Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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How can the Insolvency Service and RPBs help in this time?

When the work-place exodus started, I was heartened to read the ICAEW’s acknowledgement that inevitably some statutory deadlines would be missed (although they hoped that remote-working would result in little disruption).  In contrast, the IPA’s two emails to members expressed the expectation that steps would be taken to ensure that statutory compliance continues.

But to be fair, those notices were issued a couple of weeks’ ago when our world looked quite different.  More recently in Dear IP 92, Steve Allinson, Chairman of the Insolvency Service Board, expressed his intention for the Service to do its best to support IPs on their assignments, stressing the need for us all to come together at this time (while keeping our social distance, of course!).

Steps that the InsS has already taken to facilitate the remote-operating of ISAs are very welcome and I hope that these mark just the beginning of changes needed to keep the insolvency wheels moving.

The insolvency technical and compliance community has long practised coming together to resolve difficulties.  Below is a summary of the suggestions of many who are struggling to help insolvency continue to work in these times.  We hold out hope that the InsS and the RPBs will help.

Taking on New Appointments

  • MVL Declarations of Solvency need to be sworn in front of a solicitor/commissioner for oaths. Solicitors are of the view that they must be in the physical presence of the one swearing (although the Law Society guidance is a little woollier).  Could guidance be given to solicitors/IPs on how this could be done virtually?  Better still, could the Act/Rules be temporarily relaxed to allow the author to verify these instead with a Statement of Truth.
  • ADM Notices of Intention to Appoint and Notices of Appointment present the same issue, so similar guidance/relaxation would be invaluable.
  • Posting mailouts is generally problematic – some IPs use commercial mailing providers, but often IPs/staff are simply using their own stash of stamps and making trips to the Post Office/Box, which is not wise – and we cannot be certain that there will be anyone physically present at the recipients’ offices to open the post in any event. The Act/Rules already allow for some mailouts to be dealt with by advertisement notice (e.g. Para 49(6) of Schedule B1 IA86 and R3.38(1) IR16), but not in relation to circulars to creditors (except with court permission).  Could there be a general power for an office holder to publish a notice, say in a Gazette (and such other way if they see fit), informing creditors who to contact/how to access the mailout and that this advertisement would be taken as satisfying the delivery provisions?  Of course, pre-CVL circulars are the responsibility of the director, so any such changes will also need to cover directors’ notifying about the S100 decision process (including any subsequent physical meeting notice) and the Statement of Affairs.
  • If the above is considered a step too far, then it would be useful to be able to write a one-pager to creditors inviting them to access the Statement of Affairs and other pre-S100 decision documents/notices via a website, rather than have to send bulky letters to creditors.
  • Of course, in addition to (or instead of) posting letters, IPs are now endeavouring to email statutory docs to creditors and others as much as possible. 45 states that deemed consent to email delivery occurs when a doc is emailed to the address to which the insolvent “had customarily communicated with” the recipient.  Email delivery is much easier than post in this time, so guidance that what is customary need not be proven would be useful, e.g. to enable directors/debtors simply to provide the IP with an email address for the recipient that the IP can take as valid.
  • HMRC requires notices of S100 decision processes to be sent to their email address, notifihmrccvl@hmrc.gov.uk, but it has not been made clear whether this email address also works for other S100 docs, e.g. the Statement of Affairs – clarification would be useful. An extension of this email address to allow also for post-appointment CVL circulars would also help. 
  • There is some concern that the court filings required in preparation of a CVA will be problematic in light of the courts’ limited activities: the Nominee’s report must be filed in court before the creditors and members can decide on the CVA Proposal.
  • SIP3.2 para 10 requires an IP to meet directors “face to face”. Clarification that this does not have to be a physical meeting would be useful.
  • Where a statutory physical meeting is required (e.g. where a creditor objects to a S100 decision proposed by deemed consent), it should be possible for everyone, including the convener, to attend the meeting virtually. Clarification of this would be valuable.
  • Many IPs are reluctant to consider taking on new appointments that might require them, their staff or agents to attend on-site. However, the business may need to enter an insolvency process and business owners/directors may be nervous to continue to be responsible for the businesses in this period waiting for the coast to clear for an IP to be appointed.  Do they shut up shop now and make everyone redundant?  Or do they furlough employees in the hope that the business might be sold once everyone emerges?  If they choose the latter course, could they be at risk of an allegation of wrongful trading?  Some clarification that business owners/directors would not be penalised for helping employees to continue to be paid via furlough payments in this time would be helpful for IPs advising business owners/directors.
  • On the other hand, some guidance for IPs on how to handle trading-on appointments would also be valuable.

Statutory Filings / Deliveries

  • Of course, some relaxation to statutory deadlines would be invaluable.
  • Some IPs are moving hell and high water to try to get progress reports issued, which can include asking one member of staff to attend premises to print docs, deal with mailouts etc. Personally, I would hope that the RPBs/IS would prefer IPs and their staff to stay at home even if this means that progress report (and other?) deadlines are missed.  In line with the Government’s key messages, some clarification from the RPBs/IS as to the importance (or not) of travelling to work simply to avoid certain breaches of statute/SIPs in these times would seem urgently required.
  • In particular, Para 107 only allows the 8-week timescale to deliver Administrators’ Proposals (and the 10-week timescale for any decision on those Proposals) to be extended by court order. Confirmation that Administrators need not apply to court to extend these timescales would be very welcome. 
  • If shifting deadlines is considered a step too far and the RPBs/IS wish for IPs to meet statutory deadlines wherever humanly possible, perhaps they could confirm that at least they, as regulators, will not look too unkindly on docs that are technically deficient as regards the disclosure requirements of statute & SIPs.
  • As above, it would be good to be able to notify creditors of statutory deliveries, e.g. Administrators’ Proposals, by public advertisement to avoid the problems with posting out packs.
  • At present, all filings to Companies House must be delivered by IPs in hard copy form. In addition to the logistical problems of posting letters mentioned above, IPs are also concerned at the potential for delays by Royal Mail etc. or Companies House such that time-critical dates are missed.  In particular, Form AM22 (notice of move from Administration to CVL) must be received by Companies House before the Administration ends automatically.  Therefore, a mechanism to enable all insolvency forms to be sent to Companies House by email would be valuable.
  • Another issue is extending Administrations by court order. These are always time-pressured at the best of times, but with the courts’ limited activity, there is real risk of Administrations ending automatically before a court order extending them can be granted.  Ideally, a temporary halt of the automatic ending provision (Para 76) and of any subsequent end-date consented to by creditors or the court would be valuable.  If this is a step too far, then perhaps Administrators could be allowed to seek a second extension by creditor consent, rather than having to resort to court.
  • It is now usually impractical for staff/IPs to review company records with a view to submitting CDDA D-reports. Of course they could submit an inconclusive D-report in the 3 month timescale and then, when they are able to review the records, they could submit “new information”.  However, this probably will be unhelpful to the DCRS staff, as in the future they may get a great number of “new information” submissions, which cannot be processed automatically by their rules engine.  Therefore, it is probably in everyone’s interests to extend the 3-month deadline for D-reports.

Case Administration

  • An email address for HMRC forms, e.g. VAT769s, VAT100s, VAT7s, VAT426/427s, would be valuable. Of course, this would involve a number of HMRC departments, but VAT769s and VAT426/427s are particularly needed to be dealt with by email.
  • In light of limited court activity, there is a risk that Trustees in Bankruptcy will not be able to make appropriate applications to avoid bankrupts’ homes revesting under S283A IA86. A pause in the 3-year timescale would help.  Failing this, could S283A(3) be flexed to allow a Trustee to have “applied” for a relevant order by simply posting a skeleton application to the court?
  • Consultations with employees of insolvent entities to comply with TULRCA (and TUPE) have previously been achieved usually by getting all employees together. This should now be avoided, but it does leave office holders with logistical difficulties in complying with TULRCA.  Presumably Job Centre Plus attendance has also ended.  Some guidance on how IPs should approach TULRCA and employee interaction generally would be valuable.
  • It is not clear how furlough payments will work for employees of a business already in an insolvency process. For example, if the office holder retains staff on furlough payments in the hope that they might be able to sell the business (and TUPE transfer all staff) in the future, how will those furlough payments be treated?  Confirmation that these will not be sought back either from the insolvent estate as an expense or from the purchaser would be welcome.
  • Some IPs are office holders of nursing homes and they require regular, usually daily, on-site attendance by them or their staff. Some confirmation that they would be viewed as key-workers might assist.
  • On some cases, office holders had already issued notices of intended dividend before the lock-down, but they will have problems issuing cheques for some time. 34(1) requires the office holder to declare the dividend within 2 months of the last date for proving.  It is possible for the IP to declare the dividend, but not pay cheques out until later, but in the past this has been frowned upon by the RPBs.  Some guidance that this is acceptable in these circumstances would be helpful.
  • In other cases, an office holder would like to extend an already-notified last date for proving in recognition of creditors’ difficulties in submitting proofs and therefore also extend the 2-month timescale for declaring the dividend (as well as the 14 days to adjudicate all claims – R14.32(1)), but there is no way to do this under the rules. The ability to do so would be useful, otherwise the whole process would need to be started again once we all emerge.
  • Dear IP 92 urged IPs to show forbearance “where possible” to individuals who are finding it difficult to meet financial commitments. Although many IVA Proposals will provide capacity for payment breaks/reductions, many will not.   In some cases, the debtors will already have used up their payment break quota.  In other cases, the flexibility simply will not be there in the Proposals.  Of course, variations can be sought but these are cumbersome especially in these times when mailouts are difficult.  It is difficult to see what can be done about IVA terms, but we would welcome some guidance.
  • The same will apply to CVAs based on regular contributions.
  • On many IVAs (involving tax debts) and CVAs, HMRC has modified Proposals to restrict the Supervisor’s ability to propose a variation, e.g. variations may not be allowed in the first year. HMRC has also modified many VAs by including more stringent clauses where the insolvent fails to pay contributions on time.  Perhaps HMRC could notify IPs that, during this time, all such modifications may be considered waived.
  • The AiB has issued a Dear Trustee letter (https://www.aib.gov.uk/sites/default/files/dear_trustee_-_covid-19_-_expanded_ptd_contingency_arrangements.pdf) stating that he believes it would be reasonable for IPs not to extend the period of the Protected Trust Deed in order to ingather contributions that failed to be paid in this period. Personally, I do not believe that the same automatically applies in IVAs (as the Supervisor may be required to take specific action in line with the IVA terms), but the AiB’s letter may create confusion for IVA debtors and IPs in this situation.  Therefore, some guidance may be useful.
  • File reviews are pretty-much impossible for anyone who does not administer electronic case files. Confirmation from the RPBs that IPs are not expected to carry out regular formal file reviews during this period would help.

 


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Administration Tangles

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Ah, the Insolvency Act & Rules, what shall I compare thee to? Maybe an old Crown Derby figurine: looks in good nick when you first encounter it, but it’s only when you begin to handle it that you spot all number of hairline cracks and chips to the paint. I have been threatening to myself for many months now to blog on my top Act/Rules gripes. I have made a start here – with the tangle of provisions governing convening Administration meetings and fee approval – and I have many more that I intend to use as good blogging material for many months to come.

Administrators: To hold or not to hold a Creditors’ Meeting

Paragraph 52(1) of Schedule B1 of the Insolvency Act 1986 lists the circumstances in which the requirement to hold a creditors’ meeting to consider the Administrators’ Proposals shall not apply:

52(1) …where the statement of proposals states that the administrator thinks:

(a) That the company has sufficient property to enable each creditor of the company to be paid in full;
(b) That the company has insufficient property to enable a distribution to be made to unsecured creditors other than by virtue of Section 176A(2)(a) (“the prescribed part”); or
(c) That neither of the objectives specified in paragraph 3(1)(a) and (b) can be achieved

So if a creditors’ meeting is not held by reason of any of these circumstances, how does an Administrator get approval for his fees?

Rule 2.106(5A) states that “in a case where the administrator has made a statement under paragraph 52(1)(b)… the basis of the administrator’s remuneration may be fixed… by the approval of (a) each secured creditor of the company; or (b) if the administrator has made or intends to make a distribution to preferential creditors: (i) each secured creditor of the company; and (ii) preferential creditors whose debts amount to more than 50% of the preferential debts of the company, disregarding debts of any creditor who does not respond to an invitation to give or withhold approval”.

Therefore, it’s pretty clear (although see below) for Administrators who have made a Para 52(1)(b) statement, but what if they have made statement under either Para 52(1)(a) or (c)? They cannot use Rule 2.106(5A) and it seems to me that they have to use R2.106(5): “If… the case does not fall within paragraph 5A, the basis of the administrator’s remuneration may be fixed… by a resolution of a meeting of creditors” (or they can go to court, but only after they’ve tried to seek approval via (5)). Gripe number one: does anyone else think it’s nuts that the requirement to call a creditors’ meeting to consider the Administrator’s Proposals shall not apply, if he makes a Para 52(1)(a) or (c) statement, but then in those circumstances the only way it seems that he can get his fees approved is by a resolution of a meeting of creditors?! Some might suggest that this is met by the deemed approval route of R2.33(5), although personally I very much doubt it (as I do not think that Proposals “deemed to have been approved” equates to fees basis “deemed to have been fixed by a resolution of a meeting of creditors” and surely someone has to positively approve fees). At a stretch, I wonder if the drafter felt that, in Para 52(1)(a) or (c) cases, the rest of the Administrator’s Proposals were not up for discussion by the unsecureds – that would make sense, but then I still don’t understand why in those circumstances fee approval should rest with the unsecureds.

Is this just a theoretic gripe or can it arise in practice? Well, Para 52(1)(a) statements are extremely rare, but what about Para 52(1)(c) statements? How many Administrations end up simply meeting the third objective of “realising property in order to make a distribution to one or more secured or preferential creditors”? If that is the case, then take care that, if you make a Para 52(1)(c) statement, it seems (to me anyway) that you need to seek approval of your fees by a creditors’ meeting (or by correspondence, of course) resolution. This outcome also seems contrary to the so-called “spirit” of the Act/Rules, which I will return to later.

The Paragraph 52(1)(b) Statement

So let’s look a little closer at the Para 52(1)(b) statement that takes Administrators down the route of dispensing with a creditors’ meeting to consider their Proposals and seeking approval for their fees from secured (and preferential) creditors.

Firstly, how does an Administrator think about the outcome for creditors? If, as a creditor, you were to ask an office holder, “do you think I am going to get a dividend from this insolvency case?”, how would you expect him to answer you? Personally, I would expect him to consider what the realisations were likely to be, what costs were going to be deducted from those funds, and thus how much money was left over for creditors. I would accept that, if I look at the estimated Statement of Affairs as at the date of insolvency, the outcome does not incorporate the costs of administering the case, so this outcome is completely unrealistic. It does not reflect what the office holder thinks the outcome will be for creditors.

You might be wondering why I’m labouring such an obvious point. The issue is that I believe that opinions are divided on how Administrators should think about the likely outcome for creditors for the purposes of making Para 52(1)(b) statements: some believe it should be on a Statement of Affairs basis, i.e. exclusive of costs; others believe that the anticipated costs of the Administration should be taken into consideration. My personal view is that I believe that Para 52(1) asks the Administrator to think about the outcome and that any decision made without considering the likely costs that will be deducted is wholly unrealistic. However, I do accept that, in following what I believe is the letter of the Act, it could lead the Administrator in some circumstances down a route that does not observe the so-called “spirit” of the Act (see below), but what is an IP to do when he is expected to follow the Act/Rules?

I have another issue with the wording of Para 52(1)(b): what is meant by: “insufficient property to enable a distribution to be made to unsecured creditors other than by virtue of” the prescribed part”? At first glance, it suggests that a Para 52(1)(b) statement can only be made in cases where the Administrator thinks that there will be a prescribed part distribution (but no other unsecured dividend). But if that’s the case, then R2.106(5A)(a) would never kick in, as there would always be a pref distribution – in full – in order for there to be a prescribed part, so there would never be a case where only secured creditors’ approval – and not the prefs also – would be sufficient for fees. You could argue that R2.106(5A)(a) could be used in cases where there are no prefs, but then I still think R2.106(5A)(a) is unnecessary, as surely, with a bit of sensible drafting, you could just use the wording in (5A)(b) and accept that no prefs’ approval is needed as they don’t exist.

And does it make sense for Para 52(1)(b) to apply only when there is a prescribed part? As you know, the consequence of a Para 52(1)(b) statement is that the secureds (and prefs) have the authority to approve the Administrator’s fees. Does it make sense that, if unsecureds are only likely to receive something via a prescribed part, fees are approved by secureds (and prefs), but if unsecureds are not in the frame for any dividend at all (say, because the (net) realisations are going to be wiped out by the preferential claims or there is a pre-2003 debenture so that any surplus after the prefs goes to the secured creditor), the unsecureds get to approve the fees? If it is considered inappropriate from a policy point of view for unsecureds to have power over fees when there is likely to be only a prescribed part for them, then I would expect it to be considered similarly inappropriate for unsecureds to have such power when they are not likely to receive even a prescribed part. It seems to me that the policy point is that, just because S176A provides for a proportion of floating charge realisations to be divided off for the unsecureds, this does not mean that the floating charge-holder loses control over fees. If that is the policy, then it seems to me that Para 52(1)(b) only really makes sense if one reads it that it applies where there may, or may not be, a prescribed part distribution, but one thing is for certain: there is insufficient property to pay unsecureds a non-prescribed part dividend.

And who exactly are unsecured creditors? Another gripe of mine is that the Act/Rules – at least post-EA2002 – seem to have developed a convention of using the term “unsecured creditor” when referring only to non-preferential unsecured creditors. For example, R4.126(1E)(a)(xii) requires liquidators’ final reports to set out “the aggregate numbers of preferential and unsecured creditors”, which suggests that preferential creditors are not included in the unsecured creditors category. For definitions, we can look to S248, which states: “‘secured creditor’, in relation to a company, means a creditor of the company who hold in respect of his debt a security over property of the company, and ‘unsecured creditor’ is to be read accordingly”. So the Act, at least as originally drafted, acknowledges the reality that preferential creditors are included in “unsecured creditors”.

However, the concept that “unsecured creditors” includes prefs makes a nonsense of Para 52(1)(b), because in that case Para 52(1)(b) could not be used if the Administrator expected to pay prefs, although the only time R2.106(5A)(b) kicks in is when there is a pref distribution.

So, where does all that leave an IP who is simply trying to follow the Act/Rules? When should he be making Para 52(1)(b) statements?

The “Spirit” of the Act/Rules

Although I don’t think I’ve seen it written publicly or officially, I recall an exchange I had with someone at the Insolvency Service when I was at the IPA about the way the Administrators’ fees approval mechanism was intended to work. I believe the intention was that the creditors whose recovery prospects were affected by the Administrators’ fees would have authority to fix the basis of those fees – I don’t think anyone would disagree with that sensible principle. The problem is that it is extremely difficult to convert into legislation and, as I hope I demonstrate below, I do not believe it has been achieved.

As an example, take the argument above about whether the Administrator should think about the outcome to creditors before or after costs. Let me take a simple case: no prefs, just a fixed and floating charge creditor (fixed over a freehold property) and minimal floating charge assets. Before costs (i.e. on a Statement of Affairs (“SoA”) basis), the estimated-to-realise figures indicate that there would be a surplus available to unsecured creditors. However, when you take into consideration the likely costs of the administration (i.e. on an Estimated Outcome Statement (“EOS”) basis), it looks like the fixed charge surplus and the floating charge realisations are going to be eaten up in costs leaving nothing for the unsecureds. On that basis, it would seem that it would be fair for the unsecureds to have power over the fees, as they are the ones losing out by reason of the fees.

But what if the property value only just covers the secured creditor’s position – although the SoA still shows a small surplus for unsecureds – and therefore when the fees and costs are taken into consideration, there is a shortfall to the secured creditor? Now, it would not be fair to the secured creditor to look at it from an SoA basis – and give the power to the unsecureds who are losing very little by reason of the marginal surplus – but the EOS perspective would seem fairer.

But, in this scenario, to whom would you go for fees approval, if you were following the letter of the Act/Rules?

I attach here – Admin outcomes – a table on which I have tried to demonstrate the range of possible scenarios – both before and after costs – and the resultant party/parties holding power over the Administrator’s fees based on the alternative interpretations of the Act/Rules, together with who should have authority on the basis of what I think is the so-called spirit of the Act/Rules, as I’ve described it above. PLEASE NOTE, however, that I created this late at night and I haven’t checked it through. After a while, my mind boggled as I tried to picture the outcomes, Act/Rules interpretations, and which creditor(s) was/were being affected by the costs/fees. Whilst, as a consequence, I would not be surprised if I have got it wrong in some places, I think it demonstrates how none of the different interpretations of the Act/Rules reflects consistently the spirit (although it does show that some get it right more often than others). Thus, even if an IP tries to shoe-horn in a particular interpretation of an Act/Rules provision in a well-meaning attempt to reflect its spirit, they will come a cropper sooner or later if they consistently use that interpretation for every case.

Not all scenarios are explored by the attached table, for example where there is more than one secured creditor. The Act/Rules appear odd in the case of multiple secured creditors, because, rather than treating them as a queue of expectant claimants, only one of whom (assuming they have security over the same assets) is going to be impacted by the Administrator’s fees, they are treated as members of a group each with equal authority over the Administrator’s fees; in a Para 52(1)(b) case it seems that the approval to fees of all secured creditors must be sought.

But what if the company has several secured creditors who appear to have no financial interest – on either an SoA or EOS basis – by reason of the fact that the realisable value of the secured assets is only sufficient to return monies to the first charge-holder? It seems that this makes no difference – the approval of all secured creditors needs to be sought. And what if the subordinate uninterested charge-holders decline to respond to an invitation to give or withhold approval? It seems that the Act/Rules provide no solution… other than to apply to court under R2.106(6). This seems nonsensical: that a court order should be required to decide on an Administrator’s fees simply because a secured creditor, whose security is worthless, does not bother to respond to an invitation to approve the fees basis. The same seems to apply where there are priority secured creditors who are healthily secured and are facing zero risk of a shortfall whatever the fees are. Despite this, the Act/Rules still seem to require their positive approval of the fee basis (although there remains the thorny question as to whether they still count as a creditor once their debt has been discharged in full from the insolvent estate).

What about a different kind of multiple security case? What if a company has several creditors holding security over different assets, say a portfolio of mortgaged properties? The Act/Rules allow the Administrator to fix more than one fee basis “in respect of different things done by the administrator” (R2.106(3A)) and it would seem appropriate to go to each relevant secured creditor and ask for approval for fees, but only in relation to dealing with the property subject to that creditor’s security. However, I can see nothing in the Act/Rules that enables an Administrator to do that. It seems that every secured creditor needs to approve the Administrator’s fee basis in relation to everything that he does on the case, even if he is seeking to charge different bases for different items and irrespective of whether that secured creditor has any interest in the property that the Administrator is handling. I accept that in reality, if there are separate mortgaged properties involved, you might have some LPA/fixed charge receivers about, but you get my point, don’t you?

So where does that leave us? I think it leaves us with a tangle of statutory provisions governing one of the most sensitive areas of an IP’s activity – his fees – and, although I dread the day when I have to get my head around a completely new set of Rules, in some ways I feel that it cannot come soon enough.


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Common Bond Queries – a correction

My sincere apologies for making a mistake in yesterday’s posting.

I expressed the view that a director’s contribution to the costs of a liquidation need not be bonded, however Gareth Limb of Compliance on Call (thank you, Gareth) has pointed out to me that paragraph 1 of schedule 2 of the Insolvency Practitioners Regulations 2005 defines “insolvent’s assets” as “all assets comprised in the insolvent’s estate together with any monies provided by a third party for the payment of the insolvent’s debts or the costs and expenses of administering the insolvent’s estate”, thus the calculation for the bond level does need to include a director’s contribution to costs.

I will edit yesterday’s post (and apologise in advance to my followers if that means they receive a third email!), but I wanted to post this also as a separate entry for those who have already read yesterday’s post.


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Common Bond Queries

Recently, I gave a presentation that covered, amongst other things, IPs’ bonding duties.  I thought it might be useful to repeat part of my presentation here.  Below is a list of assertions made by IPs over my years with the IPA – with perhaps a dash of poetic licence here and there – together with how I would answer (and have answered) them based largely on the Insolvency Practitioners Regulations 2005 (“IP Regs”).

I cannot stress enough that you should not rely on the views expressed below.  If you require clarification of your bonding duties under the IP Regs, you should seek legal advice and/or ask your authorising body.

I have thrown in a couple of controversial issues below, which I think demonstrate how following the strict wording of the IP Regs appears to result in an answer that seems insensible given the purpose of the specific penalty bond.  For example, if the bond is intended to make good losses resulting from an office-holder’s fraud or dishonesty for the benefit of unsecured creditors, why should a Nominee’s bond cover the debtor’s voluntary contributions for, say, five years into the future?  And if future contributions are appropriate for bonding in a VA (which I believe they are, but only when the Supervisor has control over them), why is the same principle not applied to Trust Deed appointments?  I have to admit that, when I used to help IPs and staff with bonding queries whilst at the IPA, I often found myself sympathising with those who sought to apply common sense to issues but I was forced to say: “unfortunately the Regs are the Regs”.  In many cases, I understand that bond insurers recognise the low (or possibly even zero) risk attached to some bond levels arising from a strict interpretation of the IP Regs and they are prepared to reduce bond premiums accordingly.

 

“I can ignore fixed charge assets, but I have to bond for floating charge assets”

  • IP Reg 4, Sch 2: ignore assets “charged to a third party”, so ignore fixed, floating, and any other charged assets, but…
  • IP Reg 4, Sch 2 continues: “to the extent of any amount which would be payable to that third party”, so bond needs to cover (i) fixed charge surplus, (ii) funds available to preferential creditors, and (iii) prescribed part (or floating charge surplus).

“I can bond as Nominee of a VA at the minimum level, because I am not in control of any assets at that stage”

  • Per IP Reg 5 Sch 2: where an IP acts as Nominee or Supervisor, bond for assets subject to the terms of the Arrangement.  Can it be argued that, prior to approval, there is no “Arrangement”?  Safer to bond.

“I don’t have to bond for the assets in an MVL because the assets are going to be distributed in specie”

  • IP Regs do not distinguish assets that are “handled” by IP; all must be bonded.

“For interlocking IVAs, I can arrange one bond to cover all assets”

  • Interlocking (incorrectly aka joint) IVAs – there are two IVA cases, so two bonds must be arranged.  Where funds are pooled, technically both parties’ contributions are subject to the terms of each arrangement, so technically each bond should cover total pooled contributions (even though this means that each bond is covering the same assets).

“That asset is doubtful, so I can count it as valueless for bonding purposes”

  • IP Regs: “value as estimated by the IP”; reasonable worst case scenario is generally acceptable, but IP should still make honest judgment.

“I don’t need to bond for VAT refunds”

  • If it is a VAT refund due to the company at the date of appointment, it is an asset, thus should be bonded.

“I don’t need to bond for the funds expected to arise from that legal action until I see the money”

  • Again, what estimated value would the IP put on it?  IP should make ongoing assessment, not wait until the action has completed nor wait until he has his hands on the cash.

“My agents are going to sell the assets and then deduct their fees direct, so I only need to bond for the anticipated net realisations”

  • IP Regs require gross estimated realisations to be bonded, which makes sense as the IP could collude with the agents to deduct excessive fees.

“The only realisation in this case is the director’s contribution towards the costs of the Liquidation, but I need to bond for that”

  • Whilst it may seem counter-intuitive, given that the IP Regs refer to bonding the insolvent’s assets (which would not include third party funds), Reg 1 of Schedule 2 of the IP Regs defines “insolvent’s assets” as “all assets comprised in the insolvent’s estate together with any monies provided by a third party for the payment of the insolvent’s debts or the costs and expenses of administering the insolvent’s estate”.  Therefore, this is correct: the calculation for the bond level does need to include a director’s contribution to costs.

 “Now that the company has moved from Administration to CVL, I can just roll over the bond”

  • Each case must be bonded, so technically it is a separate bond.  Also, it is likely that the value of assets caught by the CVL will be much lower than those for the prior Administration (as most assets will have been realised and disbursed), so bond level likely will be much lower.

“Now that I have replaced my former colleague as Liquidator, I shall set my bond at the level it was for my predecessor”

  • Predecessor will have realised assets and distributed proceeds – these do not need to be bonded by successor, only balance in hand plus any future realisations.

“I have been appointed Administrator of a bank with customer account balances, but as they are monies held in trust I do not need to bond them”

  • IP Reg 4 Sch 2 does state that for bonding purposes IP ignores “assets held on trust by the insolvent to the extent that any beneficial interest in those assets does not belong to the insolvent”, so strictly speaking may be correct.  However, this seems counter-intuitive, as the customer account balances are probably one of the principal matters that the IP has been appointed to deal with.
  • Recommend asking the bond insurer – if, due to theft of customer account monies, a bond claim were made, would it be covered by the bond?

Although I have vacated office as Supervisor, I’m not releasing the bond until all the remaining dividend cheques have cleared”

  • Bond applies to those acting as an IP in relation to a person (S390(3)), i.e. in office.  Once out of office, it is no longer necessary (or beneficial) to keep bond in place.


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Mis-sold PPI claims in IVAs

NB: the post below was published on 8 October 2012, however on 19 April 2013 the RPBs issued guidance on PPI mis-selling claims. Please refer to the RPB guidance (the ICAEW’s copy can be found at: http://www.icaew.com/~/media/Files/Technical/Insolvency/helpsheets-and-checklists/personal-insolvency/guidance-note-on-payment-protection-insurance-claims.pdf) and not to my personal views below. Nevertheless, I have added notes to my original post below to identify material areas where the RPBs’ guidance appears to me to take a different approach.

In its August 2012 newsletter, the IPA referred to a number of questions on the subject of mis-sold PPI policies, which, having spoken to a few IPs, only scratch the surface of the PPI refund minefield.

As with the Paymex VAT decision, the absence of guidance from the RPBs/Insolvency Service (I appreciate that the Service has published something on PPI refunds in bankruptcy, but again that does not really begin to get to grips with the issues) will only lead, at best, to each IP seeking his/her own independent legal advice, or at worst, it may mean that some IPs fail to face the issues head-on, prepared to face (or perhaps oblivious to) the risks of challenge down the line.

I sense that the regulators have a difficult job, however, as of course many issues in IVAs turn on their particular terms and thus any guidance either will have to cover a variety of situations or will be so generic as to be well-nigh useless.  However, I do not believe that this means that it is futile or unnecessary to point out the pitfalls or questions that each IP should be asking him/herself.  Of course, I come at this from a purely theoretical perspective and thus I am grateful to the IPs, particularly Sue Clay and Melanie Giles, who have helped me to appreciate the practical issues and get me up to speed with what is going on out there.

What are PPI refunds – assets, windfalls or after-acquired assets?

The Insolvency Service takes the view that a PPI claim is a bankruptcy asset (http://www.bis.gov.uk/insolvency/personal-insolvency/ppi-mis-selling-claims-and-bankruptcy), however CCCSVA suggests it is caught by the windfall clause in their IVA Proposals (http://moneyaware.co.uk/2012/05/can-i-reclaim-ppi-while-on-an-iva/) – and well it might be, as IVA Proposals* can define terms as the drafter sees fit and can “deem” one thing to be another.  This demonstrates the need to scrutinise the terms of each IVA Proposal (or at least each template used by the IP) to see where a PPI claim falls and thus whether it is caught by the terms of the IVA.

Proposal definitions aside, my instinct is to consider the PPI claim to be an asset, but it does not necessarily follow that it is due to be paid into the Arrangement.  This will depend on the wording of the Proposal.  Does the Proposal provide that all assets, apart from those expressly excluded, are available for the Arrangement?  Or does the Proposal define included assets as those specified, resulting in any others (including any undisclosed) being excluded?

Could the PPI claim be an after-acquired asset?  The Protocol Standard Terms & Conditions (“STC”) define “after-acquired assets” as “any asset, windfall or inheritance with a value of more than £500, other than excluded assets that you acquire or receive between the date the arrangement starts and the date it ends or is completed, if this asset could have been an asset of the arrangement had it belonged to or been vested in you at the start of the arrangement” (R3’s STC use similar wording at clause 27).  Could the PPI claim have been an asset at the start of the arrangement or was it an asset at that time? My instinct is that the PPI claim existed at the start of the IVA; I do not believe that the asset was created when it was established that the policy was mis-sold, but the asset was created when mis-selling of the policy took place.  In that event, it would not be an after-acquired asset.  However, I am no lawyer, so I would welcome an authoritative answer.

Is the Supervisor obliged to pursue a PPI refund?

If it is an asset caught in the IVA, then I believe the Supervisor is so obliged (subject to the usual commercial question of whether the realisation will exceed the allowable costs to recover).  However, what if it is likely that the creditor will seek to set off the claim against an existing debt?  Ah, the thorny problem of set-off!  Let me start with the definitions in widely-used STCs.

Set-off and the Protocol STC

Clause 17(6) of the Protocol STC states: “where any creditor agrees, for whatever reason, to make a repayment to the debtor during the continuance of the arrangement, then that payment shall be used solely in reduction of that creditor’s claim in the first instance. If such repayment results in the creditor’s claim being entirely extinguished (after the application of set off) any surplus will be treated as an after acquired asset and offered to the Supervisor for the benefit of the arrangement”.  I understand that proceeds of PPI claims can comprise: (i) return of premium paid; (ii) historic interest on the premium paid; and (iii) compensatory interest/payment.  Are the proceeds of a PPI claim a “repayment”?  To my mind, something can only be a repayment, if it were paid over (or charged to an account) in the first place.  If this is the case, then I suggest that it follows that only the return of the premium and any interest paid is a “repayment” and thus available under the Protocol STC to the creditor for set-off.  I do not believe that the creditor can claim – at least not under the Protocol STC – to set off any compensatory payment against any monies owed to it. NOTE: the RPBs’ April 2013 guidance acknowledges that this is one of a number of possible interpretations of clause 17(6) and states: “consequently, pending such clarification by the court, office holders may wish to consider taking legal advice where they feel it would be proportionate to do so”.

Set-off and the R3 STC

Interestingly, R3 STC’s clause 79 is comparable to the Protocol STC’s clause 17(6), but it restricts set-off only for repayments due to HMRC.  Thus, that clause is not relevant for PPI claims.  However, R3’s STC apply S324 of the Insolvency Act 1986 to IVAs at clause 7.  It appears to me that this clause gives creditors a strong argument for setting off PPI refunds against any outstanding IVA debt, although the application of, and case law surrounding, the statutory set-off rules make me sufficiently nervous to suggest a “seek legal advice” approach.

What if it is likely that there will be no surplus after set-off?

Even if set-off is likely, I struggle to see how a Supervisor can adjudicate on claims without taking the possibility of mis-sold PPI into consideration.  Of course, not all PPI policies have been mis-sold and I believe it would be professional of an IP to make enquiries of the debtor and take a balanced and reasonable view on the evidence as to whether the policy was mis-sold and thus whether it would be time well-spent to pursue a claim.

Does the IP need to go through the process of lodging a complaint with the PPI provider to agree the claim?  If the Supervisor is satisfied that the PPI adjustment will not generate an actual realisation for the IVA, might it be possible for the Supervisor simply to adjudicate on the claim, take account of the apparent mis-sold PPI policy, admit only the remainder of the claim, and deal with any appeal from the creditor in the usual manner?  That might be a risky approach and I appreciate that the calculation of a PPI refund is complex, but the alternative approach – incurring costs to agree a PPI refund that generates no real cash for the estate – seems to me to give rise to other considerations.

Adjudicating claims is a clear responsibility of Supervisors and other insolvency office-holders where a dividend is intended.  It is generally acceptable to incur costs, payable from the insolvent estate, in this exercise.  True, discharging costs of the adjudication process will reduce the “pot” available for dividend, but it likely will also reduce the total creditors’ claims ranking for dividend and, more importantly I think, it results in a fair dividend.  I understand that some PPI refunds can be substantial sums, so the resultant percentage charge of any claims management company in pursuing large claims will be significant and payable in full from the IVA funds.  Whilst I do not believe that this downside calls into question the appropriateness of properly adjudicating claims, I suspect that it may create a perception with some that IVA funds are being used unnecessarily.  I believe therefore that IPs would be wise to reflect on the Insolvency Ethics Code’s principles on obtaining specialist advice and services (paragraphs 53 to 56) and they may want to add some explanation to reports of the justification for such costs.

What happens to the tax liability arising from the interest payment?

If the PPI refund includes compensatory interest, this may give rise to a tax liability, depending on whether the PPI provider has deducted tax and/or depending on whether the debtor is a basic or higher rate tax-payer.

The Protocol STC cover “tax liabilities arising on realisations” at clause 28 (and R3 STC’s clause 82 has similar wording): “if you have taxation liabilities arising on the sale or other realisation of any asset subject to the arrangement, you must meet them out of the proceeds of that sale, as far as those proceeds are sufficient”.  The STC refer to proceeds of sale, which seems to me to be a drafting error (it is obvious what scenarios the drafter had in mind) – whether this can be relied upon to enable the Supervisor to pass to the debtor sufficient funds to discharge the tax liability on the compensatory interest, I cannot say, but I get the sense that the major creditors/agents in consumer IVAs are taking a fair and reasonable approach to PPI refunds, so I would be surprised if they would challenge this… but I think it would be very useful to IPs in general if they issued something in writing on this.

However, as I see it, it is likely that the compensatory interest will fall into two categories: interest relating to the period pre-IVA and that post-IVA.  Therefore, I would have thought that a portion of the tax liability arising from the compensatory interest is likely to fall as HMRC’s claim in the IVA (note: Protocol and R3 STCs include in HMRC’s IVA claim the tax relating to the tax year in which the IVA was approved).  But does clause 28 override this so that all the tax liability, pre- and post-IVA, is discharged from the realisation?  It seems so to me (provided the drafting error is not fatal).

I would hope that a sense of fairness would prevail so that, whatever happens, the debtor is not left with a tax liability (and for that matter, the charges of any claims management company, provided the debtor has not seriously gone out on a limb) to be paid outside of the Arrangement where the benefit of the PPI refund has been passed on solely to the IVA.

Could the debtor or IP (as advising member) be considered at fault for not disclosing the PPI claim as an asset in the Proposal?

Before the mis-sold PPI story broke, I do not believe that anyone could be blamed for assuming that PPI premiums had been charged appropriately.  However, I would hope that IPs are now wise to the situation and take the possibility of mis-sold PPI policies into consideration when advising debtors and preparing IVA documents.

How far does a debtor/IP need to go in establishing a claim at this stage?  SIP3 paragraph 4(b) states that “the member should take steps to satisfy himself that the value of the assets is appropriately reflected in the statement of affairs.  Where the value of an asset is material to the outcome of the arrangement consideration should be given to obtaining corroborative evidence as to its value”.  Of course, the application of SIPs rests with the IP’s authorising body, but I suggest that we have all lived with the concept of estimated asset realisations for long enough to be able to provide sufficient information in Statements of Affairs or similar to enable readers to understand the position reasonably. NOTE: the RPBs’ April 2013 guidance simply states: “debtors should be asked at an early stage about possible claims in connected with PPI mis-selling and appropriate enquiries made… IVA proposals or Nominees’ reports should explain how potential PPI mis-selling claims are dealt with”.

Conclusion

I should reiterate that the above are my own opinions, albeit that I have been helped in reasoning on this by a number of IPs.  Therefore, readers should not rely on any of the above, but should consider seeking their own legal advice.  However, I do hope that this helps to highlight some of the issues and perhaps move the arguments on.

Although it would be a challenge for the regulators/R3 to issue guidance on this topic, the Paymex VAT decision experience proves that it can work, but that it is really only useful if the guidance is issued quickly.

In the meantime, IPs will have to make their own decisions.  I have heard stories of debtors handing over surprise cheques to Supervisors, having pursued a PPI refund on their own.  I believe that this does not mean that Supervisors need not check that the monies are due to the IVA – if it is not an included asset, then the debtor could use it to propose a full and final settlement variation – nor should they disregard the effects of any recovery costs or tax liability arising for the debtor.  Ethically, IPs should act with integrity and professionalism, but they will also wish to act prudently to avoid complaints or challenges down the line.

I now wonder whether this has been of any help at all!  My aim is simply to attempt to move the story along a little – it is clear that there are still many uncertainties – and I hope that I have not written anything misleading; I will attempt to keep my ear to the ground and report any updates/changes.  If anyone would like to email to me their thoughts (rather than make them public here), please feel free at insolvencyoracle@pobox.com.

 

* “Proposal” in this article may include any terms and conditions associated with the Proposal.


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Can a successor office-holder rely on the previous office-holder’s fees resolution?

I was asked this question informally by an IP and I hope that she will not mind me using it as an illustration of how I hope this blog content will develop.  I invite any IP or others working in the UK insolvency industry to send to me queries (at insolvencyoracle@pobox.com) on technical, ethical or SIP matters (but please bear in mind that I’m not a solicitor!) and I will provide my thoughts, confidentially if you would prefer, but I am a great believer in sharing information, so I’m hoping to post the results (avoiding any hint of the identity of the enquirer, of course) on this blog.  The usual caveats apply: these are purely my own views and are not to be relied upon.

So to the query: a liquidator, IP1, is replaced by IP2.  Can IP2 draw his fees on the basis of a resolution put forward by IP1 whilst he was in office and approved by creditors before IP2 came on the scene?

Cases after 6 April 2010

The answer appears simple for cases that commenced after 6 April 2010 (having regard, of course, to the effects of the transitional provisions): R4.131B of the IR86 states that “if a new liquidator is appointed in place of another, any determination, resolution or court order in effect under the preceding provisions of this Section of the Chapter immediately before the former liquidator ceased to hold office continues to apply in respect of the remuneration of the new liquidator until a further determination, resolution or court order is made in accordance with those provisions”.  There are similar rules for some other insolvency types – R2.109B for Administrations and R6.142B for Bankruptcies – but, as to be expected, there are no such provisions for VAs or Receiverships.

Cases before 6 April 2010

There are no statutory provisions to deal with this matter for cases pre-April 2010, so I would suggest that the answer lies in the wording of the original resolution.  If the resolution is of the usual style, “remuneration shall be fixed by reference to time properly given by the liquidator and his staff…”, then it would seem to me that the actual identity of the liquidator does not come into the equation, although of course the thoughts of the creditors when they considered the resolution would be concentrated on IP1.  I believe that this resolution technically would apply also to IP2’s remuneration on his succession.  The matter would be different, however, if the original resolution specifically referred to IP1 (and/or his firm, if that is different from IP2’s).

There is an ethical angle here too, however.  Given that the creditors approved the original resolution on the basis of the charge-out rates of IP1 and his staff, some may question the ethics of IP2 relying on such a resolution to draw fees at significantly higher charge-out rates.  SIP9 (paragraph 16) does provide that creditors be informed of changes in charge-out rates when reporting routinely, but it would seem to me fairer to creditors to explain to them up-front, when the change in office-holder has taken place, that IP2 is relying on the original fees resolution and providing details of his and his staff’s charge-out rates.  Personally, I do not believe that it would be necessary to seek a new resolution to approve IP2’s time costs if different charge-out rates apply, but this may be a method of heading off future challenges or complaints.