Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The revised SIP3.1 (part 2): will it improve debtors’ experiences?

This is my second post on the changes introduced by the revised SIP3.1.  In this post, I examine how the SIP affects the IVA journey through the Nominee to Supervisor and on to closure.  I end with a quick summary of all the key document changes required by the revised SIP.

As mentioned in part 1, please bear in mind that these posts focus on the main changes.  Particularly depending on your own templates and procedures, the revisions may affect you in other ways.  This is no substitute for scrutinising the SIP for yourself.

The topics covered in this blog post are:

  • Elevating the need to communicate with affected third parties
  • Pre-IVA investigations relaxed?
  • Signposting creditors
  • Thirteen items added or changed on the Proposal wishlist
  • Additional steps for modifications
  • Six additions or changes to the Supervisor’s duties
  • Will all this help improve IVA standards and, importantly, the debtor’s experience?
  • Finally, a quick summary of document templates affected by the new SIP

Dealing with third parties

The SIP contains a couple of new requirements about how we should be dealing with third parties:

  • IPs need to maintain records of “considerations of the impact of the IVA on any third parties, including any joint creditors, guarantors or co-owners of property” at all stages of the IVA (para 15b)
  • IPs need procedures to ensure that “consent is obtained, where appropriate, from any third-party individuals whose income is to be shown as included in the income and expenditure statement or who have an interest in any assets included in the proposal” (para 16f)

In my experience, it has been rare (maybe too rare) for only one person in a couple to propose an IVA, but in those circumstances there is a need to communicate directly with the other party where they have interests in assets or the household income or they share liabilities.

The SIP also includes that “any third party contributor’s identity [should be] checked and verified and all evidence is kept on the file” (para 18f) – this was previously required by the RPBs, albeit only appearing in their AML “guidance”.  The SIP extends this requirement also to verifying the debtor’s identity, but as this is clearly required by the MLR17, I am not quite sure why it has been considered necessary for a SIP.

A relaxed requirement?

It is very unusual for a SIP to be revised to ease requirements.  This SIP3.1 appears to have done that as regards exploring the debtor’s assets, liabilities, income and expenditure:

  • The old SIP3.1 required “proportionate investigations into and verification of” these items
  • The new SIP3.1 merely requires “proportionate enquiries” to be undertaken and evidenced on the file (para 18f)

Duties to creditors

An IP’s procedures are required to ensure that:

  • “where creditors might need assistance in understanding the consequences of an IVA, the insolvency practitioner signposts sources of help” (para 18g)

While it might be useful to add to your initial letter to creditors something to achieve this, this paragraph actually appears under the heading, “Preparing for an IVA”, i.e. before issuing the Proposal, so it might be difficult to put safeguards into place to ensure this is met, as any pre-Proposal exchanges with creditors will be pretty bespoke.

Anyway, where would you send such creditors?  Who other than a solicitor would be well-placed to assist a creditor in understanding the consequences of an IVA?

Finally, the Proposal!

By the time we get to the SIP’s Proposal section, I think we all realise that the concept of SIPs being principles-based and not prescriptive has gone out of the window.

Here is a list of the main additions to the Proposal wishlist (para 21):

  • “the alternative options considered both outside and within formal insolvency procedures, with specific reasons for not adopting them”
    • This seems odd for an IVA Proposal – you wouldn’t put in a contract why the parties have decided not to contract with competitors – but hey ho.
  • “where relevant, information to support any profit and cash projections, subject to any commercial sensitivity”
  • “an explanation of the role and powers of the supervisor”
    • … in addition to “the functions of the supervisor” (R8.3k)..?
  • “details of any discussions which have taken place 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, in a manner which aims to be clear and useful”
  • “an explanation of how debts are to be valued for voting purposes, in particular where the creditors include long-term or contingent liabilities”
    • More SIP3.2 spill-overs (sigh!)
  • “whether the source [of any referral of the debtor] undertook the regulated activity of debt counselling, and if so whether the source is FCA authorised or exempt in relation to debt counselling…”
    • As mentioned earlier, this seems to require IPs to have an in-depth knowledge of the FCA’s authorisation regime and regulations including its distinction between advice and information.  The PERG section of the FCA’s handbook has much to say on this topic.
  • “… and details of any prior relationship between the source and the debtor or the insolvency practitioner”
    • It seems odd that this was not extended to encompass the referrer’s relationship with the firm.
  • where any payment has been, or is proposed to be, made to the referrer, an explanation of “how it represents value for the work/services provided to the insolvency practitioner”
  • “details of any direct or indirect payments made, or to be made, to any third parties or associates in connection with the proposed IVA, together with a description of the goods or services provided and the reasons for all payments”
    • This is pretty-much the old SIP’s words but in a different order.  I think this is now clearer in requiring disclosure of payments from sources other than the IVA estate (e.g. from the IP’s firm), although I think it could be difficult to enforce.
  • “an explanation of how debts that are proposed to be compromised will be treated should the IVA fail”
  • “the circumstances in which the IVA might conclude or fail, including what might happen to the debtor in such circumstances”
    • I’m assuming they only mean what might happen to the debtor if the IVA fails, not if it concludes (successfully).  But even this is asking a lot, isn’t it?
  • “any specifically identifiable risks of failure applicable to the IVA”

If any of these new (or any other) items on the Proposal wishlist are “not detailed in full”, the SIP requires “adequate explanations” to be provided (para 21).  I am not sure how one measures what might be an adequate explanation!

As with the Initial Advice wishlist, although many of these may already be covered in your Proposal template, I think you would do well to double-check that the template hits the mark in all aspects.

In addition, the SIP states that, “if the IVA Protocol has been used to form the basis of an IVA proposal, any deviations from the Protocol should be explained in writing to the debtor and their creditors” (para 20), although this need not form part of the Proposal itself.

Handling modifications

The SIP has changed in respect of the Nominee’s duties on receiving creditors’ modifications (para 22):

  • when the Nominee seeks the debtor’s consent to any modifications, their explanation should “include the preparation of revised comparative outcome statements showing the effects of the modifications if agreement to them is a reasonable prospect and will change the outcome”
  • “where any conflicting modifications are proposed, the prevailing adaptations, i.e. those agreed by debtor and supported by a 75% majority of creditors, are identified and recorded by the nominee”
    • I thought I understood what was meant by “prevailing adaptations”, but the “i.e.” threw me.  The “i.e.” just means the mods agreed by debtors and creditors need to be recorded.  But “prevailing adaptations” where there are conflicting mods means much more, doesn’t it?  Doesn’t it mean that, if one creditor caps fees at £3,000 and another caps them at £2,000, and both mods are agreed by debtor/creditors, then the “prevailing adaptation” is that the fees are capped at £2,000?  Of course, that’s a straightforward clash of mods. There could be many complex conflicts presented by agreed mods and the “prevailing adaptations” could depend on one’s priorities, but I don’t think the SIP makes clear what is required.
  • “the debtor’s consent to agreed modifications is recorded and in the absence of the debtor’s consent, the IVA cannot proceed in a modified form”
    • The wording here is slightly changed from the previous SIP.  The change is rather subtle, but I think it means that the debtor’s agreement must be recorded by the start of the IVA – otherwise it cannot proceed – rather than staff contacting the debtor after the creditors’ decision has been made in order to record the debtor’s agreement.

Finally, the IVA!

The SIP contains a few more additions for Supervisors (para 23):

  • Supervisors should “obtain the debtor’s written consent to any variations to the original terms of the IVA proposal put forward by creditors”
    • This is odd: how many variations are “put forward by creditors”??
  • Reports must provide full disclosure of the IVA costs “including the cost of any work carried out by third parties and associates of the supervisor or their firm”
    • The revision removes the requirement to disclose also “any sources of income of the insolvency practitioner or the practice in relation to the case”.  But it should be remembered that, if the IP/firm/associate receives any referral fees or commission during the IVA, the Code of Ethics requires this to be paid into the estate and disclosed to creditors in any event.
  • Any increase in costs over previously reported estimates should be “explained and” reported at the next available opportunity “and in any event no later than six months after the end of the IVA”
    • Given that R8.31 requires a report within 28 days of any full implementation or termination of the IVA, I don’t understand the 6-month deadline here.  The only scenario I can think of is where the IP/firm did not realise that the IVA had expired due to the effluxion of time and so missed this statutory requirement, but does it help to add a SIP requirement seemingly allowing 6 months?
  • “Any completion certificate should be issued as soon as reasonably practicable and no later than six months after the final payment is made by the debtor, unless another requirement of the proposal makes this impossible”
  • “The effect of completion or failure should be reported to the debtor and their creditors”
  • “When the IVA concludes or fails, the supervisor should ensure that they act in accordance with the terms and conditions of the proposal”
    • Isn’t this like stating that an office holder needs to comply with the Act and Rules?  Then again, given that the IVA Standing Committee and the Insolvency Service published expectations during the pandemic that Supervisors would not act in accordance with IVA Proposals’ terms, maybe it did need saying!

Will the new SIP improve the delivery standards of IVAs?

My overriding feeling is that the RPBs have seen a number of practices that they don’t like and they have sought to outlaw them by means of this SIP.  The only problem is that, if you don’t know what the bad practices are, it can be difficult to discern exactly how the RPBs expect you to implement the changes. 

When I asked one RPB staff member to explain some elements of the SIP, their explanations often were: what we don’t want to see is […]  I haven’t repeated them here, as they are only one person’s point of view and I suspect that other RPB monitors will measure compliance success or failure differently in the future.  I’m not sure it would be appropriate to publish a list of bad practices and, having had to roll with the RPBs’ FAQs on the last revision of SIP9, I definitely don’t want to suggest that the RPBs follow up with additional guidance on how to implement SIP3.1.  But it doesn’t stop me feeling that the SIP has left plenty of room for goalposts to move in the future.

What about the debtor?

Finally, I think we should spare a thought for the person at the centre of IVAs: the debtor.  While I accept that there are poor practices out there, I am not persuaded that they will be eliminated by requiring IPs to throw yet more information to debtors. 

I am surprised that many of the known poor practices were not capable of being addressed with reference to the principles of the old SIP3.1 and the Code of Ethics.  And I am not convinced that the new SIP will silence those who believe that pre-IVA advice would be better regulated by the FCA.  I suspect this debate will run and run.

A list for compliance managers

To summarise my two blog posts, here’s a short list of documents that needed to be amended – or at the very least double-checked to ensure that you were ahead of the curve – in light of the revised SIP:

  • Initial meeting script/record
  • Initial advice letter / engagement letter
  • Internal docs to record SIP3.1 Assessments (both pre and post-approval of IVA)
  • Internal docs and processes to explore advice given by any referrer and their authority for giving the advice
  • Letters to third party contributors and other third parties affected
  • Letters to non-IVA partners where household income & expenditures are to be disclosed
  • Vulnerability checklists
  • Proposal doc
  • Nominee report (depending on the extent that the report explains the roles and the extent of investigations)
  • Letters to creditors (redefining the adviser’s role and signposting sources of help)
  • Communications with the debtor about proposed modifications
  • Progress reports
  • Final reports and any covering letters explaining the effects of the end of the IVA
  • Checklists (of course!)


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The revised SIP3.1: is longer better?

The new SIP3.1 has c.1,300 more words than the old SIP.  That means it’s around 72% longer than its predecessor.  Inevitably, the new SIP involves additional prescriptive requirements on IPs and delivery of yet more words to debtors and creditors. 

Will the changes improve the standards of advice and IVAs?  How can you make sure that you’ve taken account of all the changes introduced by the revised SIP?

The revised SIP3.1, effective for IVAs where the nominee was appointed on or after 1 March 2023, is available from https://www.r3.org.uk/technical-library/england-wales/sips/more/29119/page/1/sip-3-voluntary-arrangements/

In this blog post, I look at:

  • A change in the role of adviser
  • Must all advice be tailored to the debtor?
  • The need to give more information on rejected options
  • Eleven new items added to the initial advice
  • How much time should debtors be given to absorb advice?
  • Vulnerability makes an appearance
  • A greater emphasis on documented assessments
  • What is an “in-person” meeting?
  • Substantial changes to processes where a debtor has been referred, especially where any advice has previously been given

In the next post, I will be working through the rest of the SIP, including new duties on Nominees and Supervisors.

Please note that, while I have attempted to cover the main changes in the SIP, there are several others not covered in my blogs – I think my posts are long enough already!  Therefore, you will need to scrutinise the SIP yourself to ensure that you have addressed all the requirements.

If you’d like to absorb all this in another medium, you might want to try out Jo Harris’ webinars on the subject.  Drop a line to info@thecompliancealliance.com to learn more.

Initial Advice

For whom is the IP acting?

I had always believed that, before acting as nominee, the firm’s primary role was to provide advice to the debtor.  The firm’s engagement is with the debtor and, I thought, the regulators were concerned to ensure that firms acted in the interests of debtors – the old SIP3.1 did state that this was the role of the adviser.

Para 16a of the new SIP redefines the role of the firm in the advice stage to:

  • “providing advice that strikes a fair balance between the interests of the debtor and their creditors”

Doesn’t this conflict with how the FCA would expect firms to deliver debt counselling to consumers?  For example, if a debtor would be better-off financially going bankrupt and in reality there are no real downsides for them in going bankrupt, is it appropriate for an adviser to say: ah yes, but if you paid into an IVA for 5 years, this would be fairer to your creditors, wouldn’t it?

Generic -v- specific information

The SIP states that IPs “should minimise generic explanations and instead provide bespoke advice tailored to the debtor’s circumstances” (para 11) but also that IPs “should avoid using generic advantages and disadvantages and should use the details provided by the debtor to provide bespoke information tailored to the debtor’s circumstances” (para 17).

So: minimise or avoid?

Many pros and cons of the options available apply in all circumstances.  For example, DROs and bankruptcies cost the same for everyone; a DMP can never be guaranteed to freeze all interest and charges; and no IVA will take effect unless 75% or more of creditors by value approves it.  Does this make the information generic?  Or does it just mean that no specific tailoring is required?

Of course, several other pros and cons do depend on the debtor’s circumstances, e.g. whether or not their occupation could be affected, how their home will be handled, whether an option can or will realistically deal with their debts and over what likely period. 

I think that most firms’ procedures were already designed to deal with the big debtor-specific issues.  However, in the past when advisers followed a script that rattled through each option, those details were often generic, including wriggle words such as: some occupations can be affected by bankruptcy.  Also, when that advice was put down in writing, it tended to be yet more generic, largely relying on standard guide attachments detailing all options.

Now this will not do.  Telephone/meeting advice must be specifically tailored so that pros and cons that do not apply to the debtor are omitted and so that the debtor can make realistic comparisons of their options.  The “bespoke information tailored to the debtor’s circumstances” must also be confirmed in writing (para 17).

All “available” or “potential” options?

In some respects, the SIP’s requirement to cover the options has not changed.  It still says that debtors must be “provided with an explanation of all the options available, the advantages and disadvantages of each, and the likely cost of each” (para 16g).  In the past, this has been interpreted to mean, e.g., that if a DRO is not available to the debtor because they do not meet the criteria, then no more information on DROs needs to be provided to the debtor.

However, this seems no longer to be the case.  Paras 4 and 5 require explanations to cover “all potential debt relief solutions” and under “Preparing for an IVA” the SIP states that the debtor needs to have had appropriate advice “including other options which have been discussed and discounted” (para 18a).  “Discount” is a peculiar word to use, but these paras suggest to me that all potential options available to debtors in general should be covered with specific information about why an option may not be open to the debtor in question.

Something that I have seen work quite well but is by no means universal is where the initial advice gives an estimate of the time it would take to discharge all debts via a DMP.  This is bespoke advice and usually helps to illustrate why the debtor has chosen not to pursue a DMP.  I think it is also “comprehensible to the debtor”, which is another new requirement of SIP3.1 (para 10).

New items to add to initial advice scripts and letters

There are a host of other new items for initial advice scripts and letters scattered through several paragraphs in the SIP.  Here are the main changes in paras 10, 15, 16 and 18:

  • “whether the debtor will require additional specialist assistance, which will not be provided by the supervisor appointed, including the likely cost of that additional assistance, if known”
    • Although the footnote to this requirement refers to “for example, support for a vulnerable individual”, the “specialist assistance” reference appears to have originated from the SIP3.2 (CVAs) changes.  Therefore, I think it could include instructing agents or solicitors to deal with asset realisations (if this is envisaged for the IVA) or known legal issues.  It should also add transparency to any firm that outsources work or introduces unusual tasks as routine on IVAs.
  • “how [the likely duration of the IVA] might be affected by any provisions concerning the family home contained in the arrangement” 
  • “any circumstances which might affect the duration of the IVA and the potential impacts of any delays, complications or changes to the original IVA terms”
    • This is slightly different from the old SIP3.1, which only required the potential delays or complications to be explained, not their potential impacts on the IVA and particularly on its anticipated duration.
  • “the likely costs of implementation and how realisations will be applied to them”
  • that the debtor is required to provide “full, accurate and proper disclosure”
  • “explanations of any areas of concern about what the debtor has reported…” – another matter requiring special case-by-case attention – “… and of the consequences if the debtor fails to comply with their obligations”
  • “an assessment of the risk of failure”
    • Before the Proposal has even been drafted, IPs are expected to assess the risk of its failure?!  It would be fair to inform debtors that there is always a risk that creditors reject an IVA Proposal, but this would not be a failure of the IVA.  If a debtor cannot meet their core obligations, there is always the option of asking creditors to approve a variation.  Ok, there is a risk that creditors would reject the variation, but how do we assess this risk at this early stage of providing initial advice?  I suppose also that the IVA could fail if a debtor provided seriously misleading information or simply refused to cooperate, but again how are IPs supposed to assess the risk of this happening?  An RPB staff member suggested this was intended to encompass obvious changes in the debtor’s circumstances that would lead to inabilities to meet terms, e.g. looming retirement or a serious illness.  But if an IVA is considered an option for anyone, its terms surely will accommodate such events where reasonably expected and the terms should always provide for variations for unexpected events, shouldn’t they?
  • the debtor’s “right to challenge a creditors’ decision and to make a complaint via the Insolvency Complaints Gateway”
  • the SIP’s new definition of the role of the adviser – “providing advice that strikes a fair balance between the interests of the debtor and their creditors, in the context of identifying an appropriate and workable solution” to their difficulties – must be disclosed to debtors (and creditors)
  • explaining that the debtor is obliged to cooperate and provide full “and accurate” disclosure “throughout the initial process and the duration of the IVA”
  • ensuring that the debtor understands that the IVA “will involve a lengthy professional relationship with the supervisor”

While many of these may already have been covered in firms’ scripts and/or letters of advice, it is worth double-checking that those docs tick off every item including the new nuances suggested by the revised wording.  In some respects, this could be like approaching a JIEB question: there are specific trigger words that some (i.e. RPB monitors) would expect to see in your docs and, if they’re there, you get the tick.  I appreciate this is not how the RPBs want firms to approach compliance with the SIP, but, really, it is difficult to see how we can deliver the enormous prescriptive list of information in a practical, useful, way to debtors.

Providing “adequate time”

The SIP has a new principle, that debtors should be given:

  • “adequate time to think about the consequences and alternatives before an IVA proposal is drawn up” (para 4)

How much time is adequate?  Do we only learn that the time given was inadequate when someone complains that they didn’t have enough time?

Does the rest of the SIP explain application of this principle?  The only other SIP reference to time is that the explanations of options’ pros and cons etc. “should be confirmed to the debtor in writing no later than the date on which an IVA proposal is issued” (para 17).  Which IP is sending out IVA Proposals before advice letters?!

Although compliant with para 17, I would not expect that sending advice letters and IVA Proposals at the same time would meet para 4’s requirement for adequate time.  So we are no further forward in determining this.

It seems likely to me that most debtors, having decided to go with an IVA, just want to get on with it asap.  I accept that many debtors do not give as much attention to their options as they should, but you can only lead a horse to water, can’t you?

Most IVA engagement letters acknowledge consumers’ rights to a 14-day cooling-off period and provide that the debtor can instruct the firm to start work immediately.  If the debtor signs the engagement letter, does this act as confirmation that they have had adequate time?  If an engagement letter makes clear that this is what the debtor is confirming, then would this satisfy the RPBs?

Vulnerable debtors

A common criticism of the old SIP was that it did not include any duties in dealing with vulnerable debtors.  Personally, I did not see that it needed to, as this is implicit in the Ethics Code’s principles of professional behaviour, integrity, professional competence and due care.  But evidently this was not enough.

The new SIP now contains three references to vulnerability.  As explained earlier, support for vulnerable persons should be mentioned at the advice stage where additional specialist assistance will be required.  The second reference is in the context of meetings (see below).

The other mention of vulnerability appears in the “Assessment” section:

  • “whether the debtor is subject to any factors that make them vulnerable and, if so, any necessary adjustments and, subject to the debtor’s consent, an accurate record of the vulnerabilities disclosed”

Most volume providers will already have procedures and staff training in place to address debtors’ vulnerability needs and it is about time that all other firms take these measures too.  After all, IPs and their staff can encounter vulnerable people in situations other than IVAs.

SIP3.1 assessments

In my experience, this has always been an area that has been poorly documented.  The old SIP3.1 required procedures to ensure that assessments of a list of six factors are made “at each stage of the process”, i.e. at assessing the options available, preparing the IVA and implementing the IVA.  I rarely saw formal documentation of these assessments and on cases where the goalposts were moved e.g. where some horse-trading with a creditor was necessary, I rarely saw that the old SIP’s assessments, e.g. the viability of the evolving IVA when compared with other available options, had been carried out.

In addition to the vulnerability point above, the list of factors for these assessments has changed:

  • “whether the debtor is being sufficiently cooperative” has been removed
  • “whether the debtor is likely to be able to fulfil their obligations under the terms of the arrangement for its duration” has been added
  • the IVA’s prospect of being improved and implemented has changed to “successfully” implemented
  • “whether a breathing space… is needed or available” has been added to the same considerations for an interim order

The old SIP did not state explicitly that these assessments had to be documented.  The new SIP does.  It also suggests that such assessments may be “conducted by way of a” call, in which case a call recording or note of the call should be retained.

Meetings in the 21st century

The old SIP wasn’t broken as regards meeting the debtor, but it was certainly dated.  It required IPs to assess at each stage of the process whether a face-to-face meeting with the debtor was required.

“Face-to-face” has been replaced with “in-person meeting (whether a physical meeting or using conferencing technology)” (para 13).  Is “in-person” any different from “face-to-face”?  Online dictionaries appear to define them the same, i.e. the attendees must be physically present in the same place, not via the internet or telephone.

Ok, so it’s clear that the SIP uses in-person in a different way to common dictionaries and it doesn’t limit in-person to physical meetings, but what does it mean by “conferencing technology”?  A conference can be conducted by telephone, can’t it?  So, for the SIP’s purposes, does a telephone conference of just the adviser and the debtor constitute an “in-person meeting”?

Does it matter?

No, not really.  If an in-person meeting is assessed as required – for example, per SIP3.1, based on the debtor’s understanding and vulnerability – then obviously the IP/staff should request one.  If in-person excludes a telephone call but the IP/staff considers that a telephone call would be sufficient for their purposes, then this still complies with the SIP, as it merely means that the IP/staff have assessed that an in-person facetime etc. is not required.

What is important is that “all these meeting considerations and arrangements should be evidenced, documented and retained on the file”.  Therefore, it is something to add to the SIP3.1 assessments form.

Where someone else does the advising

Another historically contentious topic has been the diligence measures expected of IPs who are introduced to potential IVAs by other parties.  It seemed to me that two practices became prevalent: either the IP firm would develop relationships with introducers who they could trust to provide appropriate advice, basing that trust on direct involvement with the introducers’ processes and/or quality control measures of sample testing and mystery shopping; or the IP firm would treat the debtor as having received no advice previously, so they would start from scratch working through the SIP3.1 initial advice with the debtor. 

The new SIP makes the former approach troublesome and effectively eliminates the latter approach. 

Firstly, SIP3.1 requires IPs to “undertake sufficient due diligence on any referrer to identify whether they have advised the debtor” (para 12).  I wonder if it is considered sufficient simply to ask them.

Then, where a referrer has provided advice, para 12 requires that:

  • Contractual arrangements between the IP and the referrer “should extend to the insolvency practitioner maintaining access to all the referrer’s communications with the debtor, including call recordings or detailed written notes where calls were not recorded and transcripts of webchats or other communications were undertaken”
    • How many IPs enter into contractual arrangements with referrers?  Aren’t contracts normally with the firm?
  • “Any shortcomings in the advice… should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • This seems to require the referrer’s advice in every case to be reviewed by the IP/firm.  This is a tall order, isn’t it?  Firms are going to have to devote significant staff resources to reviewing advice given, as this could take as much time as it would to give the advice in the first place.

But can’t an IP simply ignore any advice given by the referrer and start from scratch?  This does not seem possible under the SIP, as the above are required “where advice was given by the referrer”.  It does not seem to matter if the IP chooses to rely on that advice as discharging their SIP3.1 advice duties or not.

It will be interesting to see how the referral market changes as firms start implementing the new SIP.

What about referrers’ FCA authorisations?

Over the years, the RPBs have grappled with the question of whose responsibility it is to police the FCA authorisations of IVA referrers.  The Protocol (Aug 2021) dealt with the issue unsatisfactorily, directing that IPs “should take steps to ensure” that all referrers (i.e. debt packagers and lead generators) should be FCA authorised, but it then went on to state that, if they were not authorised, the IP could simply give the advice themselves. 

To a degree, I sympathised with this approach.  After all, why should a consumer be turned away simply because they had the misfortune to encounter an unregulated introducer?

In its April 2021 members’ newsletter, the IPA published an article by the then-CEO stating:

  • “Insolvency marketing… Any introducer, or lead generator, firm that is employed by a member should be FCA regulated. The reason why we have taken this step is to respond to some evidential unscrupulous introducer activity, not compliant with how insolvency advice and solutions should work for the consumer.”

I made enquiries of IPA staff: did they truly mean this for all insolvency appointments (even corporate cases??) of IPA members and how did they enshrine this new requirement into their regulatory framework?  I learned that this was a standard on their “volume providers” only.

So I was not surprised to see some new measures in the revised SIP (para 12):

  • Where a referrer has provided advice, the IP should identify “whether [the referrers] are required to be authorised by the… FCA for debt counselling or are able to rely on an exclusion or exemption in relation to the debt advice”
    • Are we all clear on when an exclusion or when an exemption applies?  What about the difference between giving information and giving advice?  This isn’t just an internal assessment; the new SIP means that we need to know in order to draft the Proposal (see later)
  • “The referrer’s authorisation status should be evidenced, or details sufficiently documented and retained in each case”
  • “Any shortcomings in the advice, including in relation to the referrer’s authorisation, should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • What does this mean practically where there are shortcomings in relation to the referrer’s authorisation?  Does it mean that whenever a referrer does not have the correct authorisation (or exclusion or exemption), the IP simply starts from scratch in providing advice?  This would make the need to review the advice pretty pointless, wouldn’t it?  …unless IPs are being expected to do something more, e.g. report the referrer for providing advice without authorisation?  Or should IPs do this in all cases anyway, irrespective of whether there were any shortcomings in the referrer’s advice?

There’s more

In my next post, I shall look at the other changes to the SIP, particularly those affecting the IVA Proposal and the Supervisor’s duties.


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HMRC guidance note on S100 notices: what exactly does it mean?

I’m sure you have all seen the HMRC guidance note, “Deemed Consent Procedures”, but what does it actually mean?  I have asked HMRC and received some answers.

The guidance note can be found at: https://www.icaew.com/-/media/corporate/files/regulations/regulatory-news/april-2022-deemed-consent-procedures-update.ashx (amongst other places).

“Deemed Consent Procedures” only?

R3 notified members of the guidance note under the heading, “HMRC Insolvency Guidance – Deemed consent procedures”.  Similarly, the IPA piece read: “HMRC update: we draw your attention to an update from HMRC on deemed consent procedures” and the ICAEW news heading was “April 2022: Deemed consent procedures update”.  The emphasis on the deemed consent process in the R3/RPB emails was not surprising given the title of the HMRC note, but does this reflect HMRC’s message?

Firstly of course I think it can be assumed that HMRC was not writing about all deemed consent process notices, e.g. notices proposing to extend an administration.  The note’s contents make clear that it applies only to “initial notification of a CVL”, by which I assume they mean the pre-CVL S100 notice, not the initial notification after the CVL has begun.

But did HMRC intend the change to affect only S100 deemed consent notices?  Nowhere in the HMRC note was any mention made of virtual or physical meeting notices.

A changed email address?

The original Dear IP article (chapter 8 article 26) and corresponding R3/RPB bulletins that notified us of the HMRC request to email S100 notices gave an email address of notifications.hmrccvl@hmrc.gsi.gov.uk, whereas the latest guidance note gives a different address: hmrccvlnotifications@hmrc.gov.uk (and incorrectly states that this was the email address that was given in January 2018).

Has HMRC got the email address in its new guidance note wrong?  Or have they changed the email address?  At present, the old one works.

HMRC’s response

After a couple of attempts, HMRC responded to my queries as follows:

Our recent comms note should have reflected the same instruction as the Dear IP article, with the only difference being that we now want IPs to stop using the mailbox where there is a compliance interest (as defined in our recent comms note). HMRC would like all S100 notices to be delivered in the same manner and to a compliance caseworker or the mailbox where there is no active interest.

Thank you.  So we can ignore the misleading title of the HMRC guidance note: all S100 notices – for virtual or physical meetings and for deemed consent processes – should be emailed to their mailbox or, where there is a compliance matter, delivered to the HMRC caseworker.  I also gather from this response that the email address is the one described in the Dear IP article.

What is the practical effect of the change?

Ok, setting aside my gripes about the wording of the note, what change is HMRC looking for? 

With effect from 1 June 2022, as quoted above, on prospective CVLs where there is an HMRC compliance interest, HMRC would like the S100 notice to be sent to the compliance caseworker, not emailed to their mailbox.

This will mean some more diligence when preparing for a S100 to establish whether there is a compliance interest and, if so, to get the details of the HMRC caseworker. 

The HMRC note states that a compliance matter “could be an ongoing compliance check or other correspondence regarding determination of the amount of any of the company’s tax liabilities”.  The words “could be” suggest to me that this is not an all-encompassing definition, but it seems to me that you could use this wording as a prompt in any questionnaire to directors to supply details of the caseworker where such a matter exists.

What if you don’t get full information from the directors?  Surely, all you can do is ask.

Will there be an update to Dear IP?

At present, the original Jan-18 HMRC request remains in the online Dear IP bank, at https://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26.  I asked HMRC if they would please publish an update to this article (and/or withdraw this obsolete article) also via Dear IP, preferably making absolutely clear what HMRC now wishes.

What about a central bank for HMRC guidance notes?

While we’re on the subject, do you find it as frustrating as I do that there is no central bank for all these HMRC guidance notes?  I now have a folder dedicated to all these missives, which seem quite randomly produced on all sorts of subjects.  HMRC also appears to rely on the RPBs and R3 to notify members of new notes, who then often need to relay these to staff members to action. 

Wouldn’t it be better if there were a dedicated free-access web space for all these notes especially for future reference, much like Dear IP?


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New IVA Protocol: what has changed for the Proposal and Conditions?

The new IVA Protocol is half a world away from its predecessor.  In most respects, the changes are welcome.  While Dear IP highlighted the main changes, many more adjustments are hidden away in the detail.  The new template Annexes have also added lots more items worthy of a blog post.

In this post, I’ll explain the changes to the Proposals themselves and the Standard Terms and Conditions (“STC”).  In the next blog, I’ll look at the other Protocol changes around dealing with debtors and introducers etc. and how to administer the IVA.

In this post, I look at:

  • What changes from the April 2021 version were slipped in on 2 August 2021
  • The ambiguities around the new home equity provisions
  • Inconsistencies between the Proposal template annex and the Protocol/STC
  • A host of small, but not inconsequential, changes in the STC

I am sorry for the length of this post! I didn’t want to miss anything out that could trip you up.

The new Protocol and associated docs are available from: https://www.gov.uk/government/publications/individual-voluntary-arrangement-iva-protocol

Where did the April-21 versions go?

The new Protocol and STC were originally released on the .gov.uk website on 29 April 2021.  Dear IP 126 announced that the new Protocol etc. could be used immediately and that they would become mandatory for all new Protocol-compliant Proposals issued to creditors after 1 August 2021.

Then, on 2 August 2021, the April Protocol and STC were replaced on the .gov.uk website by amended versions.

In some respects, this was welcome – the InsS managed to fix some inconsistencies that I was trying to find the time to write to them about.  However, what I cannot fathom is why they removed the April 21 STCs.

The many Covid-19 changes to existing IVAs announced by the IVA Standing Committee give me the impression that the Committee considers STCs to be moving feasts in any event, able to be changed unilaterally simply by saying it is so, much like a bank announces changes to the terms of its products.  Guys, I don’t think that’s how it works.  Surely an IVA must be administered according to the terms agreed by the debtor and the creditors; you cannot sneak in changes to the STCs without approval of the parties.

The new STCs are whizzy, containing hyperlinks that take you to other relevant clauses.  Therefore, I wonder what firms did when they issued IVA Proposals in May, June and July.  Did they reproduce the April 21 STCs on their own websites and/or circulate them to the debtors and creditors… or did they simply provide a link to the .gov.uk version?  If they did the latter, then it will not be easy to track what STCs had been incorporated into which IVAs.

Given that it is evident the Insolvency Service has no qualms about slipping in changes to the STC published on https://www.gov.uk/government/publications/individual-voluntary-arrangement-iva-protocol/iva-protocol-2021-annex-1-standard-terms-and-conditions, it seems essential that IP firms reproduce the STC on their own website so that they – and the debtors and creditors – can have some certainty about which terms apply in each case.

Were the changes to the 2 August version material?

Well firstly, the Protocol itself doesn’t form a part of the IVA, so the changes there have no effect on IVAs proposed.

The STC changes were, as Dear IP 133 had announced:

  • “Some minor amendments have been made to clarify the provisions on equity to reflect the position of the IVA standing committee”

The April-21 version stated that “if a re-mortgage can be obtained, the agreement will be automatically be (sic.) reduced to 60 months”.  The Aug-21 version now reads: “if a re-mortgage cannot be obtained, the agreement will remain at 72 months.  If equity is released the term will be reduced to 60 months”. 

So yes, the Aug-21 version is certainly tighter – at least now the IVA duration won’t change just because a re-mortgage can be obtained – but I think it still leaves wriggle room as regards the amount of equity that must be released in order to cut 12 months off the IVA.  Although the STC explain further what “equity to be released” means, I think a debtor could argue that they had met the terms simply by releasing some of the equity.

  • “the redundancy clause in the protocol… has been updated to make it easier to interpret and understand”

Actually, this part of the Protocol has not changed, but the STC have.  Now, the STC contain a detailed redundancy pay clause, which does not appear to change the debtor’s obligations from the April-21 version.

A change that is not listed in Dear IP 133 is the addition to the STC of:

  • “You will be required to increase your monthly contribution by 50% of any increase in disposable income one month following such review”.

Unless this was included in the Proposal itself (and it is not included in the Protocol’s Annex 4, Proposal template), any PCIVAs issued with the April-21 STCs do not contain this requirement or anything like it.  That could make for some interesting debates with debtors!

Material changes to home equity treatment

The changes between the 2016 and the Apr-21 STC are vast.  The most material relate to the structure of IVAs where there is a property. 

There are now three alternatives:

  1. Where the “available equity is below the de minimis amount”, the IVA will be drafted for a 60-month term and the equity effectively will be excluded from the IVA.
  2. Where the “available equity is above the de minimis amount but does not meet the current lending criteria for a potential re-mortgage as set out in annex 5 of this protocol”, the IVA will be drafted for a 72-month term and the equity effectively will be excluded from the IVA.
  3. Otherwise, the IVA will be drafted for a 72-month term; there will be a revaluation at month 54; and “if the second valuation confirms the equity position in the proposal” and if “equity is released”, then the term will reduce to 60 months.

The Protocol actually provides a fourth option:

  • If option 3 is followed but equity release is not possible, then a third party may contribute a lump sum equivalent to 12 monthly payments and then the IVA can be concluded early.  Unfortunately, however, this option is not covered in the STC, so unless IPs provide for this in the Proposal (and the Protocol’s Proposal template does not mention it), this approach will require a formal variation to be proposed to creditors.

What is the de minimis amount?

This isn’t defined in the STC.  Personally, I think it should be: after all, what will happen if a future Protocol revision changes the amount? 

The Protocol sets the de minimis at £5,000 (or £10,000 for a property jointly owned by two people proposing interlocking IVAs).

What is “available equity”?

Again, this is not defined in the STC.  The Protocol states: “The value of the consumer’s equity will be considered de minimis if it is £5,000 or less when valued before the IVA proposal is put to creditors.  The calculation should be based on 85% of the value of the property less any secured borrowings (e.g. mortgage).  This means that the consumer will retain at least a 15% financial interest in the value of the property in all cases.”

Mmm… so “equity” doesn’t mean equity then.  It means 85% of the equity.

Annex 5 of the Protocol also describes “anticipated equity”, which involves projecting both the property value (“using the simple interest formula at the date of the review”) and the mortgage position at month 54.  It is not clear to me what should be done with this “anticipated equity” figure: I don’t think it is meant to determine whether the equity is above or below the de minimis, but is it intended to be the figure that the debtor must introduce to the IVA from month 54 if their IVA is to drop to 60 months’ long?  Annex 7, the EOS template, doesn’t mention anything about projected equity values, so I really don’t know!

To be honest, although the STC include lots of statements about the upper limits of re-mortgage (e.g. a re-mortgage would bring the amount secured to no more than 85% of the total value of the property), I found it very difficult to identify what minimum payment would satisfy the “available equity” release condition.

What if the second valuation doesn’t “confirm the equity position”?

It isn’t clear what “confirm the equity position” means.  How different from the equity position presented in the Proposal can it be before it is no longer “confirmed”?  If it is way different, then can the IVA end at month 60 if nevertheless the available equity is released? 

Presumably, this provision is meant to address situations where the equity turns out to be less than the de minimis at month 54.  In this case, I would expect the IVA to drop to 60 months, but neither the STC nor the Protocol make this point.

At least the debtor should have a better idea of what is expected of them

The Protocol requires that “a copy of the calculations” – i.e. how the equity is proposed to be dealt with in the IVA – “should be provided to the consumer and also to all their creditors within the scope of the IVA proposal”.

Is the equity treatment clear in the Proposal template?

I have real problems with the Proposal template, which is provided as Annex 4 to the Protocol.  As regards the equity treatment, the Proposal template gives me the following concerns:

  • Para 6.2 states that the property will be valued in month 48, whereas the Protocol envisages month 54
  • Para 6.3 states that the debtor “will make reasonable endeavours to introduce this sum into the arrangement” – it is by no means clear what “this sum” is
  • Para 6.4 states: “Should I be unable to re-mortgage, I will continue to pay my IVA for the full 72 months, if I am successfully (sic.) and introduce equity my IVA will complete at month 60” – again, what amount of “equity” needs to be introduced (and of course the IVA won’t complete at month 60 unless the supervisor can wrap everything up immediately)?

Can the property be sold?

The Proposal template contains an interesting scenario.  Para 6.5 states that, in the event that the debtor sells their home at any time in the IVA and pays in the sale proceeds less costs, “the additional remaining payments will no longer be payable into my IVA” even if the funds are insufficient to clear the debts and costs.  So… a debtor with minimal equity sells their home early on in the IVA, pays in the small amount of sale proceeds… and then they are not required to pay in any more income-related contributions?!

I cannot see that this is an expectation of the Protocol.  All it states is that, if a property is sold, then the proceeds of sale to the extent of settling the costs and debts in full – excluding statutory interest – shall be paid into the IVA.

Is statutory interest not payable for early completion?

Yep, that’s what the STC say.  However, Para 5.1 of the Proposal template states: “The IVA will finish when the agreed level of payments have been made or I have paid creditors together with the costs of the IVA in full and with statutory interest”.

Are there other issues with the Proposal template?

Yep.  I have lots of minor gripes (like reference to an irrelevant “3.1”), but some other material ones are:

  • While it is reasonably complete as regards ticking off SIP3.1 and Rules’ matters, it does not flag up the SIP3.1 requirements to disclose the referrer, their relationship/connection to the debtor, or any payments to the referrer made or proposed, amounts and reasons.
  • No monthly contribution amount is specified.  It simply states (Para 5.1): “I will make monthly payments of my surplus income estimated at £X”.  Odd!
  • Para 7.3 strangely provides for a trust “in favour of the Supervisor” and states that the trust will end when the notice of termination is filed with the SoS.  The STC state the trust will end earlier, i.e. when the certificate of termination is issued or, as regards assets not realised, when a bankruptcy order is granted.
  • Para 7.11 states that late-proving creditors “will not be entitled to disturb dividends already paid but will be entitled to participate in future dividends”.  The STC state that they will also be entitled to catch-up dividends.

Do these inconsistencies matter?

The STC state that, “in the event of any ambiguity or conflict between the terms and conditions and the proposal and any modifications to it, then the proposals (as modified) shall prevail”.  So, yes, as always the Proposal takes precedence. 

So, if the Proposal reverses or negates the apparent intended effect of the STC, can the Proposal be called Protocol-compliant?  Surely not… except if the Proposal simply follows the Protocol’s Proposal template annex, then presumably it’s ok..?

Are IPs obliged to use the Proposal template?

It is not at all clear.  The 2021 Protocol repeats the previous Protocol’s introduction that “Where a protocol IVA is proposed and agreed, insolvency practitioners and creditors agree to follow the processes and agreed documentation”.  But, apart from the contents list, there is no specific mention in the Protocol to the Proposal template.  Contrast this with specific reference to Annex 6, which gives examples of how an IP might comply with the Protocol’s new requirement to “set out details of how the funds received… will be allocated towards the costs of the IVA, together with a timetable and schedule of expected payments to creditors” (which interestingly is a document that is not mentioned in the Proposal template!).

So is the Proposal template intended to be just for guidance?  Given its departures from the Protocol and STC, it cannot be intended to over-ride it all, can it?

What about the other templates?

The Proposal template states that attached is a “combined outcome and Statement of Affairs”.  Annex 7 is clearly solely an estimated outcome statement, not a SoA. 

Annex 3, which is an “example” letter to send to the debtor along with the draft Proposal, does not mention that a SoA (i.e. one that complies with the Act/Rules) is enclosed and there is no reference to a Statement of Truth, which the debtor is required to provide to the IP per R8.5(5).  The letter also contains the old pre-29 June DRO thresholds.

Again, it is not clear whether IPs must use these templates.  I also appreciate that it will be difficult to maintain templates to deal with changes in legislation or SIPs… but, hey, that’s what we all have to do, isn’t it?

Some things never change

One of the obvious changes needed to the STC was to bring it into line with the 2016 Rules as regards the various decision procedures.  Way back in April 2017, Dear IP 76 had expressed the Insolvency Service’s expectation that supervisors “take advantage of the new and varied decision making procedures that are available under the Act as amended and the 2016 Rules”.

Did someone forget this expectation?  The new STC still refer solely to “meetings of creditors” that may be called during the course of the IVA.  As the STC state that they be called “in accordance with the Act and the Rules”, we are talking about only virtual meetings here.  What is evident, however, is that it does not include electronic or correspondence votes.

Other STC changes

There are some relatively minor changes introduced by the new STC – I would love to give you paragraph references, but crazily the STC no longer have para numbers!

  • Unsurprisingly, the old STC that supervisors can make a reasonable charge for variations has gone.
  • The STC state that a completion certificate “will be issued within 28 days of all payments and obligations being satisfied”, although the Protocol states that the completion certificate should be issued within 3 months.  Both the STC and Protocol provide a long-stop date of 6 months.
  • The concept of a completion certificate where there has been substantial compliance has been ditched.
  • The liabilities can now be up to 25% more than those estimated in the Proposal before it is considered a breach (the old STC provided for a 15% limit).
  • A Notice of Breach will now always provide a timescale of one month to remedy and/or explain a breach (the old STC allowed the supervisor’s discretion to set a timescale of between one and three months).  Now, a remedy can include proposing “a reasonable plan to remedy” the breach, which may be useful, although of course some proposals will still need to be varied formally.
  • All trusts will end on issuing a certificate of termination or completion (the old STC were silent).
  • A variation to reduce contributions can only be proposed in the first 2 years of the IVA “if evidence can be provided to creditors that the supervisor could not have reasonably foreseen such a change in circumstances at the start”.
  • Interestingly, “if you cannot reach agreement with the supervisor in respect of your obligation to contribute additional income, then the supervisor has the discretion to issue a notice of breach”… or not.
  • Oddly, the STC no longer describe any means for changing supervisors except by a block transfer order (or removal by a creditors’ decision).  Presumably, though, a switch may still be proposed by variation.  Para 2.8 of the Proposal template, however, does provide a simple: any “vacancy may be filled by an employee of the same firm who is qualified” as an IP, although I’m not sure if this over-rides the requirement for a court order or creditor decision appointing them. 
  • The requirement to register a restriction on a property has been removed from the STC.  It is, however, still required under the Protocol, so you will need to make sure that it is included in your Proposal template (it is in the Annex 4 template).
  • Creditors now only have 2 months to submit a claim, rather than the old 4 months.
  • The supervisor now has discretion to admit claims of £2,000 (up from £1,000) without a PoD or claims that do not exceed 125% (up from 110%) of the amount listed in the Proposal without additional verification… with the new condition that this cannot “result in a substantial additional debt being admitted” – I’m not sure how this would be measured.
  • Although both old and new STC state that all payments into the IVA “are intended to be used to pay dividends” and costs, now there is no limit on the surplus funds at the end of the IVA that will be returned to the debtor (it used to be £200 max.).
  • I’m confused about the HMRC-specific requirements: they state that HMRC’s claim will include self-assessment tax arising in the tax year in which the IVA is approved (less payments on account), but then they state that the debtor “will be responsible for payment of self-assessment/NIC on any source of income that begins after the date of approval”, but then also that any “monthly charge for income tax/NIC as it appears in the income and expenditure statement” must be paid into the IVA for the rest of the tax year after approval of the IVA.

The consequences

All these intricate changes will complicate systems and procedures, as you will need to be alert to which terms apply to which IVAs you’re administering.  As you can see, it would also be valuable to refresh your Proposal template to ensure that it corresponds with the new STC, plugs the gaps and eliminates ambiguities. 

If you do choose to use the Protocol’s Proposal template, I recommend that you give it some tweaks to make sure it is SIP3.1-compliant (as well as tailored to your own practices, as some clauses are quite bespoke) and that it does not stray far from the new Protocol and STC.

More changes

These are only Protocol changes affecting the Proposal and STC.  In the next blog, I’ll look at the other changes including new requirements as regards advising debtors and liaising with introducers.


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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.