We seem to have avoided major changes in 2012: no new/revised SIPs, no significant changes to legislation… does that mean it is all being stored up for 2013?
Here are a few developments that I’ll be looking out for next year:
• HM Treasury’s review of the Special Administration regime for investment banks – report to the Treasury by the end of January 2013 with a fuller report expected by end of June 2013: http://www.hm-treasury.gov.uk/press_124_12.htm
• Outcome of the Red Tape Challenge on insolvency – Insolvency Service to set out proposals to be considered by Ministers in early 2013: Dear IP 56 (not yet posted to the Service’s website)
• Revised SIP3 and SIP16 to be issued for consultation (per IPA autumn roadshows)?
• The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 come into force on 2 January 2013 (thanks to Jo Harris for pointing these out) – I guess they are what they are, but I would like to see a user-friendly summary of them: http://www.legislation.gov.uk/uksi/2012/3013/pdfs/uksi_20123013_en.pdf
• The Financial Services Act comes into force on 1 April 2013… with what direct impact on IPs? I confess that it is not something that I know a lot about, but I do know that from it is created the Financial Conduct Authority, which (from 1 April 2014) will take on consumer credit regulation from the OFT so it may well affect IPs’ (and RPBs’ group) consumer credit licences: http://www.hm-treasury.gov.uk/press_126_12.htm
I’ll also take this opportunity to mention that I reproduce my blog posts into pdfs every couple of months or so – I have added these to a new page on this blog, but I email them direct to those who have asked. If you would like to be added to this emailing list, please drop me a line at insolvencyoracle@pobox.com. I have also started on twitter (@mbmoving); I am a complete novice, but I am hoping to use it to make immediate reference to news items on subjects such as those above (but I’ll continue to blog). Finally, I have given my blog a new look for the New Year – a photos from my trip to Patagonia in January 2012.
Have a lovely few days/weeks off, everyone, and I hope I get to meet up with some of you again sometime in the next year, when I emerge finally from all my unpleasant experiences of 2012.
“Bank rules eased for bankrupts” goes the press coverage, but will the planned legislative change really open the way for bank accounts for bankrupts? Why does there need to be a change in the legislation? And how will it affect IPs? The government response to the consultation and the impact assessment (“IA”) – at: http://www.bis.gov.uk/insolvency/Consultations/BankAccount – provide some answers.
The Legislation – current and future
S307 of the Insolvency Act 1986 currently provides for a Trustee to claim after-acquired property, however he is not entitled to such property where a banker passes it on in good faith and without notice of the bankruptcy order. The flipside of this is that banks feel there is a risk that, if they are aware that an account-holder is an undischarged bankrupt and after-acquired property moves through the account, the Trustee could seek remedy from the bank. “Insolvency legislation as drafted leaves bankers unwilling to countenance the risk of claims from a trustee in bankruptcy. Although such a claim is unlikely, the likelihood of a court upholding the claim (if challenged) is unlikely and there is no evidence that such a claim has previously been brought, the perception of the risk is sufficient to discourage banks from transacting with undischarged bankrupts” (paragraph 68, IA).
Despite the existence of a perceived, rather than a real, risk, the conclusion of the consultation process is: change the Act. Although my first instinct was to feel that this was a disproportionate response, if it solves the problem, then it makes sense. After all, if (to my knowledge) there has never been a claim made, the change will have little impact on IPs or on creditors’ prospects, will it not?
The planned change will redraft S307 so that “liability would only transfer to a bank after receipt of notice from a trustee regarding the potential claim” (paragraph 70, IA). Although it is only a small issue – particularly given the few, if any, claims made on banks – it seems that this change would remove the ability to claim against a banker that acted in bad faith prior to receiving notice from the Trustee of a claim to after-acquired property. “Banking respondents generally felt that risks were minimal as banks have to work to codes of practice anyway” (paragraph 75, IA). Oh well, that’s alright then, isn’t it?!
Will the change really work?
Jo Swinson, Minister for Employment Relations and Consumer Affairs, seems pretty certain: “I am pleased with the positive response from the banking sector, in particular from those that offer basic bank accounts. They have said that a small change in insolvency legislation will prompt them to change their policy on access for people who have become bankrupt” (Ministerial Foreword, government response, my italics). The government response hints at some of the discussions leading to this conclusion: “It was not clear from initial responses whether more banks would change their policies as a result. Further consultation with the main banks has provided assurance that a change in insolvency law to prevent trustees from claiming against them in respect of after-acquired property will result in banks looking again at their policy”. Although agreement to look again at a policy is not agreement to change policy, it is evident that there is significant political pressure stacked against banks to make a change.
The argument for financial inclusion may well be the principal driver, but the IA identifies other pressures: recipients of the new Universal Credit scheme payments will need to have access to a bank account and new European Commission proposals include giving everyone the right to have a basic payment account with a bank.
Political pressure aside, will this change really prompt a change to bank policy?
Banking respondents explained that providing basic bank accounts is often done at a loss. Withdrawing access to cash machines for basic account users appears to me to be a recent step taken by some banks towards reducing such losses. In discussing the rationale for banks providing basic accounts, the IA states: “a significant benefit is that the customer is likely to remain with them for future years with only 12 months (the duration of bankruptcy) in a basic account and then free to operate whatever account suits them at which point the bank will be able to run a profitable account service” (paragraph 126, IA). However, I suspect that this benefit has become less realistic as switching accounts between banks has become easier.
I think it is particularly telling that one of the two banks that offered accounts to bankrupts recently withdrew the service. This bank responded to the consultation stating “that it already holds a disproportionate share of the basic bank account market and that, given that accounts were provided at a cost to them, it was an unsustainable situation” (paragraph 55, IA). I would not be surprised if the consultation prompted the bank to review its policy and consequently it questioned why it was in the clear minority in providing this service. It seems that those two banks’ responses came with a threat: “They considered that any increase in applications, or any change made which did not increase the number of providers, came with a risk that their policies would be changed, which would worsen the current position for undischarged bankrupts” (paragraph 108, IA).
Thus, clearly the banks have no real incentive for providing accounts to bankrupts – quite the opposite – and yet they put the focus on the S307 risk simply being too great. If that were truly the case, then what is stopping banks providing accounts to debtors in DROs? The CAB reported that some debtors find their accounts closed as a consequence of them entering into a DRO and many are refused new accounts because of the DRO… but the fact is that there is no S307 equivalent for DROs. The IA acknowledges that “it remains a commercial decision whether or not to offer a bank account, but this proposed amendment should ensure that bankrupts are on an equal footing with other account holders and applicants” (paragraph 13), but if DRO debtors are also having difficulties in keeping or getting new accounts, then will anything change for bankrupts? “Analysis of responses indicates that market behaviour is based on a range of factors and suggests that where bankrupt individuals are unable to open a bank account, it is mainly because of their credit record, and not specifically because of a risk of a claim by a trustee in relation to after-acquired property” (government response) – but their credit record will not change with the change of S307, so why should that result in improved access to accounts for bankrupts?
It seems to me that, if it were not for the political pressure, it would be highly unlikely that any change to S307 would improve bankrupts’ access to bank accounts and, whilst it seems a little disingenuous to suggest that S307 is the overriding reason for restricting access, it is difficult to criticise banks for their risk-averse stance and the best approach must be to remove this alleged barrier and then watch for the banks’ reaction.
When will the change be made?
Ah, the all-purpose “when Parliamentary time allows”! Of course, this is primary legislation and opportunities to change that do not come around very often at all. I recall many changes to the Insolvency Act proposed by the Insolvency Service over the past few years and as far as I am aware remain on the cards; they must form quite a stack by now. It’s a shame that this has just missed the boat of the Enterprise and Regulatory Reform Bill – the repeal of Insolvency Act’s provision for early discharge from bankruptcy managed to slip into the Bill, but then of course that is counted as an ‘Out’ in regulatory reform terms, whereas this measure is an ‘In’… and with effect from January 2013, the government is planning to operate a ‘One-in Two-out’ process (http://news.bis.gov.uk/Press-Releases/-One-in-two-out-Government-to-go-further-and-faster-to-reduce-burdens-on-business-and-help-Britain-compete-in-the-global-race-6838c.aspx), which will make it even trickier to get the S307 change through.
However, let’s hope that this proposal does not sit of the shelf too long, because in the meantime bankrupts are left with only one bank (which seems twitchy about being the sole provider) and a few expensive alternatives.
Oh dear, the Official Receiver cannot seem to get it right. In the first case, his swift handover of an appointment left the Trustee with outstanding costs and no bankruptcy, but in the second case, his delay in getting to grips with a new case that clearly warranted an IP’s appointment jeopardised the continuance of an action commenced by the Provisional Liquidators. Is this “a reflection of the enormous pressure on resources, both financial and human, under which the OR is working” (TAG Capital Ventures v Potter, paragraph 31)?
The circumstances of the Appleyard case were unique (as demonstrated by the fact that it revealed a previously unreported lacuna in the 1986 Rules) and therefore I do not think that they serve as an argument for an OR to delay passing a case to an IP. However, I would suggest that the TAG Capital Ventures case demonstrates a more obvious downside of such a delay. To ensure the most beneficial outcome for creditors, I would have thought that a swift review of each case as soon as it comes into the OR’s hands – to identify the cases that are more appropriate for IPs and to get those shifted asap – surely is the best way to work, particularly with limited resources, isn’t it? Of course, it’s easy to see what needs to be done, but not so easy to do it when one is fire-fighting and this may be a one-off, but such ‘endemic, notorious, delays’ surely warrant attention.
Appleyard v Wewelwala [2012] EWHC 3302 (Ch) (23 November 2012)
Summary: An unfortunate train of events left the Trustee in Bankruptcy with outstanding costs after the debtor’s bankruptcy was overturned on appeal. The judge’s view was that the Trustee had been “unjustly left out in the cold”; he decided that the debtor’s property should stand charged with payment of the Trustee’s costs incurred up to the point when he learned that the bankruptcy order had been set aside; and he recommended amendment to the Insolvency Rules to deal with this lacuna.
The Detail: The debtor appealed the bankruptcy order on the grounds that the petitioning creditor had unreasonably refused to accept her offer to make payments by instalments. On 14 December 2011, the court provided that the bankruptcy order be set aside and that the hearing of the petition be adjourned for twelve months on the debtor’s undertaking to pay instalments to the petitioner. The order made no provision for the Trustee’s release from office or for payment of his expenses. In fact, it may have been the case that the judge did not even know that a Trustee had been appointed.
Appleyard had been appointed Trustee by the Secretary of State – the Official Receiver believing, correctly at the time, that the debtor had been refused permission to appeal. Appleyard had not been notified of the hearing – there is no provision in statute or the CPR requiring him to be notified – and he only learned of the setting aside of the bankruptcy order when the debtor telephoned him in January 2012. The Trustee had progressed the case in the usual manner, incurring costs of some £6,500.
Mr Justice Briggs felt that, as the Trustee was simply doing his job, there was no reason in principle why the Trustee’s expenses – up to the point when he learned of the successful appeal – should not be paid. In considering from whom those expenses ought to be paid, Briggs J drew on the judgment in Butterworth v Soutter, an annulment case: if the ground for annulment was where the order ought not to have been made (S282(1)(a)), then “there must be strong argument for saying that the petitioning creditor should pay the trustee’s costs” (paragraph 25), but if it were on the ground of payment/securing of the bankruptcy debts, then there is strong argument that the bankrupt should pay. This, and the decision in Thornhill v Atherton, led Briggs J to conclude that “Mr Appleyard’s right as trustee to recover his expenses, having acted entirely properly and innocently at least until January 2012, must prevail over Mrs Wewelwala’s right to enjoy to the full her estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. This is so even if, as between her and Davenham [the petitioner], it may be Davenham which was largely to blame for the circumstances leading to those expenses being innocently incurred… I do not think that it would be right to make an order against her personally, since this is more than Mr Appleyard would have been entitled to, had he remained her trustee. Nonetheless I should direct that her property… stand charged with payment of Mr Appleyard’s reasonable expenses down to January 2012, leaving him to obtain execution in that respect in such manner as he should think fit, in the absence of agreement with Mrs Wewelwala” (paragraphs 32 and 33). The judge left it open to the debtor whether she might challenge the reasonableness of the Trustee’s fees and/or to pursue a claim for compensation against the petitioner.
However, in relation to the Trustee’s costs incurred after he had learned of the setting aside, Briggs J “reached the opposite conclusion”. It seemed to him “that he [the Trustee] should have incurred no further expense without first applying to the court for directions” (paragraph 34).
Briggs J concluded: “it is most unfortunate that it was not appreciated by either of the parties to Mrs Wewelwala’s appeal last December that Mr Appleyard’s expenses need to be addressed. A trustee in bankruptcy’s expenses are as important a matter to be dealt with on an appeal against a bankruptcy order heard after his appointment, as they are in any application for rescission or for annulment. To the extent that the Insolvency Rules fail to make this clear, consideration should be given to their amendment, or to the issue of an appropriate practice direction. In any event, it is to be hoped that the reporting of this judgment may draw this aspect of bankruptcy practice and procedure to the attention of litigants and their professional advisors” (paragraph 37).
TAG Capital Ventures Limited v Potter [2012] EWHC 3323 (Ch) (23 November 2012)
Summary: The fact that the Official Receiver had not been in a position to continue an action commenced by Provisional Liquidators and a four month delay were insufficient to conclude that continuance of the action would amount to an abuse of process of the court or to discharge a freezing order made at the outset of the action.
The Detail: Immediately following their appointment, the Provisional Liquidators applied for a freezing order against director, Potter, and commenced an action against him. A trial timetable was agreed, although neither party complied with disclosure.
Hot on the heels of the OR’s appointment as Liquidator on 25 June 2012, Potter’s solicitors asked the OR about his intentions with regard to the action. They asked again on 3 October and received the response: “Based on the information we have, and the fact that the provisional liquidators have not provided the records to date, the Official Receiver is not in a position to continue this action”.
Around the same time, the OR sent a report to creditors confirming that he did not intend calling a meeting of creditors. Shortly on receipt of this report, on 5 October, the petitioners’ solicitors contacted the OR’s office and put in train the process to have one of the former Provisional Liquidators appointed as Liquidator by the Secretary of State.
On 8 October, the date for filing the pre-trial questionnaire, Potter’s solicitors notified the OR’s office that failure to discontinue the proceedings would result in their client’s own application to have the proceedings struck out. No response was received and thus the application was made.
The IP was appointed Liquidator on 23 October and was now keen on continuing the action.
Mr Justice Warren commented that, without the OR’s statement on 4 October that he was “not in a position to continue this action”, Potter’s application would be “hopeless” (paragraph 37) and that the evidence (emails between the OR and the IP) suggested that up until the end of September “the OR had made no decision at all, a fact consistent with the suggestion made by Mr Wolman [for the claimant] that there are endemic, and he would say notorious, delays within the OR’s office” (paragraph 39). The judge suggested that, even if the conclusion were that on 4 October the Company did not intend to intend to pursue the action (a conclusion on which the judge cast significant doubt), it would be “an entirely disproportionate response” to strike out the action (paragraph 45).
In considering whether any delay in progressing the action supported the discharge of the freezing order, Warren J took no account of any delay prior to the appointment of the OR, as the Company was not in a position to act prior to this point. He also stated that “the OR must, on any footing, have been given a reasonable time after his appointment in which to consider his position in relation to the proceedings. I do not say that in all cases involving an insolvent company as claimant that a defendant simply has to accept the delays caused by the insolvency process. But in the present case, Mr Potter was the controlling mind and owner of the Company and ultimately responsible in practical terms for its demise… It would be wrong, I think, for Mr Potter to be able to rely on delay resulting from the orderly implementation of an insolvency process in order to obtain the discharge of the freezing order” (paragraph 48).
However, Warren J did observe that there seemed to be a delay over and above the “proper time for those matters” of some two months and that it may have been reasonable to expect the OR to have decided in July that, in view of the existing litigation, it would have been appropriate to hand the case to an IP, but nevertheless this small delay did not warrant the discharge of the freezing order.
The judgment includes details of exchanges between the OR’s office and the Provisional Liquidators, which demonstrate that there was no constructive dialogue between these parties throughout the OR’s term of office (which was not entirely due to delays by the OR) and leaves me wondering why the OR did not conclude swiftly on his appointment that an IP should be appointed (particularly given this case’s profile) or, failing this, why it took over three months for him to issue a Notice of No Meeting to creditors.
Summary: This has been the subject of some discussion on the LinkedIn Contentious Insolvency group. The main lessons I drew from this case are that, not only should IPs take care to avoid personal liability when signing contracts/agreements as agent (SoBO?), but also to understand who – himself or the insolvent entity – is made party to legal proceedings. In this case, it seems that the IP did not think through the consequences of an action brought against him; he seemed to assume (or at least he attempted to rely on the assumption) that the successful litigant would rank pari passu with other administration expense creditors. As the IP had not appealed the order, all that was left to the judge – who was asked by the litigant for directions that it be paid in priority to the other expense creditors – was the question: was the order against the IP personally or the companies in Administration? As the companies had not been made party to the proceedings, the court on appeal concluded that it could not be the companies and thus the IP was held personally liable.
The Detail: Mr Morris, Administrator of two companies, entered into two CFAs with Wright Hassall LLP. The judgment of Lord Justice Treacy notes: “Although the heading to the agreements made plain that the two companies were in administration, and the Appellant must have understood that Mr Morris was the Administrator, when he signed the agreements he did so without any qualification as to his personal position or reservation as to his personal liability. In due course Judge Brown QC was to find that Mr Morris signed the documents without reading them” (paragraph 5). Here endeth the first lesson.
Later, the solicitors sought payment under the CFAs. The court found in favour of Wright Hassall LLP, but, as described above, when the solicitors pursued payment, Morris sought to treat them as an administration expense creditor who would need to wait along with all other expense creditors. The solicitors sought directions that they be paid in priority to the other expense creditors, but, although the issue of personal liability had not been raised before, Judge Cooke recognised that this issue was key. He decided that Morris was not personally liable, putting some weight behind the naming of the defendant as “Morris as Administrator of… Limited” and suggested that this acknowledged that Morris was acting as agent, rather than in a personal capacity. Wright Hassall LLP appealed this decision.
The problem identified by one of the appeals judges, Treacy LJ, was that the only defendant was Morris; at no stage had the companies been joined as parties to the litigation. Treacy LJ noted that there was no authority for asserting that, by describing the defendant as “Morris as Administrator of… Limited”, this recognises that he is being sued as agent. He also noted that the only way the companies could have been made party to the action was with the consent of the Administrator or by order of court, but neither of these steps had been taken. Finally, he noted that, had the companies truly been the defendants, they would have been described as “XYZ Limited (In Administration)”. As Judge Brown QC could only make an order against a party to the action before him, it followed that the order was against Mr Morris personally.
LPA Receivership results in change of client, thus no TUPE transfer of service provision
McCarrick v Hunter [2012] EWCA Civ 1399 (30 October 2012)
Summary: I have seen some commentary on the Hunter v McCarrick Employment Appeal Tribunal ([2011] UKEAT 0167/10/DA) and, as this recent appeal was dismissed, there has been no change, but I thought it was worth a quick mention.
We are all used to the principle that, if a business switches its service provider, the people employed by the original service provider are protected under TUPE. In this case, the appointment of LPA Receivers led to employees switching employer although they provided the same services to the same properties. However, the switch of employers was not considered to be a transfer of service provision, because the “client” had changed from the borrower to the mortgagee/receivership.
The Detail: McCarrick was employed by WCP Management Limited (“WCP”), which provided management services on a group of properties. The mortgagee appointed LPA Receivers, who instructed a new property management company, King Sturge, and thus WCP stopped providing the service. McCarrick then became employed personally by Hunter, who had an interest in seeing the swift end of the receivership and who made McCarrick available to assist King Sturge in the property management at no cost to the receivership. McCarrick apparently provided the same property management services as he had before, but he was now paid by Hunter.
Subsequently, McCarrick was dismissed and he sought to claim that the dismissal was unfair. In order to do so, he needed to prove continuity of employment between WCP and Hunter. The Employment Appeal Tribunal decided – and this appeals court confirmed – that there was no transfer of service provision between WCP and Hunter. It was stated that Regulation 3(1)(b) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 envisages that the client will remain the same throughout the transfer of service provision and “it would be quite illegitimate to rewrite the statutory provisions in the very broad way suggested by the appellant” (paragraph 37), i.e. to enable the Regulations to achieve the purpose of protecting employees in this situation when there is a transfer of service provision. Therefore, as the client switched from the borrower to the mortgagee “and/or the receivership” (paragraph 27), Regulation 3(1)(b) regarding the transfer of service provision does not apply.
Out-bid Newco avoids claims from purchaser who found the cupboard bare
City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors [2012] EWHC 3148 (Ch) (8 November 2012)
Summary: The post-Administration purchasers of a business alleged that they found “the cupboard was bare”, but claims against “Newco” and others for migrating the business prior to insolvency failed.
What I found particularly interesting in this case was the apparent acknowledgement of the judge that the director could take certain steps in anticipation of a pre-pack sale to Newco.
The Detail: A subsidiary of the first claimant bought the business, name and assets of Lothbury Financial Limited (“LF”) from its Administrators four days after the company was placed into Administration on application of the claimants. The claimants alleged that a former director, consultants, and employee of LF conspired to transfer the business to Lothbury Financial Services Limited (“LFS”) and thus committed serious acts of misfeasance.
Mrs Justice Proudman concluded that the claims failed. She was satisfied that the evidence demonstrated that: LFS operated as a bona fide separate business prior to the Administration of LF; LF’s clients were not misled, but chose to follow the consultants, who had no restrictive covenants, to LFS of their own accord (the business was PR); and LFS was entitled to continue to use the name after the goodwill of LF was sold to the claimant.
As far back as summer 2009 (LF was placed into Administration on 29 March 2010), the director was taking advice from an IP regarding a pre-pack Administration, although he was also attempting to re-negotiate payment terms with the claimant in order to rescue LF. The claimants alleged that LFS was set up and structured as part of the director’s exit strategy, that LFS was to be the destination for LF’s business. “The claimants argue that the allegation of a pre-pack administration is self-serving as depriving LF of its business served to ensure that the price to be paid would be minimised and rival bidders would be discouraged. However, preparing to succeed to an original business in such circumstances is in my judgment different from preparing to compete with it. It is the essence of a pre-pack management buy-out that information has to be derived from the failing company in order to structure such a buy-out” (paragraph 38).
So how much activity in preparation of a pre-pack is acceptable and over what kind of period? It is noteworthy that in this case, although there was evidence of some confusion of company names on a client’s contract and an employee was described as having “overreached herself” (paragraph 28) in explaining to the London Stock Exchange’s Regulated News Section that LF had simply changed its name to LFS and moved offices, the judge found no case against the director for breach of fiduciary duty and noted that LF suffered no loss by the actions.
When will a court release a bankrupt from a family proceedings debt under S281(5)?
McRoberts v McRoberts [2012] EWHC 2966 (Ch) (1 November 2012)
Summary: A discharged bankrupt was refused release from a bankruptcy debt arising from a family proceedings order.
Although this is not a particularly surprising outcome, the judgment provides a useful summary of the factors the court considers when deciding whether to override the default position of S281(5) of the Insolvency Act 1986.
The Detail: Mr McRoberts’ bankruptcy started in September 2006. Mrs McRoberts submitted a proof of debt for c.£245,000 being the amount owed under an order in their family proceedings in 2003 in resolution of their financial claims ancillary to their divorce. Mr McRoberts was discharged from bankruptcy in September 2007 and the bankruptcy was concluded with no distribution to creditors.
S281(5) provides that discharge from bankruptcy does not release the debtor from such a debt, but the court has jurisdiction to release it and the court in Hayes v Hayes held that the court’s discretion in this matter is unfettered and the debt can be released after the debtor’s discharge. The Hon. Mr Justice Hildyard considered the factors described in Hayes and continued: “As it seems to me, the ultimate balance to be struck is between (a) the prejudice to the respondent/obligee in releasing the obligation if otherwise there would or might be some prospect of any part of the obligation being met and (b) the potential prejudice to the applicant’s realistic chance of building a viable financial future for himself and those dependent upon him if the obligation remains in place. In striking that balance I consider that the burden is on the applicant; unless satisfied that the balance of prejudice favours its release the obligation should remain in place” (paragraphs 24 and 25). He also considered that a review of the merits or overall fairness of the underlying obligation did not come into it, but that, if any modification of the order were sought, this was a matter for the matrimonial courts.
In this case, the judge’s view was that the balance remained in favour of keeping the obligation in place – the debtor had not provided evidence that any future enterprise or activity would be blighted by the continued obligation – and thus he declined to grant release.
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?
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?
The AiB/SG’s consultation, which closed on 18 May 2012, raised questions on every aspect of Scottish personal insolvency – DAS, PTDs, SEQs, LILAs, and even suggested introducing a whole host of other “products” – as well as exploring the AiB’s current and prospective roles in administering and supervising insolvencies. The report on the consultation responses was published on 28 August 2012 and can be accessed at: http://www.aib.gov.uk/news/releases/2012/08/bankruptcy-law-reform-consultation-summary-responses
The summary of the opening Summary alone lists 65 conclusions (pages 5 to 7), but I have attempted to list the most significant below (my comments added in parenthesis). I should mention that I have only ever come across Scottish insolvency in my role at the IPA, so, although I have been closely involved with Scottish IPs in drafting consultation responses (although not for this one) and I have reviewed Scottish cases as part of the monitoring function, I have no front-line experience of administering them.
Money advice to be made compulsory prior to accessing any form of statutory debt relief, although not to be provided by the AiB
Support to have one Common Financial Tool, preferably a Scottish-specific one, against which all debtors will be measured, irrespective of the insolvency process being contemplated
Allow assessed contributions to be deducted directly from an individual’s wages
“Support to introduce a moratorium period of 6 weeks in statutory debt relief products, these to be displayed in a public register” (this seems to be directed at bankruptcy, so that the debtor can intimate an intention to apply, as is currently available in DAS)
“DAS should not be the default option where an individual can pay their debts in 8 years, although there was support for a shorter period” (it seems the majority who responded to the question, “how long should it be?”, answered 6 years. However, the table suggests that “majority” is only 12 out of a total of 129; 89 answered “N/A”, so presumably many of those would not wish to see any defined timescale where DAS is the default option – seemingly this was not picked up by the AiB.)
“Composition in DAS should be available, after the programme has run for 12 years and 70% of the debt has been paid” (although not in the summary, the report indicates that a strong majority would like creditors to have to consent to the composition, with some suggestion being that this is sought after DAS has run successfully for a number of years)
Support for a minimum debt level of £10,000 for entry into a PTD
Support for a minimum dividend in PTDs (see my comments below)
There should not be a fixed term for completion of a PTD
The current process of deemed consent and current thresholds in PTDs should continue
“Support for the removal of Apparent Insolvency as criteria in debtor applications” (the report adds: “if mandatory advice is adopted as a precursor to bankruptcy”)
The minimum debt level for debtor’s bankruptcy should increase to £3,000
Support for a “No Income” product for individuals on state benefits who have up to £10,000 of debt and up to £2,000 of assets
Other products, e.g. “Low Income Product”, “High Value Product”, not required
Support for a new Business DAS for sole traders and partnerships
Support for discharge to be linked to a bankrupt individual’s co-operation with their trustee
Where an individual cannot be located their discharge should be deferred indefinitely
AiB should have the power to defer discharge rather than refer the case to a sheriff
Support for debts that were incurred within 12 weeks of a debtor application or the granting of a trust deed should be excluded from discharge
Child maintenance arrears and credit union debts should continue to be discharged in bankruptcy and PTDs
Creditors should have to submit a claim within 120 days (the report adds “… of notification of an individual’s bankruptcy”, although the consultation question suggested this statutory timescale for all processes and this had strong support from respondents)
Support for the recall of bankruptcy process to be clarified and that the final interlocutor should be withheld until all funds have been distributed
The current prescribed rate of interest should be retained and all post-procedure interest and charges be frozen
Support for the debtor’s discharge to be linked to the date of award
Payment holidays of up to 6 months should be available in all statutory debt relief products and the period of time added onto the length of the product before discharge is granted
AiB should have the power to make orders for some bankruptcy processes and a separate independent panel should be used to review complex or disputed decisions
AiB should not have a more proactive role in supervising debt relief products
An AiB panel should not determine an appropriate course of action where a trustee has not followed an AiB direction (see my comments below)
Support for a Memorandum of Understanding between the UK Insolvency Service and RPBs to be redrafted to allow information on regulatory activity related to Scottish cases to be issued to AiB
“There should be an office of the Official Receiver in Scotland and this role should be carried out by AiB” (i.e. to act as liquidator of last resort)
The timescales for changes are, understandably, vague, given the vast range of proposals that will affect primary and secondary legislation as well as AiB Guidance Notes and the development of other projects, such as the proposed Scottish common financial tool. Whilst the report states that, after a series of stakeholder workshops, it is hoped that the SG will be in a more informed position to issue an official response, the AiB’s website states that the SG’s response is expected to be published in October 2012.
My thoughts on the report – the methodology
What struck me was the AiB’s methodology in considering, not only the numbers of responses by individuals, but also those by organisations only. The cynic in me senses that the AiB may have been somewhat selective in this consideration.
For example, Q15.1b asks: “If the AiB should continue to act as trustee, should she act only as trustee of last resort?” (page 87). 49 individuals answered “yes” and 44 answered “no”, but when responses only from organisations are considered, this becomes 29 “yes” against 39 “no”. The summary to this section states: “Whilst the majority of respondents believed that AiB should continue to act as trustee of last resort, when the figure for organisations only was examined, this showed that AiB should continue to act as trustee in all cases where appointed” and this conclusion seems to have drifted into the opening summary. However, on other occasions, an “organisations only” majority does not seem to have influenced the outcome. For example, Q15.4 asks: “Where the AiB makes a direction which is not adhered to by the trustee, should an AiB panel decide on an appropriate course of action?” (page 89). Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions (albeit that the comment from Nolans Solicitors suggests that some “no” respondents may feel that someone other than an AiB panel, e.g. the IP’s regulator, should decide – something again not picked up by the AiB).
Perhaps I should not be too selective myself however, as sometimes this selective process seems to lead to positive outcomes. For example, Q15.3 asks: “Should AiB have a more proactive role in the supervision of all debt relief products?” (page 89). Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions.
Given that IPs are perhaps more accustomed to writing as individuals than the other categories of respondents, it is not surprising that this selective approach, putting greater emphasis on “organisations only” responses, sometimes swings the outcome away from what I suspect are the IPs’ preferences. 20 of the 37 IP responses were from individuals, whereas all the creditor responses were from organisations and only 7 of the 27 advice sector responses were from individuals (and 13 in the “other” category). There may be some merit in giving less weight to some individual responses (which some may be inclined to put in the “green ink brigade” category), but given that the vast majority of IPs operate in an “organisation” and many manage that organisation, this broad-brush distinction seems grossly unfair to me.
My thoughts on the report – the detail
Although there are many quoted responses that are extremely sensible suggestions, of which I hope the AiB will take notice and incorporate in future plans, some response quotes raised my hackles. For example, there seems to be a perception that, if a PTD only produces a 50% dividend, this means that a large proportion (would some incorrectly assume 50%?) of the funds ingathered fall into the hands of the IP (see, for example, Grampian Credit Union’s comment on page 32). Putting aside all the non-IP costs that need to be discharged, the percentage dividend of course bears no resemblance to the amount of the funds paid as a dividend. For example, if £10,000 is distributed to creditors with claims of £200,000, this is only a 5% dividend, but if the same sum is distributed to creditors with claims of £20,000, it is a 50% dividend (perhaps a comparison of extremes, but I’m sure you get the point). Thus it is nonsensical to assume that a PTD paying out a low dividend is automatically disadvantageous to creditors; surely the crux of the matter is: would the outcome be any better (not forgetting the impacts on the debtor) via any other process? It seems to me that the only real way of exploring whether PTDs can become more beneficial to creditors is to consider carefully whether the costs in the process can be reduced, although the outcome of the AiB/SG’s earlier consultation on “Protected Trust Deed – Improving the Process” suggests to me that the process will become more costly with more reporting and other burdens laid at the IP’s door.
It is therefore extremely frustrating that the outcome of the consultation, that “the majority of respondents either suggested 10p in the pound or that no minimum amount should be specified” (page 33), has been interpreted by the AiB as “support for a minimum dividend on PTDs” (summary on page 5).
I was surprised at the majority (albeit not a large one) supporting the idea that a debtor’s discharge from bankruptcy be deferred indefinitely where he/she cannot be located. I would concur with ICAS’ comment (page 63) that “just because an individual cannot be located does not indicate that he would not co-operate. Consideration has to be given to whether the Trustee has been able to deal with the estate effectively for the benefit of the creditors. Each case has to be considered on its own merits”. Hopefully, reasonableness will prevail if/when this provision makes it to statute.
I also find the idea that debts incurred prior to bankruptcy (the apparent preferred period being 12 weeks) should be excluded from discharge a novel one, particularly in comparison with E&W bankruptcy legislation (putting aside transactions such as preferences). I will be interested to see how this is described in draft legislation, as the report suggests there is support for the exclusion of only some debts, such as those relating to non-essential items or where the debtor had knowledge that they would probably not be paid – this may generate some work for the lawyers and courts, I would suggest.
Speaking from my perspective of having worked at an RPB, I struggle with the arguments the AiB puts forward for engaging in an information gateway with the RPBs and the UK Insolvency Service. The AiB seems to want to know what disciplinary actions the RPB may be in the process of taking against IPs. No information gateway will assist the AiB to learn of actions-in-process (and even if she knew, what would this indicate about the IP’s conduct until the issue had been decided?), but only of settled sanctions, which in most cases are in the public domain (and if any are not, it is very likely that the Insolvency Service’s/JIC’s work in ensuring consistency of the publicity of disciplinary outcomes will bring these into line). It is certainly the case that currently the AiB’s and the RPBs’ activities in supervising/regulating IPs occur in isolation from each other – and I believe that it is unhelpful when the AiB receives and investigates complaints (with no reference to the RPB) that are more suited to investigation by the IP’s licensing/authorising body – but in my mind that is an inevitable outcome of the seeming overlap of responsibilities of the different bodies.
There are far too many details in the report to cover here and it is perhaps not sensible to spend too much energy in contemplating the proposed changes at this moment. I am sure that many of you, like me, will be interested in seeing how the results of this consultation are reflected in future stages.
Insolvency Oracle 