Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Proposed changes to Scotland and EU insolvency legislation gain clarity

In this blog, I compare the responses to the EC Insolvency Regulation consultation – including: should Schemes of Arrangement be included? – and comment on today’s AiB release on planned changes to Bankruptcy. Also hidden within the BIS consultation responses is a view of great improvements to Gazette searches planned for this year…

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Unanimous support for opting in to amended EC Insolvency Regulation

As I tweeted a week ago, the UK government has announced recently that it has decided to opt in to the proposal to amend the European Commission’s Regulation on insolvency proceedings, following unanimous support by those who responded to BIS’ consultation.

The ministerial statement and responses to the call for evidence can be found at: http://www.bis.gov.uk/insolvency/news/news-stories/2013/Apr/EUCallForEvidence

I noticed that the consultation responses were almost unanimous in one other respect; I thought that the voice for excluding Schemes of Arrangement from the Regulation’s scope – which would be possible under the revised Regulation, as currently proposed by the Commission – came through particularly loud and clear. Respondents cited the success stories that would not have been possible had Schemes been included in the Regulation; the fact that Schemes are often used for purposes other than insolvent restructurings; and that they are not always fully collective processes and thus do not really meet the criteria for proceedings included in the Regulations in any event.

There was a lone voice suggesting an alternative, however: appreciating the contentious nature of the issue, Paul Omar of Nottingham Trent University suggested a compromise whereby the jurisdictional bases for Schemes might be tightened up so that there should be more than just an arguable connection with the UK or benefit for creditors in order for UK courts to sanction such Schemes. I suspect that the other respondents will hope that such a compromise will not be necessary.

Other areas of apparent agreement between the respondents included a request for clarity over the proposed not-less-than 45 days timescale for foreign creditors to lodge claims; several parties had spotted that it was not clear whether this would apply, not only to submitting claims for dividend purposes, but perhaps also for voting purposes, which would be quite impractical, particularly for votes invited to commence proceedings. Several also asked for consideration to be given to providing mechanisms to avoid frivolous challenges to the opening of main proceedings, as these could create uncertainty and delays, which could de-rail some rescue or recovery plans.

Finally, I was interested in the response by the National Archives, which reported positively on the Gazette Platform project to improve free access to insolvency information “due for launch later this year”. The response included an illustration of one aspect of the planned new service: a timeline of insolvency events, so that all the key dates identified in Gazette notices for a single company (or insolvent individual?) appear on the same page – I like it!

More on the Scottish Bankruptcy Bill

The AiB’s equality questionnaire issued today (http://www.aib.gov.uk/publications/bankruptcy-bill-new-bankruptcy-scotland-act-2013-equality-questionnaire) includes a summary of the proposed changes in policy that are intended to materialise in the “New Bankruptcy (Scotland) Act 2013”. I haven’t cross-referred them to previous missives – and I am sure that readers who have attended an AiB stakeholder event will know these inside out – but I thought I would list those that made me raise an eyebrow:

• The AiB is continuing with the “No Income/No Asset” product for people who have been on income-related benefits for at least 6 months – and presumably this will have some benefits over LILAs, e.g. cheaper entry, swifter exit? Whilst I can see the advantages, it seems a shame that people in very low-paid employment might be barred access to a NINA.
• Mandatory advice from an approved money adviser prior to applying for any form of statutory debt relief – personally, I’m pleased to see this proposal repeated.
• “Altering the process for discharge of debtors so the trustee applies, showing cooperation with creditors (subject to appropriate appeals)” – how will this work? Does that mean that there will be no such thing as an automatic discharge period?
• Creditors will have to submit claims within 120 days of the trustee giving notice. “Where creditors do not submit their claims by this deadline, they would have to justify late submission or risk losing their dividend.” I see the advantage of putting some pressure on creditors to react more quickly, although personally I am not sure what is wrong with the current process (I’m guessing that Scotland is the same as E&W in this respect?) whereby a late-proving creditor cannot disturb a dividend, but can hope to catch up when the next dividend is declared. I also suspect that most of the difficulties in paying out complete dividends lie in creditors who have submitted claims but based on current information the trustee does not feel able to admit them.

Still, in general it’s all good stuff to see the AiB’s proposals gaining clarity and momentum.

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Legislative changes on the horizon: PTDs, TUPE, and gift vouchers

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Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:

• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors

AiB’s proposed changes to PTDs and DAS

28/02/2013: The AiB published some welcome (by me, anyway) fine-tuning to her developing “vision of a Financial Health Service” (http://www.aib.gov.uk/news/releases/2013/02/bankruptcy-law-reform-update).

She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: http://wp.me/p2FU2Z-V (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.

The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate: http://wp.me/p2FU2Z-w).

So what now does she propose to introduce? Some new significant items for PTDs:

• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.

The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.

BIS TUPE Consultation

17/01/2013: The BIS consultation on proposed changes to the Transfer of Undertaking (Protection of Employment) Regulations 2006 was issued and closes on 11 April 2013 (https://www.gov.uk/government/consultations/transfer-of-undertakings-protection-of-employment-regulations-tupe-2006-consultation-on-proposed-changes – a 72-page document that takes some reading!).

Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.

The proposals do include some elements that may be more useful:

• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).

Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.

Gift Voucher Creditors

15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (http://www.r3.org.uk/index.cfm?page=1114&element=17990&refpage=1008), but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.

MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 (http://www.youtube.com/watch?v=53_fN8c1f8Q&feature=youtu.be). Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:

“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.

(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”

As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.

To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, http://www.lexology.com/library/detail.aspx?g=8298e876-f998-4777-bacf-ce781f312242 – the clue is in the name…)

There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (http://www.11sb.com/pdf/insider-gift-vouchers-jan-2013.pdf).

(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS.  R3 summarised the difficulties in dealing with gift vouchers in an insolvency at https://goo.gl/eN20mN.  This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at https://goo.gl/GJDbNO.)

 

Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…


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Scottish Government’s Response to the Consultation on Bankruptcy Law Reform Defies Logic

I appreciate that I am a bit behind the times here – the Scottish Government’s response was published on 1 November 2012: http://www.aib.gov.uk/publications/scottish-government%E2%80%99s-response-consultation-bankruptcy-law-reform.  I won’t summarise it here, as it is a fairly brief document, which is well worth reading.  However, I could not resist commenting on some of the plans.

Fundamental Changes to Trust Deeds

It seems to me that, at present, one strength of the Trust Deed is its flexibility: with the assistance of an IP, a debtor can consider what he/she can afford and what he/she is prepared to put forward to creditors, effectively in exchange for avoiding bankruptcy.  I appreciate that, to some extent, Trust Deeds – and creditors’/creditor agents’ reviewing of them – have become standardised so that in effect we now have a “consumer” Trust Deed, which anticipates a pretty standard level of contribution over a standard three-year period, delivering a fairly standard dividend to creditors.  However, I think it should be remembered that this is not what the legislation (currently) provides and the beauty of it is that debtors can formulate a Trust Deed to fit their particular circumstances.  Not all debtors fit the “standard consumer” model.

However, the SG is now looking to “standardise the period over which an individual makes the assessed contribution in bankruptcy and protected trust deeds, to be equivalent to a minimum of 48 monthly payments”.  The response also states: “There is a strong case for setting a minimum dividend at which Trust Deeds are eligible to become protected. We recognise that there are differing views among interested parties and believe that there is a legitimate debate to be had on the level of any minimum dividend. Our view is that the level would be most appropriately set between/around 30-50p in the £.  We will engage constructively with interested groups over the coming weeks to agree on an appropriate level.”

Why take a flexible tool and impose such restrictions on its use?  And how do these conclusions stack up with the consultation responses?

One of the conclusions described in the report on the consultation responses was: “There should not be a fixed term for completion of a protected trust deed” (page 5) – 71 respondees were opposed to a fixed term and only 29 were in favour.  Perhaps the argument is that, in setting a minimum of 48 monthly payments, the SG is not setting a fixed term!

What exactly is the “strong case” for setting a minimum dividend?  The report on consultation responses observed that “in recent years some creditors have taken a greater interest in PTDs and have actively rejected the protection of trust deeds which propose a dividend of less than 10p in the £” (page 31) – so that means that the Trust Deed framework is working, doesn’t it?  In introducing a minimum dividend at which Trust Deeds become eligible for protection, isn’t the SG taking the power away from creditors to decide what they are prepared to accept?  And how does evidence of creditors rejecting Trust Deeds anticipating 10p in the £ lead to a conclusion that the minimum dividend should be 30-50p?

The report on consultation responses quotes two responses from credit unions in support of 50p in the £ and I have already described how I personally feel about these in my earlier blog post (https://insolvencyoracle.com/2012/09/13/the-aibscottish-governments-report-on-responses-to-the-bankruptcy-law-reform-consultation/).

In my mind, it is simply not logical to put a minimum dividend on a Trust Deed.  The dividend level is simply a measure of net assets/income over total liabilities; it is not a measure of what a debtor can afford to pay and neither is it a reflection of how appropriate the proposal is.  Take two people: one can raise net assets/income of £12,000 and has liabilities totalling £40,000; the other can raise net assets/income of £13,000 and has liabilities totalling £45,000.  Where is the logic in allowing the first person to acquire a Protected Trust Deed, as the dividend will be 30p in the £, but denying the second, as the dividend would be 29p in the £?

What is wrong with a Trust Deed that offers a return of 29p in the £, if the likely outcome of bankruptcy is no improvement?  I remember an IP telling me that she had arranged an Individual Voluntary Arrangement for a 1990s Lloyd’s Names individual, which proposed a return of only a fraction of 1p in the £, but it still represented the best deal for creditors and it involved some reasonable assets/income.  Surely that is the key of voluntary processes, such as IVAs and Trust Deeds – they can offer a better deal for both debtor and creditors, when compared with the alternative of bankruptcy.  They should not be restricted by the need to meet a minimum dividend, which fails to recognise the individual circumstances of the debtor.

So will the introduction of a minimum dividend lead to many more people choosing bankruptcy?  I wonder.  It seems to me that many people will do almost anything to avoid bankruptcy, even when from a purely financial perspective it is obviously the best option for them.  If they are prohibited from seeking a PTD, I wonder whether they would rather take the option of a long-term DAS or informal debt management plan or simply struggle on in no man’s land.  In introducing a minimum dividend for PTDs, it seems to me that the misery for thousands will be extended for many years.

Protected Trust Deed “Guidance”

The SG appears to be seeking to introduce a further fundamental change to the PTD process, but via “Guidance”: “New Protected Trust Deed Guidance will also be introduced, to encourage best practice to be adopted in all cases.  The Guidance will include a revised structure for trustee fees consisting of an up-front fee for setting up the trust deed and a percentage fee based on the amount of funds ingathered from the debtor’s estate.”

I believe that it is correct to avoid prescribing the basis on which Trustees should be paid via legislation, but I do wonder how the SG/AiB expects its Guidance will persuade IPs to re-structure fees to be on this fixed sum and percentage basis.  What pressure will it bring to bear on IPs who do not follow this approach that it calls “best practice”?  Will the AiB, as is stated in the paragraph preceding this, “take a more proactive role, where necessary compelling trustees to act by using their powers of direction”?  But the Guidance is just guidance, isn’t it?

Creditor applications for Bankruptcy

The SG response states that the Bankruptcy Bill will look to develop “the bankruptcy process to facilitate the ability for non-contentious creditor applications to come to AiB rather than a petition to the court for an individual’s bankruptcy”.  This plan appears most odd to me, particularly in view of the report on the consultation responses.

In the report’s summary, one of the conclusions of the consultation responses was: “creditors should continue to petition the court for an individual’s bankruptcy” (page 6), which appears unequivocal to me.  The response statistics also bear out this conclusion – there were more responses opposed to the proposal that creditor applications be submitted to the AiB than there were responses in favour and this remained the case even when the proposal was restricted to “non-contentious” creditor applications.  So what is the argument for proceeding with this plan?

Fortunately, Westminster has decided not to take forward the idea that creditor petitions for bankruptcy and company windings-up in England might avoid the courts.  It took that decision having consulted on the proposal and having received the clear message back that the majority were opposed.  It is strange that Holyrood has decided to take the opposite view on having received a similar reaction to a similar consultation question.

 

Of course, I have only commented on the plans that appear to me to be most significantly flawed – there are many more planned changes, including some that make perfect sense and are welcome.  However, some leave me asking the question: why?  What ills are these changes seeking to remedy?  Are they going to be an improvement over what we already have, which seems to me to work reasonably well on the whole?  And what kind of world will we live in when it all becomes a reality?