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.
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.
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.
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.
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
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!
I don’t usually write on legal decisions anymore, but I felt that this was such a good news story, I would make an exception.
I have seen many an IP look ashen and frustrated at learning that the employee or consumer creditor schedules have been sent to Companies House for filing along with a Statement of Affairs (“SoA”). It’s a very easy mistake to make, but it can be costly. Not only is it a data breach, but over the past few years, the Registrar seems to have hardened his stance and no longer agrees to whip out the offending schedules but instead refers the IP to the expense of getting a court order for their removal.
In this case, the IP was quick to spot the error, so just a few days after the SoA containing the employee/consumer schedules had been emailed for filing, he emailed the Registrar asking for the filing to be cancelled. Unfortunately, although the Registrar had confirmed that the SoA had been returned in the post, there was a mix up and the SoA-plus-schedules were filed.
The Registrar told the IP that he would need a rectification court order to remove the schedules.
Employee/consumer schedules were “unnecessary material”
The court decided that the schedules were “unnecessary material” under S1074 of the Companies Act 2006 (“CA06”):
(2) “Unnecessary material” means material that—
(a) is not necessary in order to comply with an obligation under any enactment, and
(b) is not specifically authorised to be delivered to the registrar.
This section also gives the Registrar discretion to choose not to file the unnecessary material. If the unnecessary material cannot readily be separated, then the Registrar can reject the whole document submitted. But if it can readily be separated, then S1074 allows the Registrar to remove just this item. Of course, this is handy when employee/consumer schedules are mistakenly submitted with SoAs.
S1094 CA06 also gives the Registrar discretion to remove such unnecessary material from documents already filed.
Should the Registrar have used his discretion to remove the schedules?
The court said: yes.
The judge pointed out that:
“If the IR 2016 prohibit delivery of the Schedules to the Registrar it is difficult to see how it could be lawful for him to register them.”
Therefore, the Registrar’s refusal to exercise that discretion was considered “unlawful and irrational within the Wednesbury principles”.
The force of the judge’s decision perhaps is felt in the fact that the judge ordered that the Registrar pay the costs of the IP’s application:
“Having found that the Registrar had a discretion which he should have exercised to remove the Schedules or not to register them in the first place, I ordered that he should pay the costs of the application. His repeated position in correspondence that a court order was necessary was simply wrong.”
Will the Registrar use his discretion in future?
Let’s hope so!
The Registrar was not represented at this application, except by written submission on the question of costs. I suppose an appeal is possible, but I would think unlikely.
Have you found yourself reading articles about the effects of the end of the Brexit transition period that leave you wondering: ok, but is there anything that directly affects my bog-standard UK insolvency work?
As we have been labouring on fixing our own document packs, I thought I’d publish our to-do list.
Jo’s latest Technical Update summarised the main changes and gave a full list of useful resources. If you have bought the latest Butterworths, you’ll see that the changes have already been helpfully inserted in italics. However, you still really need to refer to the Insolvency (Amendment) (EU Exit) Regulations 2019 (at https://www.legislation.gov.uk/uksi/2019/146/contents) to see which Act sections and Rules have been affected. And then of course there’s non-insolvency legislation like the GDPR to think about.
Jo and I found that the key effects boil down to:
Determining the type of proceedings;
Ignoring member State liquidators; and
Re-defining the GDPR
New Types of Proceedings
It seems like only yesterday that we started to add to docs whether the EU Regulation (or EC Reg as it was then in 2010) applied and thus whether the proceedings in question were main, secondary, territorial or non-EU proceedings.
Unfortunately, the Brexit effect is not that this sentence can now be eliminated. Instead, we need to replace it with a statement as to whether the proceedings are (or will be):
“COMI proceedings, establishment proceedings or proceedings to which the EU Regulation as it has effect in the law of the United Kingdom does not apply”.
What defines the proceedings?
New definitions have been added to Rule 1.2:
“COMI proceedings” means insolvency proceedings in England and Wales to which the EU Regulation applies where the centre of the debtor’s main interests is in the United Kingdom;
“establishment” has the same meaning as in Article 2(10) of the EU Regulation;
“establishment proceedings” means insolvency proceedings in England and Wales to which the EU Regulation applies where the debtor has an establishment in the United Kingdom
Dear IP no. 116 explains that effectively COMI proceedings are the new “main” proceedings: the COMI tests are very similar to the previous ones and so, where a company’s principal place of business and registered office are in the UK, this will be the reason why the proceedings are COMI proceedings.
Dear IP no. 116 also explains that similarly establishment proceedings occur where the COMI is elsewhere but the insolvent has an establishment in the UK, where previously this would have resulted in secondary or territorial proceedings.
“Proceedings to which the EU Regulation as it has effect in the law in the United Kingdom does not apply” will be encountered where, per Dear IP no. 116, “one of the UK’s other grounds for the opening of insolvency proceedings has been relied upon”.
What documents are affected?
The documents affected (excluding those that an IP’s solicitors would draft, such as Admin order applications and winding-up petitions) are:
As regards the last document listed above, in fact there has been no change to R8.24(2)(c), which requires the Nominee’s report on the consideration of the IVA Proposal to “state whether the proceedings are main, territorial or non-EU proceedings and the reasons for so stating”… but we assume that this was mistakenly omitted.
Member State Liquidators: blink and you’ll have missed them
In June 2017, the Act and Rules were amended to require office holders to engage with member State liquidators involved with the debtor. For example, office holders needed to send to the member State liquidator copies of all their notices to the court, Companies House or the OR and liquidators and administrators needed to seek the member State liquidator’s consent to the dissolution of the company prior to filing the final docs at Companies House.
All those obligations have now been removed.
Even if you have never dealt with a member State liquidator before and your checklists never even referred to them, there is one change that you need to make to documents as a consequence: R15.8(3)(j) requires decision procedure notices in CVAs and IVAs to state the effects of R15.31 about the calculation of voting rights. R15.31(7) and (9) have been changed to remove reference to the rights of a member State liquidator to vote, so likewise you will need to tweak your CVA and IVA R15.8 notices.
The GDPR: what is it called now?
The EU’s GDPR (i.e. EU 2016/679) forms part of the UK’s law as a consequence of the European Union (Withdrawal) Act 2018. The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019 define the product of this action as the “UK GDPR”. These Regulations also make the necessary amendments to the GDPR to reflect the fact that the UK is not a member State.
Does this mean that we now need to start referring to the “UK GDPR”? Personally, I don’t think so. “GDPR” was a colloquial term in any event, so I don’t think this has ceased to be relevant… unless you’re communicating with someone in the EU about the GDPR, of course. Certainly, I don’t think there is any need to go editing internal checklists and I don’t think there’s any pressing need to change documents that refer in passing to the GDPR… although you might like to take this opportunity to replace “GDPR” with something more generic like “data protection legislation” to future-proof it in case the EU GDPR and the UK GDPR diverge materially over time.
So no changes are required for the GDPR switch then?
Almost none. If you have any documents that accurately define the EU GDPR, then you should update this. For example, many letters of engagement make specific reference to the General Data Protection Regulation EU 2016/679 in setting out the parties’ obligations as data controllers (such as the style clause for engagement letters that was issued in 2018 by ICAS at https://www.icas.com/regulation/guidance-and-helpsheets/preparing-for-gdpr). If so, then it would be correct to update this to refer to the effect of the 2019 Regulations.
You should also check what your privacy notice says about transferring data outside the EU. Some notices are specific about when this would happen (if ever). Of course, now the data you process are already outside the EU and if you were to transfer any of it to any of your service providers (e.g. ERA providers or debt collectors) in the UK, it would be a transfer outside the EU. Other than making sure that your privacy notice describes this reality, it’s not a big deal, as you would still be transferring data in accordance with the data protection legislation, wouldn’t you..?
What about GDPR-compliant contracts?
To be honest, I’ve encountered a staggering diversity in the levels of concern about the creation of GDPR-compliant contracts with data processors. I suppose that’s not surprising when even some RPB reviewers have chosen not to explore GDPR compliance to any great degree.
But if you do ensure that the data processors that are engaged by you, your firm, or the insolvents over which you are appointed are wrapped into a GDPR-compliant contract, then you may want to revisit the wording of your standards, especially around the conditions for transferring data outside the EU.
Fortunately, as far as we can see, those are the only practical effects on day-to-day UK insolvency work. What with all the changes to documents and processes in consequence of the CIGA and HMRC secondary preferential creditor changes, I think we could all do with a break from largely unhelpful tinkering for a while.
If the draft regs and pre-packs were a Venn diagram…
The new draft legislation requiring an evaluator’s opinion on connected pre-packs has drawn most attention. But the measures will affect more than just connected pre-packs and the Insolvency Service’s report reveals other planned efforts to influence IPs’ activities and disclosures.
In this article, I focus on the less-publicised changes that are afoot, including:
The impact on post-appointment connected party sales
The option of seeking creditors’ approval, rather than getting an independent opinion
The government’s desire to increase the use of viability statements
The emphasis on SIP16’s “comply or explain” requirement
The government’s wish for RPBs to probe into cases where marketing is not undertaken
The need for greater compliance with SIP16’s disclosure requirements
No, really, they’re not. The draft regulations impose new requirements on:
Connected party sales only
But not just connected party pre-packs, also any sales of “all or a substantial part of the company’s business or assets” within 8 weeks of the start of the Administration
How is a “substantial part” defined? It isn’t. It will be up to Administrators to form an opinion about whether a sale involves a substantial part
And the regs will capture not just sales, but also the “hiring out” of all or a substantial part of the business or assets
Why interfere with post-appointment sales?
The Insolvency Service’s report does not explain or seek to justify this step. It seems to suggest that, because the SBEE Act’s power to legislate extended to all connected party sales, they were free to regulate all such sales. However, they have graciously decided “only” to apply the requirements to sales within 8 weeks of the start of the Administration.
So… a secured lender appoints Administrators perhaps in a hostile manner. The Administrators have had no contact with the director before their appointment, but they soon learn that the director is anxious to hold onto the business so will offer almost anything. The Administrators are keen to recover as much as possible for their appointor and, as is their statutory duty, to care also for other creditors’ interests, so they play hard ball to squeeze out the best deal. The Administrators’ agents recommend that they snap up the offer – maybe they’ve now carried out some marketing, maybe it’s a no brainer that no unconnected party in their right mind would offer anything approaching the director’s offer – the secured lender is happy with it, and the Administrators make sure that the purchaser is good for the money. But still the purchaser must instruct an independent evaluator?
What will the evaluator evaluate?
The evaluator’s report must state whether or not they are:
“satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances”
It seems to me that the people best-placed to evaluate whether the consideration is reasonable are professional agents, aren’t they? Shame that independent, qualified, PII’d agents instructed by the Administrators to do just that cannot be trusted with this task, isn’t it?
How does someone assess whether “the grounds for the substantial disposal” are reasonable? It’s not “the grounds for Administration”, so this will not address the cynics’ belief that directors engineer companies into Administration to “dump debts” and start again. I’m not saying this happens often, if at all. Unnecessarily putting yourself through an Administration and then battling to restore, or to build new, trust of suppliers, employees, and customers seems a drastic step to take. I think that many connected purchasers underestimate the struggles ahead of them.
Presumably, “the grounds for the substantial disposal” relates to the question: could a better price be achieved by a different strategy? This sounds like a debate about the marketing strategy, the prospects of alternative offers, and going concern v break-up, so again professional and experienced agents seem best-placed to make this evaluation.
But why not just ask the Pool?
I understand the noises of: what’s wrong with simply asking the Pre-Pack Pool? But I return to the question: why have an opinion in the first place? It won’t dispel the suspicions that the whole thing has been designed by the directors who shouldn’t be allowed to use Administration or Liquidation and it won’t answer the many who just believe that it’s wrong for a director to be allowed to buy the business or assets from an Administrator or Liquidator. The public comments below The Times’ articles on pre-packs say it clearly: some people call connected party sales (and CVAs) “fraud” or “legal theft”. How do you persuade these people to see things differently?
The strongest argument I could find in the Insolvency Service report for a Pool opinion was:
“Whilst some stakeholders said that an opinion from the Pool (or lack of one) would not affect their decision to trade with a business that was sold to a connected party purchaser, other creditor groups said that their members valued the Pool’s decision, and that the opinion did influence their decision as to whether to trade with the new company. They also stated that where the Pool had been utilised, the opinion given helped to demonstrate to creditors that in some circumstances a sale to a connected party provided a reasonable outcome for creditors.”
So some say it helps, some say it doesn’t.
Somehow the Insolvency Service concluded that their “review has found that some connected party pre-packs are still a cause for concern for those affected by them and there is still the perception that they are not always in the best interests of creditors”, but I saw nowhere in the report where those perceptions originate. The report referred to the media and the CIG Bill Parliamentary debates. Is that your evidence? Oh yes, some Parliamentarians have been very colourful in their descriptions of pre-packs; one said that the directors offer “a nominal sum – maybe only £1 or a similarly trivial sum”. Their ignorance – or the way they have been misled to believe this stuff – is shameful and on the back of such statements, distrust of connected party pre-packs grows and so the case for an independent opinion is made.
And now the R3 President is reported as saying that “effectively anyone will be allowed to provide an independent opinion on a connected party pre-pack sale, which risks abuse of the system that undermines the entire rationale of these reforms”. Again, we feed the beast that bellows that IPs – and professional agents – cannot be trusted.
So, ok, if it makes you happy, fine, let it be a Pre-Pack Pool opinion. In my view, they have fallen far short of justifying their existence, but if it shuts the mouths of some who see pre-packs as “Frankenstein monsters” (The Times) or at least gives them pause, then so be it.
Getting creditors’ approval as an alternative
The draft regulations provide that, as an alternative to getting an evaluator’s opinion, a substantial disposal to a connected party may be completed if:
“the administrator seeks a decision from the company’s creditors under paragraph 51(1) or paragraph 52(2) of Schedule B1 and the creditors approve the administrator’s proposals without modification, or with modification to which the administrator consents”
This must be achieved before the substantial disposal is made, so it will not be available for pre-packs… unless you can drag out the deal for 14+ days.
Could it help for post-appointment business sales? Provided that you don’t make a Para 52(1)(a), (b) or (c) statement in your proposals, it might. And let’s face it, if you’re issuing proposals immediately on appointment and before you’ve sold the business and assets, you may be hard pressed to make any positive statement about the outcome of the Administration.
But if you issue proposals immediately, i.e. before you have negotiated a potential deal with anyone, what exactly would the creditors be approving? Presumably, they would be informed of your strategy to market the business and assets and shake out the best deal from that. They would not be informed of what offers (if any) are on the table and it would be commercial suicide for the proposals to include valuations. Would such vague proposals achieve what the Insolvency Service is expecting from this statutory provision?
Could it be that the Service recognises that true post-appointment connected party sales (i.e. not those that avoid the pre-pack label by resisting negotiation until a minute past appointment) do not require independent scrutiny and this is their way of avoiding putting them all in that basket?
Smartening up on SIP16 statement compliance
The Insolvency Service reports that SIP16 statement compliance has improved: since the RPBs took on monitoring compliance in late 2015, the annual non-compliance rate has dropped from 38% to 23%. The report states, however, that:
“the level of non-compliance continues to be a concern, as SIP16 reporting is a key factor in ensuring transparency and maintaining stakeholder confidence in pre-pack sales”
Hang on, when did SIP16 require a “report”? The Insolvency Service refers throughout to a SIP16 report. It’s funny, isn’t it, how something that started off as “disclosure”, then became a “statement”, and now is considered a “report”? I think this demonstrates how the SIP16 disclosure requirements have grown legs. And, while the report acknowledges that the RPBs state that most of the non-compliances are “minor technical breaches” and that there is “now more information available to creditors as a result of the SIP16 changes”, it seems to suggest that stakeholder confidence can only be enhanced if we eliminate even those minor breaches.
The report focuses on three areas where it seems that “greater consistency needs to be promoted across the profession”: viability statements, marketing activity and valuations.
The value of viability statements
The report indicated that, of the 2016 connected party SIP16 statements reviewed, 28% of them “stated viability reviews/cash flow forecasts had been provided”. 69% of the purchasers in these cases were still trading 12 months later. However, in the category of cases where no viability statements were evidenced, 87% of those purchasers were still trading after 12 months. This suggests to me that disclosure of a viability statement does not particularly help Newco to gain trust with creditors!
Of course, rightly so the report states that the purchasers may well have carried out their own viability work but have been unwilling to share it. What I was far less pleased about was that the report stated that “alternatively, it may be that the insolvency practitioner… is not requesting the purchaser to provide a viability statement, which would indicate non-compliance with the requirements of SIP16”. The cheek of it! If a progress report omitted the date that creditors had approved an office holder’s fees, would the Service suspect that this was because it never happened? Actually, I can believe that they would. The Insolvency Service has no evidence of non-compliance in this regard, but they can’t help but stick the boot in and foment doubts over IPs’ professionalism and competence.
Having said that, IPs would do well to double-check that they are asking for viability statements and making sure that there’s evidence of requests on the file, don’t you think..?
I wonder whether a future change will be that the RPBs will ask to be sent, not only the SIP16 statement, but also evidence of having asked the purchaser for a viability statement.
The report’s conclusion is puzzling:
“In discussions with stakeholders no concerns were raised regarding the lack of viability statements. However, the government considers that there continue to be benefits to completing viability statements for the reasons highlighted in the Graham Review. Therefore, we will work with stakeholders to encourage greater use.”
Hmm… so no one seems bothered about their absence, but the government wants to see more of them. Logical.
Compliance with the SIP16 marketing essentials
The review sought to analyse 2016 connected party SIP16 statements as regards explaining compliance with the six principles of marketing set out in the SIP. The report states:
“the principles that encourage exposure of the business to the market ‘publicised’ (54% compliance), ‘broadcast’ (53% compliance) and ‘marketed online’ (56% compliance) have only been complied with in just over 50% of cases.”
Given that they were reviewing only the SIP16 statements, I’m not sure they can say that the marketing principles have not been complied with. Might it just be that the IPs failed to explain compliance in the SIP16 statement?
Having said that, the review also revealed that, “of those that deviated from the marketing principles, over 80% of administrators provided justification for their marketing strategy”, i.e. they complied with the SIP16 “comply or explain” principle. This suggests to me that 20% of that c.50% need to try harder to get their SIP16 statements complete.
The value of marketing
The report acknowledges that “in some limited cases it may be acceptable for no marketing… to be undertaken”. I think that many would go further than this: in some limited cases, it may be advantageous not to market. The review stated that no marketing had been carried out in 21% of the 2016 connected pre-packs reviewed. This does seem high to me and I think does not help counteract suspicions of undervalue selling.
Interestingly, though, where marketing was undertaken, 46% of those connected party sales were below the valuation. But where marketing was not undertaken, 43% were below “the valuation figure”. As most IPs get valuations on both going concern/in situ and forced sale bases, I’m not sure which “figure” the Service is measuring against here. But nevertheless perhaps this is some comfort that marketing doesn’t make a whole lot of difference… unless of course it attracted an independent purchaser, which would have taken the case outside the scope of the Service’s review entirely. Shame that they didn’t analyse any unconnected SIP16s!
The compliance problem
The government’s response to the diversity in approach to marketing and to SIP16 disclosure includes that they will:
“work with the regulators to ensure: there is greater adherence to the principles of marketing”; and “there is a continued increase in compliance with the reporting requirements under SIP16”.
As I mentioned above, the report stated that SIP16 statement non-compliance was at 23% in 2019… but in her recent virtual roadshow presentation, Alison Morgan of the ICAEW stated that their IPs’ 2019/2020 rate was at c.50%. We must do better, mustn’t we?!
I too am frustrated about the levels of compliance with SIP16. I realise it’s a killer of a SIP – some of the requirements don’t follow chronologically or logically and some leave you wondering what you’re being asked to disclose. I realise that almost no pre-packs fit neatly into the from-a-to-b SIP16 ticksheet. But I don’t know when I last saw a 100% fully compliant SIP16 disclosure! I know I’m harsh, harsher it seems that some of the RPB reviewers, but whatever SIP16 asks for, please just write it down… and tell your staff not to mess with templates – they/you may think that some statements are pointless or blindingly obvious, but please just leave it in.
Expect to be “probed”!
Another part of the government’s response is to:
“ensure that where no marketing has been undertaken, the explanation provided by the administrator is probed by the regulator where necessary”.
True, SIP16 allows for a “comply or explain” approach, but if a large proportion of businesses are not being marketed, it just opens us up to the cheap shot that the sale might have been at an undervalue, doesn’t it?
What is a valid reason for not marketing? Again in her recent presentation, Alison Morgan indicated that a fear of employees walking out or of a competitor stealing the business may not in themselves be sufficient justification.
SIP16 changes in prospect
So what changes will we see in SIP16? The government response is that they:
“will work with the industry and the RPBs to prepare guidance to accompany the regulations and to ensure SIP16 is compatible with the legislation.”
Guidance? Sigh! If it’s anything like the moratorium guidance, then I don’t see why they bother: what more can they say apart from regurgitate the regulations, which are only 6 pages long?
And how is SIP16 incompatible with the regulations? Well, obviously in referring specifically to getting an opinion from the Pre-Pack Pool… but I wonder how the regulations will look when they’re finalised. With all the murmurings about almost anyone being able to call themselves an evaluator, I suspect it may be the regulations that will be brought more into line with SIP16 on this point!
But let’s hope that SIP16 is not changed to accommodate the regulations’ capture of all connected party Administration business/”substantial” asset sales within the first 8 weeks. That truly would be sledgehammer-nut territory, wouldn’t it?
The government has also threatened to:
“look to strengthen the existing regulatory requirements in SIP 16 to improve the quality of information provided to creditors”.
“Strengthen” the requirements? I wonder what they have in mind…
What about valuations?
Oh yes, I forgot: that was the third area the government highlighted for greater consistency.
Right, well, they weren’t happy that 18% of the SIP16s they reviewed failed to state whether the valuer had PII. I don’t know what they think IPs do, have a chat with a guy in a pub? So, yes, we need to check that our SIP16 ticksheets are working on that point.
The report also noted that some SIP16s didn’t have enough information to compare valuations to the purchase price, although they didn’t make a big deal of it. In her recent roadshow presentation, Alison Morgan repeated her request that IPs produce SIP16s that neatly detail the valuations per asset category alongside the price paid. (You’ll have gathered that Alison had a lot to say about SIP16 compliance – I recommend her presentation!) Although I share Alison’s view, working through the SIP’s requirements in the order listed is not conducive to presenting the valuation figures alongside the sale price, so this is definitely a SIP16 area that I think could be usefully changed.
What if SIP16 compliance does not improve?
Ooh, the government is waving its stick about here:
“Should these non-legislative measures be unsuccessful in improving regulatory compliance, the quality of the information provided to creditors and the transparency of pre-pack sales in administration, government will consider whether supplementary legislative changes are necessary.”
SIPs have pretty-much the same degree of clout as legislation. In the case of SIP16, arguably it carries a greater threat. There have been several RPB reprimands for SIP16 breaches published over recent years. How many court applications does the government think will result if they enshrine SIP16 in legislation? More than the number of RPB reprimands? If IPs are failing to comply with SIP16, it’s not because the SIP is toothless.
Will the measures solve the pre-pack “problem”?
In my view, no. There is just too much general cynicism about IPs being in cahoots with directors and about directors being determined to stiff their creditors.
What I think might help a little is if our regulators – the Insolvency Service and the RPBs – reported a balanced perspective of SIP16 compliance. I know that the report acknowledges that most SIP16 disclosure breaches are “minor technical” ones, but the simple stats grab the headline. We also need a simpler SIP16 so that compliance is easier to achieve and to measure. Concentrating on the minutiae and concluding that the statement is non-compliant just does not help. Are the minutiae really necessary? Does it improve the “quality” of the information and the transparency of the sale? I know, I know, the SIP isn’t going to get any simpler, is it?
I think the regulators might also help if they were to defend themselves and in so doing defend IPs as a whole. Do they not realise that the perceptions that pre-packs are not in creditors’ best interests is also a slight on how they may be failing to regulate IPs effectively? No one naïvely claims that all IPs are ethical and professional, so what steps have the RPBs taken to tackle the actual, suspected or alleged abusers of the process? If they have identified them and are dealing with them, then can they not publicise that fact and confirm that the rest of the IP population are doing the right thing? Instead, all we hear especially from the Insolvency Service is that, while pre-packs are a useful tool, IPs do a poor job of acting transparently and that there needs to be an independent eye scrutinising the proposed deal to give creditors confidence. Are not the regulators the policemen in this picture?
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.
In the report, the ICAEW highlights the following areas that have brought IPs to the Committee’s attention:
Remuneration
Ethics
Investigations
Statutory Deadlines
Insolvency Compliance Reviews
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.
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.
I’m sure we’ve all been flooded with articles on the new moratorium process. Therefore, I am avoiding the usual broad-brush approach here. Instead, I hope to draw out some of the niggly complexities and awkward practical consequences of the new provisions… although, to be honest, the closer we look, the more we find…
Jo made an early start on listing some issues in her Technical Update issued earlier this month. If you’d like a copy, please drop us a line at info@thecompliancealliance.co.uk.
Of course, you all know where to find the Corporate Insolvency & Governance Act 2020 (“CIGA”), but for completeness, it is available at: www.legislation.gov.uk/ukpga/2020/12/contents/enacted. The references in brackets in this article are to provisions in CIGA, unless otherwise stated.
When monitors might do more than just monitor and how they get paid for this
The dangerous timeline of seeking creditors’ consent to an extension
A mixed bag of CIGA drafting issues
The consequences for SIP9 compliance
The ethics of a subsequent appointment
The practicalities of a subsequent appointment
Monitors Must Monitor, not Supervise
Over the years, I’ve seen several CVA files with seemingly half-hearted or sporadic efforts to extract information, and sometimes even payments, from directors. A deadline may come and go, a chaser or two might be sent, and at worst efforts simply fizzle away. The defence is run: but I have discretion… the CVA isn’t strictly in default… it is in creditors’ interests to keep the CVA ticking over even if there’s not 100% compliance, rather than see the company go into liquidation.
This approach will not work in a moratorium: the monitor needs to stay keen, the information flow needs to be far swifter and more frequent. A monitor must end the moratorium if they think that, by reason of a directors’ failure to provide information, the monitor is unable properly to carry out their functions (A38(1)(c)). This is not a discretionary power, it’s a “must”, and if a monitor lets things slide, I think they open themselves up to a challenge (A42).
The termination-by-monitor provision (A38) also states that the monitor must bring the moratorium to an end when “the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern” (albeit that this is modified in these coronavirus times) or when they think “that the company is unable to pay any moratorium debts or non-payment holiday pre-moratorium debts that have fallen due” (subject to the tweak in para 37 Sch 4).
This seems to call for a continual process, not a periodic one. Of course, monitors are going to have a periodic approach to reviewing the company’s position, checking that the required debts have been paid when they fell due, checking the company’s prospects going forward and making sure that the rescue strategy remains on track. But surely we are talking days here, not several weeks or months.
Therefore, getting the directors geared up to provide information quickly and regularly and ensuring that you have the internal resources of a disciplined team to keep up the pace are vital.
Not all Fees are “Monitors’ Fees”
Over recent years, several IPs have discovered to their loss the idiosyncrasies of R6.7 and R3.1, which restrict what they can be paid for after appointment in relation to pre-CVL and pre-administration costs. CIGA has given us another trap like this.
CIGA requires the directors to complete several tasks during the moratorium such as notifying the monitor before they take steps to go into another insolvency process (A24), when the moratorium ends. Worryingly, the directors are also responsible for extending the moratorium. The InsS Guidance states:
“Directors may not be familiar with the rules surrounding decision making in insolvency procedures and whilst it is not part of a monitor’s statutory duty to assist directors in obtaining the consent of creditors they may choose to do so in an advisory capacity.”
Yep, InsS, I think you can rest assured that no monitor is going to trust a director to run a creditors’ decision procedure without the IP’s strong oversight, as the decision procedure rules are so complex (and made more complex by CIGA’s special voting rules)!
Thus, moratorium extensions will work in a similar way to S100 decision processes: strictly speaking, the director is tasked with the job, but they instruct an IP – almost inevitably the monitor – to do the work for them. But, as the IP is not carrying out this work in their capacity as monitor, payment will not be classed as the “monitor’s fees”, at least not unless your letter of engagement makes it so. Therefore, you need to ensure that you have a letter of engagement signed to cover this “advisory capacity” work.
Tight Timings
In brief, the timescales of a moratorium are:
The first 20 business days are granted on commencement
This can be extended by a further 20 business days by the director filing a simple form with the court
The moratorium can be extended for period(s) up to the anniversary by getting creditors’ consent via a decision procedure
The moratorium can be extended for any length by a court order
In general, the IR16 apply as regards decision procedures, so we’re looking at decisions by correspondence/electronic or a virtual meeting.
What happens if creditors ask for a physical meeting? What if they say “no” or they simply don’t vote at all? What if you want to adjourn the virtual meeting, but the moratorium will end in the next day or two?
With these scenarios in mind (and especially as the director needs to sign the docs), you would do well to start a decision procedure long before the moratorium is due to end.
It would have helped if the CIGA had provided that moratoria receive an automatic extension where the decision procedure’s conclusion is delayed, in the same way as an automatic extension is given where a CVA proposal is pending (A14), but hey ho.
Impossible Timescale
One timescale in the CIGA simply does not work. The decision procedure requires five calendar days’ notice, but R15.6(1) (IR16) has not been disapplied, so it seems that creditors have 5 business days from delivery of the notice in which to request a physical meeting. How does that work then??
It might help, therefore, to hold virtual meetings instead of trusting that creditors will be content with a vote by correspondence/electronic. At least a virtual meeting is a moderately useful forum for airing grievances and concerns. Of course, virtual meetings also do not suffer the there’s-no-changing-a-cast-vote issue of the other procedures either, so this might also help if there’s any horse-trading to be done.
General Fuzziness
Jo and I have spent far too long debating the following questions:
A17(2) requires the monitor to notify creditors of the end of the moratorium in several situations, but we can find no notification requirements if the moratorium simply ends because it has run out of time. The InsS Guidance states that “there is no requirement for the monitor to notify creditors or the registrar of companies that the moratorium has ended on expiry of the initial period of 20 business days”. Ok, but what about where a longer moratorium ends through the effluxion of time? And does anyone ever tell the court (or for that matter, the PPF, Pensions Regulator, FCA or PRA)?
Court notification of the end of the moratorium also appears lacking in other situations: when a CVA proposal has been disposed of (A14); when a court order’s deadline had been reached (A15); and when the company enters an insolvency procedure (A16). Was this intentional?
There also doesn’t appear to be any duty on the monitor to notify relevant persons of the end of the moratorium where a court order under A15(2) has specified a time limit (or event) after which the moratorium is ended. Maybe this is why there is no Companies House form to record this end event?
What exactly does A24(2) mean, where it requires the directors to notify the monitor before “they recommend that the company passes a resolution for voluntary winding up under section 84(1)(b)”? Is this triggered when the director issues notices to members or would this occur earlier, e.g. when they instruct an IP to help?
Why on earth do we have different prescribed content for the proposed monitor’s consent to act in A6(1)(b) and para 17 Sch 4? Do we need both (e.g. that the IP “is a qualified person” and they certify that they are “qualified to act as an insolvency practitioner in relation to the company”)? And does a monitor act in relation to the moratorium (A6) or the company (para 17)??
A28 requires the monitor’s (or the court’s) consent if the company wants to pay certain pre-moratorium creditors. A28(1) states that, with such consent, “the company may make one or more relevant payments to a person that (in total) exceed the specified maximum amount”. The “specified maximum amount” is defined in A28(2) as £5,000 or 1% of certain liabilities, but do these thresholds relate to “payments to a person… (in total)” or to payments to all such persons in total? I think that A28(1)’s grammar leads to a meaning of payments to the person in question, but the InsS’ Guidance states that “total payments shall not exceed…”, which gives the impression that the thresholds relate to payments to all such persons. Which is it?
SIP9
SIP9 applies to “all forms of proceedings under the Insolvency Act 1986”, but clearly it was not written with moratoria in mind. Does it create any difficulties if we assume that we need to follow it (and assuming that its references to “office holder” include a monitor)?
Well, for a start, it means that we all need to draft a Creditors’ Guide to Fees, which will say… erm… not a lot, as fees are a matter for the IP and the company, apart from a couple of rights to challenge. Of what rights should we inform “other interested parties”? What about the requirements to justify why a fixed fee is considered fair and reasonable or to cover the “key issues of concern” such as what work we are proposing to do, the anticipated financial benefit to creditors? Is there any expectation by RPBs that we comply with these requirements even if compliance is required only in spirit?
I know that there’s a SIP9 consultation going on, but when do we think we might see a revised SIP9 come into force..? Could the RPBs issue some clarification in the meantime?
Ethical Threats
This is another area where RPB guidance would be very welcome. In my view, the InsS Guidance does a poor job in helping IPs observe the Code of Ethics. It states:
“The monitor is not prevented from taking up a subsequent appointment subject to the insolvency practitioner making an assessment of any threats to compliance with the fundamental principles. Practitioners may find it helpful to refer to section 2520 of the Code of Ethics that deals with “Examples relating to previous or existing insolvency appointments” in terms of how any subsequent insolvency appointments following appointment as monitor (as administrator or liquidator for example) may be treated. The monitor should satisfy themselves that they have identified any threats to compliance with the fundamental principles and have been able to put in place appropriate safeguards to reduce any threats to an acceptable level.”
My heart always sinks when someone in the profession goes straight to the Code’s examples to see whether they or their boss can take an appointment. At best, I think that it’s lazy, but at worst it may mean that they don’t really get it. My heart similarly sank when I read the InsS’ emphasis on the Code’s examples.
Agreeing to act as a monitor has immediate consequences, including an immediate change in priority of liabilities in a subsequent liquidation or administration. Some of those given an automatic leg-up may be connected to the company; they could be directors or shareholders. The IP who becomes monitor probably advised the company on its options. Then there are the during-moratorium self-review and self-interest threats: whether the monitor failed to terminate promptly; whether their fees were excessive; whether it was the right decision to consent to certain payments or to security being granted; and whether they have any outstanding fees thus making themselves a creditor. All these threats need to be taken seriously and cannot be ticked off simply by seeing that there is normally no reason why an administrator may not take a subsequent liquidation appointment.
But who would want a subsequent appointment?
Surely the CIGA’s shifted priorities would make any IP think twice about taking on a subsequent liquidation or administration! Would you want to risk discovering a whole host of unpaid moratorium liabilities and pre-moratorium claims ranking ahead, not only of your fees, but also of all the expenses of the liquidation or administration (paras 13 and 31 Sch 3)? And, if you are an administrator, you must make a distribution to those creditors (para 31 Sch 3)!
I think that directors/monitors would be hard-pressed to find an independent IP willing to pick up such a murky can of worms. It seems to me that the Official Receivers may find themselves with a delightful new source of work. Perhaps that’s why the InsS made sure that the ORs’ fees take priority over them all (para 13 Sch 3)!
The Marketing Bit
Jo and I have rolled out a large part of our moratorium document pack: all the statutory docs are there – to get in to a moratorium, extend it and exit it (although we do still have the nagging questions above) – and we are in the process of topping and tailing the pack to include items like file notes to record the key decisions, which should become available in the next week or so.
The moratorium pack is available at no extra cost to all our document pack subscribers and we shall continue to update it at no further cost to these clients. We are also happy to provide the moratorium pack as a standalone purchase – as-is when complete – for £2,000+VAT.
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.
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:
identifying threats;
evaluating them; and
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.
Just a short blog today to let you know about a new page I’ve added: appointment statistics.
The past few weeks have been so disruptive, it has been difficult to discern how the demands on IPs have changed: are more companies toppling now or are many directors waiting out the storm?
At https://insolvencyoracle.com/appt-stats/ (and below for this post only), I have added graphs showing the ADM, CVL and MVL appointment notices published in the Gazette each week over the past couple of months. I intend to update these graphs on a weekly basis. The vertical line marks the day that the UK went into lockdown.
Insolvency Oracle 