Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Category Archives: Consultations


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Government Issue Response to Bankruptcy Petition Reform Consultation

“The Government has decided to take forward changes just to the process for dealing with debtor bankruptcy applications and has today included the measure as a proposed new clause in the Enterprise and Regulatory Reform Bill. Instead of applying to the court for a bankruptcy order, individuals will instead make a bankruptcy application to an Adjudicator, which would be a new office based  within the Insolvency Service.” (Jo Swinson MP, 9 October 2012)

The full response is available at: http://www.bis.gov.uk/insolvency/Consultations/petition%20reform.


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The AiB/Scottish Government’s Report on Responses to the Bankruptcy Law Reform Consultation

Summary

The AiB/SG’s consultation, which closed on 18 May 2012, raised questions on every aspect of Scottish personal insolvency – DAS, PTDs, SEQs, LILAs, and even suggested introducing a whole host of other “products” – as well as exploring the AiB’s current and prospective roles in administering and supervising insolvencies.  The report on the consultation responses was published on 28 August 2012 and can be accessed at: http://www.aib.gov.uk/news/releases/2012/08/bankruptcy-law-reform-consultation-summary-responses

The summary of the opening Summary alone lists 65 conclusions (pages 5 to 7), but I have attempted to list the most significant below (my comments added in parenthesis).  I should mention that I have only ever come across Scottish insolvency in my role at the IPA, so, although I have been closely involved with Scottish IPs in drafting consultation responses (although not for this one) and I have reviewed Scottish cases as part of the monitoring function, I have no front-line experience of administering them.

  • Money advice to be made compulsory prior to accessing any form of statutory debt relief, although not to be provided by the AiB
  • Support to have one Common Financial Tool, preferably a Scottish-specific one, against which all debtors will be measured, irrespective of the insolvency process being contemplated
  • Allow assessed contributions to be deducted directly from an individual’s wages
  • “Support to introduce a moratorium period of 6 weeks in statutory debt relief products, these to be displayed in a public register” (this seems to be directed at bankruptcy, so that the debtor can intimate an intention to apply, as is currently available in DAS)
  • “DAS should not be the default option where an individual can pay their debts in 8 years, although there was support for a shorter period” (it seems the majority who responded to the question, “how long should it be?”, answered 6 years.  However, the table suggests that “majority” is only 12 out of a total of 129; 89 answered “N/A”, so presumably many of those would not wish to see any defined timescale where DAS is the default option – seemingly this was not picked up by the AiB.)
  • “Composition in DAS should be available, after the programme has run for 12 years and 70% of the debt has been paid” (although not in the summary, the report indicates that a strong majority would like creditors to have to consent      to the composition, with some suggestion being that this is sought after DAS has run successfully for a number of years)
  • Support for a minimum debt level of £10,000 for entry into a PTD
  • Support for a minimum dividend in PTDs (see my comments below)
  • There should not be a fixed term for completion of a PTD
  • The current process of deemed consent and current thresholds in PTDs should continue
  • “Support for the removal of Apparent Insolvency as criteria in debtor applications” (the report adds: “if mandatory advice is adopted as a precursor to bankruptcy”)
  • The minimum debt level for debtor’s bankruptcy should increase to £3,000
  • Support for a “No Income” product for individuals on state benefits who have up to £10,000 of debt and up to £2,000 of assets
  • Other products, e.g. “Low Income Product”, “High Value Product”, not required
  • Support for a new Business DAS for sole traders and partnerships
  • Support for discharge to be linked to a bankrupt individual’s co-operation with their trustee
  • Where an individual cannot be located their discharge should be deferred indefinitely
  • AiB should have the power to defer discharge rather than refer the case to a sheriff
  • Support for debts that were incurred within 12 weeks of a debtor application or the granting of a trust deed should be excluded from discharge
  • Child maintenance arrears and credit union debts should continue to be discharged in bankruptcy and PTDs
  • Creditors should have to submit a claim within 120 days (the report adds “… of notification of an individual’s bankruptcy”, although the consultation question suggested this statutory timescale for all processes and this had strong support from respondents)
  • Support for the recall of bankruptcy process to be clarified and that the final interlocutor should be withheld until all funds have been distributed
  • The current prescribed rate of interest should be retained and all post-procedure interest and charges be frozen
  • Support for the debtor’s discharge to be linked to the date of award
  • Payment holidays of up to 6 months should be available in all statutory debt relief products and the period of time added onto the length of the product before discharge is granted
  • AiB should have the power to make orders for some bankruptcy processes and a separate independent panel should be used to review complex or disputed decisions
  • AiB should not have a more proactive role in supervising debt relief products
  • An AiB panel should not determine an appropriate course of action where a trustee has not followed an AiB direction (see my comments below)
  • Support for a Memorandum of Understanding between the UK Insolvency Service and RPBs to be redrafted to allow information on regulatory activity related to Scottish cases to be issued to AiB
  • “There should be an office of the Official Receiver in Scotland and this role should be carried out by AiB” (i.e. to act as liquidator of last resort)

The timescales for changes are, understandably, vague, given the vast range of proposals that will affect primary and secondary legislation as well as AiB Guidance Notes and the development of other projects, such as the proposed Scottish common financial tool.  Whilst the report states that, after a series of stakeholder workshops, it is hoped that the SG will be in a more informed position to issue an official response, the AiB’s website states that the SG’s response is expected to be published in October 2012.

My thoughts on the report – the methodology

What struck me was the AiB’s methodology in considering, not only the numbers of responses by individuals, but also those by organisations only.  The cynic in me senses that the AiB may have been somewhat selective in this consideration.

For example, Q15.1b asks: “If the AiB should continue to act as trustee, should she act only as trustee of last resort?” (page 87).  49 individuals answered “yes” and 44 answered “no”, but when responses only from organisations are considered, this becomes 29 “yes” against 39 “no”.  The summary to this section states: “Whilst the majority of respondents believed that AiB should continue to act as trustee of last resort, when the figure for organisations only was examined, this showed that AiB should continue to act as trustee in all cases where appointed” and this conclusion seems to have drifted into the opening summary.  However, on other occasions, an “organisations only” majority does not seem to have influenced the outcome.  For example, Q15.4 asks: “Where the AiB makes a direction which is not adhered to by the trustee, should an AiB panel decide on an appropriate course of action?” (page 89).  Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions (albeit that the comment from Nolans Solicitors suggests that some “no” respondents may feel that someone other than an AiB panel, e.g. the IP’s regulator, should decide – something again not picked up by the AiB).

Perhaps I should not be too selective myself however, as sometimes this selective process seems to lead to positive outcomes.  For example, Q15.3 asks: “Should AiB have a more proactive role in the supervision of all debt relief products?” (page 89).  Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions.

Given that IPs are perhaps more accustomed to writing as individuals than the other categories of respondents, it is not surprising that this selective approach, putting greater emphasis on “organisations only” responses, sometimes swings the outcome away from what I suspect are the IPs’ preferences.  20 of the 37 IP responses were from individuals, whereas all the creditor responses were from organisations and only 7 of the 27 advice sector responses were from individuals (and 13 in the “other” category).  There may be some merit in giving less weight to some individual responses (which some may be inclined to put in the “green ink brigade” category), but given that the vast majority of IPs operate in an “organisation” and many manage that organisation, this broad-brush distinction seems grossly unfair to me.

My thoughts on the report – the detail

Although there are many quoted responses that are extremely sensible suggestions, of which I hope the AiB will take notice and incorporate in future plans, some response quotes raised my hackles.  For example, there seems to be a perception that, if a PTD only produces a 50% dividend, this means that a large proportion (would some incorrectly assume 50%?) of the funds ingathered fall into the hands of the IP (see, for example, Grampian Credit Union’s comment on page 32).  Putting aside all the non-IP costs that need to be discharged, the percentage dividend of course bears no resemblance to the amount of the funds paid as a dividend.  For example, if £10,000 is distributed to creditors with claims of £200,000, this is only a 5% dividend, but if the same sum is distributed to creditors with claims of £20,000, it is a 50% dividend (perhaps a comparison of extremes, but I’m sure you get the point).  Thus it is nonsensical to assume that a PTD paying out a low dividend is automatically disadvantageous to creditors; surely the crux of the matter is: would the outcome be any better (not forgetting the impacts on the debtor) via any other process?  It seems to me that the only real way of exploring whether PTDs can become more beneficial to creditors is to consider carefully whether the costs in the process can be reduced, although the outcome of the AiB/SG’s earlier consultation on “Protected Trust Deed – Improving the Process” suggests to me that the process will become more costly with more reporting and other burdens laid at the IP’s door.

It is therefore extremely frustrating that the outcome of the consultation, that “the majority of respondents either suggested 10p in the pound or that no minimum amount should be specified” (page 33), has been interpreted by the AiB as “support for a minimum dividend on PTDs” (summary on page 5).

I was surprised at the majority (albeit not a large one) supporting the idea that a debtor’s discharge from bankruptcy be deferred indefinitely where he/she cannot be located.  I would concur with ICAS’ comment (page 63) that “just because an individual cannot be located does not indicate that he would not co-operate. Consideration has to be given to whether the Trustee has been able to deal with the estate effectively for the benefit of the creditors. Each case has to be considered on its own merits”.  Hopefully, reasonableness will prevail if/when this provision makes it to statute.

I also find the idea that debts incurred prior to bankruptcy (the apparent preferred period being 12 weeks) should be excluded from discharge a novel one, particularly in comparison with E&W bankruptcy legislation (putting aside transactions such as preferences).  I will be interested to see how this is described in draft legislation, as the report suggests there is support for the exclusion of only some debts, such as those relating to non-essential items or where the debtor had knowledge that they would probably not be paid – this may generate some work for the lawyers and courts, I would suggest.

Speaking from my perspective of having worked at an RPB, I struggle with the arguments the AiB puts forward for engaging in an information gateway with the RPBs and the UK Insolvency Service.  The AiB seems to want to know what disciplinary actions the RPB may be in the process of taking against IPs.  No information gateway will assist the AiB to learn of actions-in-process (and even if she knew, what would this indicate about the IP’s conduct until the issue had been decided?), but only of settled sanctions, which in most cases are in the public domain (and if any are not, it is very likely that the Insolvency Service’s/JIC’s work in ensuring consistency of the publicity of disciplinary outcomes will bring these into line).  It is certainly the case that currently the AiB’s and the RPBs’ activities in supervising/regulating IPs occur in isolation from each other – and I believe that it is unhelpful when the AiB receives and investigates complaints (with no reference to the RPB) that are more suited to investigation by the IP’s licensing/authorising body – but in my mind that is an inevitable outcome of the seeming overlap of responsibilities of the different bodies.

There are far too many details in the report to cover here and it is perhaps not sensible to spend too much energy in contemplating the proposed changes at this moment.  I am sure that many of you, like me, will be interested in seeing how the results of this consultation are reflected in future stages.


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BIS Measures to Enhance Consumer Protection – summer consultations

Insolvency-specific case law has been quiet over the last couple of weeks, so I’ve taken a closer look at some summer publications that touch on insolvency matters.

I will start by apologising for the fact that likely this post will create more confusion than clarity!

Over the summer, BIS issued a consultation (plus impact assessments) on the Consumer Rights Directive, “Enhancing consumer confidence by modernising consumer law” (http://www.bis.gov.uk/Consultations/consultation-implementation-consumer-rights-directive), closing date 1 November 2012, and a standalone impact assessment, “Enhanced suspension of consumer credit licences” (http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/e/12-987-enhanced-suspension-of-consumer-credit-licences-impact), which explores the “preferred option” of introducing a change via the Financial Services Bill plus an OFT consultation in September 2012 on draft guidance.  I read these documents whilst keeping in mind the question, what impact, if any, might these proposals have on IPs?  I have to say that I discovered that this was a tricky question to answer given the plethora of existing regulations!  There is a further BIS consultation, “Enhancing consumer confidence by clarifying consumer law” (http://www.bis.gov.uk/Consultations/consultation-rationalising-modernising-consumer-law?cat=open), closing date 5 October 2012.  I have not reviewed this one, although it does encompass proposed changes to the Unfair Terms in Consumer Contracts Regulations 1999, so there may be some impact for IPs – and presumably, if there is, the OFT will revise its debt management guidance accordingly.

Consumer Rights Directive

The Consumer Rights Directive (“CRD”) was agreed by EU Member States in October 2011 and this BIS consultation explains how it is proposed the Directive will be reflected in UK statute.  The focus of the Directive includes on transparency of information, particularly pre-contractual information, cancellation rights, and express consents for payments.

Readers will be aware that the OFT has issued guidance on how it expects consumer credit licence-holders who provide debt advice and debt management services (which, by the OFT’s definition, includes those who advise and assist debtors with IVAs and Trust Deeds) to demonstrate their fitness to hold a licence.  The OFT’s debt management (and credit repair services) guidance (“DMG” http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft366rev.pdf), thus describes expected standards in relation to some areas that are likely to be impacted by the implementation of the CRD.

However, the CRD does not apply to “financial services”, which are defined as “any service of a banking, credit, insurance, personal pension, investment or payment nature” (Art 2(12)), and BIS’ CRD consultation states that “The Financial Services (Distance Marketing) Regulations 2004 will remain in force, offering consumer protection for financial services sold at a distance. There are also additional protections through FSA rules, under the Financial Services and Markets Act 2000, offering protection for certain off-premises sales as well as on-premises sales” (footnote on page 28).

But are the provision of IVAs and Trust Deeds caught by this “financial services” exemption?  To my mind, helping debtors avail themselves of statutory insolvency processes does not fit exactly the CRD definition (which is the same as the definition in the Financial Services (Distance Marketing) Regulations 2004).  However the OFT DMG states: “In the OFT’s view, a licensee who provides debt management services or credit information services will be providing financial services and those that do so at a distance should comply with the Financial Services (Distance Marketing) Regulations 2004” (paragraph B.8).  It is noteworthy that the OFT’s previous DMG (issued September 2008) referred to the Consumer Protection (Distance Selling) Regulations 2000 as setting down the requirements for providers of debt management services, but this does not appear in the current DMG.  Presumably therefore, the OFT had reconsidered its views on which regulations apply sometime before the current DMG was issued in March 2012.

If the OFT’s (current) view is correct, then it would seem to me that very little UK statute arising from the CRD will impact IPs – it is anticipated that the Consumer Protection from Unfair Trading Regulations 2008 and the Provision of Services Regulations 2009 will continue in force – and thus we can rest easy that the outcome of this consultation will not alter IPs’ pre-Nominee/Trustee engagement with debtors (although the Cancellation of Contracts made in a Consumer’s Home or Place of Work etc. Regulations 2008 and the Consumer Protection (Distance Selling) Regulations 2000 will be revoked and replaced).  But can we..?

Then again, should we be concerned even if the CRD does stray into IPs’ work?  In my view, much of the proposals seem common-sense, concerning the provision of thorough information to consumers about the service to be provided, charges to be made, cancellation rights, etc.  Thus, implementation of the CRD may require IPs to revisit, and probably lengthen, their engagement letters and terms and conditions – and some provisions may prove cumbersome to translate in relation to the provision of IVAs or Trust Deeds – although much of the principles of transparency, fairness etc., seem to be covered already by the OFT DMG and related regulations.

In researching this matter, I got to the bottom of one significant change in the OFT DMGs that arose due to the OFT’s shift away from the Consumer Protection (Distance Selling) Regulations 2000 to the Financial Services (Distance Marketing) Regulations 2004.  The Distance Selling Regs 2000 require only a 7 working day cooling-off period, but the Financial Services Regs 2004 require 14 calendar days (and the on-consumer-site Regs require 7 calendar days).  Thankfully (in the interests of consistency at least), the CRD consultation proposes to change the cooling-off period for both off- and on-site sales to 14 calendar days, which would bring it in line with the selling of financial services.

Enhanced Suspension of Consumer Credit Licences

At present, when the OFT considers a consumer credit licence-holder is unfit, the licence remains in effect until all rights of appeal have been exhausted.  The appeal process can take up to two years, during which time a licence-holder may continue to trade uninterrupted.  Although it is expected that the new Financial Conduct Authority will take over credit regulation from the OFT in April 2014, the BIS select committee and others have called for more immediate changes.  Thus, it is proposed that with effect from spring 2013 the OFT will have to power to suspend immediately a business’ consumer credit licence where the OFT considers that there is a risk of serious consumer detriment.

Although this change is clearly welcome given the worrying companies that pop up from time to time, I have been aware of “minded to revoke” notices issued by the OFT in the past on businesses whose practices, in my mind, should not be fatal (they are either easily rectified or in fact defensible).  It seems to me that the OFT has only really been aware of IVAs and Trust Deeds in the past four years or so and its knowledge still seems somewhat patchy (perhaps not helped by the regular rotation of staff to different positions in the department).  The Impact Assessment states that the new power would only be used against businesses that cause significant and ongoing harm to consumers and it defines consumer detriment as including “being sold inappropriate or more expensive credit products due to poor or misleading customer advice, provision of incomplete or incorrect customer information, harassment of customers, delays in providing refunds, deducting additional fees without informing the customer etc.” (paragraph 33).

Although I take some comfort in the Impact Assessment’s statement that “the OFT is in close contact with firms under investigation and the firms have the opportunity to explain their behaviour etc and alter it if required” (paragraph 32), and thus perhaps the “minded to revoke” process or something similar may still be used to persuade firms to fix deficiencies or to convince the OFT that in fact they are compliant, clearly the impact on a business of an immediate licence suspension would be enormous.  Therefore, I hope that the OFT remains – and perhaps becomes more – open to engagement with licence-holders who are endeavouring to be compliant, some of whom may have suffered temporary lapses in performance or who may hold a different opinion, for example, on what constitutes correct or complete information.