Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Revised R3 IVA Standard Terms: Improving with Age..?

Finally, 10 months after the 2016 Rules came into force, R3 issued 2016 Rules-adapted revised Standard Terms for IVAs. In this blog, I summarise the key changes.

Having worked on the R3 group (an inevitable consequence of saying: the work must get done!), it is difficult for me to be critical of the result. But drafting-by-committee always involves some compromises (and soooo much time!), so don’t be surprised if I slip in the odd gripe below.

The revised IVA Terms are available from the R3 website but only to logged-in R3 members, which seems odd considering the drive to go paperless for insolvency proceedings. R3’s conditions of use state that R3 members may “use” the terms, so presumably as the 2016 Rules and the Terms themselves allow delivery by website, non-members should be able to access them from R3 members’ websites over time.

While I’m on the subject of websites…

 

Website Use

The new Terms provide that Rs1.49 to 1.51 shall apply. Did the Terms need to include this? Can’t Supervisors (and Nominees) already use the 2016 Rules to deliver documents by website?

Yes, these 2016 Rules do already work for IVAs… but only for documents required under the Act or the Rules (R1.36(1)). Therefore, whilst we’ve been able to send relevant notices to wrap in website-delivery for statutory documents including the Nominee’s notice of the decision procedure to approve the IVA, progress reports and implementation/termination notices, technically the 2016 Rules do not enable website-delivery of items arising only by reason of the IVA Proposal and Terms. In other words, the methods of delivery of proposed variation decisions and outcomes are determined by the IVA Terms, not by the 2016 Rules.

The previous R3 IVA terms allowed the 2009 Rules’ process for website-delivery, i.e. by posting out a one-pager each time that something new was uploaded. The revised Terms now also allow the R1.50 process so that the despatching of one notice will enable all future documents to be uploaded onto the website with no further notice. It is doubtful that this will help when seeking a variation, but it may help with the next – new – requirement…

 

Reporting Outcomes

Where a meeting was held during the period of an IVA, the old terms required a list of creditors voting to be sent with “the chairman’s report to Creditors, the Debtor and the Court”. This was a bit odd, because firstly of course there was no requirement to send any report on meetings during an IVA to the Court. But secondly, what was “the chairman’s report”? The rules defined a chairman’s report arising from the meeting to vote on the IVA Proposal, but there were no rules or terms to define such a report for meetings after approval. Another oddity of the old terms was that there was no requirement to report to creditors on the outcome of a postal resolution.

The revised Terms plug these gaps… although not in a low-cost way. Term 69 follows the 2016 Rules’ model of “records of decisions”, which for meetings are in the form of minutes and which show how creditors voted on the decisions. Separately, Term 69 requires a list of creditors who participated and the amounts of their claims. The revised Terms require the “record of decision” to be sent to the creditors and the debtor.

This seems a little onerous and a departure from the 2016 Rules as regards decisions taken during the course of an insolvency process, where rarely is a post-decision circulation required. Couldn’t the decision outcome be delivered by a simple one-liner? Is a copy of the full record of decision/minutes really necessary? Well, it would appear so if creditors are able to exercise their rights under the Terms to appeal a decision (Term 65) or to “complain” about being excluded from a virtual meeting, which is a new right transferred in from the 2016 Rules (Term 62(7)).

As mentioned above, though, at least Supervisors may now use websites to deliver such documents easily… and it has since been pointed out to me that there is no timescale on this delivery.

 

Decision Procedures

I joined the working group thinking that we had an opportunity to take the good bits from the 2016 Rules and leave the bad. This didn’t mean that I was keen on making life easy for IPs while running rough-shod over measures designed to improve matters for the debtors and creditors. It’s just that I think we all know what works in the 2016 Rules, what balances well the objectives of reducing costs and engaging stakeholders, so why could we not learn from our early experiences of the 2016 Rules and design new Terms to improve on them?

For example, if an IP feels that a physical meeting would be the best forum in a particular case, why can’t s/he decide to summon one? Even the Insolvency Service has suggested that for other insolvency proceedings IPs might ring around creditors before notices are sent and encourage them to ask for a physical meeting. So why not design the Terms so that we can avoid this charade?

Regrettably, I was outvoted on this point as well as some other 2016 Rules that found their way into the revised Terms.

The revised Terms incorporate the following now-familiar Rules:

  • A physical meeting may only be convened if 10/10/10 creditors ask for one (Term 61(2) and (3))
  • The 2016 Rules on the creditors’ power to requisition a decision (i.e. out of the blue) generally have been replicated (Term 61(4) and 63).
  • A notice of decision procedure compliant as far as applicable with R15.8 must be issued (Term 62(2)) – note: this must be sent even if it is a vote-by-correspondence (I have seen a number of IPs omit this notice in other insolvency proceedings)
  • Other 2016 Rules on the decision procedures should be followed, e.g. the timescale for convening a physical meeting after receiving requests (Term 62(2))
  • Once a vote has been cast in a non-meeting procedure, it cannot be changed (Term 64(4))
  • As mentioned above, the 2016 Rules on excluded persons apply (Term 62(7))

But on the other hand, some departures from the 2016 Rules have been made:

  • The deemed consent process has not been transported into the Terms – it was felt that, as an IVA is effectively an agreement between the debtor and their creditors, silence-means-approval was an inappropriate way to make changes to it
  • Meetings must still be held between 10am and 4pm on a business day (Term 62(4)) (personally, I thought that IPs could be trusted to convene meetings at a sensible time such that this prescription was unnecessary – oh well)

But I guess we should be grateful for small mercies: at least we don’t need to invite creditors to form a committee every time!

 

The Debtor’s Involvement

Some changes in the Terms regarding the level of involvement of the debtor in the process may come as a surprise:

  • Notice of a meeting is no longer required to be sent to the debtor (unlike in bankruptcy – R15.14(2)/(3))
  • Debtors may request a decision (Term 61(6)), but the Supervisor need only convene a decision procedure if s/he considers it is a reasonable request
  • The Terms no longer allow the debtor to inspect proofs (Term 36)

Despite these changes, of course it must be remembered that the debtor’s participation in the IVA process, which is intended to achieve a fair outcome for all, is fundamental and crucial.

 

The Trust Clause

We all know about the Green v Wright fun-and-games, which decided that, notwithstanding that a debtor had met all their obligations under the IVA that had concluded successfully, when an asset emerged later that would have been caught by the IVA had it been known about at the time, such an asset was caught by the enduring trust.

Is this practical for cases generally? For example, how do you revive cases long-ago completed? What if you’ve destroyed the file? What if the former Supervisor has left the firm? What if they are no longer licensed?

Is this fair for cases generally? It seems fair in a bankruptcy scenario, which was how the judge came to the decision, but in an IVA where an agreement is reached with creditors (provided of course that the debtor has been entirely open and honest in formulating the Proposal), the debtor meets their side of the bargain and the creditors get what they were expecting, shouldn’t that be the end of it?

As R3’s covering note explained, on consulting with major creditor groups, it seemed that they generally were comfortable with such finality. On the whole, avoiding Green v Wright trusts capturing unknown unknowns seemed like a popular idea.

The new Terms introduce the Trust Realisation Period. This period continues after the expiry, full implementation or termination of the IVA, if there remain (known) assets included in the IVA Proposal that remain to be realised and distributed. Therefore, in theory if unknown assets emerge before the Trust Realisation Period ends, they could be caught by the trust. However, the Terms are designed so that, once the Trust Realisation Period ends, the trusts end, so any unknown assets emerging after this point should not be caught by a trust.

The new Terms also change the position on the debtor’s bankruptcy. In this case, any assets already got in or realised by the Supervisor remain for distribution to the IVA creditors, but any other assets that were caught by the IVA are freed from the trust, so as not to disturb the vesting of the bankruptcy estate in the Trustee in Bankruptcy.

 

Other Good Bits

The new Terms improve on some other areas that previously didn’t quite work:

  • Previously, a meeting could be adjourned again and again (as long as there were no more than 21 days between adjournments). Now, adjournments have a long-stop date of 14 days from the original meeting date (Term 68(3))
  • The process for a Joint Supervisor to resign has been simplified: no longer does there need to be a meeting to seek creditors’ approval of the resignation, but now all that is needed is for the Joint Supervisor’s resignation to be notified to creditors in the next progress report (Term 18(3))
  • Debts of £1,000 or less may be admitted for a dividend without the delivery of a proof (Term 39(4)). The new Terms do not prescribe how Supervisors should deliver this message to such creditors, but it would seem sensible to me for the Supervisor to follow something akin to the 2016 Rules’ process of notifying such creditors when issuing the Notice of Intended Dividend so that these creditors know how much their claim is going to be admitted for absent a proof and the timescale for submitting a proof for a different amount, if they so wish. As in the 2016 Rules, this Term does not mean that Supervisors must admit small debts – they remain in full control of whether to exercise this power.

 

On the whole, I think the new Terms are an improvement, especially now that the 2016 Rules’ Decision Procedures have bedded in generally. Of course, the odd flaw or ambiguity will always take us by surprise. But hopefully Version 4 will serve us well for a few years yet.

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The Regulators present a unified front on fees

 

In an unprecedented step, the IPA and the ICAEW have issued largely consistent articles on fees, SIP9 and reporting. I think some of the points are well worth repeating, not only because in the past few months, I’ve seen more IPs get into a fix over fees than anything else, the new rules having simply compounded the complexities, but also because the articles contain some important new messages.

In this post, I explore how you can make your fee proposals bullet-proof:

  • What pre-administration work is an allowable expense?
  • What pre-administration costs detail is often missing?
  • What pre-CVL work is allowable as an expense?
  • What Rules/SIP9 detail is commonly missing from fee proposals?
  • How do the monitors view Rules/SIP9 omissions?
  • What problems can arise when using percentage or mixed basis fees?

The articles can be found at:

The effort seems to have originated from a well-received presentation at the autumn’s R3 SPG Forum, given by the ICAEW’s Manager, Alison Morgan (nee Timperley) and the IPA’s Senior Monitoring Manager, Shelley Bullman.

As the ICAEW and the IPA monitor c.90% of all appointment-taking IPs, I think this is a fantastic demonstration of how the RPBs can get out to us useful guidance. Of course, such articles do not have the regulatory clout of SIPs or statute (see below). However, I believe it is an essential part of the RPBs’ role to reach out to members in this way in written form. Although roadshow presentations are valuable, they can only reach the ears of a proportion of those in need and the messages soon settle into a foggy memory (if you’re lucky!).

  • Do the articles represent the RPBs’ views?

The IPA article ends with a disclaimer that “IPA staff responses” cannot fetter the determinations of the IPA’s committees and the ICAEW article is clearly authored by Alison Morgan, rather than being something that can strictly be relied upon as representing the ICAEW’s views (for the sake of simplicity, I have referred throughout to the articles as written by “the monitors”).

That’s a shame, but I know only so well how extraordinarily troublesome it is to push anything through the impenetrable doors of an RPB – that’s why SIPs seem to emerge so often long after the horse has bolted… and I suspect why we are still waiting for an insolvency appendix to the new CCAB MLR guidance. However, at a time when the Insolvency Service’s mind is beginning to contemplate again the question of a single regulator, issuing prompt and authoritative guidance serves the RPBs’ purposes, not only ours.

 

Pre-Administration Costs

Over the past few years, I’ve seen an evolving approach from the RPBs. In the early days, the focus was on the process of getting pre-administration costs approved. The statutory requirement for pre-administration costs to be approved by a resolution separate from the Proposals has taken a while to sink in… and the fact that the two articles repeat this requirement suggests that it is still being overlooked on occasion.

Then, the focus turned to the fact that it was, not only pre-administration fees that required approval, but also other costs. I still see cases where IPs only seek approval of their own costs, apparently not recognising that, if the Administration estate is going to be paying, say, agents’ or solicitors’ costs incurred pre-administration, these also need to go through the approval process.

  • What pre-administration work is an allowable expense?

Now, it seems that the monitors’ focus has returned to the IP’s own fees. Their attention seems fixed on the definition of pre-administration costs being (R3.1):

“fees charged, and expenses incurred by the administrator, or another person qualified to act as an insolvency practitioner in relation to the company, before the company entered administration but with a view to it doing so.”

The IPA article states that this “would exclude any insolvency or other advice that may or may not lead directly to the administration appointment” and the ICAEW article states that it “would exclude any general insolvency or other advice”.

I do wonder at the fuzzy edges: if a secured creditor who is hovering over the administration red button asks an IP to speak with a director, doesn’t the IP’s meeting with the director fit the description? Or if an IP seeks the advice of an agent or solicitor about what might happen if an administration were pursued, wouldn’t this advice count? But nevertheless, the monitors do have a point. If a firm were originally instructed to conduct an IBR, this work would not appear to fall into the definition of pre-administration costs. Also, if an IP originally took steps to help a company into liquidation but then the QFCH decided to step in with an Administration, the pre-liquidation costs could not be paid from the Administration estate.

  • What pre-administration costs detail is often missing?

As mentioned above, the monitors remind us that pre-administration costs require a decision separate from any approval of the Proposals – there is no wriggle-room on this point and deemed consent will not work. The monitors also list other details required by statute that are sometimes missing, of which these are my own bugbears:

  • R3.35(10): a statement that the payment of any unpaid pre-administration costs as an expense of the Administration is subject to approval under R3.52 and is not part of the Proposals subject to approval under Para 53 of Schedule B1
  • R3.36(a): details of any agreement about pre-administration fees and/or expenses, including the parties to the agreement and the date of the agreement
  • R3.36(b): details of the work done
  • R3.36(c): an explanation of why the work was done before the company entered administration and how it had been intended to further the achievement of an Administration objective
  • R3.36(d) makes clear that details of paid pre-administration costs, as well as any that we don’t envisage paying from the Administration estate, should be provided
  • R3.36(e): the identities of anyone who has made a payment in respect of the pre-administration costs and which type(s) of costs they discharged
  • R3.36(g) although it will be a statement of the obvious if you have provided the above, you also need to detail the balance of unpaid costs (per category)

 

Pre-CVL Costs

Another example of an evolving approach relates to the scope of pre-CVL costs allowable for payment from the liquidation estate. Again, over recent years we have seen the RPB monitors get tougher on the fact that the rules (old and new) do not provide that the IP’s costs of advising the company can be charged to the liquidation estate. This has been repeated in the recent articles, but the IPA’s article chips away further still.

  • A new category of pre-CVL work that is not allowable as an expense?

R6.7 provides that the following may be paid from the company’s assets:

  • R6.7(1): “Any reasonable and necessary expenses of preparing the statement of affairs under Section 99” and
  • R6.7(2): “Any reasonable and necessary expenses of the decision procedure or deemed consent procedure to seek a decision from the creditors on the nomination of a liquidator under Rule 6.14”.

Consequently, the IPA article states that:

“Pre-appointment advice and costs for convening a general meeting of the company cannot be drawn from estate funds after the date of appointment, even if you have sought approval for them.”

So how do you protect yourself from tripping up on this?

If you’re seeking a fixed fee for the pre-CVL work, make sure that your paperwork reflects that the fee is to cover only the costs of the R6.7(1) and (2) work listed above. Of course, SIP9 also requires an explanation of why the fixed fee sought is expected to produce a fair and reasonable reflection of the R6.7(1)/(2) work undertaken. Does this mean that you should be setting the quantum lower than you would have done under the 1986 Rules, given that you should now exclude the costs of obtaining the members’ resolutions? Well, personally, I don’t see that the effort expended under the 2016 Rules is any less than it was before, even if you cut out the work in dealing with the members, but you will need to consider (and, at least in exceptional cases, document) how you assess that the quantum reflects the “reasonable and necessary” costs of dealing with the R6.7(1)/(2) work.

Alternatively, if you’re seeking pre-CVL fees on a time costs basis, make sure that you isolate the time spent in carrying out only the R6.7(1)/(2) work and that you don’t seek to bill anything else to the liquidation estate.

Although the articles don’t cover it, I think it’s also worth mentioning that, as liquidator, you need to take care when discharging any other party’s pre-CVL costs that they fall into the R6.7(1)/(2) work.

 

Proposing a Decision on Office Holders’ Fees

  • What Rules/SIP9 detail is commonly missing from fee proposals?

The articles list some relatively common shortcomings in fee proposals (whether involving time costs or otherwise):

  • lack of detail of anticipated work and why the work is necessary
  • no statement about whether the anticipated work will provide a financial benefit to creditors and, if so, what benefit
  • no indication of the likely return to creditors (SIP9 requires this “where it is practical to do so” – personally, I cannot see how it would be impractical if you’re providing an SoA/EOS and proposed fees/expenses)
  • generic listings of tasks to be undertaken that include items irrelevant to the case in question
  • last-minute delivery of information, resulting in the approving body having insufficient time to make an informed judgment

The IPA article states that “presenting the fee estimate to the meeting is not considered to be giving creditors as a body sufficient time to make a reasoned judgement”. Personally, I would go further and question whether giving the required information to only some of the creditors (i.e. only those attending a meeting) meets the requirement in R18.16(4) to “deliver [it] to the creditors”. At the R3 SPG Forum, one of the monitors also expressed the view that, if fee-related information is being delivered along with the Statement of Affairs at the one business day point for a S100 decision, this is “likely to be insufficient time”.

  • fee estimates not based on the information available or providing for alternative scenarios or bases

I wonder whether the monitors are referring primarily to the fairly common approaches to investigation work, where an IP might estimate the time costs where nothing of material concern is discovered and those that might arise where an action to be pursued is identified down the line. You might also be tempted to set out different scenarios when dealing with, say, a bankrupt’s property: will a straightforward deal be agreed or will you need to go the whole hog with an order for possession and sale?

Some IPs’ preference for seeking fee approval only once is understandable – it would save the costs of reverting to creditors and potentially of hassling them to extract a decision – but at the SPG Forum the monitors recommended a milestone approach to deal with such uncertainties: a fee estimate to deal with the initial assessment and later an “excess fee” request for anything over and above this once the position is clearer. This approach would often require a sensitive touch, as you would need to be careful how you presented your second request as regards the next steps you proposed to undertake to pursue a contentious recovery and the financial benefit you were hoping to achieve. But it better meets what is envisaged by SIP2 and would help to justify your decision either to pursue or to drop an action.

Alternatively, perhaps the monitors have in mind the fees proposed on the basis of only a Statement of Affairs containing a string of “uncertain”-valued assets. Depending on what other information you provide, it could be questioned whether creditors have sufficient information to make an informed judgment.

  • no disclosure of anticipated expenses

Under the Rules, this detail must be “deliver[ed] to the creditors” prior to the determination of the fee basis, whether time costs or otherwise, for all but MVLs and VAs… and SIP9 and SIPs3 require it in those other cases as well. It is important to remember also that this relates to all expenses, not simply Category 2 disbursements, and including those to be paid directly from the estate, e.g. to solicitors and agents.

  •  How do the monitors view Rules/SIP9 omissions?

At the R3 SPG Forum, one of the monitors stated that, if the Rules and SIP9 requirements are not strictly complied with, the RPB could ask the IP to revert to creditors with the omitted information in order to make sure that the creditors understood what they were approving and that this would be at the cost of the IP, not the estate. The IPA’s article states that “where a resolution for fees has been passed and insufficient information is provided we would recommend that the correct information is provided to creditors at the next available opportunity and ratification of the fee sought”. Logically, such a recommendation would depend on the materiality of the omission.

When considering the validity of any fee decision, personally I would put more weight on the Rules’ requirements, rather than SIP9 (nothing personal RPBs, but I believe the court would be more concerned with a breach of the Rules). For example, I would have serious concerns about the validity of a fees decision where no details of expenses are provided – minor technical breaches may not be fatal to a fees decision, but surely there comes a point where the breach kills the purported decision.

 

Fixed and Percentage Fees

  • How can you address the SIP9 “fair and reasonable” explanation?

It is evident that in some cases the SIP9 (paragraph 10) requirement for a “fair and reasonable” explanation for proposed fixed or % fees is not being met to the monitors’ expectations. The ICAEW article highlights the need to deal with this even for IVAs… which could be difficult, as I suspect that most IPs proposing an IVA would consider that the fee that would get past creditors is both unfair and unreasonable! MVL fixed fees also are usually modest sums in view of the work involved.

The articles don’t elaborate on what kind of explanation would pass the SIP9 test. Where the fee is modest, I would have thought that a simple explanation of the work proposed to be undertaken would demonstrate the reasonableness, but a sentence including words such as “I consider the proposed fee to be a fair and reasonable reflection of the work to be undertaken, because…” might help isolate the explanation from the surrounding gumpf. For IVAs, it might be appropriate to note how the proposed fee compares to the known expectations of what the major/common creditors believe to be fair and reasonable.

  • What is an acceptable percentage?

Soon after the new fees regime began, the RPB monitors started expressing concern about large percentage fees sought on simple assets, such as cash at bank. Their concerns have now crystallised into something that I think is sensible. Although a fee of 20% of cash at bank may seem alarming in view of the work involved in recovering those funds, very likely the fee is intended to cover other work, perhaps all other work involved in the case from cradle to grave. In addressing the fair and reasonable test, clearly it is necessary to explain what work will be covered by the proposed fee. Of course, if you were to seek 20% of a substantial bank balance simply to cover the work in recovering the cash, you can expect to be challenged!

Equally, it is important to be clear on what the proposed fee does not cover. For example, as mentioned above, the extent of investigation work and potential recoveries may be largely unknown when you seek fee approval. It may be wise to define to which assets a % fee relates and flag up to creditors the potential for other assets to come to light, which may involve other work excluded from the early-day proposed fee. The IPA article repeats the message that a fee cannot be proposed on unknown assets.

 

Mixed Fee Bases

It seems to me that it can be tricky enough to get correct the fee decision and billing of a single basis fee, without complicating things by looking for more than one basis! To my relief, personally I have seen few mixed fee bases being used.

  • How is mixing time costs with fixed/% viewed?

In particular, I think it is hazardous to seek a fee on time costs plus one other basis. Only where tasks are clearly defined – for example, a % on all work related to book debt collections and time costs on everything else – could I see this working reasonably successfully. The IPA article notes that:

  • when proposing fees, you need to state clearly to what work each basis relates; and
  • your time recording system must be “sufficiently robust to ensure the correct time is accurately recorded against the appropriate tasks”.
  • I would add a third: mistakes are almost inevitable, so I would recommend a review of the time costs incurred before billing – the narrative or staff members involved should help you spot mis-postings.

 

Of course, there are plenty of other Rules/SIP areas where mistakes are commonly made – for example, the two articles highlight some common issues with progress reports, which are well worth a read. However, few breaches of Rules or SIPs have the potential to be more damaging. Therefore, I welcome the RPB monitors’ efforts in highlighting the pitfalls around fees. Prevention is far better than cure.


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The 2015 Fees Rules: One Year On

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In November last year, I gave a presentation at the R3 SPG Forum: a look back at one year under the new fees regime. Although I don’t have the benefit of my co-presenter, Maxine Reid, I thought I would set out some of my main points here, as well as some new and improved observations on Administrators’ Proposals:

  • Do more recent Proposals indicate a move away from time costs?
  • How are creditors voting now?
  • How do time costs incurred compare to fees estimates?
  • Are progress reports and excess fee requests compliant with the rules and SIP9?
  • Is the picture any clearer now on what the regulators’ expectations are on some of the finer points of the rules and SIP9?

Is there a move away from time costs?

My analysis of Proposals issued in early 2016 (https://goo.gl/bvebTz) showed that time costs was still the preferred choice: 75% of my sample (108 Proposals) had proposed fees based on time costs.

To see whether things had changed more recently, I reviewed another 67 Proposals issued between July and September 2016 (no more than two from each insolvency practice). This is how the fee bases proposed compared:

feebasis2

This suggests that not a lot has changed, which isn’t too surprising I guess as there are only a few months’ difference between the two sets of Proposals. I also suspect that, if I looked at CVLs, I’d see quite a different picture. There does seem to be a bit more experimenting going on though, especially involving percentage fees, which is a topic I’ll come back to later.

How are creditors voting?

The filing of progress reports on my early Administration sample enabled me to fill in the gaps regarding how secured creditors and committees had voted on fees:

feecaps

Although I accept that my sample is small, I think that this is interesting: the average reduction in fees approved is the same whether the decision was made by unsecured or secured creditors. I’d better explain the committee percentage: in these cases, the committees were approving fees only on the basis of time costs incurred, not on the estimated future time costs, which is also interesting: it isn’t what the fees rules envisaged, but I think it is how most committees are accustomed to vote on fees.

Have creditors’ decisions changed more recently?

As I only have the Results of Meeting to go on for the more recent cases, this is not a complete picture, but this is how the two samples compare:

  • Jan-Mar 2016 (67 Results of Meeting):
    • 11 modified; 1 rejected
    • 7 early liquidations; 4 independent Liquidators
    • 1 Administrator replaced
    • 6 fees modified (average reduction 29%)
  • Jul-Sept 2016 (55 Results of Meeting):
    • 5 modified
    • 2 early liquidations; no new IPs
    • 1 fee modified (reduction 48%)

Again, it’s only a small sample, but it seems to me that creditors’ enthusiasm to modify Proposals or cap fees has waned, although c.10% of Proposals were still modified, which is fairly substantial.

How have actual time costs compared to fees estimates?

With the filing of 6-monthly progress reports, I was able to compare time costs incurred with the fees estimates:

timecosts

Over the whole case sample, the mean average was 105%, i.e. after only 6 months of the Administration, on average time costs were 105% of the fees estimate included in the Proposals. This graph also shows that, on a couple of cases, the time costs incurred at 6 months were over 250% of the fees estimate, although to be fair a large number were somewhere between 50% and 100%, which is where I’d expect it to be given that Administration work tends to be front-loaded.

You can see that I’ve distinguished above between cases where unsecured creditors voted on the fees and the “para 52” cases where the secured (and possibly preferential) creditors voted. The graph appears to indicate that time costs exceeding the estimate is more marked in cases where unsecured creditors approve fees.

Of course, fees estimates and fees drawn are entirely different worlds, so the fact that time costs have exceeded estimates will be of no practical consequence – at least, not to creditors – where a case has insufficient assets to support the work. In around only half of the cases where time costs exceeded estimates did the progress report disclose that the Administrator was, or would be, seeking approval to excess fees. This suggests that in the other half of all cases the IPs were prepared to do the work necessary without being paid for it, which I think is a message that many insolvency onlookers (and the Insolvency Service) don’t fully appreciate.

How compliant are progress reports and excess fee requests?

Firstly, I think it’s worth summarising what the Oct-15 Rules and the revised SIP9 require when it comes to progress reports. The Rules require:

  • A statement setting out whether:
    • The remuneration anticipated to be charged is likely to exceed the fees estimate (or additional approval)
    • The expenses incurred or anticipated to be incurred are likely to exceed, or having exceeded, the details given to creditors
    • The reasons for that excess

SIP9 requires:

  • Information sufficient to help creditors in understanding “what was done, why it was done, and how much it costs”
  • “The actual costs of the work, including any expenses incurred, as against any estimate provided”
  • “The actual hours and average rate (or rates) of the costs charged for each part should be provided for comparison purposes”
  • “Figures for both the period being reported upon and on a cumulative basis”

It is clear from the above that the old-style time costs breakdown alone will not be sufficient. For one thing, some automatically-produced old-style breakdowns do not provide the average charge-out rate per work category. I also think that simply including a copy of the original fee estimate “for comparison purposes” falls short as well, especially where the fees estimate uses different categories or descriptions from the time costs breakdown.

What is required is some narrative to explain where more work was necessary than originally anticipated. The best examples I saw listed each work category (or at least those categories for which the time costs incurred exceeded the fees estimate) and gave case-specific explanations, such as that it had proven difficult to get the company records from the IT providers or that the initial investigations had revealed some questionable transactions that required further exploration.

I also saw some useful and clear tables comparing the fee estimates and actual time costs per work category. As mentioned above, in some cases, the progress reports were accompanied by a request for additional fees and in these cases the comparison tables also factored in the future anticipated time costs and there was some clear narrative that distinguished between work done and future work.

Reporting on expenses to meet the above requirements proved to be a challenge for some. Admittedly, the Rules are not ideal as they require fees estimates to provide “details of expenses” likely to be incurred and some IPs had interpreted this to require a description only of who would charge the expense and why, but it is only when you read the progress report requirements that you get the sense that the anticipated quantum of expenses was expected. For example, where an Administrators’ Proposals had stated simply that solicitors’ costs on a time costs basis were likely, it is not easy to produce a progress report that compares this with the actual costs or that states whether the actual expense had exceeded the details given previously.

What do the regulators expect?

A year ago, the regulators seemed sympathetic to IPs grappling with the new Rules and SIP9. Do they consider that a year is sufficient for us all to have worked out how to do it?

I get the sense that there may still be some forbearance when it comes to complying with every detail of the SIP, but understandably if there is a fundamental flaw in the way fees approval has been sought, it is not something on which the RPBs can – or indeed should – be light touch. Fees is Fees and the sooner we know our errors, the less disastrous it will be for us to fix them.

The S98 Fees Estimate question seems to have crystallised. There seems to be general consensus now amongst the regulators and their monitoring teams that, whilst there are risks in relying on a fees resolution passed at the S98 meeting on the basis of fees-related documentation issued prior to appointment as a liquidator, the regulators will not treat such a fees resolution as invalid on this basis alone. Fortunately, the 2016 Rules will settle this debate once and for all.

The trouble with percentage fees

From my conversations with a few monitors and from the ICAEW Roadshow last year, I get the feeling that the monitors are generally comfortable with time cost resolutions. There is a logical science behind time costs as well as often voluminous paper-trails, so the monitors feel relatively well-equipped to review them and express a view on their reasonableness. The same cannot always be said about fees based on a percentage – or indeed on a fixed sum – basis.

In her 2013 report, Professor Kempson expressed some doubts on the practicalities of percentage fees, observing that creditors could find it difficult to judge the reasonableness of a proposed percentage fee. When the Insolvency Service’s fees consultation was issued in 2014, R3 also remarked that fixed or percentage fees were not always compatible with unpredictable insolvencies and could result in unfair outcomes. The recent shift towards percentage fees, which appears more pronounced in CVLs, has put these concerns into the spot-light.

In the ICAEW Roadshow, Allison Broad expressed her concerns about fees proposed on the basis of (often quite substantial) percentages of unknown or undisclosed assets. I can see Allison’s point: how can creditors make “an informed judgment about the reasonableness of an office holder’s request” if they have no information?

Evidently, some IPs are proposing percentage fees as a kind of mopping-up strategy, so that they do not have to go to the expense of seeking creditors’ approval to fees later when they do have more information and they feel that creditors can take comfort in knowing that the IPs will not be drawing 100% of these later-materialised assets. Although a desire to avoid unnecessary costs is commendable, the message seems to be that compliance with SIP9 requires you to revert to creditors for fee-approval only when you can explain more clearly what work you intend to do and what financial benefit may be generated for creditors, e.g. what are the assets that you are pursuing or investigating.

Another difficulty with percentage fees is the quantum at which they are sometimes pitched. I have heard some stories of extraordinary percentages proposed, although I do wonder if, taken in context, some of these are justifiable, e.g. where the percentage is to cover the statutory work as well as asset realisations. Regardless of this, the message seems to be that some of us could improve on meeting SIP9’s requirement “to explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”… and you should not be lulled into a false sense of security that 15% of everything, which of course is what the OR can now draw with no justification (and indeed with no creditor approval), is always fair and reasonable.

Looking on the bright side

Although getting to grips with the Oct-15 Rules has not been easy, I guess we should count our blessings: at least we have had this past year to adapt to them before the whole world changes again. If there’s one thing we don’t want to get wrong, it is fee-approval, so at least we can face the April Rules changes feeling mildly confident that we have that one area sorted.

If you would like to hear and see more on this topic (including some names of Administration cases that I found had particularly good progress reports and excess fee requests registered at Companies House), I have recorded an updated version of my R3 SPG Forum presentation, which is now available for Compliance Alliance subscribers. For more information, email info@thecompliancealliance.co.uk.


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Reflecting on New Fees Proposals

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I reckon that Administrations are the most complex insolvency procedures and the Oct 15 fees Rules made them a whole lot worse.  However, Administrators’ Proposals provide valuable indications of how IPs – and creditors – have reacted to the new fees regime over insolvencies as a whole.

Only for Administrations are the fees proposals filed at Companies House, so they were ripe for review. I have gleaned many lessons on what not to do and I’ve also gathered a view of how IPs in general are structuring fees proposals in this brave new world.

I shared the fruits of my review at the R3 SPG Technical Reviews. If you missed my presentation, I set out here some of the highlights.  The full presentation is also available as a webinar via The Compliance Alliance (see the end of this article for more details).

 

How many IP practices have I looked at?

Using the Gazette and Companies House, I have gathered 108 sets of Administrators’ Proposals on 2016 cases:

  • Proposals from 69 different IP practices where unsecured creditors were asked to approve fees (i.e. a creditors’ meeting was convened or business was conducted by correspondence)
  • Proposals from 39 different IP practices where fees-approval was limited to secured creditors (and in some cases preferential creditors)
  • In total, 85 different IP practices are represented, from “SPG-sized” (i.e. using R3’s smaller practices criteria) to Big 4.

 

Time costs basis is still king

Ok, so that’s not a bombshell. I also accept that, if I were to look at CVL fees proposals, I might see a different picture.

However, this is the spread of fee bases for my Administration sample:

Feebasis

I’d be interested in running the exercise again, say in January 2017, to see if the picture has changed at all. I think that it depends, however, on whether creditors are looking any more kindly on non-time costs fees.

 

How are creditors voting?

Where unsecured creditors voted on fees proposals:

  • 58 fees resolutions were passed by creditors with no modifications
  • 6 fee proposals were modified
  • Creditors’ committees were formed in two other cases
  • One set of Proposals was rejected

The modified fees look like this:

  1. A fixed fee was reduced from £55K to £47.5K.
  2. A fixed fee of £10K plus 50% of realisations of uncharged assets was limited to the fixed £10K alone.
  3. A fixed fee of £33K plus all future time costs was restricted to a fixed sum of £40K.
  4. A time costs fee with an estimate of £30K was limited to £20K.
  5. A time costs fee with an estimate of £1.26m was subject to a complicated cap which effectively meant a reduction of c.6%.
  6. A time costs fee with no estimate was limited to the WIP at the date of the meeting of c.£20K.

I think it is interesting that proportionately more non-time costs fee cases were capped – 50% of all capped fees cases involved fixed/% fees, whereas fixed/% fees cases represent only 27% of the whole.  It was a fixed/% case that suffered the greatest cut: a hefty 79%!  The average reduction was 29% of the fees requested.

Four of the cases listed above also involved new IPs being appointed – in three cases as the subsequent liquidators and, in the other case, the administrator was replaced. In these cases, the original IPs were forced to vacate office early, so it is understandable that the proposed fees were clipped.

However, the IP who had been clobbered with a 79% reduction was not being fairly remunerated in my opinion. I found this case doubly depressing, as the Proposals were of good quality, lots of useful information was given and it was clear that the IP had worked hard.  On the other hand, I saw lots of Proposals that at best were clumsy and vague and at worst contained fundamental breaches of statutory requirements.

 

Statutory and SIP slip-ups

My presentation included some examples of seriously scary statutory breaches that really should never have happened, but I will spare the authors’ blushes by covering them here. However, we’re all trying hard to comply with Rules and SIPs that often make you go “hmm…”, so I can understand why slip-ups happen.

Sharing only some information with unsecured creditors, because fees are being approved by the secured creditors alone

Do you need to provide full details of the fees that you are seeking in your Administrator’s Proposals, if the Act/Rules only require you to seek secured creditors’ approval? My sample indicates that a couple of IPs at least believe not.

Personally, I think that the Oct 15 Rules are clear: the office holder must, “prior to the determination of which of the [fees] bases… are to be fixed, give to each creditor of the company of whose claim and address the administrator is aware” either the fees estimate (if time costs are being sought) or details of the work the office holder proposes to undertake (if another base is being sought) and in all cases details of current/future expenses.

I do not think it complies with statute to state that this information is only going to be given to the secured creditors (or indeed to a committee, which is a similar scenario). Of course, this does not mean that you must provide all this information in the Administrators’ Proposals – although remember that R2.33 requires Proposals to include the “basis on which it is proposed that the Administrator’s remuneration should be fixed”.  The fees-related information (to support a request for approval of the basis) could be provided under separate cover, but it does need to be sent to all creditors.

Failing to justify fixed/% fees

I think that some IPs have been caught out by the SIP9 requirement that we need to “explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”.

Some Proposals seemed to lack any attempt to provide this explanation. This included one set of Proposals on which the fees were proposed on a time cost basis plus a “success fee” of 7.5% of asset realisations on top, which clearly needed substantial justification.

Other Proposals simply included a statement such as “I consider the proposed basis is a fair and reasonable reflection of the work that I propose to undertake” – not good enough, in my opinion.

The R3 SIP9 Guidance Note suggests referring to “prevailing market rates”. Before the new OR fees had been announced, I wondered how this might work in practice, but now I think that many fixed/% fees can be more than justified by comparing them to the OR’s starting point of £6,000 + £2,000 to £5,000 + 15% of all realisations (what, even cash at bank?).

Personally, though, I do think that time costs is generally a fair and reasonable reflection of work undertaken, so I think that comparison of a fixed/% fee to what the time costs might be is justification, isn’t it? I don’t mean that you need to include time costs information, but simply a statement that you would not expect a time costs basis to be any cheaper… although make sure that you can back this up internally, as I understand that some monitors are querying the quantum of some fixed/% fees.

 

Presentation problems

There is no doubt that over the years many layers have been added to statutory reports such that Administrators’ Proposals and progress reports for all case types have become ridiculously unwieldy – and of course very expensive to create and check. Then, we have the SIPs that layer on yet more requirements to reports.  And don’t get me started on the R3 SIP9 Guidance Note!

With this backdrop, I have to bite my lip whenever I hear/read a regulator or similar express the opinion that items such as fees proposals can be dealt with in short order. I’ve even read that, for simple cases, a fees estimate could be “little more than a few lines of text”! I am ever conscious, however, that it is a temptation of compliance specialists to throw kitchen sinks at statutory and SIP requirements.

Although I accept that Administrators’ Proposals involve often lengthy schedules such as creditors’ lists, my sample had an average length of 41 pages and the longest was 97 pages! It has become silly, hasn’t it?

The mass of information provided in Proposals leads to presentation problems over and above simply helping creditors to trawl through it all.

Documents that just don’t match up

Administrators’ Proposals involving fees proposed on a time costs basis should contain the following numerical items:

  • A receipts and payments account
  • A statement of affairs (“SoA”) or estimated financial position
  • An estimated outcome statement (“EOS”) (optional)
  • A fees estimate
  • A schedule of anticipated expenses (“expenses estimate”)
  • A time costs breakdown (proportionate to the costs incurred)
  • A statement of pre-administration costs

A common problem in my sample was that all these documents did not cross-check against each other. Most frequently, the expenses on the EOS did not match the expenses estimate.  The picture was generally worse in non-time cost cases where sometimes an expenses estimate (or at least “details” of expenses anticipated to be incurred) was missing altogether.  Another issue in non-time cost or mixed bases cases was that my calculation of the expected fee did not match that listed in the EOS.

It is not surprising that mistakes happen with so many schedules to produce and I do realise that we need to manage costs and get these documents out reasonably swiftly, but I do think that a failure to get all these items cross-referring correctly is an easy way to get on the wrong side of a voting creditor (and RPB monitor).

Estimating dividends

I don’t wish to discourage you from providing anticipated dividend figures – especially as we now have the SIP9 requirement that “where it is practical, you should provide an indication of the likely return to creditors” – but it was noticeable that some Proposals that included estimated dividend figures were fraught with difficulties.

How can you estimate the dividend from an Administration if:

  • you only disclose fees on a milestone basis, e.g. for the first six months; or
  • where a non-prescribed part dividend is anticipated, you only estimate the Administrator’s fees, not the fees and expenses of the subsequent CVL?

In these cases, I think you need to make it clear that the bottom line of any EOS does not equate to a dividend, not even to a “surplus available for creditors”, but perhaps the balance after six months (or whatever the milestone happens to be) or the estimated funds to be transferred to the liquidator.

The worst case I saw was an EOS that suggested a 14p in the £ dividend, but when the rest of the Proposals were factored in (especially some expenses that hadn’t made their way to the EOS), it was evident that there would be no dividend and the IP would not recover his time costs in full.

I think it is important to manage creditors’ expectations; do not set yourself up for a fall.

Liquidation estimates

Few Proposals included clear information on the subsequent Liquidators’ fees and expenses: this was present in 10 Proposals out of 63 that indicated a likely non-prescribed part dividend. That is fine, this information is optional under the Rules.

What concerned me, however, was how muddy the water looked in some of the other 53 cases. For example, one Proposal listed adjudicating on claims and paying a (non-prescribed part) dividend in the work to be undertaken, but the surrounding text suggested that the estimate was for the Administration only.

I think it is important to be clear on what the fee estimate covers and also what it does not cover, especially if non-routine investigation work is to be dealt with separately or later.

Although the Rules provide that the basis of the Administrators’ fees carries over automatically to the Liquidation (provided that the IP is the same and that both the Administration and the Liquidation commenced after 1 Oct 15), it seems to me that the quantum of fees that have been approved could be a little trickier to determine.  This does not just concern time costs: when you start working through an actual case, you realise that the Rules are very woolly (and I believe even conflict in some respects) as regards Liquidators’ fees approved on a fixed/% basis in the prior Administration.

The narrative

I am the first to confess that I struggle to get the balance right as regards the Rules and SIP9 requirements for narrative. As my blogs demonstrate, I’m not known for being concise!

My review of over 100 Proposals, however, has led me to the following personal conclusions:

  • A good EOS can tell the story far better than pages of text. I hated seeing an EOS or an SoA with strings of “uncertain” assets.
  • I guess we need to include some narrative to explain the statutory and general administration tasks, but, really, once you’ve read one, you’ve read them all. Yawn!
  • The R3 SIP9 Guidance Note suggests adding the number of creditors, number of statutory reports, returns etc. to your narrative. In view of the costs incurred in tailoring this information to each individual case, I really don’t see that it is effort well spent. Will creditors really thank us?
  • Ok, yes, explaining prospective/past asset realisations is the meat of our reports. Especially if you do not have an EOS or if realisation values truly are uncertain, fleshing out what you have to realise and how you are going to go about unusual realisations would be valuable.
  • What to do about Investigations? I wriggled a bit when I was asked this question at the R3 event. Many IPs are being sensibly cagey when it comes to proposing what Investigations will involve. This is an area where proportionality really is key: if you are expecting to charge a lot, then I think you do need to give creditors some of the story, although you will want to be careful of your timing and the risk of potentially giving the game away.

 

Other Insights

In my presentation, I also shared other insights from my Proposals dataset, such as whether the amounts of proposed fees tallied with the expected realisations and what was the average and range of charge-out rates, but I think it would be insensitive to share the detail so publicly here.

Nevertheless, here are some general observations from my review:

  • I saw no real difference in the ratio of fees proposed to asset realisations where unsecured creditors controlled approval as compared to that where secured creditors were in control. Although I am no statistician, I think this is interesting in view of the OFT’s conclusion in 2010 that fees were higher when unsecured creditors were in control.
  • Although time costs are still overwhelmingly preferred, other and mixed bases are being proposed in a variety of cases, including some with substantial assets.
  • Only 26% of time cost fee estimates broke down anticipated time into staff member/grade, i.e. to the level of detail suggested in the R3 SIP9 Guidance Note. I am yet to be persuaded that it is in creditors’ interests to go to the expense of providing this level of detail, which I do not believe is required by the Rules or SIP9.

 

Personally, I’ve learnt a lot from the review – what can go wrong, where some seem to be getting into a muddle, how IPs and creditors have reacted to the new fees regime. Although I spent many (sad) evenings trawling through Proposals, I shall be doing this again sometime to see whether things have changed.

If you would like to listen to the full webinar (£250+VAT for firm-wide access to all our webinars for one year), please drop a line to info@thecompliancealliance.co.uk.


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What’s new in the revised IVA Protocol?

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A revised IVA Protocol and Standard Terms – including for the first time standard report templates – were published on 20 June with no fanfare, no comment from regulators or trade bodies. In the absence of an official tracked-changes or commentary, I have created my own.  Perhaps all will be made clear by a Dear IP before the start date of 1 September… or should that be 1 October..?

[UPDATE 06/07/2016: Just today, a Dear IP has been issued!  See https://goo.gl/gSigmg.  The Dear IP sets out the expectation that IPs “should be using the new version by 1 October 2016”.]

The documents can be found at: https://goo.gl/7CZuly.

My tracked-changes version is here: IVA Protocol 2016 comparison with 2014

The key points to note are:

  • Start date: the Protocol purports to be effective from 1 October 2016, although the attached Standard Terms are “for use in proposals issued on or after 1 September 2016”.
  • There are some material changes to allowable extensions to collect in missed or additional payments.
  • The standard report templates are a new feature, although “usage is not mandatory”.

I have elaborated on these and some other changes below.

 

Making the switch

As I mentioned above, there seems to be some confusion as to the start date. I trust that the IVA Standing Committee will resolve this inconsistency before 1 September: it is difficult to see how the revised Standard Terms can be used for IVAs proposed after 1 September 2016 when the revised Protocol does not apply until 1 October 2016.

Notwithstanding this confusion, because the date for using the revised Terms relates to proposed IVAs, a clear cut-off date is not possible. For example, an IP could issue a proposal incorporating old terms on 30 August (IVA(i)) and a proposal incorporating the new Terms on 1 September (IVA(ii)).  IVA(i) could be approved on 26 September, but IVA(ii) could be approved on 16 September, i.e. an IVA using the new Terms could be older than an IVA using the old terms.

Still, we have been in this position before and I am sure that IPs are able to annotate cases simply so that, at a glance, staff can discern which terms apply. I believe that it will be particularly important to get this right this time, as the revised Protocol reflects some quite different timescales, e.g. as regards payment holidays.

Is a Straightforward Consumer IVA suitable for self-employed people?

The current Protocol states that people “in receipt of a regular income either from employment or from a regular pension” are likely to be suitable for a Straightforward Consumer IVA. The revised Protocol’s definition of “consumer” – as “a person in debt or the debtor” (para 2.6) – suggests a wider application.  This is confirmed by para 3.1, which now states that a suitable person will be “in receipt of a regular sustainable income for example, but not limited to, from employment or from a regular pension”.

Therefore, the revised Protocol seems to acknowledge that self-employed people in receipt of a “regular sustainable income” may be appropriate for a Straightforward Consumer IVA.

Who regulates IPs for debt advice?

In the current Protocol, Annex 2 includes an explanation of the involvement of the OFT and the Financial Ombudsman Service in certain elements of IPs’ work. Clearly, updating this section has been long overdue.  However, the new Protocol removes entirely this explanation from the Annex.

The revised Protocol includes a new statement-of-the-obvious para (2.2) that, if an IP is subject to FCA authorisation, they must comply with the FCA’s Consumer Credit Sourcebook, but the Committee has now side-stepped the dangerous territory of where IPs sit as regards some RPBs’ Designated Professional Body status for governing certain regulated activities; the IP exclusion for advising in reasonable contemplation of an insolvency appointment; and the FCA’s regulatory zone.

In my view, IPs have been piggy-in-the-middle of this territory war for too long: I would dearly love to see some unequivocal guidance.

Vulnerable debtors

Paras 2.8 to 2.10 are new. They highlight the need to be alert to, and deal appropriately with, vulnerable debtors, which is fair enough. However, they also state that, subject to obtaining the debtor’s explicit consent to disclosure, “full transparency is recommended as creditors should take these vulnerabilities into account when considering an IVA proposal”.

“Consumer vulnerability” disclosure is explicitly prompted on the revised proposed IVA summary sheet and on all report templates.

General beefing-up

Personally, I do wonder why many paras have been added. Are there particular mischiefs that need to be dealt with?  If so, then I do not see that slipping more words into the Protocol helps.  Rather, I think the approach should be to highlight the issues to IPs, help us all to understand better what measurable standards are expected, provide examples of behaviour seen to be falling short, and/or take actions under the existing Code of Ethics to deal with anyone working in the extremes.

Anyhow, here are some of the additions. They are generally not controversial, especially when read in context or alongside other standards such as the Code, but what really do they add..?

  • “IVA providers should consider the suitability of an IVA with caution for an individual whose income is mainly made up of benefits.” (para 3.2)
  • “The IP has a responsibility to ensure that any lead generators that they use follow the rules and codes.” (para 5.3)
  • “Every individual who proposes an IVA should be given this advice or information” (i.e. appropriate advice or information in light of the debtor’s particular circumstances, leading to a proposed course of action) (para 6.1) [Update 06/07/2016: Dear IP explains that this is to ensure that both parties in interlocking IVAs are given full advice. Ahh…]
  •  “There are a range of options that may be appropriate in individual circumstances and all advice and information given and action taken should have regards to the best interests of the consumer. Sufficient information must be provided about the available options identified as suitable for the consumer’s needs.” (para 6.2)
  • “In addition to other regulatory requirements the IVA provider should take the following into consideration:
    • a. Fair treatment of consumers is central to the firm’s culture.
    • b. IVAs are offered accordingly.
    • c. IVA and its service functions as the consumer is led to expect (likely to successfully complete). [Is this even English?!]
    • d. Advice is suitable and appropriate for the individual.
    • e. There is clear information before, during and after appointment.
    • f. There are no barriers created to make a complaint.” (para 6.3)
  • “The expenditure should be at a level that is likely to be sustainable and not cause undue hardship to consumers.” (para 7.5)
  • “Where the net worth [in the home] is released by way of a secured loan, consideration should be given to the term and interest rate applied to the loan and the principles of treating the consumer fairly.” (para 9.3) (I don’t think this gets close to dealing with Debt Camel’s concerns about the 2014 Protocol’s migration from remortgages to secured loans – see http://goo.gl/5DCccu and http://goo.gl/x6BK54.)

There is even one of these statements-of-the-obvious-perhaps-for-emphasis for creditors:

  • “Creditors should not put forward modifications which are already included in the proposal” (para 13.5).

I wonder if creditors will observe this instruction…

Snuck in, however, is also a new prescriptive requirement:

  • “Consumers should be provided with a copy of the IVA protocol. This can be either through provision of a physical copy or providing an electronic link.” (para 3.7)

Altered extensions

Perhaps most significant are the changes to the Standard Terms, which affect the processes and timescales of allowable extensions.

As far as I can see, the following have changed significantly:

  • Para 9.2 of the revised Protocol states that the term of the IVA is automatically extended for 12 months, if the consumer’s obligation to pay 85% of their interest in the home is to be discharged via 12 more monthly contributions. Standard Term 5(7) reflects this 12-month extension without variation.
  • Para 10.5 states that the IVA may be extended by up to a maximum of 6 months without a variation to deal with any overtime etc. due but not paid over (this is new).
  • Para 10.8 allows payment “holidays” or reduced payments of 9 months maximum (the current Protocol allows one payment “break” of up to 6 months) with an IVA extension of 12 months max. to pay the missed contributions (the current Protocol allows a 6 month extension).
  • Consumers must provide “full details of the inability to pay… to the Supervisor’s discretion” in order to “qualify” for a payment holiday (para 10.8). Payment holidays will no longer need to be reported to creditors within 3 months of agreement, but only within the next progress report.

Because of Standard Term 5(7), I assume that all these additional months can only run concurrently and, if more than 12 months is required, this must be approved by variation.

After-acquired assets

Currently, after-acquired assets need to be realised to the extent of discharging costs and debts in full plus interest (Term 14(3)). Under the new Terms, after-acquired assets will not need to settle interest on claims.

Unclaimed and returned dividends

The Standard Terms include a whole new section (at 17(7) to 17(10)).

If an interim dividend is unclaimed or returned, “the Supervisor shall take reasonable steps to allocate that payment” – the Terms set out what those steps are (although I am not persuaded that “allocate” is the correct word).

“Where it is not possible to allocate the unclaimed or returned dividend then the Supervisor may discount the proof of debt received and distribute the funds to those creditors whose dividends have been claimed.” Whilst it is useful for the revised Protocol to set out what happens with these, personally I don’t like reference to “discounting proofs”: not only does “discount” conjure up different thoughts to that intended by the term (i.e. the ignoring of a claim for dividend purposes), but also nowhere else in the Standard Terms is a “proof of debt” mentioned.

New Term 17(7) accepts that a Supervisor need not redistribute unclaimed final dividends if it is “cost prohibitive (for example the cost of making payment is in excess of the funds in hand)”… although given that Supervisors are usually paid as a %, I am not certain when this “for example” will arise.

After any attempts to “allocate” (although it does not seem that these attempts need to be made in respect of final dividends) and redistribute, uncashed/ unclaimed/ returned dividends are paid over to the consumer and “the creditors have no further claim to these funds” – which is very different to R3’s IVA Standard Terms.

Dealing with a surplus

If there are residual funds (I assume not including unclaimed or returned dividends) up to £200, the Supervisor “may” choose to return these to the consumer as a surplus (Term 17(10)). If this is unclaimed or returned, the Supervisor can use it to locate the consumer and make payment to them or donate it to a registered charity of the Supervisor’s choice.

Application of the Act and Rules

Revised Term 4(3) borrows from the R3 IVA Standard Terms. It requires the Supervisor to use the bankruptcy provisions of the Act and Rules with necessary modifications “in the event that the Arrangement does not provide guidance to the Supervisor as to what action he/she should take in any given situation”.

Whilst this could be useful, I am not sure how cut-and-dried its application will be in practice. I have rarely seen it used in IVAs incorporating R3’s Standard Terms, but then R3’s Terms are far more all-encompassing anyway.

I think its inclusion does mean, however, that the deletion of the current Standard Term 19(2) – regarding creditors’ power to requisition a meeting – has no practical effect, as the Act and Rules entitle creditor(s)>25% to force a meeting in a bankruptcy.

Standard Report Sheets

The .gov.uk website now provides separately Annex 5 to the Protocol, which comprises excel templates for the following:

  • Proposal summary sheet
  • Chairman’s report on the meeting to consider the Proposal
  • Annual progress report
  • Notice of variation meeting
  • Chairman’s report on the meeting to consider a variation
  • Report on completion
  • Report on failure The disclaimers on each sheet are noteworthy:

Only the Proposal summary sheet gets a mention in the IVA Protocol itself, but all other templates state “usage is not mandatory”, which is handy, given that personally I don’t think they cut the mustard.

The disclaimers on each sheet are noteworthy:

“Completion of this template does not necessarily ensure full compliance with Statute and SIP where circumstances dictate that additional information is warranted.”

“The Regulators accept no liability for deficiencies in the information supplied to creditors – this remains the Responsibility of the Insolvency Practitioner.”

I have not scrutinised the templates to identify what gaps in compliance with statute and SIPs might exist (but I couldn’t help noticing some typos: Protocol “complaint” and “persuant”). However, I do note that there are insufficient prompts as regards dividends paid to comply with SIP7 and so you will need to make sure that your attached R&P provides the breakdown.

Also, the new SIP9 does not feature at all. I appreciate that “proportionate” information on the fees/costs of a Protocol-compliant IVA is likely to be minimal, but the annual progress report template provides a few lines of free text for “information / comments / use of discretion / consumer vulnerability”. Personally, I would have thought that some reference to SIP9 information (i.e. the “key issues of concern”) would have been sensible.

Alternatively, does this indicate that the regulators believe that SIP9 can be complied with in a few lines of text in a case with, say, fees<£10K..?

I also note that the template refers creditors to “R3.org.uk” (or the IP’s website) for a suitable explanatory note (i.e. Creditors’ Guide to Fees), which will not satisfy the monitors, as most expect a link to the relevant Guide.

Finally, the “failure” report does not seem to envisage any transactions, e.g. final dividend payments and fees/costs, being made after termination from monies in trust.

 

Conclusion

The revised IVA Protocol and Standard Terms introduce plenty of changes, so it would be nice to have some commentary from the IVA Standing Committee at the very least.

Maybe the lack of publicity has something to do with the fact that IVAs are being managed by fewer providers these days (TDX reported that the top five are responsible for 70% of all new IVAs, compared with 55% two years’ ago – https://goo.gl/J3EmFy). If you are hanging on in there, I wish you all the best.

 

 

 

 


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The ICAEW Roadshows: A Helping Hand Through Hazards

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Last autumn, Jo Harris and I enjoyed travelling with the ICAEW on their Roadshows (although it has taken us several months to recover!). If you want to know what you missed (or you feel you need a reminder in view of all that has changed in the past six months), here is my personal summary of highlights from last year’s programme.

RPB Changes

Bob Pinder, ICAEW’s Director of Professional Standards, explained to us the impacts of the two 2015 Acts primarily on the RPB environment.

As we know, the Small Business Enterprise and Employment Act 2015 introduced new powers for the Insolvency Service to sanction RPBs. However, it is worth remembering that the Secretary of State now also has the power to apply to court for a “direct sanctions order” against an IP “if it appears to the Secretary of State that it would be in the public interest for the order to be made” (S141 of the SBEE Act 2015).  Such an order could involve: loss, suspension or restriction of a licence; specific requirements to comply; and/or a contribution to creditors.

Although I am sure that this action will only be contemplated in extreme cases (not least as I’m sure the Service would prefer that the RPBs spend the time and money disciplining IPs), I found this development more than a little disconcerting given the cudgel a certain past Secretary of State swung about when some IPs appeared not to have complied with the employee consultation requirements. As commented on by R3 last November (https://goo.gl/QX6kHM), the 2015 government consultation on this particular issue offered no helpful solution and who knows what (in)action might light the next touch paper in Ministers’ minds.

Compliance Hazards

This was Jo’s and my presentation: an attempt to highlight the principal areas in which we’ve seen IPs trip up. Some of the areas we covered were:

  • Getting remuneration right: how to approach the new fees rules
  • File management: how to deal with the new Oct-15 IP Regulation on maintaining records to demonstrate administration and material decisions
  • Statutory deadlines: how misunderstanding certain rules can make all the difference
  • Anti-money laundering and bribery: how to make checklists more effective
  • SIP highlights: a quick trip through the SIP series identifying some key and some lesser-known slip-up risks
  • Ethics: how to avoid threatening compliance with the principle of professional competence and due care

If you would like to hear the full presentation, Jo has recorded it as a webinar available to all Compliance Alliance webinar subscribers (£250+VAT for firm-wide access to all our webinars for one year)*.

Legal Update

Steven Fennell, Exchange Chambers, explored with ease some key decisions, such as Jetivia SA v Bilta (UK) Limited and Re Corporate Jet Realisations Limited.

Reviewing Steven’s notes now emphasises to me how necessary it is for us to keep up to date with court decisions – so much can happen in six months! Cue plug for R3’s Technical Reviews (starting next month): https://goo.gl/jnnxUA.

Regulatory Hot Topics

Allison Broad, Senior Manager of ICAEW QAD, ran through some regulatory developments and issues seen by the monitoring team. The main points that stood out to me were:

  • ICR reminders: as we know, all appointment-taking ICAEW-licensed IPs need to have an ICR each year. Don’t forget that this includes retiring IPs even if they are merely running off their remaining few cases. IPs who move practices also need to make sure that this requirement is not overlooked, which is easily done if their new colleagues have already carried out an ICR earlier in the year.
  • Ethics reminders: make sure that ethics checks are carried out and signed off before appointment; initial ethics checks signed off months (or even years!) after appointment are not acceptable. Ethics checks should be signed off by the appointment-taking IP personally, not delegated. Make sure that the ethics check is noted appropriately, e.g. if your Form 2.2B (Statement of Proposed Administrator) discloses a prior relationship, is this noted on the ethics review?
  • Anti-Money Laundering reminders: ensure that the files demonstrate the risk-based approach; it is not sufficient simply to state that you consider a subject as “normal” risk, you should be setting out how you reached this conclusion. Also don’t forget to carry out a risk assessment even on court appointments and take appropriate steps consequent to that risk assessment.
  • Bonding reminders: make sure that forms calculate the bond correctly, taking into consideration charged assets and prescribed parts. Also, be consistent in calculating the bond level in VAs: you may have difficulty in justifying why you have bonded assets for less than their realisable values as set out in the VA Proposal’s EOS.
  • SIP8 reminders: Allison described a surprising flurry of SIP8 breaches as regards S98 reports, e.g. lack of detail in trading history and company accounts and inaccurate deficiency accounts. Therefore, perhaps it would be valuable to refresh your staff’s/template’s treatment of SIP8 disclosures in S98 reports.

The Pre Pack Pool

At a time when we were all awaiting the revised SIP16, Stuart Hopewell, a Director of Pre Pack Pool Limited, gave us a welcome insight into the Pool’s vision… and valiantly tackled a number of enthusiastically-delivered questions from the floor.

Back in December, Allison’s webinar http://goo.gl/ZCzzxR reported that the Pool had received two applications over its first month of operation.  I wonder if that number has reached double figures yet…

Valuable CPD

In conclusion, I would just like to say to those of you who have never attended an ICAEW Roadshow before: please do consider it this year. I found it a valuable overview of core developments – both past and prospective – affecting insolvency, together with several heads-up warnings on how some IPs are getting things wrong and carefully-worded insights into the RPB’s perspective on some serious challenges for IPs, balancing well the ICAEW’s roles as both a regulator and a membership body.

* For more information on the Compliance Alliance’s Compliance Hazards webinar, please email info@thecompliancealliance.co.uk


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SIP9 – the tricky bits

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Warning: this blog post may lead to disappointment.

I know that I am not alone in feeling that SIP9 poses as many questions as it answers. To be fair, much of our dissatisfaction originates from inadequate rules, but the fact that my earlier post, “SIP9 – the easy bits” (http://goo.gl/Xu7DM4), generated contrary feedback indicates to me just how much clarification is needed.

Regrettably, I don’t have the answers, certainly not here and now. I could offer my best guesses, but my opinions don’t count.  We need to know how the RPBs will measure compliance with the SIP and how they want SIP9 applied.  I’m currently waiting for answers to a number of questions I’ve put to some RPB monitors, but I do hope that the regulators – via monitors, committees or the Insolvency Service – issue guidance publicly, so that all IPs and insolvency professionals can benefit.  Allison Broad, ICAEW, has made a fantastic start with her webinar, but SIP9 raises far more questions.

What are the questions?

Here are what I think are some of the tricky bits of SIP9:

  • How does SIP9’s statement that “an IP is not precluded from providing information, including a fee estimate, within pre-appointment communications” fit with the rules’ requirement that the office-holder must give the information to creditors? (I know this is an old chestnut, but a serious one, which I note has not been adjusted in the published draft 2016 Rules.)
  • To what extent are we expected to continue to be “consistent” in using an old reporting style?
  • When and how should proposed S98 fees be disclosed? What about MVL fixed fees?
  • How far do we go in providing narrative? Does the bond premium really need to be explained? Are “a few lines of text” (per an RPB staff member’s online interview) really going to satisfy monitors (and be rules-compliant)?
  • How do you explain why a proposed fixed or % fee is “expected to produce a fair and reasonable reflection of the work” to be undertaken?
  • Are monitors expecting to see time costs breakdowns at all? What about charge-out rate sheets in progress reports?
  • If they are not expecting them right now, is it safe to ditch the ability to produce time costs breakdowns or might we need them for the next inevitable iteration of SIP9?
  • Do the Creditors’ Guides to Fees really work to “inform creditors and other interested parties of their rights under the insolvency legislation”?
  • What are the RPBs expecting as regards providing “an indication of the likely return to creditors where it is practical to do so”?

Where are the answers?

The absence of “official” answers puts pressure on all of us to come up with our own. We’ve heard noises to the effect that some RPB monitors will go gentle on IPs as the SIP beds in.  However, I think that’s a cop-out.  An enormous amount of time and effort is expended in setting up systems and procedures and training staff in what is required.  It’s not good enough to learn only at a monitoring visit how we’re expected to apply the SIP, leading to the need to invest further time and effort in changing things.

I think that the fact that the SIP hasn’t been in force for 3 months yet and already it has been the subject of an R3 webinar, an ICAEW webinar, countless blog posts and insolvency queries demonstrates just how we’re all struggling to get to grips with the issues dealt with so unsatisfactorily by the fees rules and the SIP.

Nevertheless, we have to manage as best we can. If you’re keen to absorb yet more information about SIP9, for the Compliance Alliance I shall be recording a webinar providing my thoughts on the questions above (including some thoughts from RPB staff who have responded to my queries) as well as taking a practical look at how to apply the SIP’s principles and standards.  If you would like to sign up to the webinar (which will be available in a week’s time), please email info@thecompliancealliance.co.uk*.

SIP16: two for the price of one

In the same webinar, I’ll also be reviewing the practical application of the latest revision of SIP16 – a far less troublesome SIP, I think, but perhaps just as risky.

* Our webinars are available to all Compliance Alliance webinar subscribers (£250+VAT for firm-wide access to all our webinars for one year).  If you would like to sign up, please email info@thecompliancealliance.co.uk.


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SIP9 – the easy bits

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There’s no doubt that the October Rules and the revised SIP9 generated many questions. However, in this blog (first published on The Compliance Alliance), I summarise the known impacts of the new SIP9 for those who want to double-check that they have the basics right.

Scope

Have you remembered that the scope of the new SIP9 reaches wider than simply cases affected by the October Rules? It also affects:

  • Pre-October 2015 appointments;
  • Case types not affected by the October Rules, i.e. CVAs, IVAs, Receiverships and MVLs; and
  • Pre-appointment fees (where these are paid from the estate), e.g. SoA/S98 fees and VA drafting fees;
  • But it does not apply to Scottish or NI appointments, which continue to be subject to the “old” SIP9.

Key disclosure

I think that paragraph 9 of SIP9 is key. Whenever you are “providing information about payments, fees and expenses to those with a financial interest in the level of payments from an insolvent estate”, you should address the following:

Prospective disclosure:

  • What work will be done
  • Why it is necessary
  • How much it will cost (both fees and expenses)
  • “Whether it is anticipated that the work will provide a financial benefit to creditors and if so what anticipated benefit (or if the work provides no direct financial benefit, but is required by statute)”

Retrospective disclosure:

  • What work has been done
  • Why it was necessary
  • How much it has cost (both fees and expenses)
  • “Whether the work has provided a financial benefit to creditors and if so what benefit (or if the work provided no direct financial benefit, but is required by statute)”

The information given should be transparent, useful and proportionate to the circumstances of the case (which makes a rigid template approach difficult and dangerous), but also consistent throughout the life of the case. Therefore, whilst you might have made wholesale changes to requests/reports for new cases, you have probably designed a half-way house for older cases.  Although the new SIP9 avoids pretty-much all reference to numerical information, if you have already provided tables for a case on the lines of the old SIP9, it seems that you cannot drop them for future reports.  However, you should review the narrative elements of pre-December 2015 case reports to make sure that they meet the new disclosure requirements.

As mentioned above, these narrative requirements also apply to fees/costs that are new to the SIP9 scope and that are not affected by the October Rules. Therefore, have you checked off your documentation relating to MVL, SoA/S98, and VA drafting/Nominees’/Supervisors’ fees?

Fixed or percentage fees

Have you ensured that, whenever you are seeking approval for fees on a fixed or percentage basis, you have included some kind of prompt/explanation as to “why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken” (paragraph 10)?

Also with SIP9 paragraph 25 in mind, have you made sure that this explanation is covered when you are hoping to get approval for the following (which are often sought on a fixed/% basis) where they are to be drawn from the estate:

  • SoA/S98 fees;
  • Nominees’ fees;
  • Supervisors’ fees; and
  • MVL fees?

SoA/S98 fees

As you can see above, the new SIP9 seems to affect SoA/S98 fees quite substantially. I believe it has been rare to see pre-S98 circulars disclose much at all about these fees.  Personally, I find it difficult to see how the principles of SIP9 can be met without disclosing in the pre-S98 circular the quantum of the proposed SoA/S98 fee, if the IP is hoping to get this approved for payment from the estate at the S98 meeting.  However, I do not think that SIP9 is at all clear on this point, so I’ll put this one in the “known unknown” category.

Numerical information

As mentioned above, the new SIP9 has distanced itself from a formulaic numbers-say-it-all approach in favour of case-tailored narrative. However, the SIP does require some numerical information, not all of which I think flows naturally.

Are your systems set up so that, for cases where (October Rules) fees estimates have been provided, the progress reports disclose:

  • “the actual hours and average rate (or rates) of the costs charged for each part… for comparison purposes” (paragraph 13); and
  • “when reporting the amount of remuneration charged [i.e. time costs incurred] or expenses incurred… figures for both the period being reported upon and on a cumulative basis” (paragraph 17)?

Having now looked at some fee estimates, I have to say that I really do not think that the average rate for each work category adds anything at all – although I can see that an overall average rate has some value – so why the JIC felt that this was so vital that it had to be prescribed, I do not know! But I do know that it has added expense to some IPs in getting their time recording systems set up to produce these numbers.

The second requirement adds further complication. The 2010 Rules require progress reports to disclose expenses incurred (whether or not paid) in the period and SIP7 requires expenses paid in the period and cumulative, but now SIP9 requires also expenses incurred on a cumulative basis: that’s four different numbers.  So much for transparency!

Back to the beginning

The new SIP9 has introduced some subtle changes as regards disclosure of parties’ rights.

Information to creditors about how to access information on their rights has been moved to earlier in the process: no longer should this occur in the first communication following appointment, but simply “within the first communication with them” (and in each subsequent report).  Therefore, have you checked that this is covered in the pre-S98 circular?  But have you also kept it as standard in any post-S98 template, just in case you take an appointment without having been the IP advising member for the S98 meeting?

Personally, I’ve been struggling to work out how to meet the requirement above for MVLs: does there exist an “official” sensible explanation of creditors’ rights in an MVL?  The Creditors’ Guide to Liquidators’ Fees doesn’t really do the job, but I am not convinced that the RPBs expect IPs to draft something themselves, do they..?  Perhaps this is another “known unknown”.

Whilst we’re on the subject of Creditors’ Guides… I think that many IPs assumed that, as the new SIP9 applies to old and new cases, the new Guides also apply to both old and new cases.  However, if we remember that the purpose behind directing creditors to the Guide is to inform them of “their rights under insolvency legislation”, then it is evident that the pre-April 2010 Guides are still relevant to pre-April 2010 cases, as new rights were introduced in April 2010.  It is regrettable, however, that all the old Guides set out the requirements of the old SIP9 – and I would suggest that this might render them no longer “suitable information” – but as regards a creditor’s statutory rights, they’re generally reasonable.

Therefore, do your circulars/reports direct creditors to the Guide appropriate to the case type and appointment date? If you display the Guides on your own website, do you have Guides covering the full range of appointment dates?  The R3 website only goes back to 1 November 2011, but the ICAEW website, http://goo.gl/kjZlJC, (for example) has Guides going way back.

Heavy hints

The new SIP9 includes several items that fall short of being prescriptive, but the language indicates to me that monitors will still be looking out for them. These include:

  • Providing “an indication of the likely return to creditors” when seeking approval of the fee basis “where it is practical to do so”;
  • Dividing narrative explanations into the six categories listed in paragraph 12… whilst making sure that not every case follows exactly the same categories (we have to demonstrate that we’ve considered each case’s specific circumstances); and
  • Using “blended rates” for fees estimates.

And don’t forget…

Some old SIP9 requirements have survived the revision process. Items that sometimes get overlooked include:

  • Disclosure of “any business or personal relationships with parties responsible for approving his or her remuneration or who provide services to the office holder in respect of the insolvency appointment where the relationship could give rise to a conflict of interest”;
  • Explanation of why any sub-contractors are being used to do work that could otherwise be done by the IP/staff; and
  • An existing SIP7 requirement: disclosure of any pre-appointment costs paid, detailing the amount paid, name of the payor, their relationship to the estate and the nature of the payment.

Simple?

I get the feeling that the RPBs have been inundated with queries over the practical application of the October Rules and the revised SIP9, many originating from compliance consultants (including The Compliance Alliance). I haven’t raised these queries here; there is no real point, as there are few reliable answers at present.

In many respects, I doubt that we will get straight answers, at least not for some time to come. A recent response from one of my RPB contacts was heavily caveated with the observation that it was only her personal understanding and that the RPB’s stance would be formed by its committees over time.  Therefore, please bear with your compliance consultants.  You might hear us saying that we don’t know how your authorising body or its monitors view a certain matter and you may find that our recommendations change over time, as we try to remain alert to the shifting sands of interpretation around the Rules and SIP.  We will do our best to highlight the issues as we see them, whether they are clear breaches or whether they fall into the currently numerous known unknowns.


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SIP1: must you make a formal complaint?

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Sorry for the long silence. SIP9/fees have ruled my life for the past few months and I’ll share my thoughts on those when the fog has cleared.  In the meantime, I thought I’d catch up on something far less controversial (you’d think!): SIP1’s requirement to “report” IPs to the Complaints Gateway or to the RPB.  Does this mean that reports will be handled as full-blown complaints or is there another way?

Why shouldn’t all reports be handled as formal complaints? 

Well, imagine you are a licensed IP working for other licensed IPs. Maybe you’re in that boat now.  Maybe you’re in a firm’s compliance department.  Maybe you’re a case manager.  Say you become uncomfortable about something you’ve seen, something that you think triggers the SIP1 reporting requirement.  Should you to report it via the Insolvency Service’s Complaints Gateway?

What would happen next? Would the RPB write to the IP providing a copy of the report?  The IPA’s complaints procedure, for example, states that this is done in all complaint cases.

Clearly, this is unhelpful. But does elevating the need to report concerns to a SIP requirement rule out any alternative to lodging a formal complaint?

Does SIP1 allow IPs to discharge their reporting duty by whistle-blowing to the RPB?

SIP1 states:

“An insolvency practitioner who becomes aware of any insolvency practitioner who they consider is not complying or who has not complied with the relevant laws and regulations and whose actions discredit the profession, should report that insolvency practitioner to the complaints gateway operated by the Insolvency Service or to that insolvency practitioner’s recognised professional body.”

This appears to give IPs a choice: either they may lodge a (formal) complaint via the Gateway or they can report to the IP’s RPB.

What is the destiny of a “report” to the RPB?

The MoU between the Insolvency Service and the RPBs (https://goo.gl/ICqHEo) suggests that there is no practical distinction.  It defines a complaint as “a communication about a person authorised as an insolvency practitioner expressing dissatisfaction with that person’s conduct as it relates to his or her professional work as an insolvency practitioner in Great Britain, or with the conduct of others carrying out such work on that person’s behalf.”  The MoU then states: “Each Recognised Professional Body will forward to the Authority any Complaint received by it within five Working Days of receipt” and then the Authority, the Insolvency Service, will process the Complaint in the usual manner.

So this would appear to complete the circle. It appears that however an IP seeks to report a matter, it is going to be handled as a complaint sooner or later.

Is there no way to whistle-blow to a regulatory body?

So it seems that all reports will end up in the Complaints Gateway. This seems wrong, doesn’t it?  After all, the Insolvency Service is a “prescribed person” for the purposes of whistle-blowing about misconduct in companies generally (https://goo.gl/cIkGL4).  It doesn’t make sense to leave those working within the insolvency profession with nowhere to turn.

Surely the Service appreciates that IPs (and others employed by IPs) might want to use a far more discreet method than a formal complaint to bring their concerns to the attention of the regulatory bodies. I certainly hope that the Service would not look to enforce this aspect of the MoU against the RPBs.  We must be able to trust our regulatory bodies to act sensibly when dealing with such sensitive situations.

To be honest, I haven’t asked anyone at the Service for comments. However, I have sought the views of some within the RPBs.

The IPA’s view

Alison Curry gave me this answer:

“If the practitioner is reporting regulatory intelligence, in discharge of their SIP 1 obligations (and their membership rules, as the case may be) then they may do so to the RPB of the practitioner reported upon.  In such an instance, presumably, they could maintain anonymity if they chose, but could not be expected to be appraised of an outcome (i.e. they would not be a complainant in the formal sense). Presumably then the RPB will have a process by which that intelligence is fed into their monitoring processes. We certainly do and expect the IS to be monitoring that others do also.”

Alison also pointed out that, as information may end up in the monitoring stream, it could result in a referral to the Investigation Committee (which deals with complaints). However, this would be a referral from the Membership & Authorisation Committee (which deals with monitoring), so I think the whistle-blower’s identity would be unlikely to feature in the “complaint” referral, as the chances are that the IPA’s monitoring team will have gathered their own evidence in order for the M&A Committee to consider the issue in the first place.

ICAS’ view

David Menzies gave me this answer:

“You will be aware that the normal complaint procedures as agreed by the IS and the RPBs are that complaints should be made through the Complaints Gateway. RPBs also receive regulatory intelligence and it is possible that information relating to an IP’s misconduct could also be received by the RPB in that manner. In reality whether information is submitted through the complaints gateway or via an RPB is not critical, the important aspect being that the information is transmitted in the first place…

“The issue of the reporter’s identity being disclosed is of course something that no guarantees can ever be given on. If matters eventually proceeded to a disciplinary tribunal then certain documents would have to be put before the tribunal and that would most likely include correspondence with the complainer. There is also the possibility that if the IP who was being complained against submitted a subject access request under Data Protection legislation then it may be difficult to justify not disclosing the correspondence containing the complaint. There may well be circumstances where we can withhold a complainant’s identity but I think that this would need to be looked at on a case by case basis.”

The Other RPBs

I won’t quote my ACCA contact here, as it wasn’t an “official” response. Nevertheless, I did learn that ACCA’s monitoring team receives intelligence – from IPs as well as the other RPBs – and this is similarly absorbed into its monitoring processes, rather than put through the formal complaints process where the discloser doesn’t wish to lodge a formal complaint.

I suspect also that this is the case with the ICAEW and, to be fair to them, they were hoping to revert to me with a consensus view once this matter had been discussed at the Regulators’ Forum a couple of months’ ago. I expect that the demands of other SIP revisions have overtaken the publication of any guidance on this matter.

So whistle-blowing to the IP’s RPB can count as SIP1 compliance?

From the comments I have received, it would seem so. It also seems to me that the RPBs would not treat it as a formal complaint and thus pass it to the Insolvency Service for processing via the Gateway.  Confidential intelligence-delivery worked within RPBs before the revised SIP1.  The revision certainly was not intended to close any doors that were previously open.

What about your duty under your RPB’s Membership Rules?

Within all the RPBs’ membership rules/regulations, there is an obligation to report the misconduct of another member. The purpose of the revised SIP1 was to expand this obligation so that, in effect, the same rules apply whether the offending IP is a member of your RPB or not.

However, this means that, technically, if you have lodged a complaint via the Insolvency Service’s Gateway, you may need to report the matter also to your RPB so that you comply with its membership rules. This does seem a bit of unnecessary duplication, however, and I would hope that an IP would not be beaten about the head for complaining only to the Gateway.

What acts should be reported?

As quoted above, SIP1 sets out two criteria:

  • non-compliance with “the relevant laws and regulations” AND
  • actions that discredit the profession.

I am pleased to see that, at least with the IPA, its rules have been amended in the past few months clearly to bring them in line with the revised SIP1. Previously, their rules had stated “misconduct” needed to be reported, which could have constituted simply a breach of a SIP, statutory provision or the Ethics Code.  Now, the IPA has also imported reference to discrediting the profession (although also, interestingly, discredit to either the member, the IPA, or any other member) as a must-have in order to trigger the reporting requirement.

What actions discredit the profession? Actions at the far end of the spectrum will be blindingly obvious, but I reckon there is a huge swathe of greyness where subjectivity reigns.  To be fair though, we have always lived with this issue.  The revised SIP1 wasn’t meant to make our lives more difficult – I don’t think so anyway – but rather to emphasise our personal responsibility to keep our profession clean.  With this objective in mind, I have no complaints about the revised SIP1.


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SIP16: it’s more than just a Pool

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The Pre Pack Pool launched to sounds of applause from the likes of Anna Soubry MP and Teresa Graham, whilst most IPs have been keeping their own counsel at best.  For IPs and their agents, the new SIP16 contains changes of more practical consequence than the Pool.

On the Compliance Alliance blog, I have set out some pointers on how to implement the changes into internal processes and documentation (http://thecompliancealliance.co.uk/blog/sips/sip16/).  I’d also like to make a plug for my Fees Rules article for the ICAEW’s Insolvency & Restructuring Group’s newsletter, which I have reproduced on the CompAll blog (http://thecompliancealliance.co.uk/blog/practical/octfees/).  I plan to present a webinar on the combined subjects of SIP9 and SIP16 in a few weeks’ time.

Here, I thought I’d explore the outlook from over the SIP16 parapet.

How many applications will the Pre Pack Pool see?

Shall we open a book on that question?

Here are the Administration and pre-pack stats:

ADMs

 

 

 

 

 

 

I’ve drawn from the Insolvency Service’s insolvency appointments tables, extrapolating for a full year’s figures, and their annual regulatory and SIP16 monitoring reports.

If the pre-pack proportions are consistent, there would be 340 pre-packs over 2015 of which 228 would be to connected parties.  In one respect, it’s a shame that the Insolvency Service has handed over SIP16-monitoring to the RPBs, as I guess we may lose this insight into the numbers in future.

The Pool has 19 members (I’m not sure why 20 is often-quoted, unless there is an anonymous member!) – the names are at https://www.prepackpool.co.uk/about-the-pool – so each one could be expecting up to one review each month.  Of course, as many have noted, the reality could be far fewer given that applications are not mandatory.  Although the government’s threat of statutory measures to control pre-packs has been breathed hotly, why should this prospect persuade the pre-pack purchasers of today to apply to the Pool?

Also, as the graph illustrates, Administrations have been on the decline for a number of years and I suspect that the additional hurdles raised via the revised SIP16 and the fear in some IPs’ minds of their regulator picking up on an unintentional SIP16 clanger will force the numbers lower still, as instead more deals may be done either before or after Liquidation (which I think is already a far more frequent occurrence).

How will the regulators view absent Pool opinions?

There seems to be some anxiety that the regulatory bodies will be critical of IPs who complete connected party (“CP”) sales that lack a Pool review.  However, the new SIP16 puts little responsibility on the IP to press for a Pool application.  It merely states:

“the insolvency practitioner should ensure that any connected party considering a pre-packaged purchase is aware of their ability to approach the pre-pack pool and the potential for enhanced stakeholder confidence from the connected party approaching the pre-pack pool and preparing a viability statement for the purchasing entity” (paragraph 9).

‘The IP should ensure that [the party] is aware of their ability…’ – that is pretty light touch.

The IP also needs to ask the CP for a copy of any Pool opinion, but of course there is no obligation on the CP to concede to that request.  I understand that the CP can tick a box during the application to tell the Pool to provide a copy of the opinion to the IP, which at least might cut out the potential for some delay.

How should an IP react to a Pool application?

What would you do if you knew that the CP had applied to the Pool, would you wait for the opinion before concluding the sale?  I asked this question of an IP the other day and I confess that I was surprised when he said that he would wait.

Admittedly, 48 hours might not be long to wait in the great scheme of things, although this presupposes that the CP gets their application in pretty sharpish.  In view of the Pool’s wish-list (albeit not prerequisites), some of which carry not insignificant cost, the fact that the CP is probably being bombarded with issues from all directions and feeling ragged given their involvement in a limping company, and of course the inevitable reaction of “so you’re telling me I don’t have to make an application?”, the odds do seem stacked against a swift and comprehensive application to the Pool.

What would you do if the Pool’s answer was negative?  The Pool’s Q&As are factually correct but tight-lipped on the consequence for a potential sale of a negative Pool opinion (remembering of course that a negative opinion means “there is insufficient evidence that the grounds for the pre-packaged sale is reasonable”):

“It is for the IP to decide whether to proceed with such a sale or not.

“IPs are subject to regulation and authorised to act as IPs by recognised professional bodies. The insolvency regulators look at practitioners’ conduct through complaints received and proactive monitoring. Where systemic problems are identified, the regulators have the ability to take appropriate action.

“A complaint would not be well founded solely on the basis that a pre-packaged sale transaction was entered into when an opinion had been issued that the evidence was insufficient to support the grounds for a pre-packaged sale.”

I think that everyone reasonable now appreciates that the IP has got to do what the IP has got to do.  What would an IP do with a negative Pool opinion?  Would it make him think again about the sale, even though he would not know what had been behind the Pool member’s decision?  If it would not – on the basis that the IP knows what needs doing and can fully justify his actions – then why wait for the opinion?

Fortunately, I think negative Pool opinions will be very rare in any event.  After all, why would a CP go to the time and expense of voluntarily applying to the Pool, if he thought that he would struggle to persuade the Pool that the pre-pack was reasonable?  If the Pool does not a record a near-100% “pass” rate, I will be very surprised.

But would a 100% pass rate mean that the Pool has failed?  I do hope it won’t be seen that way!  After all, I suspect that applications will only be made to the Pool if the IP is moving towards concluding a sale; if the IP thinks the sale should happen, then let’s hope that the Pool rarely, if ever, disagrees.  Also, I think there’s an argument that, if applications to the Pool become the norm (although I am not convinced they will be), then the absence of an approach to the Pool might lead onlookers to presume that the CP was uncertain it would pass muster.  Therefore, even if the Pool notches up a 100% pass rate, creditors should feel confident that the wheat is distinguished from the chaff… so job done as regards improving confidence!

Quality agents step forward

For all its publicity, practically the Pool does not present the biggest SIP16 sea change for IPs.  Of far more practical effect to IPs are the additions as regards marketing.  This doesn’t mean that IPs’ past work has necessarily been at odds with the new standards, but inevitably practices and disclosures need to be adjusted to fit the now-codified standards.

Some agents have questioned the emphasis placed on having adequate PII as now required by the SIP, as they feel that qualifications – and especially RICS registration – are far better indicators of high quality and ethical services.  I can see their point, however I think that the quality agent could ease the IP’s SIP16 compliance burden in a new way.

I’d summarise the SIP16 marketing essentials this way:

  • The marketing strategy should be designed to achieve the best available outcome for creditors as a whole in all the circumstances.
  • The business should be marketed as widely as possible proportionate to the nature and size of the business.
  • Consideration should be given to the type of media used to reach the widest group of potential purchasers in the time available. Online communication should be included alongside other media by default.
  • Marketing should be undertaken for an appropriate length of time to ensure that the best available outcome for creditors as a whole in all the circumstances has been achieved.
  • Any previous marketing of the business by the Company is not justification in itself for avoiding further marketing. The adequacy and independence of the marketing should be considered in order to achieve the best available outcome.

Although much of the strategising is likely to be conducted in conversations in view of the urgency of the situation, SIP16 compliance requires good record-keeping.  Could agents help IPs on this?  Could they perhaps set out the “reasons underpinning the marketing and media strategy used” in a form that the IP could transfer readily to the SIP16 Statement?  After all, an agent worth his salt will be familiar with the new SIP16 and will understand well the pre-pack tensions that need to be managed in order to get the best sale away.  IPs look to their agents to propose and execute effective marketing strategies, so wouldn’t it follow that the agents fully justify their recommendations and actions in writing?  Such a helpful service might also attract a premium rate or repeat instructions, mightn’t it?

Before I move away from the marketing topic, I’ve been asking myself: how can we decide if a valuation agent’s PII is “adequate”?

For starters, I suggest that IPs who do more than the occasional pre-pack set up central registers of the PII details of the agents that they use, rather than deal with this on a case-by-case basis.  In this way, you need only ask your agents for PII information once and you can update your central register when the PII renewal dates come along.

Secondly, you might find RICS’ PII guidance useful: http://goo.gl/IAd7TX.  This describes minimum terms for PII required by RICS in a style that will be familiar to all IPs.

Curly additions to SIP16

In the process of updating the CompAll SIP16 Statement template, I discovered that there were several sneaky additions to the new SIP16.  I’ve attached at SIP16 comparison a tracked-changes comparison of the 2013 version and the current SIP16.

Some – but by no means all – of the lesser-publicised changes, which will affect standard documents and processes, are (in italics):

  • IPs should make it clear that their role is not to advise either the directors or any parties connected with the purchaser.
  • IPs should keep a detailed record of both the decision to do a pre-pack and all alternatives considered.
  • If the Administrator has been unable to send his Proposals with the SIP16 Statement, the Proposals should include an explanation for the delay.
  • Confirmation in the SIP16 Statement “that the sale price achieved was the best reasonably obtainable in all the circumstances” has been replaced by confirmation that the outcome achieved was the best available outcome for creditors as a whole in all the circumstances.
  • Disclosure of the extent of the Administrator’s involvement pre-appointment has been extended to involvement of the Administrator’s firm and/or any associates.
  • Disclosure of the alternative courses of action considered has been widened to the alternative options considered, both prior to and within formal insolvency by the IP and the company, and on appointment [of] the Administrator.
  • Disclosure should include explanations of why no consultation took place with major – or representative – creditors; why no requests were made to potential funders; and why no security was taken for deferred security (including the basis for the decision that none was required), if any of these were the case.
  • Disclosure of the names of directors/former directors involved in the management or ownership of the purchaser has been extended to include their associates and to any involvement in financing the purchasing entity.
  • Disclosure of fixed/floating charge allocations of consideration needs to include the method by which the allocation was applied.

 

Although these SIP16 changes will make compliance staff’s (and consultants’) lives a little more unpleasant as we try hard to avoid SIP16 Statement slip-ups, I would welcome that extra bit of misery if the pay-off were the Holy Grail of “improved confidence”. I am yet to be convinced that this will be the outcome.