Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Revised SIP16 and SIP13 affect more than Administrations

30 April 2021: Connected Persons Disposal Regs, InsS Guidance, SIP13, SIP16, new IVA Protocol (with eight annexes), SIP9 FAQs from the RPBs and Dear IP 126 – wow!  Even Usain Bolt would struggle to keep up with the pace of regulatory change right now!

Firstly, I’ll look at the SIPs. 

“No changes have been made to the SIPs other than those required by the change in the law”

stated some of the RPB/R3 releases.  Well, that’s not quite true…

 

What needs changing?

In summary, solely to deal with the SIPs (i.e. not including the Connected Persons Disposal Regs at all), I think the following needs to be done:

  • Ensure that all staff know the widened scope of SIP13 – i.e. affecting all corporate insolvencies – and consider including prompts within checklists, progress reports etc. to ensure that any sales to less directly connected parties are picked up
  • In the pre-ADM letter template to connected parties (and letter of engagement, where relevant), replace the old Pre-Pack Pool reference with the new evaluator’s report requirement… and repeat the letter template (tweaked) for any post-appointment substantial disposals
  • Ensure that pre-pack connected parties that are not also connected persons are notified of the potential benefits of a viability statement
  • Tweak the SIP16 statement to remove references to the Pre-Pack Pool and viability statement, except where a viability statement has been provided, and add reference to enclosing any evaluator’s report with an explanation if it has been redacted

 

SIP13’s scope enlarged…

The old SIP13 affected sales to parties connected to the insolvent debtor or company by reason of S249 and S435 (but excluding certain secured creditors).  Now, SIP13 defines a connected party as:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”

If SIP13 had been changed solely to reflect the new regulations, why has the reach of SIP13 been expanded far wider than the regulations’ scope?  And what does “any connection” mean exactly?  Are we talking friendships?  Even if “any connection” is still intended to mean something approaching the statutory definition, including connections with the associates of directors, shareholders – and secured creditors – wraps in a whole host of business and familial relationships that were not captured by S249, S435 or Para 60A(3) Sch B1.

…but also narrowed..?

There is a curious omission from the above definition: reference to any connections with the debtor.  Presumably this is an error, as the SIP still states that it “applies to both personal and corporate insolvency appointments”.  Oops!

 

Connected person communications

The above definition is of a connected party, but both SIPs also refer to connected persons.  These are the statutorily-defined connected persons caught by the new regulations, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, as defined by Para 60A(3) of Schedule B1.  Of course, it is sensible for IPs to ensure that any connected person considering a regulations-caught disposal is aware of the requirement to obtain a qualifying evaluator’s report to enable the disposal to be completed without creditor approval.  This is now also a SIP requirement.

Because SIP16 is concerned only with pre-packs, the requirement appears also in SIP13 in order to capture substantial disposals in Administrations that are not pre-packs.  In my mind, this means substantial disposals that occur in the first 8 weeks of an Admin where there have been no pre-appointment negotiations (and, I guess, the odd “hiring out” or non-sale “disposal” of all or a substantial part of the business/assets), i.e. truly post-appointment sales.  Indeed, the R3/RPB releases explained that the 8-week time frame of the new regulations led to the changes in SIP13.

However, the changes are odd.  SIP13 requires the “insolvency practitioner” to ensure that the connected person is made aware of the regulations, but SIP13 states that:

“for the purposes of this Statement of Insolvency Practice only, the role of ‘insolvency practitioner’ is to be read as relating to the advisory engagement that an insolvency practitioner or their firm and or/any (sic.) associates may have in the period prior to commencement of the insolvency process.  The role of ‘office holder’ is to be read as the formal appointment as an office holder”. 

So the new SIP13 requirement for connected person communications applies to IPs acting pre-appointment, not to office holders post-appointment.  Given we are talking about non pre-pack disposals here, would it not have made more sense for the SIP13 requirement to be on office holders?

But don’t worry RPBs, I am sure that no Administrator is going to spend time negotiating a deal with a connected person without ensuring that they are in a position to complete.  They hardly need a SIP to tell them to warn a relevant purchaser that they’ll need a qualifying evaluator’s report where necessary.

 

Viability Statements’ appearance narrowed…

I reported at https://insolvencyoracle.com/2020/10/30/pre-pack_reforms/ that the Insolvency Service’s report that led to the regulations had noted the government’s plan to “work with stakeholders to encourage greater use” of viability statements.  I was most surprised, therefore, to see viability statements take a step further into the shadows in the revised SIP16.

The old SIP16 required Administrators to report to creditors on the existence or otherwise of a viability statement and, if there were none, on the fact that the Administrators had at least asked for one.  Now, the only appearance of reference to a viability statement in a SIP16 statement is where one exists, in which case it should be attached.

…but also enlarged!

But we cannot ignore viability statements entirely: the new SIP16 has retained the need to make certain purchasers “aware of the potential for enhanced stakeholder confidence in preparing a viability statement”.  You might think: well, that’s fine, it had been in my letters to connected purchasers when I told them about the Pre-Pack Pool, so now I’ll leave in the viability statement bit and just tweak those letters to include the bit about the evaluator’s report instead.

Ah, if only it were that simple!  Now this requirement applies “where the purchaser is connected to the insolvent entity”… and this time, “connected” means:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”. 

So, if you are contemplating a pre-pack to someone who isn’t connected to such an extent that the new regulations apply, but they still have some kind of connection, you will need to write to them solely to tell them about the “potential for enhanced stakeholder confidence” of a viability statement.  What is the point?!

 

Copy evaluator’s report in SIP16 statement

Unsurprisingly, the new SIP16 requires a copy of any qualifying evaluator’s report to be included with the SIP16 statement circular (whether or not this is at the same time as the Proposals). 

The SIP does not mirror the regulations’ provision that the copy qualifying report (when included with the Proposals) may exclude any information that the Administrator considers is confidential or commercially sensitive, but presumably this would be acceptable provided that, as per SIP16 para 19, the Administrator explains why the report in full is not being provided.

 

More changes to come?

Yes, I’m afraid so.  Dear IP 126 states that:

“SIP16 will be reviewed and amended further during the next 6 to 12 months”. 

I shall be interested to see the trend of Administrations in the future.  I suspect that it is not so much the evaluator’s report that will discourage pre-packs but rather the endless tinkering!


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New SIP7: No surprises?

SIP7 is the baby bear of the three revised SIPs that came into force on 1 April 2021.  However, despite the RPBs’ intention being primarily to bring SIP7 into line with the revised SIP9, the new SIP7 includes some wrinkles that are worth exploring.

The revised SIP7 (E&W) can be found at: https://insolvency-practitioners.org.uk/regulation-and-guidance/england-wales/

Does it apply to MVLs?

Although SIP9 is headed up “Payments to Insolvency Office Holders…”, the revised SIP9 states explicitly that it does not apply to MVLs (“unless those paying the fees require such disclosures”).  In comparison, SIP7 is entitled “Presentation of Financial Information in Insolvency Proceedings”, but there is no explicit reference to MVLs.  Does this mean that MVLs are included, as they are a proceeding under the Insolvency Act 1986, or are MVLs excluded, as they are not proceedings in relation to an insolvent entity?

If I had to jump one side of the fence, I’d say that SIP7 leans towards excluding MVLs: paras 12 and 15 refer to “the insolvent estate”and “case” has been replaced throughout with “insolvency appointment”.

Does it matter if MVLs are included or excluded?

Ok, I admit that in general I don’t think it matters, at least not to the current generation of IPs.  We’re all accustomed to producing MVL reports with generally the same format as reports on insolvency cases.  However, when new entrants start drafting reports from a clean slate, practices may begin to diverge.

It would have been useful if the scope of SIP7 had been made clear in at least a couple of areas.  Para 19 of SIP7 conveys a similar requirement as para 15 of SIP9, that creditors and other interested parties should be informed of their rights (although oddly SIP7 states that “adequate steps should be taken to bring” those rights to their attention – I’m not sure I know what constitutes adequate steps).  If MVLs are included, is more required than simply complying with R18.4(1)(f) when issuing progress reports? 

Another area that could make a difference in MVLs is para 15e, which requires “any amounts paid to the office holder or their associates or firm other than out of the estate” to be disclosed.  It is fairly commonplace for MVL liquidators – and indeed their firm’s accounts and tax departments or sister companies – to be paid fees other than out of the estate.  Are the RPBs content for this detail to be excluded from MVL reports?

Consistency in “Associates”?

SIP7 repeats the revised SIP9’s definition of associate as including “where a reasonable and informed third party might consider there would be an association”.

However, “associates” appears in SIP7 in only one other spot: in para 15e mentioned above, which now requires disclosure of payments paid other than out of the estate, not only to the office holder, but also to “their associates or firm”.  Does this mean that we’re not required to disclose payments to associates or to the firm from the estate?  No, it seems to me that this is required by the rest of para 15, which includes the disclosure of “all other amounts required to be approved in the same manner as remueration”, so if we’ve handled SIP9 correctly and recognised that associates’ costs need approval, then we will disclose them separately under SIP7.

What kind of payments could be captured by these disclosure requirements?  Although we are awaiting the RPBs’ additional guidance on SIP9, which hopefully will clarify what an “associate” is, it occurred to me that it could include the following:

  • Where the firm pays for pre-appointment work carried out by someone with whom they have an association (e.g. introducers, fact-finders)… although it is not clear whether the SIP7 disclosures are required only for the period being reported on;
  • Where the firm has received payment for pre-appointment work over and above that captured by R3.1 (i.e. work with a view to the administration), R6.7 (i.e. work pre-CVL for the SoA and S100 process), or for pre-Nominee (e.g. Proposal drafting or advice) work – I have seen cases where the firm has worked with the company (or debtor) for some time before settling on the eventual insolvency process and the fees paid in those early days haven’t always been disclosed; and
  • Any IVA-connected payments received by associates from the debtor or elsewhere, although I expect the revised SIP3.1 will soon take care of that in the same way that the revised SIP3.2 has done.

Reconciliations required

Para 11 is new:

“Accounts should be reconciled to the balances at bank, the case records and to any amounts due to the office holder”

I suspect that most practices make the producing of a statutory report the ideal time to reconcile the bank account and to record for the file the IP’s (or manager’s) formal review of this.  Of course, practices regularly reconcile accounts at other times too.  Generally therefore, this SIP7 requirement does not appear onerous, but it does mean that, if an R&P is revised because a report has been delayed – especially Admin Proposals, fee proposal packs or final accounts/reports, where the report dates usually move when they’re revisited – another reconciliation will need to be produced.

Ok, so that’s covered reconciling accounts to the bank, but what about reconciling them to “the case records and to any amounts due to the office holder”?  Does this mean that the accounts need to be reconciled to the case records’ lead schedules, e.g. of debtors, rental payments, even where those schedules have pretty-much fallen out of use?  What about where you’ve raised a final bill but only had it part-paid from the estate (because you’re waiting for a VAT refund), should you now be noting a reconciliation of the R&P with your firm’s debtor records?  Or is it enough simply to sense check the R&P to make sure that it doesn’t include any peculiar narratives, such as “preparation of SofA” when it should be pre-administration costs?

Given that “accounts” in a SIP7 sense might include “reporting on remuneration and/or expenses, whether incurred, accrued or paid” (para 16), should you be checking that everyone has posted their timesheets for the period under review before producing a time cost breakdown?  And again, if your Admin Proposals, fee proposal packs or final accounts/reports were delayed and a fresh time cost breakdown is attached, does this mean you need to reconsider this reconciliation?

Another scenario is where a decision procedure needs to be repeated: I have seen some IPs issue a new Notice of Decision Procedure with a new decision date and simply refer to the original fee proposal pack as providing all the necessary information.  This doesn’t really work, does it, where 2 weeks or more have passed?

Comparing EtoRs

Spot the difference:

  • Old SIP7 (para 6): “Receipts and payments accounts should show categories of items under headings appropriate for the case, where practicable following headings used in any prior statements of affairs or estimated outcome statements.  Alternatively, an analysis should be provided to enable comparison with the ‘estimated to realise’ figures in any prior document.”
  • New SIP7 (para 9): “Receipts and payments accounts should show categories of items under headings appropriate for the insolvency appointment, where practicable following headings used in prior statements of affairs or estimated outcome statements.  An analysis should be provided to enable comparison with the ‘estimated to realise’ figures in any previously issued document.”

Steven Wood in the ICAS webinar on the SIPs stated that the change means that it is “no longer acceptable to simply have the R&P using headings previously used in a SoA or EOS thereby leaving creditors with the information to do the comparison but requiring several documents to do so”.  I can understand why the RPBs might want this outcome, but personally I don’t see that SIP7 achieves it.  True, the word “alternatively” has been removed so that now in every case “an analysis should be provided to enable comparison with the ‘estimated to realise’ figures in any previously issued document”, but this does not mean that all R&Ps must provide the EtoR figures.  It just means that the R&P must provide sufficient information to enable a comparison to be made with any such figures in any previously issued document, which can be achieved by analysing receipts according to the previously-issued SoA/EOS headings.  This meaning is reinforced by para 8 of the SIP, which states: “Unless there is a statutory provision to the contrary, this does not require repetition of information previously provided”. 

Having said that, it’s not a big deal, as most IPs provide the EtoR figures in report R&Ps… but I do think that an RPB might have a hard time enforcing the practice based on the wording of the SIP.

Other changes

To be honest, I don’t think the remaining changes need much attention:

  • The introduction and principles use pretty-much all the same words, just in a different order;
  • Para 20 is new: it requires a former office holder to provide to their successor information to the extent set out in the SIP;
  • Para 25 explains that a trading R&P is provided “to enable an appropriate understanding of what was done, why it was done and how much it cost”; and
  • Hive-downs have been replaced by “Alternative approaches to asset realisation”.  The section (paras 26 and 27) doesn’t explain what is meant by this, but gives hive-downs as an example.  Again, the SIP states that sufficient information should be provided “to enable an appropriate understanding of what was done, why it was done and how much it cost”, which is a principle that seems to me adequately required by SIP9 in any event.

What’s Next?

One of our clients sent Jo and me a plea that we reduce as far as possible the number of updates to our document packs.  Oh, if only we could! 

We understand that a revised SIP3.1 is near to release, we expect a revised SIP16 to be issued around the end of this months to coincide with the new Connected Person Disposal Regulations, and I have heard rumours of some changes to SIP13 also because of the new Regs.


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New SIP3.2: more red tape and longer docs

It would be a mistake to assume that we don’t need to think about the revised SIP3.2 until 1 April.  It applies to all nominee appointments from 1 April 2021, so in view of the lead time on preparing CVA Proposals, you may well find that you already have engagements that need to comply with the new SIP3.2.

In this article, I look at the practical effects of the changes to SIP3.2.

Firstly, though, I should apologise for maligning the ICAEW.  In my last blog, I’d said that they had not formally issued the revised SIPs, but I’d overlooked an email that hit my inbox two days before I posted my article.  The IPA finally issued the SIPs on 10 March 2021… so if you’re an IPA member who has already issued an unchanged advice letter to deal with a nominee appointment that you expect to get after 1 April, I suggest that you have a very good excuse why the letter didn’t comply with the new SIP.

The revised SIP3.2 (E&W) can be found at https://www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/sips/england/sip-3-2-company-voluntary-arrangements-england-and-wales.ashx

 

More Ethical Taglines

There are several new references in the SIP to acting professionally, objectively etc.  In practice, these don’t affect how IPs work, as I’m sure that your Ethics Checklists and periodic case reviews already keep these requirements in the frame.  The SIP3.2 additions just seem to be another cudgel that an RPB may wield if they see unethical behaviour, although I’m not sure why the Ethics Code needs an escort.

Instead, let’s focus on what you need to change to comply with the new SIP.

 

“Additional Specialist Assistance”

The SIP requires the IP to have procedures in place to ensure that, at each appropriate stage of the process, the company/directors are informed about:

“whether and why the company will require additional specialist assistance which will not be provided by any supervisor appointed, including the likely cost of that additional assistance, if known”

On a similar theme, the Proposal must contain information on:

“any additional specialist assistance which may be required by the company which will not be provided by any supervisor appointed, and the reason why such assistance may be necessary.., the cost of any additional specialist assistance”

What do the drafters have in mind here?  Perhaps they are thinking about restructuring professionals.  “Additional specialist assistance” could also encompass other instructions, for example where the company expects to deal with something outside the ordinary course of business, such as selling assets… or dealing with a legal matter… or refinancing… or…

Of course, it makes sense to ensure that the directors are prepared to factor in such additional costs, but I am not sure I understand what this has to do with the creditors: if the Proposal sets out what net proceeds or contributions will come into the CVA together with sensible forecasts where appropriate – and further details if the IP’s firm is to receive any additional payments (as was already required by SIP3.2) – then isn’t that enough to enable them to assess the Proposal?

 

Changes to Advice Letters and Interview Records

In addition to covering off any additional specialist assistance, advice letters and/or interview records must now explain the directors’ responsibilities and role both before and during the CVA – “during” is new.

Instead of requiring a “face to face” meeting with the directors, the SIP now requires the initial meeting to be “in person (whether a physical meeting or using conferencing technology)”.  For sole directors, would a telephone meeting be acceptable..?  In any event, it might be useful to add to your interview record the method used.

 

More Strategy Notes

The SIP adds some new strategy note requirements, which might also be incorporated into interview records.  It requires:

  • “A detailed note of the strategy, outlining the advantages and disadvantages of each option”, which was previously only required for Administrator/Liquidator Proposals
  • “…including the impact of trading within a CVA for a prolonged period and the continued viability of the business during that period” – this is new and makes sense to me: it is of course sensible to manage the directors’ expectations, make them fully aware of how tough it can be to trade on in a CVA. CVA companies may have some protection via S233 and S233A, but practically I suspect that most creditor suppliers make CVA companies go through pain.  The SIP also requires:
  • Creditors to be “given adequate time to consider what is being planned as regards the CVA”. I find this odd: what are the RPBs’ expectations?  In the ICAS webinar (http://ow.ly/tcGU50DKuCp), David Menzies suggested that IPs should document why the period of time given to creditors to consider the CVA is adequate, including factors such as the delivery time and the time creditors would need to get advice.  But the company is insolvent, it is probably continuing to trade under difficult and uncertain circumstances, surely the approval of a CVA should be pursued as quickly as possible, for creditors’ sakes as well as the company’s?  The Rules put a narrow timescale on the process – effectively between 14 and 28 days from delivery of the nominee’s report – so presumably the legislators felt that 14 days (post-delivery) was adequate time for creditors, doesn’t this satisfy SIP3.2?

 

Signposting Sources of Help

Something else to record on the strategy note might be your consideration of “signposting sources of help” “where creditors may need assistance in understanding the consequences of a CVA”.

In his webinar, David Menzies recommended that IPs should document their consideration of the creditor composition, such as their knowledge, experience and skills, and especially if the IP is not going to be signposting creditors to sources of help.  He also suggested that we gather details of potential sources of help – generic and sector specific – that could be signposted to.

Ok, a generic one is the R3’s site at http://www.creditorinsolvencyguide.co.uk/, which I expect many of us added to our initial creditor letters years ago.  Other than that, where would you signpost creditors to?

The elephant in the room is the British Property Federation, which was represented on the SIP3.2 working group.  Additions to the Proposal’s contents listed below strongly suggest that the BPF had quite some influence over the revised SIP.  True, the BPF provides guidance for landlords who receive a CVA Proposal, but I question whether it is helpful to the process to recommend that landlords issue a 33-point wishlist to nominees as “a standard document… if they do not feel they have been provided with the requisite information” (https://bpf.org.uk/media/2319/cva-creditor-friendly-document-09102019.pdf).

What about employees?  Ok, employees rarely have much more than contingent claims that won’t crystallise, but particularly as they could find that not all their claims would be covered by the RPS in the event of an insolvency process following the CVA, it would seem appropriate to consider giving them access to guidance.  However .gov.uk’s coverage is poor.  https://www.gov.uk/your-rights-if-your-employer-is-insolvent simply lists CVA amongst the insolvency processes and states that employees might be able to make claims to the government.

Well, that’s two creditor groups that might not be helped with any existing resources.  It seems that the JIC has put the cart before the horse on this one.

 

Much More Required in Proposals

The new SIP adds several new items to the Proposals’ tick-sheet:

  • Additional specialist assistance, as explained above;
  • The alternative options considered, both prior to and within formal insolvency by the company;
  • An explanation of the role and powers of the supervisor;
  • Details of any discussions with key creditors;
  • Where it is proposed that certain creditors are to be treated differently, an explanation as to which creditors are affected, how and why;
  • An explanation of how debts are to be valued for voting purposes, in particular where the creditors include long term or contingent liabilities;
  • An explanation of how debts that it is proposed are compromised will be treated should the CVA fail;
  • The circumstances in which the CVA may fail; and
  • What will happen to the company and any remaining assets subject to the CVA should the CVA fail.

Although I dislike the way SIP requirements grow and grow, most of the above additions are not disastrous and in fact several are probably addressed in most CVA Proposal templates already.  At least two of the new requirements are clearly targeted at multiple landlord CVA Proposals, which one would hope are already being well crafted with the assistance of solicitors.

One of the new requirements has got us puzzling.

 

How to Value Votes

Firstly, is it possible to define how votes will be valued for the S3 process other than as set out by legislation and case law precedent?  If the chair/convener were to value votes in any other way, wouldn’t it give rise to grounds for a challenge of material irregularity?

Secondly, what can be the point of adding to the Proposal terms setting out how claims will be valued for voting in the S3 process, when the Proposal does not take effect until after the vote has been determined?  A Proposal’s terms cannot have any effect on what happens before it is approved, can it?

Presumably, therefore, the regulators only expect Proposals to set out how votes would be valued in decision processes during the course of the CVA… although that’s not what the SIP says.

But what kind of explanation do the regulators expect?  If it is proposed that votes be valued by applying the Rules for statutory decision processes in CVA, e.g. by following R15.31(1) that votes will be calculated according to the claims as at the decision date and R15.31(3) that debts of unliquidated or unascertained amounts will be valued at £1 unless the chair/convener decides to put a higher value on it, is this sufficient explanation?  Or do the regulators expect Proposals to set out how every single claim (especially the uncertain ones) will be valued and at every stage of the CVA, e.g. before adjudicating on claims for dividend purposes and then after having paid a dividend?  What about if there is new case law that takes things in a different direction?  Should a supervisor simply consider themselves bound by what the Proposal (and perhaps as modified!) dictates?

 

After Approval

AND breathe.  In comparison, the post-approval additions don’t look too grim.

The SIP adds to the supervisor’s post-approval duties:

  • Sources of income of the associates of the IP in relation to the case must be disclosed (the old SIP restricted it to the IP’s and their firm’s income);
  • If the CVA costs have increased beyond previously reported estimates, not only should the increase be reported, but also “an explanation of the increase” should be provided;
  • When a CVA concludes or fails, the supervisor should ensure that the company is dealt with appropriately in accordance with the CVA Proposal (presumably where this is in the supervisor’s power?); and what is to happen should be reported to creditors.


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New SIPs, what new SIPs? Part 1: SIP9

The new SIPs might be the RPBs’ worst-kept secret: they’re available on the ICAEW’s website, but the ICAEW has yet to announce their release; in its recent webinar advert, the IPA mentioned in passing that three revised SIPs are “due to be issued in the beginning of March”; whereas ICAS has already presented a (free) webinar on them.

And thank goodness ICAS has been upfront about them!  While R3 stated that “the changes are not expected to be far reaching”, Jo and I think that they very well could be for IPs who still bill Category 2 disbursements.

 

In this blog, I take a look at the revised SIP9, which takes effect from 1 April 2021 in relation to all relevant cases, i.e. including existing cases.  My recommended to-do list includes:

  • Review whether your existing Category 2 disbursements recharges will be prohibited from 1 April and set up safeguards to avoid billing these from that date
  • Revisit all documents that refer to Category 1 or 2 disbursements and change definitions to meet the new SIP9’s, including referring now to Category 1 and 2 “expenses”
  • Ensure that fee proposal and/or progress report templates meet the enhanced disclosure requirements for:
    • The use of associates or those with whom you have a professional or personal relationship that falls short of a legal association
    • Sub-contracting work that could be done by you or your staff
    • Explaining what you expect to be paid (not only what it should cost) and an indication of the likely return to creditors in all cases
    • Making clear what direct costs are included in fixed/percentage fee bases
  • For fees estimates, check that you calculate a blended rate correctly
  • Don’t get too hung up on your MVL documentation, as MVLs are (almost) carved out of the new SIP9

You can access all the revised SIPs (for E&W) from https://www.icaew.com/regulation/insolvency/sips-regulations-and-guidance/statements-of-insolvency-practice/statements-of-insolvency-practice-sips-england

You can access ICAS’ webinar at http://ow.ly/tcGU50DKuCp

 

Changes to recharging costs to estates

Jungle drums have been rumbling for several years now on the topic of whether a cost can be recharged to an estate as an expense or whether it is an overhead that is not permitted to be recharged.  This SIP9 goes some way to clarifying the distinction:

  • Whereas the current SIP9 (I’ll call this the old SIP9 from here on) states that “basic overhead costs” are not permissible as disbursements, the new SIP9 widens the scope to “any overheads other than those absorbed in the charge out rates”.
  • The new SIP9 no longer refers to Category 1 and 2 “disbursements”, but to Category 1 and 2 “expenses”. If you managed to avoid getting into a debate about this with an RPB monitor over the past few years, you may find this an odd and subtle change.  The point is that a “disbursement” is an expense that is first paid by a party (e.g. the IP/firm) and only later recharged to the estate.  The consequence of this change is that direct payments from an estate to an associate are now Category 2 expenses (whereas under the old SIP9, such a payment would be neither a Category 1 nor 2 disbursement, as it is not a disbursement at all).  A more frustrating consequence is that lots of templates – fee proposal packs, disbursements policies, progress reports, Fees Guides – will also need changing to reflect the new terminology.
  • The most important change is the new SIP9’s statement that:

“All payments should be directly attributable to the estate from which they are being made or sought”.

 

Is this the end of Category 2 disbursements?

What does “directly attributable” mean?  Does this mean that you will no longer be able to be paid Category 2 disbursements on a roughly calculated basis, say, £x per creditor to cover stationery and photocopying?  Or internal room hire of £x per meeting?

Here’s the odd thing: although only “directly attributable” costs can be passed on, the SIP still allows “shared or allocated payments”.  An example of a shared cost that David Menzies of ICAS gave in his webinar was where an office holder hires an external conference room for physical meetings in relation to three connected insolvencies: this charge could be split up and passed on to the three cases… but as it is a shared cost, it would be a Category 2 expense… so it would need to be approved before being paid from the estate.

David Menzies helpfully suggested that, for a cost to be directly attributable, there needs to be a direct causal relationship between the cost and the case.  He suggested asking yourself the question: would the cost have been incurred if the case did not exist?  On this basis, it seems to me that photocopying and internal room hire charges could not be viewed as “shared costs”, as the firm would still incur the cost of the photocopier or premises rental whether or not the one case to which you are aiming to recharge the costs existed.

 

What is an “overhead”?

David’s own definition was that overheads are costs that are not directly attributable to an individual insolvency estate but which are incurred in support of insolvency appointments for the IP or are costs associated with other services that the IP/firm provides as part of their business.

So if the cost is incurred to support the administration of a case plus other aspects of the business, it is likely to be an overhead.  Here are some other examples from ICAS’ webinar:

  • Where an IP’s office space is used to store company records, the IP could not charge the estate for storage
  • Where an external storage company charges, e.g., £x per box per quarter, this could be charged to an estate based on the number of boxes stored on that case
  • Where an external storage company charges a global fee for the facility, which is used to store case files and office admin files, this is probably an overhead that could not be split up and charged to the estate
  • Where a mailing company produces a monthly itemised bill, the items relevant to each case could be charged to the estate as a Category 1 expense
  • Where a software provider charges on a per case basis, this could be considered an expense
  • Where a firm pays a global fee for software, e.g. a Microsoft licence, this could not be split up across the cases

I have tried to reflect as closely as possible what was said on the ICAS webinar – and I do see the logic of these examples – but please note that the strict wording of the revised SIP9 does not lead unequivocally to these conclusions.  We expect to see some additional guidance from the RPBs, which may help clearly define the boundaries explored by these examples.

 

How will this affect recharging?

Although the revised SIP comes into force on 1 April 2021, it does not relate only to new appointments from that date.  Therefore, even if you have already obtained approval for Category 2 disbursements that will not be allowed under the revised SIP, you will not be able to draw payment for them from the estate after 1 April.

I suggest that you revisit all your current Category 2 disbursements practices and decide now how you will put safeguards in place to make sure that no “overheads” are inappropriately billed after 1 April.

 

Other Category 2 clarifications: Associates

The revised SIP9 makes it clearer that even the charges from parties with whom the IP/firm has no legal association may fall within the scope of Category 2 treatment.  It states: “Where a reasonable and informed third party might consider there would be an association, payments should be treated as if they are being made to an associate”, i.e. they will need to be approved as a Category 2 expense.

But what is an “association”?  In my response to the JIC consultation, I gave the example that, as an IPA member, I have “an association” with the IPA, so does this mean that I would treat the IPA as an associate (e.g. if I were to hire its boardroom for a creditors’ meeting)?  David Menzies was helpful in his webinar: he suggested that the context here might be the Code of Ethics’ significant professional or personal relationship concept – if such a relationship were present (or might be perceived by a reasonable and informed third party to be present), then this would equate to an association for the purposes of SIP9.

The revised SIP9 adds to the required disclosure: now, office holders must disclose “the form and nature of any professional or personal relationships between the office holder and their associates”… presumably where it is proposed that the insolvent estate shall bear the associate’s fees/costs.

 

It’s not all extra burdens

I suspect that a big relief to many IPs will come in the form of a reduction in scope of SIP9.  With effect from 1 April, SIP9 will no longer apply to MVLs… “unless those paying the fees require such disclosures”.

In the ICAS webinar, it was suggested that a prospective liquidator might ask the members upfront whether they want to receive such disclosures and keep evidence that they had been so asked and what their response is.  But this isn’t in the SIP and personally I hope that this does not become the regulatory expectation for all MVLs.  Quite frankly, if a party is paying your fees, I’m sure you will give them whatever information they so require irrespective of what a SIP does or does not say.

Sensibly, the new SIP9 clarifies that it does not reach to Moratoriums, although I’m not sure that this needed saying considering there isn’t really an “estate” in a Moratorium appointment, is there, there’s simply a “client”?

 

The small print

Here are the other most material changes in the revised SIP that I have seen:

  • Proportionate payments

“All payments from an estate should be fair and reasonable and proportionate to the insolvency appointment” – how do you measure proportionality?

I often query IPs who instruct agents to deal with chattels that are only worth, say, £3,000 when they include agents’ costs of £3,000 (and in some cases, more!) in an expenses estimate.  The IPs often respond that the agents are doing much more than simply realising chattels – will arguments like this fall foul of the proportionate test in future?  Instructing solicitors is another minefield: hindsight sometimes makes such costs look disproportionate to what has been achieved.

 

  • Consider who is approving your fees

“Payments should not be approved by any party with whom the office holder has a professional or personal relationship which gives rise to a conflict of interest”.

For example… a firm’s IPs are often appointed on Admins by a secured creditor and now you need your fees approved by that secured creditor.  Or… you have paid or plan to pay the company’s accountants for helping on a Statement of Affairs, as you have done on a number of cases before, and those accountants are the only unsecured creditor to vote on your fees.

These relationships certainly give rise to self-interest threats, but do they overstep the SIP9 conflict of interests threshold?  David Menzies suggested that the barrier is reached where there is an unacceptable conflict, not simply an ethical threat that can be managed to an acceptable level with safeguards.

 

  • More disclosure on sub-contractors

The old SIP9 required disclosure where the office holder sub-contracts work that could otherwise by carried out by them or their staff.  Now the disclosure must also include “what is being done and how much it will cost”.

 

  • Not so much what it will cost, but what do you expect to be paid?

Whereas the old SIP9 included as a key issue of concern the anticipated cost of work proposed to be done, now the SIP includes the anticipated payment for the work.  So, for example, while a fees estimate may set out that time costs of £30,000 are anticipated to be incurred, it seems you now need to disclose that, due to insufficient assets, you only expect to be paid £10,000.  Also, where you are seeking (or have approved) a percentage basis, what payment will this likely equate to?

 

  • Always provide an indication of the likely return to creditors

Further crystal ball-gazing now appears necessary: whereas the old SIP stated that “where it is practical to do so”, you need to provide “an indication of the likely return to creditors when seeking approval for the basis of” fees, this has been toughened to a requirement in all cases, whether or not it is practical to do so.

 

  • What is included in your fixed/percentage fee?

Oddly, “where a set amount or a percentage basis is being used, an explanation should be provided of the direct costs included”.  I would think it were more important to be clear about what direct costs are excluded.  The new SIP continues: “The office holder should not seek to separately recover sums already included in a set amount or percentage basis fee and should be transparent in presenting any information”.

 

  • How to calculate a blended rate

Helpfully, the SIP now explains what is meant by a “blended rate”: it “is calculated as the prospective average cost per hour for the appointment (or category of work in the appointment), based upon the estimated time to be expended by each grade of staff at their specific charge out rate”.

You might think this is an obvious definition.  However, I have seen several fees estimates based on a “blended rate” calculated as simply the average of the charge-out rates, e.g. IP at £400 per hour and case-worker at £200 per hour, so the estimate is calculated at £300 per hour.  This method generates an artificially inflated fees estimate where, as you would expect, the case-worker spends the majority of time on the case.

The method that the SIP now promotes is use of a blended rate that reflects the estimated time to be spent on the case.  In the above example, if the IP is estimated to spend 10 hours and the case-worker 60 hours on the case, the blended rate would be c.£229 per hour, leading to a total fees estimate of £16,000, which is much more realistic than the £21,000 (i.e. 70 hours at £300) reflected by the earlier method.

 

There’s more

Yep, there’s a new SIP7 and SIP3.2… and we expect a revision to SIP16 before the end of April.  Never a dull moment!

 


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Compliance Hot Topics

I think we all need a break from new legislation and threats of more changes, don’t we?  How about settling back into something more familiar and, I think, strangely comforting: common non-compliances.

Usually, late spring brings us the Insolvency Service’s annual review of regulation, but there’s no sign of it this year.  But we do have the ICAEW’s reports, which are well worth a read for any IP, as they highlight common issues that I think we’re all seeing.  This year, there are three ICAEW reports, although this blog only looks at their Insolvency Monitoring Report at: www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/annual-return-and-monitoring/insolvency-monitoring-report.ashx

In the report, the ICAEW highlights the following areas that have brought IPs to the Committee’s attention:

  1. Remuneration
  2. Ethics
  3. Investigations
  4. Statutory Deadlines
  5. Insolvency Compliance Reviews
  6. Information to Debtors

The ICAEW report identifies several other areas of concern as well as providing some useful tips on conducting SIP11 reviews.

 

Issues that have led to Committee-referral

The ICAEW reports that the following have led IPs to face the Insolvency Licensing Committee (“ILC”):

1. Remuneration

The ICAEW reported instances of:

  • Drawing fees without proper authority

The issues that I have seen include: drawing pre-CVL fees that do not meet the R6.7 definition; getting in a muddle with who is required to approve Administrators’ fees (and failing to make sure that this tallies with the Proposals); and accepting shareholders’ informal approval of MVL fees, rather than getting a proper resolution.

  • Fees (or proposed fees) appearing excessive or unreasonable

When I have spoken with monitors (ICAEW and IPA), I have been given examples of excessive/unreasonable fees that truly are toe-curling, although I have seen other cases that do not appear particularly damning.  I understand that both RPBs have a number of cases working through their disciplinary procedures, but I have yet to see any sanction published under this heading.  It may be a difficult allegation to make stick, but for some time I have felt that the RPBs and the InsS have been looking for a worthy scalp.

  • Failing to follow the decision procedure rules

This one frustrates me: despite the comprehensive checklists and templates that many firms have, somehow several people still manage to overlook a key component in fee proposal packs.  Often, the missing piece is a Notice of Decision Procedure when seeking a vote by correspondence.  Sometimes, it is an Invitation to Nominate Committee Members and/or a failure to seek a decision on the formation of a Committee.  In some other cases, fee proposal packs have not been circulated to all the relevant creditors, sometimes because a bunch of creditors (usually the employees) have not been provided previously with a R1.50 website notice and sometimes because IPs have assumed that, as the RPO is the major preferential creditor, it is the only one who needs to be asked to approve an Administrator’s fees in a relevant Para 52(1)(b) case.

  • Failing to provide fee estimates, where required

This is scary, considering that the Rules changed in 2015!  Personally, I haven’t seen this in a few years now.  I do still see, however, fee proposal packs lacking details of expenses, which is a necessary statutory component of all ADM, CVL, WUC and BKY fee proposal packs (and a SIP9 expectation in all case types).

The ICAEW’s tips to improve in this area are:

  • Consider using a billing authority form so that evidence of statutory approval is provided whenever a bill is raised/paid from the estate

I agree that this is valuable, although it will not ensure that valid approval has been achieved unless minutes of meetings/records of decision are signed off with similarly rigorous checks.

  • Critically review fee proposal packs: does the pack explain clearly the work done or to be done and, in light of the explanation, do the costs seem reasonable?

Yep, I agree with this too.  When considering fee estimates, I find it useful to consider the hours being proposed.  For example, it might look like good value to estimate time costs of £5,000 to recover £30,000, but if this means you’re expecting to spend three whole days to collect one book debt, then without more explanation this will look unreasonable.

 

2. Ethics

The ICAEW reported three instances where:

  • Prior relationships had not been considered

I see this so often that it makes me want to weep.  In these cases, the reviewer’s view was that the IP should have concluded that it was unethical to accept the appointment: now, that will get you into hot water.

Unsurprisingly, the ICAEW’s tips are:

  • Simply do proper ethics reviews and write them down before appointment

I wonder if this goes wrong because people independent from the case (and/or people who don’t really understand ethics) are tasked with completing the ethics review… and then the prospective office holder signs it off without thinking.  IPs, please think before you sign off an ethics review: does it disclose all prior relationships and are they well explained and evaluated?

 

3. Investigations

The ICAEW reported:

  • A systemic failure to record sufficient SIP2 work

Over recent years, there has been a trend away from lengthy checklists.  While I can understand this for routine case administration not least as checklists are often completed after-the-event, this approach simply does not work for SIP2 investigations.  The RPBs expect to see contemporaneous evidence of what work has been done and the office-holder’s thinking on whether anything is worth looking into further.

  • Failure to pursue antecedent transactions

I have seen SIP2 investigations fail to pick up weird goings-on like money moving out of accounts after the company had apparently stopping trading.  I have also seen SIP2 checklists identify a potential action and then the trail goes cold.  Both are just not acceptable and, I think, usually stem from an overflowing caseload or disorganised case administration.

The ICAEW’s tips are:

  • Do the work at an early stage and then follow up; and
  • Document decisions not to continue pursuit

The ICAEW reminds us that litigation funders may be able to help.  Some IPs screw their noses up at this suggestion based on rejections they received many years’ ago.  Times have changed, so I would recommend trying again.  And if you still get a rejection, at least this can form part of your decision.  Of course, your decision will also be based on your target’s wealth: it may be a no-brainer decision, but always write it down.

 

4. Statutory Deadlines

The ICAEW reported:

  • An increasing number of systemic failures to meet deadlines

This isn’t an issue I have seen.  Perhaps it derives from poor diary/task templates?  I have seen some sub-standard designs since the 2016 Rules were introduced, but I think those issues have largely been ironed out now.  Could the problem be overwhelming caseloads?  Firms weren’t exactly working at full pelt last year, so if this is your problem, then heaven help you in 2020/21!  Also, try not to get into the habit of running off progress reports at the very end of the deadline (and remember that ADM deadlines are one month, not two): if you do that, then there is no wriggle-room when you have a flurry of new work.

The ICAEW’s tips are:

  • Have robust diary prompts and case-specific checklists; and
  • Consider appointing a staff member to oversee/chase compliance

If diaries are very detailed, sometimes it is difficult to see the wood for the trees.  Having this as one person’s duty (or requiring, say, all managers to monitor/chase) can help sift out the vital diary prompts from the not-so-important ones.  It also helps more junior staff to learn which diary lines are non-negotiable.

 

5. Insolvency Compliance Reviews

 The ICAEW reported:

  • Weak or non-existence ICRs

It is worth remembering that the ICAEW does take this seriously, so please do give ICRs a great deal of attention.

  • Failure to implement changes

Sometimes actually conducting the ICR is the easy bit.  The time required to make the necessary changes can be substantial.

The ICAEW’s tips are:

  • Use a robust checklist to carry out the ICR

The ICAEW provides a checklist (note: this works for corporate and personal cases): www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/corporate-insolvency-casework.  Some questions are subjective, e.g. re case progression, but if used critically with no preconceptions it covers all the major statutory bases.  The ICR also needs to consider key areas on a firm-wide basis.  The ICAEW’s Review of Internal Controls and Systems Helpsheet – at www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/insolvency-compliance-review-helpsheets – is a good start, but remember that, aside from the ICR itself, SIP11, client money and the Money Laundering Regs require more thorough individual attention.

  • Make the necessary changes

I recommend getting the easy wins, e.g. fixing document templates and diary lines, out of the way quickly.  Meatier tasks may take months to resolve, especially if they involve changing procedures, training staff and making sure that they have adapted to new requirements.  Plan to tackle these tasks methodically, assign the tasks to appropriate staff and follow up with chasers/meetings to make sure that progress continues to be made.  Then, review the effectiveness of the changes ideally before the next ICR is due and keep going until the issue is resolved.

 

6. Information to Debtors

The ICAEW reported:

  • Delivery of poor information to debtors presumably in a pre-IVA context

…including: omitting relevant options; rushing calls; leading the debtor; and not sufficiently explaining the pros and cons of options.

The ICAEW’s tips are:

  • Train staff;
  • Review and update scripts regularly;
  • Regularly review calls for quality; and
  • Ensure that calls are tailored to the individual and give them time to consider their options

Nothing more needs to be said, really.  Quality-controlling advice calls is a never-ending job and one that needs to be well-resourced.

 

The Worst of the Rest

Yes, there’s more… lots more.

The above issues will get you in front of the ILC, but the ICAEW’s report also highlights other issues that are worth double-checking:

  • Miscalculation of delivery timescales

Be careful of assuming first class delivery times and then using second class post.  Take care also to exclude the date of delivery and the date of a decision when calculating notice periods.

  • Flaws in reports and fee estimates

In addition to the issues raised above, a plethora of qualitative issues arise, e.g. does the narrative explain the WIP or fee requested; are the numbers consistent throughout the doc; and are generic statements relevant to the case in question?  Something I see missing a lot are explanations as to whether the fee and expenses estimates have been (or will be) exceeded and if so why.  In some other cases, these explanations do not stack up with the WIP analysis, e.g. it might be reported that the fee estimate has been exceeded because of difficulties pursuing a certain asset, but the WIP analysis shows the fee estimate has only been exceeded in the Admin & Planning category.  Sometimes this can point to poor time-recording practices.

  • Poor case progression and dividend practices

The ICAEW reports some delays in asset recovery and in progressing dividends, as well as miscalculation of claims, especially those of employees.  Remember that in most cases you have only 2 months after the last date for proving to declare the dividend and, if you miss that, then you will need to go through the NOID rigmarole again (and, if you don’t have a good reason for missing it, then your second attempt should be at your own cost).  The ICAEW expects payment of interim dividends in appropriate cases.  I have also seen IPs put off progressing a preferential distribution until they can see their way clear to an unsecured dividend, which is not acceptable.  The ICAEW has also highlighted an issue with IPs telling creditors that they will apply the small debt provisions and then they fail to follow this through.  I have seen some initial letters and progress reports state such an intention and, although personally I think this is not binding until the NOID is issued (R14.31), to avoid any creditor confusion, I strongly recommend removing such statements from these early circulars: if you decide later to apply the small debt rules, then you can make this clear in the NOID.

  • Inadequate annual AML tasks

The ICAEW report reminds readers about the need to review the firm-based AML risk assessment annually and to carry out a full AML review.  I’ll take a closer look at this topic in a future blog when I review the ICAEW’s other annual reports.

  • Clients’ Money Regulations: a reminder for non-ICAEW IPs

The ICAEW report highlights that its Clients’ Money Regs apply to more than just ICAEW-licensed IPs.  If you work in an ICAEW-defined firm or the ICAEW is the firm’s AML Supervisor, then you need to comply with the ICAEW’s Clients’ Money Regs whether or not you are licensed as an IP by them.  To be honest, there are few differences between the IPA’s and the ICAEW’s Regs, but one notable difference is that the ICAEW requires an annual review of the operation of a client account.

  • Inadequate GDPR checks

The ICAEW reports that some are not considering on a case-by-case basis what personal data is held by the insolvent, whether it is secure and for what purpose it is held/processed.  The ICAEW also expects IPs to check whether the entity was registered with the ICO… although it is not clear what they expect you to do subsequently.  I recall that R3 asked the ICO way back in 2018 whether IPs should be maintaining (or even initiating) insolvents’ ICO registrations, which of course would attract additional costs to the estate.  But then 2018’s problems seem so last year!

 

SIP11 Reviews

The ICAEW devotes a whole page to this topic in its report.  Noteworthy points include:

  • Make sure the financial controls and safeguards are written down in the first place

I have seen more than one firm try to carry out a SIP11 review without having taken this step.  How can you check whether the firm’s processes have been followed, if they’re not written down?  SIP11 lists nine areas in paragraph 9 to document… and then adds a tenth (insurance cover) in paragraph 11.  In effect, these areas result in a cashiering manual setting out what happens to money in, payments out, bank recs etc.

  • Then review them annually

The ICAEW report highlights that traditional ICRs will not cover everything required of a SIP11 review.  Jo and I concur: if you want us to do a SIP11 review alongside your ICR, please let us know this and expect the ICR to be longer (and more expensive).  There is no prescription as regards a SIP11 review, but the ICAEW report lists four points that could be considered:

  • Review a sample of cases to see whether procedures have been followed correctly

To some extent, this will be covered by a traditional ICR, but the reviewer may only carry out full reviews of a couple of cases, which will be insufficient for SIP11 purposes.

  • Review the findings of the annual client account compliance review

From a SIP11 perspective, key issues include: how quickly client account money is moved to estate accounts; whether all post-appointment transactions are reflected on the case’s cash-book; and what happens to any interest credited to the client account.

  • Run reports from IPS etc. to review money held and bank rec frequency

I would also recommend running reports on balances held in closed cases or in “suspense” accounts.

  • Review a sample of bank recs

I have seen bank recs with uncleared adjusting entries or uncleared receipts signed off month after month without any apparent thought as to what is behind these.  Understandably, uncleared payments can sit around for longer, but they do need to be resolved at some stage.

Although not included in the ICAEW’s list, the report does note that the firm’s bonding and insurance procedures also need to be reviewed as part of the SIP11 exercise.  This could include a comparison of your open case list against your bond insurer’s, which would help identify whether bonds are being released appropriately.  You could also review whether bond schedules are issued before the 20th day of the following month – look particularly at appointments occurring right at the end of the month, as they can easily fail to hit IPS etc. in time for the following month’s bordereau – and see how swiftly increases are arranged.  Of course, the firm’s insurances are reviewed annually on renewal, but you could prove SIP11 compliance by keeping a record of that renewal consideration by the IP(s) in the same location as the SIP11 review docs.

 


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Ethics: The Reboot

How does an Ethics Code more than triple in size overnight?  In my view, largely by adding lots of unnecessary words.  The devil, however, is in finding the detail hidden within the new Code that affects how we should be viewing and handling things differently from 1 May.

A primary reason why the new Code is substantially longer is that we now have “requirements” – highlighted in bold and given an “R” paragraph number – and “application material”, identified by normal text and “A” paragraph numbers.  This application material is “intended to help an insolvency practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement” (1.4 A1).  So don’t be misled into viewing “A” paragraphs as optional guidance: although all the “shall”s appear in the “R” paragraphs, the language of most of the “A”s indicates that they also are necessary to achieve compliance.

Although I have tried to highlight the main areas of change, I do recommend that you read through the Code in its entirety yourself.  There is a great deal more detail to explain RPB expectations and you could find that the particular circumstances of you or your firm and your engagements gives rise to ethical threats that you may have overlooked in the past.

The ICAEW’s version of the new Code can be found at www.icaew.com/-/media/corporate/files/technical/ethics/insolvency-code-of-ethics.ashx?la=en and the IPA’s version of the new Code is at www.insolvency-practitioners.org.uk/regulation-and-guidance/ethics-code (although the IPA hasn’t amended the text of the page to highlight that the link is not to the Code that came into force in 2009, nor have they archived the accompanying docs that relate to the old Code).  The ICAEW’s Code has an additional “2” at the start of each paragraph (to fit the insolvency section into its overarching Code).  In this article, I have used the IPA’s numbering.

 

Why now?

Do I think that the implementation date of the new Code should have been postponed?  Yes, I do!

True, we have been waiting a loooong time for a revised Code – the JIC’s consultation on a draft revised Code concluded in July 2017.  However, the new Code is so much different from the old one (and from the 2017 draft), it is not at all an easy read at 70 pages, and there are many new requirements in there.  Therefore, expecting IPs to have absorbed and adapted systems to the new Code and to have trained staff by 1 May is grossly unfair in these extremely difficult times.  Shame on you, IS/RPBs!

 

Surely the Fundamental Principles are the same?

Generally, yes of course.  Some look a bit different now, though.

“Integrity” has been beefed up.  In addition to the “straightforward and honest” statement, we now have that an IP (R101.2):

“shall not knowingly be associated with reports, returns, communications and other information where the insolvency practitioner believes that the information:

  • Contains a materially false or misleading statement;
  • Contains statements or information provided recklessly; or
  • Omits or obscures required information where such omission or obscurity would be misleading.”

The Code allows IPs to be viewed as not in breach of this where they “provide a modified report” (101.2 A1), although I guess they could still have fallen foul of the principle of professional competence and due care by allowing the incorrect or misleading statement to be released in the first place.

As another solution, the Code requires an IP to “take steps to be disassociated” (R101.3) from such information when they become aware of having been associated with it.  Thus, it goes further than the advertising and marketing requirements of the old Code, capturing the spoken word and information that might wriggle out of “advertising”, and it makes clear that the IP need not have a marketing agreement with the party issuing the information, the IP just needs to be “associated” with it.

Having said that, the Code’s “Advertising, Marketing and Other Promotional Activities” section (360) has also been expanded on, making unacceptable standards more explicit.

“Confidentiality” has also grown by a page and a half.  Comfortingly, though, this Code has elevated the requirement for transparency, i.e. to report openly to creditors etc., by putting it up-front at R104.2, rather than buried as at para 36 in the old Code.  Most of the new text are statements of the obvious, e.g. being alert to the possibility of inadvertent disclosure in a social environment or to family and not using confidential information for the personal advantage of the IP or of third parties.

“Professional Competence and Due Care” is now accompanied by a new 1.5 page section, “Acting with Sufficient Expertise”, but I saw nothing in here that I thought really needed to be said.

“Professional behaviour” contains a subtle change: no longer must IPs only avoid action that discredits the profession, but they are required to avoid “any conduct that the insolvency practitioner knows or should know might discredit the profession” and they “shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession” (R105.1).

 

What about the Framework Approach?

Yes, we still have the basic framework of:

  1. identifying threats;
  2. evaluating them; and
  3. eliminating or reducing those threats to an acceptable level, often with the use of safeguards.

And in case there was any risk that we might forget this, it is provided in full twice (at 1.5 A1 and R110.2) and then appears in the introduction to almost every other section.  In fact, the word “framework” appears 45 times in the new Code (and only 6 times in the old Code).

 

Ok, so what has changed?  More paperwork, right?

Yes, of course!

Some have expressed the view that the requirements to evidence pre-appointment ethical considerations haven’t increased, if we’d been documenting things properly in the first place.  As the old Code had a simple “record considerations” message, there is some truth in that, but it is difficult to deny that the new Code reflects the record-keeping mission creep that the profession has seen over this century.

To avoid doubt over the extent of documentation required, we now have a list of six items to be documented at R130.2 – they are what you would expect, but you would do well to ensure you’re your Ethics Checklists specifically prompt for these items.

In addition, this list of six items should define the structure for documenting your ethical considerations when a threat arises after appointment (130.1 A1).

Under the old Code, we were required to keep threats under review, simple as that.  This has survived the revision (R210.7), but we now have added “application material” – 210.7 A1 – that helps define what such a review process should look like:

  • has new information emerged;
  • or have the facts or circumstances changed (facts cannot change, can they..?);
  • that impact the level of a threat;
  • or that affect the IP’s conclusions about whether safeguards applied continue to be appropriate?

Again, periodic review checklists may need to be enhanced.

 

Other paperwork: using specialists (Section 320)

To be honest, I never did like the old Code’s “obtaining specialist advice and services” section.  Its meanings were ambiguous; I never really understood in what circumstances periodic reviews had to be conducted and whether these were to be on a firm-wide or a case-by-case basis.

The new Code leaves us with no (ok, fewer) doubts.

The four “R”s in the section are key:

  • R320.3: “When an insolvency practitioner intends to rely on the advice or work of another, from within the firm or by a third party, the insolvency practitioner shall evaluate whether such advice or work is warranted.”
  • R320.4: “Any advice or work contracted shall reflect best value and service for the work undertaken.”
  • R320.5: “The insolvency practitioner shall review arrangements periodically to ensure that best value and service continue to be obtained in relation to each insolvency appointment.”
  • R320.6: “The insolvency practitioner shall document the reasons for choosing a particular service provider.”

So every time an IP plans to instruct a third party (or another department within the firm) to provide advice or work, they need to determine whether the instruction is warranted and then why they have decided on the particular provider, having in mind the need to achieve best value and service.  Then, they need to review periodically whether best value and service is being achieved for each appointment.

This sounds like another checklist or file note process per instruction together with more prompts on case reviews.

To reduce the detail required on each case’s instructions, it may be possible to create a firm-wide process evaluating the value and service provided by regular suppliers – in effect, an approved supplier list.  This would seem particularly relevant when using a specific service provider (e.g. storage agents, insurers/brokers and pension and ERA specialists) across your whole portfolio.

 

And more disclosure to creditors?

Oh yes!  In relation to using specialists, the Code says: “Disclosure of the relevant relationships and the process undertaken to evaluate best value and service to the general body of creditors or to the creditors’ committee” (320.6 A6) is an example of a safeguard to address a threat arising from instructing a regular service provider in the firm or those with whom there is a business or personal relationship.

The new section, “Agencies and Referrals”, also provides as an example safeguard similar disclosure to address threats created by any referral or agency arrangement (330.5 A2).

 

What about disclosure of ethical threats generally?

This is an area that appears to have been watered down.  The old Code stated that generally, it would be inappropriate for an IP to accept an appointment where an ethical threat existed (or could reasonably be expected to arise) unless disclosure were made prior to appointment to the court or creditors.

However, the new Code simply requires IPs to consider disclosure of the threats and the safeguards applied (210.5 A3)… although as disclosure is a safeguard, IPs would do well to disclose wherever this is practical (200.3 A3).

 

New Section (330): Agencies and Referrals

I would strongly urge you to read through Section 330 in full and consider how this impacts on your firm’s processes and communications.  There are a lot of disclosure and other safeguard requirements, which, when you think about it, could encompass a number of dealings.

For example, at the immaterial end of the spectrum, how do you decide where to send directors who have a Declaration of Solvency to swear?  Do you recommend the solicitor around the corner (or, now, one who is prepared to witness swearings remotely)?  Such referrals, even if the decision is a geographical no-brainer, must be subject to the rigorous evaluation and disclosure standards.

Of course, there will be other more material referrals, e.g. when assisting businesses outside (or prior to) formal insolvency or when conflicted from taking on an appointment or from advising directors personally, as well as recommendations made to individuals in IVAs.  These will require substantial documentary evidence that the appropriateness of the referral or introduction has been carefully and objectively considered and that a great deal of information (including the alternatives) has been provided.

 

Any change to referral fees?

There are some subtle changes in Section 340.

The new Code repeats the old Code’s principle that the benefit of any referral fees or commissions received post-appointment must be passed on to the insolvent estate.  The new Code extends the reach, though, in stating that no associate (as well as neither the IP nor their firm) may accept a referral fee or commission unless it is paid into the insolvent estate (R340.7).  Associates include connected companies and those with common shareholdings or beneficial owners (340.8 A1).

The new Code also puts a duty on IPs who do not control decisions on referrals to get information on referral fees received (340.8 A6).  This could be challenging for IPs in large firms or with a wide network of associates.

Its reach also extends to “preferential contractual terms… for example volume or settlement discounts” – these must also be passed on to the insolvent estate in full (R340.8).

Also, whereas previously the IP only needed to consider making disclosure to creditors, now, where an insolvency appointment is involved, any referral fee or commission payments must be disclosed to creditors (R340.6 and 7).

 

What about paying referral fees out?

The new Code is more direct in stating simply that an IP “shall not make or offer to make any payment or commission for the introduction of an insolvency appointment” (R340.4).  It also wraps the firm and associates in this prohibition and, again, if the IP does not control the referrals paid out by their firm or associates, they nevertheless need to ascertain what they are (340.8 A6).

I am not sure why we have now lost the old “furnishing of valuable consideration” prohibition.  After all, not every benefit is couched as a “payment”.

But then the old Gifts and Hospitality section has been substantially lengthened from half a page to four and a half pages, so non-monetary inducements connected with improper motives are caught elsewhere.

 

“Inducements, including Gifts and Hospitality” (Section 350)

This is another section that I’d recommend reading in full, as it has been beefed up.

The old Code had included assessing the appropriateness of a gift by having regard to what a reasonable and informed third party would consider appropriate.  However, the new Code makes the connection more directly with motive:

  • R350.6: “An insolvency practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the insolvency practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”
  • R350.7: “An insolvency practitioner shall not accept, or encourage others to accept, any inducement that the insolvency practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”

It goes further than this too, even stating that the Code’s requirements (including the “A”s) “apply when an insolvency practitioner has concluded that there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another” (350.9 A3).

Examples of such inducements that might still create threats are where (350.9 A3):

  • “An insolvency practitioner is offered hospitality from the prospective purchaser of an insolvent business…
  • “An insolvency practitioner regularly takes someone to an event…
  • “An insolvency practitioner accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.”

The Code also imposes an obligation on IPs to remain alert to inducements being offered to, or made by, close family members and requires IPs to advise the family member not to accept or offer the inducement, if it gives rise to a threat (R350.12 and 13).

 

New Section (390): “NOCLAR”

Presumably, accountants are already familiar with this acronym for “non-compliance with laws and regulations”.  The new section in the Insolvency Code certainly seems to be a lift-and-drop from the accountancy code, but in my view a clumsy one.

For example, instead of referring to the “firm”, which had been nicely defined and otherwise used throughout the Code (except where other lift-and-drops have been unsuccessful), this section refers to the IP’s “employing organisation”, which I think could mislead some into assuming that IP business owners do not need to apply many of the requirements.

But more fundamentally, this section fails to acknowledge IPs’ relationships with insolvents.

I can see how accountants working with live clients need to understand how they should react when they discover that their client has breached a law or regulation.  Although of course IPs often deal with live clients, the vast majority of their time is taken up as office holders over non-trading entities and individuals and it’s those engagements that – very often – reveal non-compliances committed by the insolvent.

The new Code makes no distinction between non-compliance committed by: (i) the IP’s/firm’s clients; (ii) the entity/individual over which the IP has been appointed office holder; or indeed (iii) the IP or their staff themselves.  I think that each of these situations gives rise to different concerns and so they each deserve a different approach.

In a nutshell, the core requirements of this section are: to explore all non-compliances (including suspected or prospective non-compliances); and then, unless they are clearly inconsequential non-compliances (except where they are money laundering related etc.), to report them upwards within the firm and, where appropriate, to those charged with governance of the entity/business and to appropriate authorities.  In addition, if the case is an MVL of an audit client or a CVA, the IP must consider communicating it to the audit partner/auditor (R390.12 and 13).

The Code also imposes similar exploration and internal reporting duties on insolvency team members.

Of course, there is an expectation that this will all be documented, although the Code only encourages IPs/team members to document the matter and actions taken (390.16 A2 and 390.20 A2).

Setting aside all the “consider” and “where appropriate” steps, what does this section actually require an IP/team member to do in all circumstances?

  • Take timely steps to comply with the NOCLAR section (R390.9)
  • “Seek to obtain an understanding of the matter” (R390.10 for IPs and R390.17 for team members)
  • For IPs: “discuss the matter with the appropriate level of management” (R390.11) and for team members: “inform an immediate superior” or, if they appear to be involved in the matter, “the next higher level of authority within the employing organisation” (R390.18)

In my view, these cumbersome NOCLAR requirements are OTT for the vast majority of non-compliances committed by insolvents (e.g. do IPs really need to discuss all director misconduct with “the appropriate level of management”?) and indeed a fair number of those committed by the IP/staff.  You might be able to rely on the “clearly inconsequential” paragraph (390.6 A2), but experience with RPB monitors has taught me that there are diverse opinions over what non-compliances are inconsequential.

 

New Section (380): “The insolvency practitioner as an employee”

Although clearly this section is most relevant in the volume IVA market, it is an important section for all IPs who act as employees.  Unsurprisingly, it reinforces the message that, even as an employee, the IP has a personal responsibility to ensure that they comply with the Code (R380.5).

Having said that, some statements seem to me unfair or perhaps the writers are simply treating IP employees as ethical novices.  For example, 380.5 A2 describes a circumstance that might create ethical threats: where the IP is “eligible for a bonus related to achieving targets or profits”… but nowhere does the Code highlight that the business/beneficial owner IP might be exposed to a similar self-interest threat.

However, the section cuts to the core in highlighting the tension that an IP seeking to administer engagements ethically may experience with their superiors and peers across the rest of the firm.  The Code doesn’t pull punches: in some circumstances, an IP’s efforts to disassociate themselves with the matter creating the conflict may demand their resignation from employment (380.7 A1).

 

My other gripes

Ok, this is just a final section to allow me to get some gripes off my chest.  My main ones are:

  • The whole of the Ethical Conflict Resolution section (140)

It took a debate with my partner, Jo, for me to understand that these requirements did not apply to a specific kind of conflict situation.  The problem I have is that this section, which refers to “resolving ethical conflicts”, sits awkwardly alongside the rest of the Code, which refers to “managing ethical threats and keeping them under review”.  In my mind, an ethical conflict is only resolved by removing it entirely, e.g. by walking away from an appointment, whereas in most circumstances an IP applies safeguards to manage threats to an acceptable level.

  • The lack of change to the insolvency examples section

Last year, there was some consternation over the ethics of retaining an appointment over an MVL converting to CVL.  The example in the old Code made no sense.  It had stated that: “Where there has been a Significant Professional Relationship, an insolvency practitioner may continue or accept an appointment…”  But the old Code had explained that a relationship is denoted as a Significant Professional Relationship (“SPR”) where, even with safeguards, the threats cannot be reduced to an acceptable level, so the IP should conclude that their appointment is inappropriate.  Therefore, how was it possible for an IP to continue with an appointment in the face of an SPR?  The new Code was the ideal opportunity to fix that.  But there has been no change: paragraph 520.4 still states that in some cases an SPR will not block an IP’s appointment or continuation in office and this conflicts with R312.7, which more strongly states that, in the face of an SPR, the IP “shall not accept the insolvency appointment”.

I have similar issues with the example at 510.2, which deals with an IP accepting an appointment after having worked as an investigating accountant for the creditor.  For starters, not all IPs are accountants, but they may still do investigation work for a creditor – the text indicates that those IPs are in the scope of the example… so why not change the heading?!  More importantly, the instructions include impossibilities: they state that, where the secured creditor is seeking to appoint the IP as an administrator or admin receiver, the IP needs to “satisfy them self (sic.) that the company… does not object to them taking such an insolvency appointment”.  But it then explains that an IP may still take the appointment, even if the company does object or where the directors haven’t had an opportunity to object… so the IP doesn’t need to “satisfy them self” then?!

On the bright side, at least IPs taking on Scottish or Northern Irish appointments are now better represented in the examples section.

 

And now the marketing footer

My partner, Jo Harris, has recorded two webinars covering the new Ethics Code (there was just too much for one sitting).  We have also: created new checklists to address the new sections such as instructing specialists and dealing with referrals; substantially revised our main ethics checklists to address specifically the new Code’s requirements; and enhanced other docs like progress reports and case review forms.

If you would like more information on signing up for access to our webinars, document templates – we’re offering the ethics templates as a standalone package or you can subscribe to all our document packs and future updates – or technical support service, please do get in touch with us at info@thecompliancealliance.co.uk.


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Welcome measures to help IPs in these times

In my last blog post, I published a wishlist of measures that would help IPs to do their jobs in these difficult times.  Since then, some extraordinary steps have been taken very quickly to address many of them.  Here, I summarise those actions.

Taking on New Appointments

  • Notices of intention to appoint, and of appointment of, administrators: the Temporary Insolvency Practice Direction (judiciary.uk/publications/temporary-insolvency-practice-direction-approved-and-signed-by-the-lord-chancellor/) came into force on 6 April. Although it states that a statutory declaration by video conference may constitute a formal defect or irregularity, it confirms that this by itself shall not be regarded as causing substantial injustice, provided that the declaration is carried out in the manner specified in the Practice Direction:

“9.2.1. The person making the statutory declaration does so by way of video conference with the person authorised to administer the oath;

9.2.2 The person authorised to administer the oath attests that the statutory declaration was made in the manner referred to in 9.2.1 above; and

9.2.3 The statutory declaration states that it was made in the manner referred to in paragraph 9.2.1 above.”

UPDATE 31/03/2021: a new Temporary Insolvency Practice Direction (https://www.judiciary.uk/publications/extended-temporary-insolvency-practice-direction-approved-and-signed-by-lord-wolfson/) comes into force tomorrow, which keeps the above in place until 30 June 2021.

UPDATE 01/07/2021: a further Temporary Insolvency Practice Direction has been issued (https://www.judiciary.uk/publications/extended-temporary-insolvency-practice-direction-approved-and-signed-by-lord-wolfson-2/) extending the provisions to 30 September 2021.

UPDATE 30/05/2020: Please note that the authority for statutory declarations to be administered virtually in Scotland derives from Schedule 4 para 9 of the Coronavirus (Scotland) (No. 2) Act 2020 (http://www.legislation.gov.uk/asp/2020/10/enacted), which came into force on 27 May 2020.  The provisions are temporary only and have an expiry date of 30 September 2020, although this can be extended by regulations. 

UPDATE 27/09/2020: the expiry date has been extended to 31 March 2021 by means of the Coronavirus (Scotland) Acts (Amendment of Expiry Dates) Regulations 2020.

UPDATE 31/03/2021: the expiry date has been extended again to 30 September 2021 by means of the Coronavirus (Scotland) Acts (Amendment of Expiry Dates) Regulations 2021.

  • There have been no regulatory measures to help directly with posting mailouts, but many IPs have been exploring outsourcing options. Although I’m sure there are many providers, I understand that Postworks is used successfully by several IPs.  Widespread use of delivery by email, I think, is still a work in progress: Turnkey and others are geared up to assist, but I think the issues are in compiling a list of email addresses that can be used.  Many IPs had moved to website delivery via a single R1.50 notice before the lockdown and I suspect that this process has become even more popular.
  • HMRC S100 documents: I have seen nothing to move forward from the Dear IP article (insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26) that stated that the HMRC email address is only to be used for “the initial pre-appointment notifications under the deemed consent or virtual meeting procedures”, so it seems to me that Statements of Affairs and adjournment notices etc. must still be posted.
  • Court activities: as far as I can tell and as set out in the Temporary Insolvency Practice Direction, the courts are doing a phenomenal job in keeping their virtual doors open. Bravo!
  • Physical meetings: the RPBs published guidance that: “where procedural meetings are required, virtual meetings will suffice in order to avoid breaching social distancing requirements.  A reasonable approach will be required to handling any creditor requests for physical meetings” (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic). Personally, I’m not sure how we’re supposed to take this.  Some may consider it reasonable to convene a physical meeting in a space large enough to accommodate social distancing.  Some others could consider it reasonable to dismiss creditors’ requests for a physical meeting altogether!  In my view, the reasonable approach would be to contact the requesting creditors to explore whether their concerns can be addressed in another way, e.g. an informal discussion or, if there are formal decisions to be made, insist that the “physical” meeting be held entirely remotely, thus requiring just a little departure from R15.6(6).
  • It seems that the Government’s intention to suspend the wrongful trading provisions has been met with some negativity by IPs (e.g. r3.org.uk/press-policy-and-research/news/more/29337/covid-19-corporate-insolvency-framework-changes-r3-response/), whereas the House of Commons’ briefing paper quotes other bodies, including the IoD and ILA, as welcoming the news (https://commonslibrary.parliament.uk/research-briefings/cbp-8877/). Although the change has not yet been made, the Government plans that it will be retrospective from 1 March 2020 and it will continue for 3 months thereafter.

Statutory Filings / Deliveries

  • The RPBs’ statement referred to above did not explain their expectations specifically in keeping up with progress reports, but it did acknowledge that the current difficulties could amount to a “reasonable excuse” defence for breaching statutory requirements. The statement highlighted the need to “have followed ethical principles and have justifiable, sound and well documented reasons for making those decisions”, i.e. where “reasonable steps to comply” are not enough to overcome the difficulties caused by the restrictions imposed on us in these extraordinary times.
  • The news on Tuesday that Companies House is now accepting filings by email was extremely welcome (https://content.govdelivery.com/accounts/UKIS/bulletins/28550aa). Understandably, it seems to be taking some time for Companies House to register documents at the moment and, if you physically mailed documents before they opened their doors to emails, you might consider sending them again by email.  I’m sure that Companies House won’t thank me for that though, so only seriously time-critical documents, e.g. ADM-CVL conversions, might merit such a second attempt.  The announcement included several warnings about how a failure to follow the instructions for emailing docs would result in them being rejected and, as Companies House filings by email are excluded from the deemed delivery provisions in R1.45, you would do well to ensure that staff follow the instructions to the letter.
  • I’m a little surprised that the InsS hasn’t sought to extend the deadline for D-reports, especially as they have clearly considered the logistics of collecting books and records. At first glance, Dear IP 95 appeared to concede that IPs didn’t need to take extreme measures to collect books and records, but when I looked closely, it did not such thing.  It replaced the previous instruction that IPs should locate and ensure that books and records are secured and listed as appropriate with a requirement that IPs “should continue to take all possible steps to locate and secure” them (https://content.govdelivery.com/accounts/UKIS/bulletins/284baba).  “All possible steps”?  Well, we weren’t going to be taking impossible ones!  It’s a shame that the InsS hasn’t confirmed that IPs can limit steps to reasonable ones in these times.

Case Administration

  • Although communications from the InsS, RPBs and HMRC regarding general case administration have been welcome, there has been little that has helped avoid cumbersome rules and other regulatory requirements. This is understandable, as the rules are the rules until a statutory instrument says otherwise.  However, at least the announcements have given us some comfort that the bodies appreciate some of our difficulties.
  • Included in these are, from the RPBs (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic):
    • “IPs may defer, on a short-term basis, non-priority work on existing cases (for instance investigatory work) and focus on new/urgent areas. IPs must take all reasonable steps to progress case administration in the longer term and ensure stakeholder financial interests are not prejudiced.” (Jo and I have been debating how, if on the other hand IPs have found that new engagements have taken a dip, now would be a good time to try to clear the decks for the future busy times.)
    • It may be acceptable to allow markets to recover before selling assets.
    • “Where a Notice of Intended Dividend has already been issued, we acknowledge that the payment of the dividend can be postponed and may be unable to be paid within two months”… but you will need to remember that, in these circumstances, the NoID process will need to begin again later (R14.33(3)).
    • “In order to provide flexibility for IPs to focus on new/urgent matters and to allow time for market recovery, we are relaxing the expectation in existing MVLs that creditors will be paid in full within 12 months provided that the IP continues to consider the company will be solvent in the medium term when markets have recovered.”
    • “When considering MVLs moving to a CVL (s.95), IPs may take longer than the deadline of seven days to notify creditors that the company is unable to pay debts in full within 12 months.”
    • “We acknowledge that it is not likely to be possible to comply with the SIP 3.1 requirement to respond to debtor enquiries ‘promptly’ and to close IVAs ‘promptly’ and accept that IPs will need to prioritise their work through the crisis period.”
    • The RPBs have also acknowledged that IPs will exercise their discretion in relation to CVAs and IVAs and they “accept that the discretion afforded to IPs in order to manage cases affected by the current crisis is necessarily wide”. I’m not sure how to take this: if a VA Proposal allows the Supervisor to exercise discretion, they hardly need the RPBs to tell them that they can do so, but if the Proposal does not allow any such discretion, then they cannot.  There seems to be a veiled message here, much like a lot of the revised Ethics Code, which seems to have been written with the practices of volume/consumer IVA providers in mind.
  • HMRC’s guidance (icaew.com/-/media/corporate/files/technical/insolvency/insolvency-news/coronavirus-insolvency-bulletin.ashx?la=en) includes:
    • A similar peculiar statement that they would expect IPs to exercise any VA discretion “to its maximum, with reference to creditors only if essential”. Well yes, that’s how a discretion should be exercised, isn’t it?  Let’s hope that HMRC is now realising how unhelpful it is to IPs to have modified out many of the discretions that originally had been proposed!
    • HMRC confirms that it will support a 3-month contribution break for coronavirus-impacted “customers”, but I think its in-bold confirmation that “there is no need to contact HMRC to request this deferment” risks misleading some, not least debtors who may expect an automatic payment break. If a VA’s terms do not allow the Supervisor to permit such a payment break, then this statement does not overcome this hurdle and creditors’ approval must be sought.
    • More helpfully, the guidance confirms that HMRC will not view post-VA VAT as due where the Government has already arranged for those VAT payments to be deferred. Unfortunately, the link HMRC has provided is already obsolete and the HMRC guidance does not refer also to the deferral of self-assessment income tax, but presumably the same principles apply?
  • The InsS continues to move into the electronic age, arranging for the following (to reduce the risks of fraudulent attempts, I’m not providing links):
    • ISA payment requests to be submitted with an electronic signature;
    • ISA payment requests and other CAU forms to be received by email; and
    • IVA registration fees to be paid by BACS.
  • HMRC has done likewise with its opening the way for all dividends to be paid via BACS. Unfortunately, if you have any dividends to pay to HMRC by cheque, HMRC has asked that you “hold on to them” (9 April release on insolvency-practitioners.org.uk/press-publications/recent-news UPDATE: additional guidance on paying dividends to HMRC by BACS is on this IPA page, dated 22/04/20).

And there’s more

Finally, some miscellaneous notifications include:

  • Must IPs complete file reviews in these times? Whilst not an official response, an RPB monitor emailed me swiftly after my last blog post.  She observed that, of course, the objective of a file review is to ensure that the case progresses as it ought to and that a firm’s reviewing policies should be designed to achieve this objective.  Thus, if an IP decides to relax their firm’s policy on file reviews in these extraordinary times, they should be considering how they can still try to achieve this objective and document why the firm’s adjusted policy will not compromise effective and compliant case administration wherever possible in the circumstances.  The monitor expressed the view that some kind of file review surely would still be possible in these times, even if access to the full case files is restricted.
  • Can office holders furlough employees? The ICAEW blogged references from .gov.uk guidance (https://ion.icaew.com/insolvency/b/weblog/posts/the-coronavirus-job-retention-scheme—clarity-for-administrators-and-directors), which describes the ability of Administrators to furlough staff as well as some of the finer points about directors’ positions.  Unfortunately, the .gov.uk guidance is not cut-and-dried and furloughing depends on the “reasonable likelihood of rehiring the workers”, so understandably IPs are exercising a great deal of caution before treading a path that could lead to an expensive challenge down the line.
  • Should IPs furlough their own staff? The ICAEW and the IPA have both issued warnings that they would not expect IPs to furlough to the extent that it compromises their ability to meet regulatory requirements (https://ion.icaew.com/insolvency/b/weblog/posts/business-continuity-for-insolvency-practitioners-during-covid-19).  The IPA has also required its members to keep it informed of the numbers and job titles of all furloughed staff as well as those unable to work through serious Covid-19 illness.
  • Are IPs key workers? R3 blogged (r3.org.uk/technical-library/england-wales/technical-guidance/covid-19-contingency-arrangements/more/29316/page/1/is-the-insolvency-profession-classed-as-a-key-sector-24-march-2020/) that likely they are, especially when administering cases that involve managing businesses that themselves are in the key sectors.  R3 also observed that the InsS considers that certain staff working in the RPS, Estate Accounts and ORs’ offices are delivering “essential public services”.  As much of an IP’s work is necessary to enable such InsS staff to deliver these public services, it would seem to follow that the IPs/staff would also be key workers.  Shortly after this post, however, the IPA emailed its members reminding them that it is a decision for each employer per the guidance at www.gov.uk/government/publications/coronavirus-covid-19-maintaining-educational-provision/guidance-for-schools-colleges-and-local-authorities-on-maintaining-educational-provision.
  • Showing us southerners that it can be done, the Scottish Government brought into force the Coronavirus (Scotland) Act 2020 in a matter of a couple of weeks. Amongst other things, it has extended the pre-insolvency moratorium period for individuals from 6 weeks to 6 months.  More details can be found at aib.gov.uk/news/releases/20202020/0404/coronavirus-scotland-act

Stay safe and keep well, everyone.


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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.