Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Standing on the Shoulders: a summary of reported court decisions

0430 Brown & Viv

I think it’s great that summaries of court decisions are more freely-available now than ever before.  I’ve wondered whether I should just drift back into the shadows and leave it to the pros… but then I remember that, even if no one reads them, authoring my own summaries helps get them fixed in my own mind.  Therefore, I shall continue:

  • Sands v Layne – should the court consider all creditors’ interests when considering whether to dismiss a petition because the debtor has reached an agreement with the petitioner alone?
  • Re Business Environment Fleet Street – as statute allows an administrator to take control of property to which he thinks the company is entitled, can he sell it?
  • Parkwell Investments v HMRC – should provisional liquidators be appointed if there is a tax assessment appeal outstanding?
  • Bear Scotland v Fulton – should non-guaranteed overtime be included in holiday pay?
  • Connaught Income Fund v Capita Financial Managers – does a liquidator have a statutory power to get in post-appointment assets?
  • Day v Tiuta International – if the charge under which receivers are appointed is invalid, can they remain in office by reason of the appointor’s subrogated rights under another charge?

Trustee fails to overturn a debtor’s deal with the petitioner

Sands v Layne & Anor (12 November 2014) ([2014] EWHC 3665 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3665.html

Mr Layne originally sought to avoid bankruptcy by offering security over his home and payment by instalments to the petitioning creditor.  However, given the time that the debtor would have needed to pay off the debt, the judge rejected his defence that the creditor had unreasonably refused the offer and made a bankruptcy order in July 2011.  In June 2012, the parties came to an agreement as regards payment and security and, by means of a consent order, the bankruptcy order was set aside.  In June 2013, the Trustee in Bankruptcy applied for the consent order to be rescinded pursuant to S375 of the IA86, the thrust of his submission being that the debtor and creditor had sought to deal with the matter between themselves without taking into account any obligations to him or to other unsecured creditors.

The deputy judge expressed a wavering view over the conclusion leading from the decision in Appleyard v Wewelwala that S375 reviews and rescissions by first instance courts can deal with only decisions made by those courts, not also decisions emanating from appellate courts, and thus the Trustee’s application failed.  However, given the deputy judge’s “diffidence”, he considered further questions arising from the application.

How should the interests of other unsecured creditors impact on the court’s consideration of whether a petition should be dismissed under S271(3)(a), i.e. where “the debtor has made an offer to secure or compound for” the petition debt?  The deputy judge concluded that, as the first ground for dismissal under S271 involves the court being satisfied that the debtor is able to pay all his debts, “the second ground – involving an offer to secure or compound – must therefore be intended to apply even where the debtor is not so able” (paragraph 20).

The deputy judge listed the other unsecured creditors’ potential remedies, including seeking to be substituted as petitioner and challenging the security as a preference (albeit that they would need to establish a desire to prefer the original petitioner).  “In short, in so far as other unsecured creditors may be affected by the provision of the security to the petitioner, the statute provides a targeted remedy in what it considers suitable cases, and it is neither necessary nor appropriate for their interests to be addressed in the context of the bilateral dispute between the petitioning creditor and the debtor and in particular the issue whether, where security is offered and rejected, a bankruptcy order should be made or refused” (paragraph 22).

The deputy judge also observed that the Trustee’s argument “suffered from a serious dose of circularity” (paragraph 24) in that the Trustee could not have been joined as a respondent to the original appeal, which “was to decide whether the bankruptcy order should stand. If the order fell and there was no bankruptcy, all consequences dependent on it – the trusteeship and the vesting – disappeared with it” and thus he had no standing to bring the application in the first place.

Moon Beever published an article examining the role of the Trustee as illustrated by this decision: http://goo.gl/Fu62LU.

 

Court rejects Administrators’ attempts to sell third party assets

Re Business Environment Fleet Street Limited; Edwards & Anor v Business Environment Limited & Ors (28 October 2014) ([2014] EWHC 3540 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3540.html

Administrators applied under Para 72 of Schedule B1 for leave to dispose of assets, including properties subject to subleases and equipment located at the properties, which one of the respondents claimed to own.  Under Para 72, the court can authorise administrators to dispose of “goods which are in the possession of the company under a hire-purchase agreement”, which under Para 111 extends to chattel leasing agreements.

The deputy judge examined the agreement between the Company and the respondent and concluded that the Company had not been granted possession of the assets, which remained either with the respondent or had transferred to the subtenants.  Thus, the agreement did not comprise a chattel leasing agreement, as it did not involve the bailment of goods.

The Administrators pursued an alternative ground, arguing that Paras 67 and 68 combined entitled them to manage – which would include disposal of – property to which they think the Company is entitled.  The deputy judge rejected the argument that “property” in the two paragraphs has the same meaning: it may be appropriate for an administrator to take control of assets in a hurry on his appointment, but disposal would be a step too far.  “It would confer an exorbitant jurisdiction on the administrator to convert property belonging to third parties, simply because this happened to be desirable on the balance of convenience” (paragraph 19.3).  The deputy judge also saw no support in S234, which relieves an administrator from liability for converting third party assets where he acted reasonably.

But what if the sale sought by the Administrators appeared to make sense commercially?  The Administrators’ case here was that there was considerable “marriage” value in disposing of the assets together with the properties, enhancing the purchase price by some £7m.  In this particular case, the deputy judge saw the marriage value in the proposed sale, but did not see that a delay in a sale would be detrimental and thus was not satisfied that the balance of convenience lay in ordering an immediate sale (even if he had been satisfied that the court had jurisdiction to order it).

For an alternative – and far more authoritative – analysis, you might like to read the article by Stephen Atherton QC (via Lexis Nexis) at http://goo.gl/VYFblM.

 

Attempts to “see-saw” between courts does not avoid the appointment of provisional liquidators

Parkwell Investments Limited v Wilson & HMRC (16 October 2014) ([2014] EWHC 3381 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3381.html

This case has received some attention due to the judge’s statement that he was unable to accept the reasoning of the deputy judge in Enta Technologies Limited v HMRC (http://wp.me/p2FU2Z-6W), which if it were correct would lead to a “very undesirable consequence… namely the inability of the court to appoint anyone a provisional liquidator to a company where the company has an outstanding appeal against the assessment” (paragraph 21).

In this case, the Company had applied for the termination of the provisional liquidation and the dismissal of HMRC’s winding-up petition on the basis that the First Tax Tribunal was the place to determine its VAT position and that, as there were appeals against assessments still outstanding, it was inappropriate that the Companies Court should pre-empt the process by appointing a provisional liquidator.  Sir William Blackburne stated: “There is to my mind something highly artificial in the notion that this court has jurisdiction to entertain a winding-up petition brought by HMRC against a company founded on the non-payment of a VAT assessment… for so long as the company has taken no steps to appeal the assessment to the FTT… only to find that that jurisdiction is lost the moment the company files its notice of appeal to the tribunal or, if not lost, is no longer exercisable, irrespective of the merits of the appeal…   I cannot think that this approach is right. Jurisdiction in this court cannot arise and disappear (or be exercisable and then suddenly cease to be) in this see-saw fashion” (paragraphs 19 and 20).

The judge believed that the true question was whether the appeal to the FTT has any merit. If it has none, then the assessment continues to constitute a basis for a winding-up petition.  However, “if the court, on a review of the evidence before it, considers that the company has a good arguable appeal which will lead either to the cancellation of the assessment or to its reduction to below the winding-up debt threshold, it will dismiss the petition” (paragraph 20).  In this case, the judge concluded that the Company had failed to produce sufficient evidence to demonstrate a good arguable case and thus the provisional liquidator was allowed to continue in office.

For a more practical look at the implications of this decision, you might like to look at an article by Mike Pavitt, Paris Smith LLP, at http://goo.gl/0lZyrO.

 

Holiday pay to include non-guaranteed compulsory overtime

Bear Scotland Limited & Ors v Fulton & Ors (4 November 2014) (UKEATS/0047/13) (heard with Hertel (UK) Limited v Woods & Ors and Amec Group Limited v Law & Ors (UKEAT/0161/14)http://www.bailii.org/uk/cases/UKEAT/2014/0047_13_0411.html

None of these cases involved insolvencies, but I can see how their impact on holiday pay calculations could have consequences for IPs.  However, permission to appeal has been granted and the government has set up a taskforce to assess the possible impact of this decision (see http://goo.gl/8jmV53).

The conclusions of the Companies’ appeals against several elements of previous tribunal decisions were as follows:

  1. Normal remuneration – in relation to which holiday pay is calculated –included overtime that employees were required to work, even though the employer was not obliged to offer it as a minimum.
  2. An employer’s failure to pay holiday pay on this basis could be claimed as unlawful deductions from pay under the ERA1996, but not where a period of more than three months had elapsed between each such unlawful deduction (i.e., I think, if, say, holiday was paid short in March, August, and October of this year, only August and October could be claimed; March would not be able to be claimed, as it occurred more than three months before the August short payment).
  3. Pay in lieu of notice is not required to be calculated under the same basis, i.e. it does not include the overtime described in (1) above. This differs from the position as regards holiday pay, because it was felt that the parties’ view of what hours were “normal” at the time the contract was entered into would not have been informed by the experience of working under that contract, which described overtime as not guaranteed and not forming part of normal working hours.
  4. In two of the cases concerned, time spent travelling to work (which was paid during working times as a Radius Allowance and Travelling Time Payment) also fell within “normal remuneration” for the purpose of calculating holiday pay.

There has been some comment (e.g. Moon Beever’s article at http://goo.gl/Etay9A) that overtime other than compulsory overtime is also likely to be comprised in “normal remuneration”.  Whilst this was not dealt with by the Appeal Tribunal, the judge did highlight the principle that “‘normal pay’ is that which is normally received” (paragraph 44) and thus I can see why that conclusion might be drawn.

 

A liquidator’s power to get in post-appointment assets

The Connaught Income Fund, Series 1 v Capita Financial Managers Limited (5 November 2014) ([2014] EWHC 3619 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/3619.html

The key points – and quotes – that I’d extracted from the judgment were the same as those highlighted by Pinsent Masons (http://goo.gl/QU8o9i).

The liquidators of the Fund (which was an unregulated collective investment scheme set up as a limited partnership) took an assignment of the investors’ claims, but these were resisted under a number of arguments including a challenge that the liquidators acted outside their statutory powers in taking the assignments.

The judge decided that the assignments were allowed under the liquidators’ Schedule 4 power “to do all such things as may be necessary for winding up the company’s affairs and distributing its assets”, including those that had not been assets of the partnership when it traded.

 

Receivers’ appointment sound notwithstanding that their appointor’s charge could be invalid

Day v Tiuta International Limited & Ors (30 September 2014) ([2014] EWCA Civ 1246)http://www.bailii.org/ew/cases/EWCA/Civ/2014/1246.html

This is a complicated case, which I think has been successfully summarised by Taylor Wessing LLP (http://goo.gl/YhN2ga).

Tiuta International Limited (“TIL”) agreed to lend money to Day to enable him to repay a loan provided by Standard Chartered (“SC”) and to discharge the charge to SC.  Later, due to Day’s non-payment, TIL appointed receivers under the powers of its new charge, but Day claimed damages against TIL that, if set off against the loan, would release TIL’s charge and invalidate the receivers’ appointment.  TIL argued that, even if Day were successful in escaping from its charge, TIL was still entitled to appoint receivers because it was subrogated to the SC charge by reason of its payment settling SC’s loan and charge.  Day contended that, even if this were so, TIL would need to appoint receivers again but this time in express reliance on the SC charge.

Lady Justice Gloster stated: “it is important to bear in mind that the correct analysis of the right of subrogation is that a party who discharges a creditor’s security interest and who is regarded as having acquired that interest by subrogation, does not actually acquire the creditor’s interest, but rather obtains a new and independent equitable security interest which prima facie replicates the creditor’s old interest. Subrogation does not effect an actual assignment of the discharged creditor’s rights to the subrogated creditor. What subrogation means in this context is that the subrogated creditor’s legal relations with a defendant, who would otherwise be unjustly enriched, are regulated as if the benefit of the charge had been assigned to him” (paragraph 43).

“Thus whilst TIL did not purport to rely on the SC Charge when appointing the Receivers… and purported to rely only on the TIL Charge to make the appointment, that in my judgment was immaterial…  Subrogation is a means by which the court regulates the legal relationships between parties in order to avoid unjust enrichment and the precise manner in which it operates may vary according to the circumstances of the case. In the present case, on the hypothesis that the TIL Charge was voidable, the doctrine of subrogation, in conferring a new equitable proprietary right on TIL, would have operated to entitle TIL to the notional benefit of the SC Charge for the purposes of securing repayment of the TIL Loan made under the terms of the TIL Loan Facility” (paragraph 44).  She continued that TIL was not required to follow the payment demand process as required by the SC charge, which would be “nonsensical” since SC’s liabilities had been discharged, but it was entitled to follow the process set down in the TIL loan facility and charge leading to the appointment of receivers.

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Moving Thresholds: DROs and the Creditor’s Bankruptcy Petition

Peru252

Having finally drafted my presentation for the SWSCA course later this week, I can turn to reviewing the Insolvency Service’s consultation on DROs and the creditor’s bankruptcy petition threshold. There’s still time for you to respond: the deadline is 9 October 2014.

I have to confess that my practical experience is corporate insolvency-heavy, so personally I don’t feel in a great position to comment, but, of course, that won’t stop me!

Strictly-speaking, it is not a consultation, but a call for evidence. Thus, whilst there are hints of the direction in which the Government/InsS might take the issues forward, it’s all (supposed to be) pretty open at the moment.  This also means that the emphasis is on providing data, rather than opinion – another reason why I do not feel well-placed to comment.

The call for evidence can be found at: http://goo.gl/UhT52U.

DROs: Key Questions

Fundamentally, the Service is asking: are the criteria (and the publicity/delivery of DROs) blocking out people who should be able to benefit from a DRO?  Much of the Service’s arguments seem to focus on how many people would move from bankruptcy to DRO if thresholds were moved.  I guess this helps to explore the potential consequences of any changes on suppliers who may react by raising the hurdles for people at the margins from accessing their supplies.  However, what I’m interested in is: at what stage does a bankruptcy become beneficial to creditors?  Surely, this is a key factor in deciding the DRO/bankruptcy threshold, isn’t it?  I don’t think the Service’s consultation document explores this sufficiently.

Debts and Assets

As we know, the thresholds for accessing a DRO are:

  • Total debts less than £15,000;
  • Total assets less than £300 (excluding certain items); and
  • Surplus income less than £50 per month.

Are these at the “right” levels?

The consultation illustrates these thresholds adjusted for inflation:

  • The threshold for total debts would move to between £16,200 to £18,900;
  • Total assets threshold: £325 to £380; and
  • Surplus income threshold: £54 to £63 per month.

Hmm… assuming that the 2009 levels were valid, that appears to suggest that change should be minimal.  The world seems to have changed more than this, doesn’t it?  Or is it our attitudes to debt that have changed?

The consultation also looks to the recently statute-enshrined Scottish Minimal Assets Process (“MAP”) levels:

  • Debts between £1,500 and £17,000 (and I recall that many fought to persuade the Minister to increase this from £10,000);
  • Assets less than £2,000 (again, I think this was proposed originally at £1,000); and
  • Zero disposable income (or income entirely from benefits).

The Service then examines the levels of debts and assets of the 2013/14 bankruptcies, which suggest that, if the two thresholds were adjusted in line with inflation, up to 5% of those who became bankrupt would have qualified for DROs (assuming they met the other DRO criteria). They haven’t done the same comparison to the MAP thresholds, but have illustrated that, if the asset threshold were £2,000 and the debt threshold £30,000 (interesting number to pick!), 23% of last year’s bankrupts could have had a DRO (again, assuming they met the other criteria).  That’s all very interesting, but what is the logic behind the thresholds?

Personally, I cannot see the rationale for imposing a low debt threshold. The Service states that the threshold “was designed to limit the scheme to those with low levels of unsecured debt rather than allowing debtors to discharge ‘excessive’ sums”.  What is an “excessive” sum?  I’m in no position to answer, but, from my corporate insolvency perspective, I don’t see much of the “debt-dumping” that seems to inflame the Daily Mail reader.  I suspect that the personal insolvency world is similar: individuals are in a sorry state when they have accumulated more debts than they can afford; they’re not trying to scam their creditors, simply escape from the hole.  Does it really help to make this endeavour difficult for them?

Ah, but wouldn’t an increase in the debt threshold dissuade lenders etc.? I’m guessing that some debtors suffer a substantial change in circumstances, leaving them unable to support high levels of debt, but I guess there are other debtors who manage to build up fairly high levels of debt whilst having little assets/income to back it up.  Whichever way it is, don’t suppliers at the moment accept the risks that they might not see any recovery from a proportion of those to whom they extend credit?  If these individuals simply move from a nil-return-to-creditors bankruptcy to a nil-return-to-creditors DRO, where’s the harm?  It is far more expensive for the Insolvency Service (i.e. the public purse) to administer a bankruptcy than a DRO and, if the debtor doesn’t have the assets/income to cover those costs, that’s a loss to everyone.  So who is winning from this whole process?

I hear much support for R3’s call to raise the debt threshold to £30,000 and I can see no real argument against that.

As to the level of assets, I also see no reason why it should not be £2,000 (Debt Camel – http://debtcamel.co.uk/dro-consultation/ – makes the sensible observation that computers and the like are generally accepted to be necessities in this day, especially for job-seekers).  However, I’d like to ask the question: how high do the assets and surplus income need to be in order to generate a material return to creditors?  I’ve not done the sums, but there must be a relatively simple answer, mustn’t there?

Surplus Income

The Service’s analysis of surplus income levels is a bit cloudier. Firstly, I’m surprised to read that the Service has no income data for bankrupts who are not subject to an IPO/IPA – why not?  Surely they need to have known what the debtor’s income was in order to decide not to pursue an IPO/IPA, don’t they?  Secondly, later the Service states that “under bankruptcy, an Income Payments Order will be put in place taking the whole surplus income if a bankrupt has a surplus income of more than £20 per month, subject to an allowance for emergencies and contingencies of £10 a month for each family member.”  So presumably, all bankrupts for which they have no data fall below this threshold, don’t they?  The consultation discloses 22,044 “blanks”, i.e. no data cases, which is 93% of the total bankruptcies, but the Service estimates that only 25% of all bankrupts had incomes below the DRO level.  But shouldn’t all those “blanks” be below the DRO threshold?  If not, then why isn’t the OR pursuing IPOs/IPAs from them?

The Service’s argument against increasing the surplus income threshold is pretty-much that, apart from the emergency/contingency factor mentioned above, all the debtor’s surplus income is taken in an IPO/IPA, so why should a debtor in a DRO get to keep any of it?  Well I’m sorry, Insolvency Service, but your stats indicate to me that IPOs/IPAs are so not the norm for bankrupts; it seems that there are plenty of bankrupts getting to keep at least some surplus income, so I don’t see that debtors in DRO generally are better off than their bankrupt contemporaries.

I was also surprised to read that the Insolvency Service uses the “Living Costs and Food Survey” for calculating surplus income. Considering the Service was a body that was heavily involved in the IVA and DMP Protocols, I’m wondering why they chose this tool, rather than the CFS or Step Change guidelines.  I notice that “a consultation is ongoing to produce a Common Income and Expenditure Calculator to use as an industry standard” – presumably this will be rolled out for IVAs and DMPs too and presumably these industries are engaged in this consultation?  Personally, I’ve not seen it…

Debt Camel illustrates the disparity that using different tools can generate. She states that many IPs use guidelines that are stricter than the CFS (I guess she’s referring to the Step Change guidelines?) with the result that an IVA can be proposed for £70 or £100 per month for an individual who would meet the current DRO £50 per month threshold.  Personally, I’m not surprised at this, as an individual’s actual I&E might be very different from what any model predicts they should be.  Also, just as some debtors have chosen an IVA over bankruptcy – even though, from a purely economic perspective, bankruptcy might appear the best way to go – an individual’s choice to go for an IVA over a DRO does not make it wrong.  However, given the substantial differences in downsides for the debtor, I expect that IPs dealing in low contribution IVAs would be fanatical about giving and recording thorough advice on all the options available to avoid mis-selling complaints down the line.

However, back to my question: do creditors get to see anything from £50 per month IPOs/IPAs? That’s only £1,800 over three years.  What’s the current bankruptcy admin fee: £1,715 for starters..?  If creditors only start seeing a real recovery on IPOs/IPAs at, say, £70 per month, then shouldn’t that be the threshold – for DROs and bankruptcies?

The Debtor’s Experience

The consultation then moves to examine the debtor’s experience of DROs: how much it costs them; whether it is right that they should be able to access a DRO only once in a 6 year period; whether the competent authority/intermediary model can be improved on. Personally, I cannot really add to these issues, so I won’t attempt to.

I was intrigued by Debt Camel’s comments (sorry, DC, from drawing so heavily on your post) regarding the paucity of publicity given to DROs, including on some IPs’ websites. I can see how this situation may have arisen: when DROs were introduced back in 2009, IVAs and DROs were poles apart.  IVAs were often marketed with a surplus income threshold some way above the £50 DRO limit.  Therefore, it was perhaps understandable that IVA websites rarely signposted DROs as a potential option for readers.  However, the disposable income threshold for proposing an IVA has dropped in recent times, so I can well understand that IVA providers may now look to advise individuals with a DI of c.£50.  Given this environment, it is appropriate that IP/IVA provider websites (and, of course, advisers) that purport to set out debtors’ options cover DROs.  From my own spot-check of the websites of some of the major providers, I’d say that c.50% covered DROs, although some did seem to trail after the bankruptcy blurb, which didn’t seem entirely fair and transparent.

Any lack of DRO coverage by IPs can only give weight to arguments that someone who appears to be in the region of a potential DRO candidate should be referred to an Authorised Intermediary. I also ask myself if the DRO calculator is accessible by non-Authorised Intermediaries: if IPs are to cover well DROs in possible options for a debtor, it seems to me that they must have access to it – this is another reason for addressing the lack of consistency in the tools currently in use.

DRO Revocations

The number of DROs revoked has been running consistently for the past three years at c.300 per year. Revocations most often occurred at the OR’s discretion when he felt that the debtor’s change in financial circumstances meant that he could deal with his creditors – that is how the consultation describes it anyway.  Given that the document continues to explain that 154 revocations occurred because the asset limit had been exceeded and 29 because the surplus income level had been exceeded, it seems to me that it was more all about hitting the DRO thresholds.

Interestingly, one debtor was successful in challenging the OR’s discretion. The document states that since this, “the decision to revoke following a change of circumstances is no longer being so strictly applied, with revocation now only occurring if the creditors could be expected to benefit if the DRO was revoked”.

The consultation asks whether the revocation system could be improved. My questions would be: what happens to the debtor next; are they thrown back out into the cold?  Could they not be “switched” into a bankruptcy, if the debtors consent?

DRO Discharge

The consultation asks if the Scottish MAP discharge provisions should be adopted for DRO.

Personally, I don’t understand why MAPs have different timescales: six months for discharge from debts, but with a restriction on credit for a further six months after discharge with an option to extend this restriction for a further six months. I expect that the impact of a MAP or DRO on a debtor’s credit file restricts access to credit more than the statutory provisions anyway and, if six months is considered an appropriate timescale within which windfalls should be caught for the benefit of pre-DRO/MAP creditors (although, personally, I think that one year is not too much to ask), then why not stick with that single line in the sand?

Becoming employed

Understandably, some wonder whether being in a DRO might discourage some from taking up opportunities that risk bringing them out from under that safety net – for example, taking up employment that might take their surplus income over the £50 threshold.

I think that only those who have experienced DROs – more specifically perhaps, revocations on the basis of increased income – can really answer this question. However, I wonder if such a risk might be mitigated by allowing a greater level of surplus income once someone is in a DRO.

Bankruptcy Creditor Petition Limit

Having contemplated 25 pages of DRO territory, it seemed odd to switch to this topic for the final three pages, but good on the Insolvency Service for including it. It is a simple question: the bankruptcy creditor petition limit has been £750 since 1986, so what should it be now?

The consultation sets out these facts:

  • If it were increased in line with inflation, it would now be £1,600 to £1,700.
  • Germany, Italy, The Netherlands and Spain have no limit.
  • Australia’s is £2,700.
  • Scotland’s is £3,000.
  • Republic of Ireland’s is £15,900.
  • If the limit had been £2,000, there would have been 404 (3%) fewer creditor petitions last year.
  • If the limit had been £3,000, there would have been 979 (8%) fewer creditor petitions last year.

Personally, I don’t know where I’d put the level. I sympathise with the debtors who find themselves with a hefty bankruptcy annulment bill on the back of a small petition debt.  At the same time, I can see that creditors (even Councils) are entirely justified in using the statutory tools to pursue their debts.

Clearly, an increase is well overdue, and I hope that those with evidence-based views will help the Government decide on an appropriate level.


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IVAs: survival of trusts and breach processes – are they successfully addressed by the R3 or Protocol Standard Terms?

With the inaudible release of R3’s revised Standard Terms & Conditions (“STC”) for IVAs and the revised IVA Protocol effective from 1 March 2013 (albeit that the STC have been out since July 2012), I thought it was timely to express my personal views on the STCs and particularly on areas where I feel they are limited and therefore where the Proposals should take over.

R3’s revised STC are located at: http://www.r3.org.uk/media/documents/technical_library/IVA%20Standard%20Terms/IVA_standard_terms_version_3_web_version.pdf

The IVA Protocol and STC can be found at: http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/policychange/foum2007/plenarymeeting.htm

Bill Burch has done a great job of examining R3’s revised STC and has blogged on all the changes from the last version: http://complianceoncall.blogspot.co.uk/2013/02/hot-news-revised-r3-standard-terms-for.html. Over the past year, I had heard rumours of a revision being under way and I now regret not lobbying R3 for some more extensive changes. Thus, whilst it could be said that I only have myself to blame, it won’t stop me whinging about the fact that the issues that I’ve always had with the R3 STC remain unchanged in the current version. I have to say, however, that the two main issues I have are not unique to R3’s STC – in my view, the Protocol’s STC are equally, albeit differently, deficient – and, of course, they can be overcome by careful additions to the IVA Proposal itself, which takes precedence whether R3’s or the Protocol’s STC are used.

Trust Assets

R3’s STC state (paragraph 28(3)) that the trusts (also defined by the STC) survive the IVA’s termination and the assets shall be got in and realised by the Supervisor and any proceeds applied and distributed in accordance with the terms of the Arrangement. The Protocol STC are silent on whether the trusts (defined similarly to the R3 STC) survive, so (unless the IVA Proposal itself covers this), presumably in accordance with NT Gallagher, they usually do.

Does an IP really want to remain responsible for realising assets once an IVA has failed? Wouldn’t it be better to leave it to a subsequently-appointed Trustee in Bankruptcy? Perhaps an example of what might happen might help demonstrate the issues…

An IVA is based on five years contribution from income plus equity release from the debtor’s home in the final year. In year one, the IVA fails through non-payment of monthly contributions. What responsibilities does the (former) Supervisor have to deal with the debtor’s home? I believe it all depends on whether the house is described in the Proposal as an excluded or included asset. If the house is not an excluded asset, then the IP can find that he/she is responsible for realising any equity in the property, which now may be all the debtor’s interest in the property, not the 85% envisaged by the Protocol, and I doubt that the IP can assume that he/she can wait a few years before realising the interest, as per the original Proposal.

If funds related to property equity are included in an IVA, it usually seems that the property (or at least the debtor’s interest in it) is described as an included asset – and the Protocol’s equity clause seems to lead to this conclusion. Would it not be better for such IVA Proposals to define the property/interest as an excluded asset and simply provide that a sum equal to (rather than “representing”) 85% of the interest will be contributed to the Arrangement in Year 5? That way, at least the IP does not find he has to realise the property/interest as a trustee (with a little “t”), which could be more troublesome than if he handled it under the statutory framework as a Trustee in Bankruptcy. Then again, no bond… no annual reports… no S283A..? It could be quite liberating!

The absence of a post-termination trust provision in the Protocol creates another difficulty for IPs acting as trustees of an NT Gallagher trust. As the R3/authorising bodies’ guidance on Paymex explained, the Protocol STC do not provide for any fees to be paid under a closed IVA trust (whereas R3’s STC do), so, unless the Proposal itself addresses this, the IP acting as a trustee on termination of an IVA must seek creditors’ approval to his/her fees for so acting and may only deduct such fees from the dividend payable to consenting creditors.

Thus, I feel it is important for IPs to ensure that they do not rely solely on the STC to deal with any trusts, but ensure that Proposals themselves are worded satisfactorily.

Breach Process

Both R3 and the Protocol provide for the Supervisor to serve notice on a debtor who fails to meet his/her obligations under the Arrangement and allows some time (R3 STC allows one to two months; the Protocol allows one to three months) for the debtor to remedy the breach.

As Bill Burch has identified, the R3 terms (paragraph 71(1)) now appear to accommodate a scenario where the Supervisor has already petitioned for the debtor’s bankruptcy before he/she serves notice of breach, however it seems that the terms do not provide for the Supervisor to present a petition under any circumstance other than after the creditors have so resolved after the notice of breach process has been followed. There is a provision at paragraph 15(2), which seems to give the Supervisor power to act on directions given by “the majority or the most material of creditors”, although it would be an odd circumstance if an IP used this to move swiftly to a bankruptcy petition.

The Protocol’s STC seem a little more practical to me; at least they provide for the Supervisor to terminate the Arrangement if requested by the debtor (paragraph 9(6)). Thus, if the debtor simply wants to walk away from the ongoing commitments of the IVA, there is a swift way of bringing it to a conclusion. Without this clause, i.e. as per R3’s STC, it seems to me that, even if the debtor has no intention of remedying the breach, the Supervisor has to go through the rigmarole of serving notice of breach, waiting a month, then calling a creditors’ meeting to reach agreement as to what to do next. And what happens if the creditors’ meeting is inquorate? Under R3’s terms, the Supervisor does not appear to be authorised to terminate the Arrangement; and under the Protocol STC, I also feel it is tricky for the Supervisor, as under paragraph 9(5), the Supervisor can issue a certificate of termination or seek creditors’ views, so again I am not sure what options are left for the Supervisor on an inquorate meeting.

Minor flaws in the R3 STC

Bill has picked up on many of the STC typos and minor flaws, such as references to filings at Court, which are now only required for Interim Order IVAs following the 2010 Rules. He has also spotted – and I will repeat here for emphasis – that R3’s STC (paragraph 13(2)) seek to address the issue of the powers of Joint Supervisors, despite the fact that the 2010 Rules changed R5.25(1) so that a resolution must now be taken on this matter, i.e. a separate resolution from approval of the Proposal itself.

I also noted that R3’s STC have not been updated to reflect the 2005 Rules, which changed Rule 11.13 regarding the calculation of a dividend on a debt payable at a future time. I guess there is nothing wrong with IVAs using the pre-2005 formula, but I would have thought it would make sense to follow the bankruptcy standard.

I note that R3 has changed the majority required for variations – understandably from an excess of three-quarters to simply three-quarters or more (paragraph 65(2)) – but, I ask myself, why not have a simple majority for variations? And why add in for variations the R5.23(4) condition regarding associates’ votes? Why not follow the Protocol’s process of a simple majority to pass variations? 08/04/13 EDIT: Please note that there is an apparently widely-held view that the Protocol STCs provide for a 75% majority for the approval of variations – see blog post http://wp.me/p2FU2Z-2K.

A final techy flaw: both R3 (paragraph 71(2)) and the Protocol STC (paragraph 9(2) and (4)) continue to reference the old-style Supervisor reports on the progress and efficacy of the Arrangement, per the old R5.31, which has now been replaced by R5.31A.

Minor flaws in the IVA Protocol STC

The minor issues I have with the Protocol STC appear to have been created by the addition of terms over the years, resulting in some inconsistent treatments.

Paragraph 8(8) states that creditors must be informed within 3 months of the Supervisor agreeing a payment break with the debtor. Why the urgency, given that paragraph 9(2) states that creditors need only be told of the generation of more than 3 months’ arrears of contributions, which I would think is of more concern to creditors, in the next progress report?

Paragraph 10(9) states that the Supervisor may call a creditors’ meeting to consider what action should be taken when he/she fails to reach an agreement with the debtor regarding the treatment of “additional income”. That paragraph states that “any such creditors meeting should be convened within 30 days of the Supervisor’s review of your annual financial circumstances”, however paragraph 8(5) states that the debtor must report additional income to the Supervisor when it arises. This means that, if the Supervisor wants to call a creditors’ meeting regarding additional income arising outside of the Supervisor’s annual review, he/she may have a long time to wait!

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Despite these issues, I echo Bill’s sentiment: to err is human… although between us all we might get a little closer to perfection.