraged to do so.
In that respect, it seems to me that the Insolvency Service will be following Scotland’s lead where an individual may apply direct to the Accountant in Bankruptcy. My knowledge of Scotland’s process is scanty, but having looked on the AiB website it seems to me that an individual can download the application pack and post it off to the AiB and, provided the criteria are met (receiving independent advice seems to be a prerequisite only if the individual is taking the Certificate of Sequestration route), sequestration follows. The AiB publishes a Debt Advice and Information Package (which, personally, I feel is not a touch on the Insolvency Service’s “In Debt – Dealing with your creditors” publication) that the AiB’s Guidance for Trustees states must be provided to debtors before they sign up a Trust Deed, but this does not appear to be part of the debtor’s bankruptcy application process. Do I have this right? The application form has a warning that “the consequences of bankruptcy can be severe” – although according to the form they are limited to the effects on one’s credit rating, and possibly to employment prospects, bank accounts and utility supplies! – and a strong recommendation to seek advice with some contact details provided, but is that seen as sufficient safeguard against individuals taking the last resort when another option may be more appropriate? Coming from a world where so much diligence is expected of IPs before agreeing to help an individual propose an IVA, this seems to me somewhat lightweight. I appreciate, however, that this process has been operating in Scotland for many years, so I am sure that the Insolvency Service has access to evidence of its effectiveness in ensuring that people do not end up bankrupt when an alternative process would have been more appropriate.
Would the Post Office providing a service to bankruptcy applicants, similar to the passport application “check and send” service, further erode the image of bankruptcy as the last resort? 65% of consultation respondents said that they did not believe this was a “useful” service (perhaps the consultation should have asked if it was thought “appropriate”). However, Ms Swinson told the House of Commons: “The Post Office is looking at a wide range of ways in which it can increase its services and its revenue. Playing a wider role in identity checks, as was mentioned, is one of those… On the issues relating to advice, there are examples of more credit union facilities and a wider range of financial services being able to be accessed through post offices”.
Will access to alternatives be cut off?
Ss273 and 274 provide that, in the right circumstances, a debtor’s petition for his/her bankruptcy can result in an IVA. I understand that these provisions are very rarely used (although there are plenty of cases of IVAs being proposed after a debtor has been made bankrupt), but at least there is an opportunity for the court and debtor to consider this alternative to bankruptcy. There is no provision in the ERR Bill for the debtor to exit the bankruptcy application process with an IVA; for the debtor to withdraw from the process, if he/she decides at the last minute to propose an IVA; or for the adjudicator to suggest the possibility of an IVA – if the debtor meets the criteria, then the bankruptcy order is made.
Similarly, S274A provides for the court to stay proceedings on a debtor’s petition, if the court thinks that it would be in the debtor’s interests to apply for a Debt Relief Order. Again, there is no provision in the Bill for the new bankruptcy application process to result in a DRO.
Although the Insolvency Service’s consultation document suggested that bankruptcy applications might be referred to court where there is a dispute, there is no such provision in the ERR Bill. I wonder if an adjudicator’s referral to court was considered unnecessary in view of the fact that the new process now is limited to debtors’ applications. The Bill only provides for a referral to court in the event that an individual wishes to appeal the adjudicator’s confirmation of refusal to make a bankruptcy order; the adjudicator has only two choices on receipt of an application: make, or refuse to make, an order.
Ms Swinson was asked about the risk of “bankruptcy tourism”. She replied: “There is no evidence of widespread abuse, but the official receiver or a creditor can apply to court to annul the bankruptcy order if abuse takes place”. Evidence of widespread abuse there may not be, but it is a shame that the valuable gatekeeper role of the court (and others, e.g. the Official Receiver, who opposed Mr Benk’s bankruptcy petition (see https://insolvencyoracle.com/2012/09/07/two-case-summaries-comi-and-a-rejected-administration-order-application/)) will be removed and then it will be up to the OR or creditors to seek to unravel the bankruptcy after the event.
Ms Swinson was also asked about the skills of the adjudicator and she responded: “On the question about the adjudicator, the Insolvency Service is already looking at this for the debt relief orders that it administers and it will be able to do exactly the same in relation to the way in which adjudicators conduct their business. On the qualifications of adjudicators, they will be making an objective decision by reference to prescribed criteria and there will be a right of appeal for an applicant if the adjudicator refuses to make an order. Obviously, they will need appropriate qualifications and experience to function effectively, and the Secretary of State will make sure that people appointed to that role are appropriately qualified. They will be based within the Insolvency Service which, as the House knows, is an executive agency of BIS, and will already have extensive experience of administering an electronic administrative process similar to the debt relief order regime”. I imagine that it is unlikely that much, if any, “DRO tourism” exists given the low level of debt criterion for a DRO, so it is worrying that the new bankruptcy application process is being put on the same footing as a DRO application. Will Insolvency Service staff really be equipped to decide on complex COMI issues, a topic which already has taken up so much court time and effort?
Will paying by instalment work?
Although the majority of consultation respondents (possibly up to 61%) were opposed to the proposal that individuals may pay the fee by instalment, Ms Swinson informed the House of Commons that this would be part of the process, although it is not clear whether this is to apply only to the application fee, anticipated at £70, or also to the administration fee of £525.
The consultation document highlighted the difficulties of refunding instalment payments, but the summary of responses did not report how the two questions on this topic were answered nor is it known what the current plan is. Presumably, an application will not be considered as having been made until the fee has been paid in full. What is the individual supposed to do in the meantime? Will it really help individuals to trickle through payments over months but without any change in their status and with the risk that the monies will not be refunded if they decide to withdraw from the process?
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Of course, we live in a world of cost-saving efforts, so it is not surprising that this process, which in most cases is simply an administrative function, is considered a candidate for change (although some of the figures in the Impact Assessment, e.g. the estimated court time in dealing with a petition, seem a little over-cooked). As always, there are risks that a “streamlined” process introduces loop-holes or is not so well-equipped to deal with extraordinary circumstances. This does not make it wrong to make changes, but those risks should be understood and managed as best they can.
“Bank rules eased for bankrupts” goes the press coverage, but will the planned legislative change really open the way for bank accounts for bankrupts? Why does there need to be a change in the legislation? And how will it affect IPs? The government response to the consultation and the impact assessment (“IA”) – at: http://www.bis.gov.uk/insolvency/Consultations/BankAccount – provide some answers.
The Legislation – current and future
S307 of the Insolvency Act 1986 currently provides for a Trustee to claim after-acquired property, however he is not entitled to such property where a banker passes it on in good faith and without notice of the bankruptcy order. The flipside of this is that banks feel there is a risk that, if they are aware that an account-holder is an undischarged bankrupt and after-acquired property moves through the account, the Trustee could seek remedy from the bank. “Insolvency legislation as drafted leaves bankers unwilling to countenance the risk of claims from a trustee in bankruptcy. Although such a claim is unlikely, the likelihood of a court upholding the claim (if challenged) is unlikely and there is no evidence that such a claim has previously been brought, the perception of the risk is sufficient to discourage banks from transacting with undischarged bankrupts” (paragraph 68, IA).
Despite the existence of a perceived, rather than a real, risk, the conclusion of the consultation process is: change the Act. Although my first instinct was to feel that this was a disproportionate response, if it solves the problem, then it makes sense. After all, if (to my knowledge) there has never been a claim made, the change will have little impact on IPs or on creditors’ prospects, will it not?
The planned change will redraft S307 so that “liability would only transfer to a bank after receipt of notice from a trustee regarding the potential claim” (paragraph 70, IA). Although it is only a small issue – particularly given the few, if any, claims made on banks – it seems that this change would remove the ability to claim against a banker that acted in bad faith prior to receiving notice from the Trustee of a claim to after-acquired property. “Banking respondents generally felt that risks were minimal as banks have to work to codes of practice anyway” (paragraph 75, IA). Oh well, that’s alright then, isn’t it?!
Will the change really work?
Jo Swinson, Minister for Employment Relations and Consumer Affairs, seems pretty certain: “I am pleased with the positive response from the banking sector, in particular from those that offer basic bank accounts. They have said that a small change in insolvency legislation will prompt them to change their policy on access for people who have become bankrupt” (Ministerial Foreword, government response, my italics). The government response hints at some of the discussions leading to this conclusion: “It was not clear from initial responses whether more banks would change their policies as a result. Further consultation with the main banks has provided assurance that a change in insolvency law to prevent trustees from claiming against them in respect of after-acquired property will result in banks looking again at their policy”. Although agreement to look again at a policy is not agreement to change policy, it is evident that there is significant political pressure stacked against banks to make a change.
The argument for financial inclusion may well be the principal driver, but the IA identifies other pressures: recipients of the new Universal Credit scheme payments will need to have access to a bank account and new European Commission proposals include giving everyone the right to have a basic payment account with a bank.
Political pressure aside, will this change really prompt a change to bank policy?
Banking respondents explained that providing basic bank accounts is often done at a loss. Withdrawing access to cash machines for basic account users appears to me to be a recent step taken by some banks towards reducing such losses. In discussing the rationale for banks providing basic accounts, the IA states: “a significant benefit is that the customer is likely to remain with them for future years with only 12 months (the duration of bankruptcy) in a basic account and then free to operate whatever account suits them at which point the bank will be able to run a profitable account service” (paragraph 126, IA). However, I suspect that this benefit has become less realistic as switching accounts between banks has become easier.
I think it is particularly telling that one of the two banks that offered accounts to bankrupts recently withdrew the service. This bank responded to the consultation stating “that it already holds a disproportionate share of the basic bank account market and that, given that accounts were provided at a cost to them, it was an unsustainable situation” (paragraph 55, IA). I would not be surprised if the consultation prompted the bank to review its policy and consequently it questioned why it was in the clear minority in providing this service. It seems that those two banks’ responses came with a threat: “They considered that any increase in applications, or any change made which did not increase the number of providers, came with a risk that their policies would be changed, which would worsen the current position for undischarged bankrupts” (paragraph 108, IA).
Thus, clearly the banks have no real incentive for providing accounts to bankrupts – quite the opposite – and yet they put the focus on the S307 risk simply being too great. If that were truly the case, then what is stopping banks providing accounts to debtors in DROs? The CAB reported that some debtors find their accounts closed as a consequence of them entering into a DRO and many are refused new accounts because of the DRO… but the fact is that there is no S307 equivalent for DROs. The IA acknowledges that “it remains a commercial decision whether or not to offer a bank account, but this proposed amendment should ensure that bankrupts are on an equal footing with other account holders and applicants” (paragraph 13), but if DRO debtors are also having difficulties in keeping or getting new accounts, then will anything change for bankrupts? “Analysis of responses indicates that market behaviour is based on a range of factors and suggests that where bankrupt individuals are unable to open a bank account, it is mainly because of their credit record, and not specifically because of a risk of a claim by a trustee in relation to after-acquired property” (government response) – but their credit record will not change with the change of S307, so why should that result in improved access to accounts for bankrupts?
It seems to me that, if it were not for the political pressure, it would be highly unlikely that any change to S307 would improve bankrupts’ access to bank accounts and, whilst it seems a little disingenuous to suggest that S307 is the overriding reason for restricting access, it is difficult to criticise banks for their risk-averse stance and the best approach must be to remove this alleged barrier and then watch for the banks’ reaction.
When will the change be made?
Ah, the all-purpose “when Parliamentary time allows”! Of course, this is primary legislation and opportunities to change that do not come around very often at all. I recall many changes to the Insolvency Act proposed by the Insolvency Service over the past few years and as far as I am aware remain on the cards; they must form quite a stack by now. It’s a shame that this has just missed the boat of the Enterprise and Regulatory Reform Bill – the repeal of Insolvency Act’s provision for early discharge from bankruptcy managed to slip into the Bill, but then of course that is counted as an ‘Out’ in regulatory reform terms, whereas this measure is an ‘In’… and with effect from January 2013, the government is planning to operate a ‘One-in Two-out’ process (http://news.bis.gov.uk/Press-Releases/-One-in-two-out-Government-to-go-further-and-faster-to-reduce-burdens-on-business-and-help-Britain-compete-in-the-global-race-6838c.aspx), which will make it even trickier to get the S307 change through.
However, let’s hope that this proposal does not sit of the shelf too long, because in the meantime bankrupts are left with only one bank (which seems twitchy about being the sole provider) and a few expensive alternatives.
It seems to me that, at present, one strength of the Trust Deed is its flexibility: with the assistance of an IP, a debtor can consider what he/she can afford and what he/she is prepared to put forward to creditors, effectively in exchange for avoiding bankruptcy. I appreciate that, to some extent, Trust Deeds – and creditors’/creditor agents’ reviewing of them – have become standardised so that in effect we now have a “consumer” Trust Deed, which anticipates a pretty standard level of contribution over a standard three-year period, delivering a fairly standard dividend to creditors. However, I think it should be remembered that this is not what the legislation (currently) provides and the beauty of it is that debtors can formulate a Trust Deed to fit their particular circumstances. Not all debtors fit the “standard consumer” model.
However, the SG is now looking to “standardise the period over which an individual makes the assessed contribution in bankruptcy and protected trust deeds, to be equivalent to a minimum of 48 monthly payments”. The response also states: “There is a strong case for setting a minimum dividend at which Trust Deeds are eligible to become protected. We recognise that there are differing views among interested parties and believe that there is a legitimate debate to be had on the level of any minimum dividend. Our view is that the level would be most appropriately set between/around 30-50p in the £. We will engage constructively with interested groups over the coming weeks to agree on an appropriate level.”
Why take a flexible tool and impose such restrictions on its use? And how do these conclusions stack up with the consultation responses?
One of the conclusions described in the report on the consultation responses was: “There should not be a fixed term for completion of a protected trust deed” (page 5) – 71 respondees were opposed to a fixed term and only 29 were in favour. Perhaps the argument is that, in setting a minimum of 48 monthly payments, the SG is not setting a fixed term!
What exactly is the “strong case” for setting a minimum dividend? The report on consultation responses observed that “in recent years some creditors have taken a greater interest in PTDs and have actively rejected the protection of trust deeds which propose a dividend of less than 10p in the £” (page 31) – so that means that the Trust Deed framework is working, doesn’t it? In introducing a minimum dividend at which Trust Deeds become eligible for protection, isn’t the SG taking the power away from creditors to decide what they are prepared to accept? And how does evidence of creditors rejecting Trust Deeds anticipating 10p in the £ lead to a conclusion that the minimum dividend should be 30-50p?
In my mind, it is simply not logical to put a minimum dividend on a Trust Deed. The dividend level is simply a measure of net assets/income over total liabilities; it is not a measure of what a debtor can afford to pay and neither is it a reflection of how appropriate the proposal is. Take two people: one can raise net assets/income of £12,000 and has liabilities totalling £40,000; the other can raise net assets/income of £13,000 and has liabilities totalling £45,000. Where is the logic in allowing the first person to acquire a Protected Trust Deed, as the dividend will be 30p in the £, but denying the second, as the dividend would be 29p in the £?
What is wrong with a Trust Deed that offers a return of 29p in the £, if the likely outcome of bankruptcy is no improvement? I remember an IP telling me that she had arranged an Individual Voluntary Arrangement for a 1990s Lloyd’s Names individual, which proposed a return of only a fraction of 1p in the £, but it still represented the best deal for creditors and it involved some reasonable assets/income. Surely that is the key of voluntary processes, such as IVAs and Trust Deeds – they can offer a better deal for both debtor and creditors, when compared with the alternative of bankruptcy. They should not be restricted by the need to meet a minimum dividend, which fails to recognise the individual circumstances of the debtor.
So will the introduction of a minimum dividend lead to many more people choosing bankruptcy? I wonder. It seems to me that many people will do almost anything to avoid bankruptcy, even when from a purely financial perspective it is obviously the best option for them. If they are prohibited from seeking a PTD, I wonder whether they would rather take the option of a long-term DAS or informal debt management plan or simply struggle on in no man’s land. In introducing a minimum dividend for PTDs, it seems to me that the misery for thousands will be extended for many years.
Protected Trust Deed “Guidance”
The SG appears to be seeking to introduce a further fundamental change to the PTD process, but via “Guidance”: “New Protected Trust Deed Guidance will also be introduced, to encourage best practice to be adopted in all cases. The Guidance will include a revised structure for trustee fees consisting of an up-front fee for setting up the trust deed and a percentage fee based on the amount of funds ingathered from the debtor’s estate.”
I believe that it is correct to avoid prescribing the basis on which Trustees should be paid via legislation, but I do wonder how the SG/AiB expects its Guidance will persuade IPs to re-structure fees to be on this fixed sum and percentage basis. What pressure will it bring to bear on IPs who do not follow this approach that it calls “best practice”? Will the AiB, as is stated in the paragraph preceding this, “take a more proactive role, where necessary compelling trustees to act by using their powers of direction”? But the Guidance is just guidance, isn’t it?
Creditor applications for Bankruptcy
The SG response states that the Bankruptcy Bill will look to develop “the bankruptcy process to facilitate the ability for non-contentious creditor applications to come to AiB rather than a petition to the court for an individual’s bankruptcy”. This plan appears most odd to me, particularly in view of the report on the consultation responses.
In the report’s summary, one of the conclusions of the consultation responses was: “creditors should continue to petition the court for an individual’s bankruptcy” (page 6), which appears unequivocal to me. The response statistics also bear out this conclusion – there were more responses opposed to the proposal that creditor applications be submitted to the AiB than there were responses in favour and this remained the case even when the proposal was restricted to “non-contentious” creditor applications. So what is the argument for proceeding with this plan?
Fortunately, Westminster has decided not to take forward the idea that creditor petitions for bankruptcy and company windings-up in England might avoid the courts. It took that decision having consulted on the proposal and having received the clear message back that the majority were opposed. It is strange that Holyrood has decided to take the opposite view on having received a similar reaction to a similar consultation question.
Of course, I have only commented on the plans that appear to me to be most significantly flawed – there are many more planned changes, including some that make perfect sense and are welcome. However, some leave me asking the question: why? What ills are these changes seeking to remedy? Are they going to be an improvement over what we already have, which seems to me to work reasonably well on the whole? And what kind of world will we live in when it all becomes a reality?
Insolvency Oracle 