Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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2017: it’s not all about the Rules

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A watched kettle never boils, so I’ll stop watching for the new Rules to land – having missed their “aim” of w/c 10/10/16, the Insolvency Service is now claiming that it was always their “plan” to have them issued this month – and instead I’ll shift my focus to what other delights the next year may bring.

 

A Review of the Bonding Regime

What do you think? Is the bonding regime fit for purpose? Does it really work as an effective protection?

The Government has issued a Call for Evidence to explore the weaknesses and reform possibilities of the bonding regime. The opportunity for submissions closes on 16 December 2016 and the Insolvency Service’s document can be found at: https://goo.gl/wiKc0K.

The document notes that the Insolvency Service has “seen evidence where the costs claimed by an insolvency practitioner in proving a bond claim are disproportionate to the loss suffered by the insolvent estate”, whilst the specific penalty bond premiums have increased for smaller firms by 200% in one year. No wonder there are questions over whether bonding is achieving its objective.

The Call for Evidence explores questions (albeit worded differently) such as:

  • Would a system similar to the legal profession’s arrangements for dealing with fraud and dishonesty work for insolvency?
  • Could a solution be a “claims management protocol” incorporating a panel of IPs to deal with bond claims and ways to limit cost?
  • Alternatively, perhaps the bonding regime should be abolished altogether?

 

Complaints-handling by the RPBs

In September, the Insolvency Service released a summary of its review into the RPBs’ complaints-handling processes.

The Service reported that “the introduction of Common Sanctions Guidance has improved transparency in decision-making but there is scope to ensure more consistency in the application of the guidance”. The Service’s answer is to work with the RPBs to make changes to the guidance.

Three other main recommendations emerged from the review:

 1.  The RPBs should ensure that information is sought from the IP, e.g. “if the complainant has not provided or is unable to provide evidence to support their complaint”, unless there is a justified reason not to do so (whatever that looks like).

The report explains that “the most common reasons for closing a complaint at the assessment stage are the complainant’s failure to respond to further enquiries or their inability to provide evidence to support their complaint”. The Service also reports that “the review identified that some cases had been closed which appeared to merit further investigation”. Thus, the Service is recommending that RPBs look to the IPs for the information and evidence.

The Service seems to be expecting the RPBs to conduct thorough investigations on receipt of nothing more than unsupported suspicions raised by parties who then go to ground as soon as they’re asked to explain or substantiate their allegations. The Service also seems to take no account of the costs to IPs in responding to RPB requests, which of course are not recoverable from the insolvent estates irrespective of whether the complaint is founded. Isn’t it about time that the Service stopped labouring onto IPs more and more expensive burdens whilst simultaneously pursuing the agenda that IPs’ fees need to be curbed?

2.  The RPBs should consider with the Service the feasibility of a regulatory mechanism whereby compensation can be paid by the IP to the complainant where they have suffered inconvenience, loss, or distress.

The Service is recommending this measure “to ensure fair treatment for complainants”, given that some RPBs (but see below) have a compensation mechanism, but others do not. But how often do the RPBs order compensation? This information is conspicuous by its absence from the report.

From the report, it seems that the ACCA is the only RPB with a formal compensation mechanism. In view of the fact that the ACCA is handing over its complaints-handling to the IPA with effect from 1 January 2017, surely the simplest way to make things “fair” to all complainants is to have no compensation mechanism, isn’t it?

I also do not understand the Service’s logic in arguing that compensation should be offered “where minor errors or mistakes have been made”, whilst accepting that “any such mechanism would not be a substitute for any legal remedies available to individual complainants through the Courts”. Next thing we know the Service will be expecting the RPBs to decide whether fees are excessive on fairly straightforward cases, whilst accepting that decisions on really meaty fees should remain with the courts. Oh hang on a minute…

Unfortunately, the IPA is making it easy for the Service to push its agenda: the report mentions that the IPA intends to introduce a formal conciliation process in any event (which is news to me, as I suspect it is to most IPA members).

3.  RPBs experiencing particular issues progressing complaints cases should discuss their plans with the Service.

I think this is directed mainly at the ACCA, which has come in for some heavy criticism, as reported in the Insolvency Service’s monitoring reports over the last couple of years. Now that the ACCA has announced its “collaboration” with the IPA, which will investigate and decide on complaints levelled at ACCA licensed IPs (as well as conduct their monitoring visits), perhaps the Service already will be happy to tick that box.

To read the full report, go to: https://goo.gl/radZpS.

 

Action on Anti-Money Laundering

This subject really deserves a blog post of its own. The prospects for change are coming from all directions.

“Consent” SARs no more

Actually, this happened in July, but I’ve not seen it covered elsewhere, so I thought I would shoe-horn it in here. Although the Proceeds of Crime Act 2002 refers to “consent”, the NCA has issued guidance clarifying that it will no longer be granting consent, but rather a “defence to a money laundering offence”.

The NCA has taken this step to counteract the “frequent misinterpretation of the effect of ‘consent’ (e.g. assuming that it results in permission to proceed, or is a statement that the money is ‘clean’ or that the NCA condoned the activity going ahead)”.

To request a “defence”, however, you will still need to tick the “consent requested” box on the SAR submission.

For a useful reminder on the purpose and process of consent/defence SARs, including the kinds of responses you might get back from the NCA, go to https://goo.gl/c8tJzk.

Allowing “joint” SARs and other proposals

In April, the Government (via HM Treasury) issued an “Action Plan”, representing “the most significant change to our anti-money laundering and terrorist finance regime in over a decade”, and the Government sought views on the proposed actions.

Amongst other things, the Government was proposing to reform SARs, given the enormous resource demand of c.400,000 SARs submitted each year. The proposals included doing away with the SARs consent/defence process altogether, which alarmed me considerably, but I was relieved to see that the Law Society and others (including R3, although I have to say that they were not as forceful as the LawSoc) urged the Government to reconsider.

The Government’s response on the consultation was issued earlier this month at https://goo.gl/pzezpx and the conclusions are reflected in the Criminal Finances Bill, which is now making its way through Parliament.

I can only see the proposed changes affecting IPs in exceptional cases, but in brief they include:

  • some changes to the SARs regime including empowering the NCA to obtain further information from SARs reporters, but the consent process will continue at least for the moment (“the Government will keep this issue under review”);
  • “establishing a new information sharing gateway for the exchange of data on suspicions… between private sector firms with immunity from civil liability” – I am interested to discover how this will be constructed, although the Government response does include reference to…
  • enabling “joint” SARs to be submitted, which I’m sure will be good news to all IPs who have been conscious of multiple SARs being submitted on cases involving external joint office holders and legal advisers;
  • introducing Unexplained Wealth Orders;
  • strengthening powers to seize and forfeit criminal proceeds in bank accounts or “portable high value items” such as gold.

The Fourth Money Laundering Directive

I understand that Brexit is unlikely to halt the progress of the EU’s Fourth Money Laundering Directive in the UK, which is set to be transposed into national law by 26 June 2017.

In September, HM Treasury issued a consultation on how the Directive should be implemented. The consultation document can be found at https://goo.gl/5AdhQd and it closes on 10 November 2016.

Items with the potential to affect IPs include:

  • a reduction in the threshold for cash or “occasional” transactions from €15,000 to €10,000;
  • changes in the criteria triggering simplified and enhanced due diligence;
  • a potential widening of the scope of those whose AML due diligence may be relied upon (which I find interesting given that the RPBs seem to recommend avoiding reliance);
  • potential prescription surrounding requirements for certain businesses to appoint compliance officers, to conduct employee screening, and to carry out independent audits;
  • a requirement to retain AML due diligence records for 10 years (up from 5 years); and
  • a requirement for certain Supervisors (i.e. the RPBs and others) to “take necessary measures to prevent criminals convicted in relevant areas or their associates from holding a management function in, or being the beneficial owners of” AML-regulated businesses (which, personally, I think is extremely unfair – for example, is it fair to curtail someone’s career because of what their father has done?). Although the consultation refers only to accountants, solicitors and some other businesses as needing this oversight, I would be surprised if IPs escape notice when any legislation is drafted.

 

More and More Changes in Scotland

Imminent changes

As we know, the new Bankruptcy (Scotland) Act 2016 (and presumably the accompanying Regulations, which are yet to be finalised) come into force on 30 November 2016.

The AiB has headlined the Act and Regulations as “business as usual” but simply a cleaner and more straightforward reorganisation of the existing statutory instruments, the most material effect being that what was the Protected Trust Deeds (Scotland) Regulations 2013 has been written into the Act (all except from the forms, which are in the 2016 Regs).

However, inevitably the AiB has taken the opportunity to slip in a couple of changes. As drafted, the MAP asset threshold will be reduced from £5,000 to £2,000 (Regulation 14).

In its response to the AiB’s informal consultation on the draft Regulations, ICAS took the opportunity to raise a number of issues, including having another dig at the AiB’s compromising positions as both supervisor and supplier of debt management/relief services. As regards these expressions of concern and ICAS’ attempt to highlight the archaic “overly penal” use of an 8% statutory interest rate, I say: “good for them!”.

ICAS also points out apparent deficiencies in the Regulations’ treatment of money advisers, who are required under the draft Regulations to have a licence to use the Common Financial Statement, but the Money Advice Trust provides licences to organisations, not individuals. There also appears to be a flaw in the Regulations in that it does not allow a non-accountant/solicitor IP to be a money adviser if they or their employers provide other financial services.

To read ICAS’ response in full, go to: https://goo.gl/xSaKkv.

Future changes to PTDs and DAS

Earlier this year, the AiB ran consultations as part of their reviews of PTDs and DAS. The AiB published summaries of the consultation responses in July 2016 (see https://goo.gl/MW6gC5) and the AiB has promised its own responses “in the coming weeks”, although these have yet to emerge (not surprising really, given everything else going on!).

The scope of the consultation questions was vast and the reviews have the potential to affect many aspects of the two procedures.

 

New Restructuring Moratoriums and Plans… but no changes to rescue finance priority

Although the Government has not yet provided its response to the consultation, “A Review of the Corporate Insolvency Framework”, which ended on in July 2016, it has issued a summary of responses at https://goo.gl/Cf0LWK.

The summary does hint, however, that the Government is likely to take forward some of the proposals.

The introduction of a pre/extra-insolvency moratorium

If the Government were to go with the majority (yes I know, that’s a big “if”), the new moratorium:

  • would be initiated by a simple court filing;
  • would have stronger/more safeguards to protect creditors’ interests than as originally proposed;
  • potentially would not suspend directors’ liability for wrongful trading;
  • would be shorter than the originally proposed 3 months, probably 21 days;
  • could be extended without the need to obtain the approval of all secured creditors;
  • would not affect the length of any subsequent Administration (woo hoo!);
  • would be supervised only by a licensed IP (double woo hoo!);
  • would provide for costs incurred during the moratorium to be paid during the moratorium or, failing that, to enjoy a first charge if an insolvency process follows on; and
  • would provide creditors with the power to seek information (with certain safeguards and exemptions).

Essential suppliers to be held to ransom?

In contrast, consultation responses were split on whether more should be done to bind essential suppliers to keep on supplying during a moratorium or indeed during an Administration, CVA or potentially new “alternative restructuring plan”. The only clear majority response was that providing suppliers with recourse to court to object to being designated by the company as “essential” was an inadequate safeguard for suppliers.

The reaction? “Government notes stakeholder concerns and is continuing to consider the matter.”

A new restructuring plan with “cram down”

Cheekily, the consultation actually didn’t ask whether we saw value in a proposed new restructuring plan. It just asked how we saw it working.

The majority were in favour of a court-approved cram down process with the suggested addition that the cram down provisions could also apply to shareholders.

Will the long grass welcome back the proposal for super-priority rescue finance?

The Government had revived its 2009 proposal for super-priority rescue funding. Again this time, the response was pretty overwhelming with 73% disagreeing with the proposals.

 

Further Education Insolvencies

In July 2016, BIS issued a consultation that explored whether the usual insolvency procedures – as well as a Special Administration Regime – should be introduced to deal with insolvent further education and sixth form colleges in England.

The proposed objectives of the education Special Administration include to “avoid or minimise disruption to the studies of the existing students of the further education body as a whole”. The Government envisages that this emphasis would “provide more time than normal insolvency procedures to mitigate the risk that a college is wound up quickly and in a way which, by focusing only on creditors, would be likely to damage learners.”

Although a Government response has yet to be issued (the consultation closed on 5 August 2016), my scanning of a few published responses indicates that there are some loud objections to the idea from those working in the sector. Many of those who responded to the consultation also expressed exasperation that BIS issued a 4-week consultation over the holiday period, which does seem particularly insensitive in view of the intended audience (which strangely did not include IPs!).

 

Recast EC Regulation on Insolvency Proceedings

This is another piece of legislation that is set to come into force on 26 June 2017.

I admit that my partner, Jo Harris, is far more knowledgeable on this subject than me and personally I’m waiting for her to record a webinar on it, so that I can learn all about it (no pressure, Jo! 😉 ).

 

SIP13, SIP15… and many others

The JIC’s consultations on revised drafts of SIP13 and SIP15 closed many months ago. I understand that a revised SIP13 is very near to being issued and the aim is to have a revised SIP15 also issued before the end of the year.

Given that many of the SIPs refer to the Insolvency Rules 1986 – SIP8 on S98 meetings comes immediately to mind – many will need to be reviewed over the next 5 months if they are to remain reliable and relevant (although admittedly it has not stopped SIP13 continuing to refer to S23 meetings and Rule 2.2 reports, despite the fact that they were abolished in 2003!). Well, it’s not as if we have anything else to do, is it?!

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It’s all happening in Scotland!

2314 Eungella

Over the past few months, I have accumulated a pile of papers annotated as if they belonged in a 1970s stellar observatory, although most of my Wow!s have arisen from a feeling of horrific incredulity.

I apologise in advance if I have got any details wrong; this post is nothing more than an English-person’s reaction to the Scottish Government’s proposed changes to the personal insolvency landscape across the border. I’m sure that Scottish IPs are well-acquainted with the changes, but some Englanders might like to scan this; it might make you feel more grateful for the current state of affairs down here!

Here are the key new pieces of legislation affecting the Scottish personal insolvency regimes:

• The Debt Arrangement Scheme (Scotland) Amendment Regulations 2013, which came into force on 2 July 2013.
• The Protected Trust Deed (Scotland) Regulations 2013, which are due to come into force on 28 November 2013. The draft Regulations can be found at: http://www.legislation.gov.uk/sdsi/2013/9780111021361/contents.
• The Bankruptcy and Debt Advice (Scotland) Bill, which is working its way through Scottish Parliament, Stage 1 oral evidence sessions having concluded on 6 November 2013.

In this post, I deal with the first two items. In a later post, I hope to cover the Bill.

Debt Arrangement Scheme (“DAS”)

The Chief Executive of the Accountant in Bankruptcy (“AiB”), Rosemary Winter-Scott, is quoted to have said: “DAS is the only Scottish Government-backed scheme that offers a way for people who are in debt to regain control of their finances again” (http://www.scottishfinancialnews.com/index.asp?cat=NEWS&Type=&newsID=7331#7331).

That article also publicises the amount of money that has been paid via DAS: £13m in six months. Whilst that is pretty impressive, I am not entirely convinced that this is evidence enough that DAS is the success that the Scottish Government (“SG”) and AiB would have us believe. How many debtors have exited DAS debt-free? May we have some figures on that, AiB, please? If DAS is simply a statutory debt management plan (“DMP”) with no end date, is it really the solution for all the thousands of debtors that are being encouraged down that route?

The AiB’s 2012 DAS review stated that the average duration of all Debt Payment Plans (“DPPs”) is 7 years 2 months (http://www.aib.gov.uk/sites/default/files/publications/DAS%20Review%202012%20-%20published%203%20December%202012.pdf), although I noted that this is the original scheduled duration and the review shows a few DPPs scheduled to last over 20 years, even the odd one or two over 30 years! Given that this statutory process does not have the flexibility of a non-statutory DMP that might be used as a temporary stop gap, I do wonder how this can be considered the “fair and reasonable” solution.

In my mind, the DAS Regulations 2013 at least have provided a light at the end of the tunnel for some debtors. Before the Regulations, the debts had to be paid in full (less up to 10% in fees). The Regulations introduced an element of composition (actually, “re-introduced”, as it had been an original provision back in 2004): where a debtor has been making payments for 12 years (excluding any payment breaks) and has repaid at least 70% of the total debt outstanding when the DPP was approved, the debtor would be eligible to make an offer of composition to creditors. Of course, creditors don’t have to accept – and the offer takes effect only with the acceptance or silence of every creditor – but if a debtor has been paying for 12 years, one would hope that they’d show some mercy..?

Much has been said also of the Regulations’ bringing-forward of the point when interest and charges on debts is frozen: to the date at which the DPP is applied for by the debtor, “potentially saving people in debt up to six weeks interest” (http://www.aib.gov.uk/news/releases/2013/07/new-regulations-place-debt-arrangement-scheme-das). Some commentators had hoped that the Regulations could have been amended so that it occurred earlier than that, but I was interested to read what might have been the real motivation behind the change: the DAS newsletter 3 points out that the change should avoid the “high volume of applications for variations to correct the level of debt included in a DPP where interest and charges have accumulated over the application process” (http://www.dasscotland.gov.uk/news/debt-arrangement-scheme-newsletter-edition-3), so maybe it hasn’t been all about debtors…

Still, I shouldn’t be surly. However, it’s not all good news for debtors: the DAS newsletter 4 reported that some banks have reacted to this change by restricting or suspending debtors’ access to bank accounts on receipt of a DPP proposal (http://www.dasscotland.gov.uk/debt-arrangement-scheme-newsletter-edition-4). Now who’s being surly..?!

Alan McIntosh brought attention to the numbers of DPPs that have been revoked (http://www.firmmagazine.com/scotlands-bankrupt-debt-strategy/) and the numbers just keep going up: the number of approved applications to revoke in Q1 2013/14 was up 31.5% on the previous quarter and up 93.8% on the quarter of the previous year. I guess it’s not surprising that the figures are increasing, given the current squeeze on consumers and that the numbers agreeing DPPs are generally also on the rise. I just think it’s a bit rich that the Enterprise Minister, Fergus Ewing, continually hails DAS as a success in view of the fact that more and more people are accessing it, but there seems to be no attention given to the people that are (or are not) leaving it.

Protected Trust Deeds (“PTDs”)

Proposed changes to the PTD process have been rumbling on for a number of years with the SG’s express motivation being to “drive up the performance of PTDs”. Although it has sought to do this by tackling “the trend of rising costs associated with delivering PTDs alongside disappointing dividend returns” (http://www.aib.gov.uk/protected-trust-deed-update), it seems intent on achieving this by dealing with what it seems to see as rip-off costs, but it does nothing tangible to help address the real costs. What I mean is: the SG seems to think that, by relegating pre-TD costs to the status of unsecured claims, outlawing fees on a time costs basis, and layering yet more requirements on the Trustee, the “trend of rising costs” will be reversed. Aren’t we all facing a trend of rising costs in every aspect of our lives? The AiB experiences rising costs – of course, the statutory costs on PTDs continue to increase – but somehow IPs are supposed to have a magic cure for this problem..?

Having said that, I’m not completely blind to the effects of the market in debtors, the anecdotal stories of which suggest a crazy world of surely unviable sums being sought. I do wonder if the situation isn’t so grim in England because creditors have exerted more pressure on fees in IVAs. However, personally I don’t see a statutory bar on pre-TD costs as a panacea. After all, that only controls the monies in the insolvency estate.

Fergus Ewing does not see PTDs “as a sustainable debt relief solution for either creditors or debtors if more than half of all the receipts are spent on costs”. Unfortunately, the Chinese whispers have led to this message becoming even more extreme in front of the Scottish Parliament’s Economy, Energy and Tourism Committee: “A key issue with PTDs in recent years has been that, in some cases, they offer insufficient returns to creditors because most of the value in the debtor’s estate is used to pay the trustee’s fees” (http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/68799.aspx). Please, will someone start talking some sense?! Firstly, the AiB’s statistics focus on total costs, not just Trustees’ fees. And we’re not talking mainly about DAS candidates here, are we? How many bankruptcies return more than half the pot to creditors? Does the lack of such a dividend make them unfair?

I also find some of the fantastically biased AiB releases staggering. They repeatedly quote ABCUL, which refers to Trustees having “so often pocketed” the vast bulk of realisations and welcomes the “new measures to clamp down on abuses of protected trust deeds” (http://www.aib.gov.uk/news/releases/2013/09/changes-protected-trust-deeds). They absurdly misrepresent statistics, such as quoting Fergus Ewing in the same release: “the costs of protected trust deeds… are increasing by more than 25 per cent. The latest figures show this is happening in up to 84 per cent of cases”, when the figures show that this is happening in only 25% of cases! (The 84% comes from one firm’s figures alone. You could say it is “up to 100% of cases”, if you’d picked the right cases!) Thank goodness that IPs are strong professionals that will not let this kind of criticism demoralise them into stopping doing a decent job. Sometimes cases that appear straightforward on day one just get complex or assets appear – such as PPI refunds – that weren’t originally envisaged and the effort just needs to be expended, by IPs, agents and solicitors… to improve returns! Or would Mr Ewing prefer Trustees to walk away from tricky or new assets for fear that their costs might increase?

Right, I must start getting objective about this. Otherwise, I’ll never get to the end of this article!

Some of the PTD Regulation changes detailed in the AiB releases are:

• A trust deed will be ineligible to be protected if the debtor’s total debts can be repaid in full within a 48 month period (i.e. from the full amount of the debtor’s surplus income, as calculated by means of the Common Financial Statement).
• “Pre-trust deed fees, such as fact-finding fees,” will be excluded “so that these can no longer be charged separately and will be treated the same as other debts”. The AiB release refers to “fees”, but I think this should be “outlays”, shouldn’t it; I don’t think that even the AiB is expecting an IP to prepare a Trust Deed free of charge, is she?!
• Trustees’ fees will be charged on the basis of a single fixed upfront fee and a percentage of funds ingathered. The fixed fee may be increased either with a majority in value of creditors (that is, an absolute majority, not a majority of those voting) or by the AiB.

But other changes have not been given top-billing by the AiB:

• The acquirenda period for Trust Deeds will be 4 years. Considering that, at least for a couple of years until the Bill becomes Act, bankrupts will only have to pay for 3 years (, are discharged after 1 year and are only exposed to a 1 year acquirenda period), some are predicting that PTD candidates will choose Sequestration. Personally, I doubt this, as it did not happen in England when 5-year IVAs became commonplace, but then IVAs are seen as some debtors’ best efforts to do the right thing by their creditors; I’m not sure that PTDs have the same image.
• Debtors’ contributions will be determined using the Money Advice Trust’s Common Financial Statement.
• Irrespective of creditors’ wishes regarding the Trust Deed achieving protected status, the AiB will have the power to refuse to register the Trust Deed, if she is not satisfied that the debtor’s expenditures and contributions are at appropriate levels.
• The Regulations fix the equity of heritable property as at the date that the Trust Deed is granted, but they raise all kinds of questions about how equity realisation or contributions in lieu of equity are to work.
• The AiB will have power to give directions, whether on the request of the Trustee, debtor, or creditors, or on the AiB’s own initiative. The Scottish Parliament Committee report mentioned above notes ICAS’ concerns that “the AiB is not best placed to take decisions in place of and over-ruling highly experienced and qualified IPs”, but all that it records the Minister saying in response is that “the AiB was undergoing significant restructuring to ensure that certain staff who would be involved in such decisions and appeals would be ring-fenced from those taking the original decisions” – that doesn’t deal with the concerns!

The (brief) Regulatory Impact Assessment suggests that, whilst the AiB will incur costs of £1.3m over the first 5 years, which will be recovered through a statutory fee, the Regulations are not expected to impact on IPs’ costs, as the Regulations are not expected to restrict the level of IPs’ fees, just revisit the basis on which they are calculated. Does the SG truly believe that the Regulations will result in no additional expense on IPs?!

For more details on the issues with the Regulations, I’d recommend ICAS’ written evidence, accessible at: http://icas.org.uk/Current_Insolvency_Issues.aspx (thank you, ICAS, for making available such an enlightening summary).

Phew! Right – those are the imminent changes. The Bill proposes some more incredible changes and I know that ICAS and others are expending a lot of effort in an attempt to refine its contents. You have my sympathy!