Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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More little gems from the Insolvency Service’s blog

As promised in my last blog (but later than planned – sorry), here is my second selection of news from the Insolvency Service’s blog and Dear IP 76 that I think is worthy of spreading… with some further commentary from me, of course.

The questions fall into the following topics:

  • S100 Decisions
  • Other Decision Processes
  • Timing Issues

As I mentioned previously, I am very pleased that the Insolvency Service has shared their views on many issues and I do hope they will continue to be this open. I would also like to thank the technical and compliance managers and consultants with whom I have spent many hours debating the rules; without these valuable exchanges, many of the issues would not have occurred to me.

 

S100 Decisions

  • Can the Statement of Affairs and SIP6 Report be delivered by website?

As the director is responsible for delivering the Statement of Affairs, it is the Insolvency Service’s view that the Statement cannot be delivered by means of a website, as the rules governing website delivery – Rs 1.49 and 1.50 – only apply to office holders. Therefore, the Statement must be either posted or emailed to creditors.

Of course, delivery of the SIP6 report is not a statutory requirement and strictly-speaking SIP6 simply requires the report to “ordinarily be available”. I understand that at least one RPB is content for the SIP6 report to be made available via a website.

  • Does an invitation to decide on whether to form a committee need to be sent along with the S100 proposed decision notice?

The question arises because R6.19 requires such an invitation where any decision is sought from creditors in a CVL, whereas usually the company is not in CVL when the S100 proposed decision notice is signed.

The Insolvency Service has answered “yes”, the director needs to seek a decision from creditors on whether to form a committee when they propose the S100 appointment.

  • Can the SoA/S100 fee be approved via deemed consent?

In view of the Insolvency Service’s approach to IPs’ fees in general, the answer to this might seem an obvious “no”. However, the background to the query was that the rules require creditors to approve the payment of the fee, not its quantum, and therefore it is not quite so obviously “a decision about the remuneration of any person”, which the Act limits to decision procedures, i.e. not including the deemed consent process.

But unsurprisingly the Service answered: “no”.

This has led some people to rethink their process of getting paid the SoA/S100 fee. We have been receiving quite a few questions on whether such fees need approval if they are paid pre-appointment and/or by a third party.

The Insolvency Service has confirmed that R6.7(5) – which requires approval of payments made to the liquidator or an associate – applies to payments referred to in R6.7(4), i.e. those made by the liquidator. R6.7(3) provides that, where payment is made from the company’s assets before the winding-up resolution, the director must provide information on the payment along with the SoA, but they do not require creditor approval.

  • Does R15.11’s timescale for decisions on the liquidator’s remuneration (when made at the same time as the S100 decision on the liquidator) apply also to decisions on the SoA/S100 fee?

R15.11 provides that at least 3 business days’ notice must be given for S100 proposed decisions on the liquidator. This rule also provides that the same timescale applies to “any decision made at the same time on the liquidator’s remuneration”. It stands to reason that, if a virtual meeting were convened to consider a decision on the SoA/S100 fee at the same time as the decision on the liquidator, the same notice requirements would apply, but does the SoA/S100 fee strictly fall under “the liquidator’s remuneration”?

The Insolvency Service has stated that R15.11 should be taken to include the proposed pre-liquidation payments referred to in R6.7(5).

 

Other Decision Processes

  • What access information needs to be provided on a notice summoning a virtual meeting?

This question arises from the requirement of R15.5 that the notice to creditors must contain “any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”.

The Insolvency Service has answered: “we think that sending a contact number or email address for creditors to contact in order to obtain such details is also acceptable under this rule”.

Personally, I am pleased with this answer, as I think it makes the logistics of virtual meetings far more manageable. It almost eliminates the risk of unknown “excluded persons”, as you would know who is planning to attend. You could also set up ways of verifying who participants are; you could contact them beforehand, maybe send them agendas and meeting packs. Also during the meeting if they get cut off, you would have a ready alternative contact for them, and it would be easier to count votes or set participants up with electronic voting. I don’t think that some kind of pre-meeting contact is too much to ask from creditors; to illustrate, if I want to sign up to an open-access webinar, I think nothing of contacting the convener beforehand in order for a link to be sent to me.

  • Can creditors ask upfront for an Administrator’s Para 52(1) Proposals to be considered at a physical meeting?

As we know, when Administrators include a Para 52(1) Statement in their Proposals, they do not ask creditors to vote on whether to approve the Proposals, but they must start a decision process going if the requisite number of creditors ask for a decision within 8 business days of delivery of the Proposals. Para 52(2) makes it clear that the request from creditors is for a decision, not a meeting as was the case before the Small Business Act. However, R15.6(1) states that “a request for a physical meeting may be made before or after the notice of the decision procedure or deemed consent procedure has been delivered”. Therefore, if the consequence of creditors asking for a Para 52(2) decision is that the Administrator issues a notice of decision procedure (say, a correspondence vote on the Proposals), then this rule seems to allow creditors to ask for a physical meeting before this notice is delivered.

The Insolvency Service has confirmed that this is the case: “there is no reason that the requisitioning creditor should not at the same time request a physical meeting. We note your comment that the request for a physical meeting is being made here before a decision process has even commenced, but we think that is it reasonable to interpret the rules this way on this occasion because the request does clearly relate to a decision”.

  • Ok, so does a creditor asking for a physical meeting to consider the Para 52(1) Proposals need to pay a deposit to cover the costs of this meeting?

R15.6 sets out how creditors’ requests for a physical meeting should be handled. It includes no reference to paying a deposit to cover the costs of the meeting. Mention of paying a deposit appears at R15.18, which relates to requisitioning decisions.

Therefore, quite rightly (albeit unfairly) in my view, the Insolvency Service has stated that “it would follow that where costs of the decision are met by the requisitioning creditor then these would be for a decision which is not made by a physical meeting. Any costs of the physical meeting over and above the security paid by the creditor for a decision process would be an expense to the estate”.

Thus, it would seem that, on receiving sufficient requests for a physical meeting to be summoned to consider Para 52(1) Proposals, the Administrator would need to calculate hypothetically how much it would cost to organise this via a non-physical-meeting procedure and ask the requisitioning creditor for this sum. As the rules require “itemised details” of this sum to be delivered to the creditor, this would take some explaining in order to put the creditor’s mind at ease that we weren’t ignoring their request for a physical meeting even though we were asking them to pay the costs for conducting, say, a correspondence vote!

  • Does a creditor need to lodge a proof of debt in support of a request for a physical meeting?

The Insolvency Service’s simple answer is “no”. This is what I thought when I read the rules, but it does seem odd… and could lead to all sorts of controversy.

  • Can approval for an Administration extension be sought by deemed consent?

Understandably I think, the Insolvency Service has answered “yes”. It almost goes without saying, however, that seeking secured creditors’ consents is not a decision process; the positive approval of each and every secured creditor is required (just thought I’d mention it).

  • How do you deal with the need to invite creditors to make a decision on whether to form a committee when seeking a decision by deemed consent?

The Insolvency Service has confirmed that this committee decision can be posed by deemed consent.

Via Dear IP 76, the Service also endorses the format of a proposed decision in the negative, i.e. that a committee shall not be formed… although it adds a sticky proviso: “in this way, if creditors have already indicated a lack of desire to appoint a committee, the office holder could simply propose that no committee be formed”. How do creditors indicate a lack of desire? In S100 CVLs, this seems straightforward enough in view of the fact that, as mentioned above, the director will have needed to invite such a decision in the first place. However, whether an absence of anything but the usual creditor concerns in, say, the first few weeks of an Administration is sufficient to indicate a lack of desire to satisfy the Service, I don’t know.

What is the alternative: that a positive deemed consent decision be posed, i.e. that a committee will be formed? The problem here is that, unless creditors object, then this decision will be made by default. In the light of probable creditor apathy, this could be unhelpful. Therefore, if a positive deemed consent decision is posed, it would seem necessary to describe it something like “a committee will be formed if there are sufficient creditors nominated by [date] and willing to act as members”, which to be fair is almost the wording set out in the Rules (e.g. R10.76). In this way, if the invitation for nominations is similarly ignored, then the positive decision, even if technically made, is of no effect.

However, it’s all a bit of a faff, isn’t it? It hardly makes for a Plain English process. I also dislike the idea that an office holder must propose a decision that he/she may not support. It doesn’t sit right with me for an IP to invite creditors to approve a decision to form a committee when the IP does not see the need or advantage in having one on the case in hand.   However an IP words the proposed decision, creditors can take action to appoint a committee and, as the Rules do not prescribe a form of words, then surely office holders are free to propose a decision as they see fit.

  • If a Notice of General Use of Website has already been issued, what is the effect of Rs3.54(3/4), 2.25(6/7) and 8.22(4/5), which require additional wording about website-delivery in certain circumstances?

This question requires some explaining. As we know, R1.50 provides that the office holder can send one notice to creditors informing them that all future circulars (with a few statutory exceptions) will be posted onto a website with no further notice to them – this is what I mean by a Notice of General Use of Website. However, we also have R1.49, which repeats the 2010 provision that each new circular can be delivered by posting out a one-pager notifying creditors that the specific document has been uploaded to a website.

Things get complicated when looking at Rs3.54, 2.25 and 8.22. These rules govern how we invite creditors to decide on an Administration extension and a CVA/IVA Proposal. They state that the notice regarding such a decision may also state that the outcome of the decision will be made available for viewing and downloading on a website and that no other notice will be delivered to creditors and these rules go on to specify additional contents of such a notice, which draw from R1.49.

So the question arises: if you have already given notice under R1.50 to confirm that a website is going to be used for (almost) everything, do you need this extra gumpf?

The Insolvency Service has clarified that you don’t. If you have already followed (or are following simultaneously) the R1.50 process, then you need not worry about adding such references to your R3.54/2.25/8.22 notices; you can simply issue the notice via the website and then issue the outcome via the website also. Of course, given that you’re inviting creditors to consider an important decision, you might also want to post something out to them, but this does not appear necessary under the rules.

 

Timing Issues

  • If an Administration has already been extended pre-April 2017, when should I next produce a progress report?

As covered in a previous blog, the issue here is that, before April 2017, an extension would have resulted in the reporting schedule moving away from 6-monthly from the date of appointment and instead it will be 6-monthly from the date of the progress report that accompanied the request to approve the extension. As drafted, the 2016 Rules had not provided a carve-out for these cases, so it seemed that the reporting schedule for these extended Admins would be reset on 6 April back to 6-monthly from the date of appointment.

An attempt was made to fix this in the Amendment Rules, but in my view it was not wholly successful. They state: “Where rules 18.6, 18.7 or 18.8 prescribe the periods for which progress reports must be made but before the commencement date an office-holder has ceased to act resulting in a change in reporting period under 1986 rule 2.47(3A), 2.47(3B) 4.49B(5), 4.49C(3), or 6.78A(4), the period for which reports must be made is the period for which reports were required to be made under the 1986 Rules immediately before the commencement date.” The intention is clear: where the 1986 Rules have moved a reporting schedule away from the date of appointment, this adjusted schedule should continue. However, the reference to an IP ceasing to act is unfortunate, because in the scenario described above, this has not happened.

The Insolvency Service acknowledged that this rule “could perhaps have been more explicit” (ahem, I think the problem is that it was too explicit), but emphasised that the intention is clear. Presumably therefore the Registrar of Companies will not reject filings made on the extended 6-monthly schedule.

Also, just in case you haven’t already picked it up, I should mention that the Amendment Rules have most definitely fixed the issue I raised some months ago about the length of a month, so progress reporting now continues pretty-much in the pre-April way… although of course we now have to factor in the time taken to deliver reports.

  • Do Administrators’ Proposals really have to include a delivery date?

Sorry, this is more just me having a whinge: R3.35(1)(e) requires Administrators’ Proposals to state the date that the Proposals “are delivered” to creditors. When the Proposals are signed off, this will be a date in the future.

The Insolvency Service has confirmed that this is the case: they require the future “deemed” delivery date to be listed.

Of course, there are practical issues with this. If you deliver Proposals using more than one method, e.g. by R1.50 general website-delivery but also by post where some creditors have asked for hard copies (which admittedly will be rare), then you may well have more than one delivery date.

More practically, how will you/your staff complete this little nugget? It is commonplace for Proposals to go through lengthy drafting processes (despite some non-appointment taking IPs’ views that Proposals should be simple to produce in the first few days especially where there has been a pre-pack); drafts are turned over to several different people, being edited as they go. It is going to be a real faff to keep an eye on this insignificant date. My personal recommendation, if the issue date cannot be guaranteed at the outset, is to keep this delivery date coloured/highlighted on draft Proposals so that it is the very last item completed just before the Proposals are signed off.

  • Do you have to wait until the MVL final account has been delivered to members before submitting a copy to the Registrar of Companies?

When closing an MVL, the liquidator is required to confirm to the Registrar that s/he “has delivered” the final account to members (R5.10(3)).

The Insolvency Service does not believe that the liquidator has to wait until the final account has been “delivered” to members at this stage; it is sufficient that the liquidator has sent it. From what I can decipher, it seems they are viewing delivery here as “deemed” delivery, i.e. once it has left your office, it will end up being delivered a couple of days’ later (if sent by post).   Personally, I still think it is odd to confirm at this point that the final account has been delivered, but at least we have an answer for any pedant who wants to debate this.

  • Do you have to wait until the Notice of Establishment of the Committee is delivered to the Registrar/Court before holding the first Committee meeting?

Despite the paradoxical “no” for the previous question, the answer to this one is “yes”.

The issue arises because R17.5(5) states that “the committee is not established (and accordingly cannot act) until the office-holder has delivered a notice of its membership” to the Registrar/Court.   The Insolvency Service has confirmed that, yes, the notice must be delivered before the first meeting is held.

The frustration here, of course, is that we will no longer be able to hold the first committee meeting immediately after any meeting that establishes it, but because the rules require us to hold a first meeting (although this can be by remote attendance), we will have to call the committee members back again.

Personally, I wonder if practically it would still be valuable to hold an informal meeting with the (elected) committee members immediately – so that matters for investigation can be discussed and so that you can help them understand how committees work, maybe even discuss the office-holder’s fee proposal with a view to agreeing this later on – and then, hopefully, the actual first meeting will be little more than a formality.

 

The next instalment..?

As we apply the new rules in practice, I am sure that more issues and ambiguities will emerge. As I mentioned previously, I am grateful to the Insolvency Service for their openness.

Emerging interpretations and views force me to revisit my previous conclusions, which is a good thing, although I am very conscious that earlier blog posts and presentations quickly become out-of-date. Even my presentation for the R3 SPG Technical Review at the end of March needed an update and this is now available to Compliance Alliance webinar subscribers (drop me a line – info@thecompliancealliance.co.uk– if you want to know more 😉 ).

I am also looking forward (err… sort-of!) to presenting on the rules at other R3 events – 6 June SPG Technical Review in Leeds; 7 June Southern Region meeting in Reading; 28 June North East Region meeting; and 4 July SPG Technical Review in Bristol. I welcome your queries and quirky observations on the rules, which will help me to make my presentations useful to the audience. I’m sure there are many more gems to unearth.


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New Rules, Part 15: Decisions, Decisions!

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More than one IP has asked me: ok, I know the New Rules pretty-much remove creditors’ meetings, but what’s all the fuss about? It gets me every time! Not only are the changes far more widespread than this, but also this change is hardly simple. It sounds simple though, doesn’t it: just replace all creditors’ resolutions with some kind of postal vote?

From what I believe was a desire to provide options – to creditors mainly, but also to directors and IPs – has evolved a web of overlapping timescales and feedback mechanisms, not to mention reams more information to creditors, which cannot fail to bamboozle and further dissuade them from engaging.

 

Decision 1: what type of decision do you have?

The SBEEA15 introduced the idea of two tiers of decisions (by the way, in our new world, there are few resolutions anymore, just decisions… although some decisions are made by resolution, if considered at a meeting, whether physical or virtual). There are decisions that can be made by Deemed Consent and others that must be made by a Qualifying Decision Procedure (although the New Rules drop the “Qualifying” bit). In the latter category are:

  • any “decision about the remuneration of any person” (S246ZE(2)); and
  • the acceptance of IVA and CVA Proposals.

So what decisions might be dealt with by Deemed Consent? The biggie is the appointment of a CVL Liquidator (you might also have thought about the appointment of an IP in court cases, but this involves first the removal of the incumbent OR – aha, now the reason for the change so that the OR becomes Trustee immediately on the order becomes clear, doesn’t it..?). Other Deemed Consent decisions could include several ADM items, e.g. extensions, discharge and even the Proposals themselves. But other than these, Deemed Consent is unlikely to get out much.

I think the Insolvency Service saw Deemed Consent being useful to office holders in seeking creditors’ approval to certain strategies, e.g. to commence litigation. I agree that this is a possibility, however the abolition of the statutory requirement to seek sanction to exercise many old Schedule powers has meant that more often than not IPs feel empowered to take such decisions in the interests of creditors in any event.

 

Decision 2: should you use Deemed Consent?

The key point to note about Deemed Consent is that, unless more than 10% in value of creditors (entitled to vote) positively object to the decision, then it is approved as proposed. If this proportion of creditors objects, then the IP has another bite of the cherry by proposing the decision by one of the other decision processes (excluding a physical meeting unless the proposed decision is for your CVL appointment).

There is a wrinkle: creditors who meet different criteria can respond by asking for a physical meeting, rather than (or in addition to) objecting to the decision proposed by Deemed Consent. If this happens, then the Insolvency Service has stated that the Deemed Consent process is superseded and the decision must be considered at a physical meeting. Personally, I have failed to spot where this consequence is set out in the rules, so I have asked the Service for clarification.

The thresholds for seeking a physical meeting are either 10% in value of creditors, 10% in number, or 10 creditors (the “10/10/10” criteria). (UPDATE 23/03/17: recently-issued Amendment Rules affect this, although their application is unclear.  I have blogged a question on the Insolvency Service’s blog.) This time, the criteria relate to all creditors, not just those entitled to vote. Thus it seems to me more than just a theoretic possibility that a creditor/s might reach the threshold to seek a physical meeting but fall short of the threshold to object to a Deemed Consent decision… hence the need, I believe, for the rules to be clear on the consequences of a request for a physical meeting.  (UPDATE 02/05/2017: the Insolvency Service has blogged: “The intention here is that the creditors that have an interest in the decision being taken are the ones who determine whether the costs of holding a physical meeting should be incurred. Therefore the convener would consider the value of the potential vote of the creditor(s) making the request, and compare them to the total value of the potential vote.”  Got that? 😉 )

Whilst there are potential complications, I think the Deemed Consent advantages are clear, especially where you need to seek approval from uninterested creditors, e.g. the ADM extension and discharge questions (although if you need secured creditors’ approval, silence from the unsecureds is only half the battle won).

What if you are seeking a CVL appointment, should you go for Deemed Consent? Well, one downside is that you will need to add on another decision procedure if you want to get your fees, including your pre-appointment fee, approved. However, if another IP starts showing an interest, they will first have to object to the Deemed Consent process before the scene is re-set to count votes on nominations. Granted however, it may mean that you’re looking at an unexpected Centrebind.

Another strange characteristic of seeking a CVL appointment by Deemed Consent is that, if unopposed, there is no statutory requirement for any pre-appointment Gazette notice – how odd is that?!

 

Decision 3: which other Decision Procedure might you use?

How else might you seek a decision? In the order that I think they will be used, the methods are:

  • vote by correspondence (no longer a “meeting” by correspondence and not defined in the rules);
  • virtual meeting (yes, cumbersome and in some respects risky, but the only way effectively to negotiate decisions);
  • electronic voting (hmm… maybe not for some time yet);
  • only if sufficient creditors request it, a physical meeting;
  • and A N Other process that none of us has yet thought up.

Virtual meetings are prepared for pretty-much as physical meetings are now: they require Gazetting and they involve proxy forms, which can be delivered anytime up to the start of the meeting in any case, no longer just for VA meetings. Proofs of debt also need to be delivered and, although there is a deadline of 4pm the business day before the meeting, there is also provision for the chair to accept late proofs, if he is “content”.

Of course, the obvious difference is finding an appropriate virtual meeting resource. From those who I know have been exploring this, I understand that there is no clear winner. Issues include: being able to identify attendees, especially when they join and leave, and being able to block access to people not entitled to attend. The main risk in holding a virtual meeting is that an “excluded person” (i.e. someone who tried to participate but could not through no fault of their own; say, they just happen to live in an area of the UK with unreliable broadband connections) can influence the decision after the meeting (assuming you did not decide to adjourn it). They are given a very short window of opportunity to complain that, had they participated, they would have swung the vote, but this is clearly not an uncertainty you want to be left with after a decision on your appointment or on a VA Proposal. There is also the practical uncertainty in knowing how many people are likely to want to join in to a virtual meeting: multi-party conference calls are exasperating at the best of times and the prospects of being surprised by a virtual room full of fired-up creditors doesn’t bear thinking about.

So should you go for a correspondence vote? Well, if you’re looking for a CVL appointment, it’s worth clocking now that this is not an option: Deemed Consent and virtual meeting are your only options. It is also worth remembering that the deadline for correspondence votes (and other non-meeting processes, including Deemed Consent) is one minute to midnight on your chosen day (the “Decision Date”), so we will have to get used to not knowing the outcome of a proposed decision until the day after… which could prove challenging if you’re trying to coordinate it alongside a members’ meeting. Correspondence votes need to be supported by proofs of debt submitted by the Decision Date and importantly, once a vote has been lodged, it cannot be changed. This makes correspondence vote a risky choice for VA Proposals, I think. I also wonder where correspondence votes will get us on fee approvals: if there is no negotiating possible, then will it result in an increase in court applications?

As with Deemed Consent, on receiving an invitation to a virtual meeting or to vote by another means, a creditor may react by asking for a physical meeting. They have 5 business days after delivery of the notice of the decision procedure in which to have delivered a request (but see Timetables below) and the 10/10/10 thresholds apply.

There is also no ability to ask creditors for a deposit as security for the costs of convening a physical meeting on request… unless it is a requisitioned decision (yes, there is a difference!). The latter may arise for example as a consequence of issuing Para 52 Proposals, although the rules allow you only to ask for the costs of seeking a “decision”, not a physical meeting… however it is not clear whether creditors could ask explicitly for a physical meeting at this stage (that’s another question to the Insolvency Service).  (UPDATE 02/05/2017: the Insolvency Service has blogged that they think it is reasonable to interpret the rules as allowing the creditor to request a physical meeting at the same time as requisitioning a decision, although they have also confirmed that the deposit sought should only be for requesting a decision, not holding a physical meeting.)

 

Invitations to Form a Committee

In all cases (except, strangely, in Compulsory Liquidations unless the meeting is to appoint a liquidator), whenever a Deemed Consent or decision procedure notice is issued, creditors must be asked at the same time whether they wish to establish a Committee and to propose nominations. This requirement sits unhappily besides the other rules, especially the Deemed Consent process. For starters, how do you ask creditors “whether” they want something? You must propose it as a decision, e.g. I propose the decision that a Committee be established. But if you were to propose this as a Deemed Consent decision and received no objections, this would mean that the decision had been made and you would need to canvass for (more) nominations, thus postponing your original objective until the sorry “no we didn’t mean we wanted a Committee, we simply don’t care” response was made certain. Therefore, several have designed the proposed decision in the negative: I propose the decision that a Committee should not be established (which personally I think also sits better ethically where the IP does not believe a Committee is warranted: is it honest and straightforward for an IP to propose a decision he does not himself desire?). In this case, creditors’ silence works well.

But is it truly necessary to go through this rigmarole every time you propose a decision? Yes, it seems so. And of course we will need to highlight the SIP15 Committee Guidance… however I am puzzled by the SIP15 reference to highlighting it prior to inviting creditors for nominations: does this mean that we need to write to creditors separately before our first proposed decision? For once, this is not a question for the Insolvency Service!

 

Timetables

In most cases, notice of a decision – by Deemed Consent or other process – must be at least 14 days (plus delivery time). CVL appointment is the obvious exception: in this case, notice must be 3 business days after delivery, which including a weekend makes it very slightly shorter than the current requirement. Because of the short timescale in CVL appointments, requests for a physical meeting can be made at any time up to the Decision Date.  (UPDATE 02/05/2017: oops!  Sorry, the rules set the deadline as between the notice and the Decision Date and Dear IP 76 suggests that the Decision Date is not included in this period.  See https://goo.gl/ygnWjg for more analysis.)

 

There’s more

The rules contain prescriptive details about the content of notices and how to deal with “excluded persons”. In addition, the interaction of Deemed Consent/decision procedures with other requirements such as the need to send a Statement of Affairs before the CVL appointment Decision Date adds another layer of complexity to the work.

If you want to know more:

  • on the detail of decision processes especially in the context of CVL appointments, then access Jo Harris’ webinar, “New Rules: Decision Procedures and Changes on CVL Appointments” (mailto:info@thecompliancealliance.co.uk for details);
  • on the pros, cons and strategies of decision processes, then join me at the R3 breakfast seminar, The New Rules for Insolvency Work-Winners (16 March in London), or any of the three R3 SPG Technical Reviews (28 March in London, 6 June in Huddersfield, 4 July in Bristol)… and there are more Compliance Alliance webinars to come on these topics;

… or feel free to get in touch with me… but don’t expect many simple answers!


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How risky is it to act contrary to a creditors’ committee’s wishes and other questions…

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  • Re. Brilliant Independent Media Specialists – will the court approve an Administrator’s fees when he acts contrary to the committee’s wishes?
  • Co-operative Bank v Phillips – is it an abuse of process for a charge-holder to seek possession of a property in negative equity?
  • Harlow v Creative Staging – when might a winding-up petition suspended on a QFCH appointment of Administrators come in handy?
  • JSC Bank of Moscow v Kekhman – in the absence of Russian personal bankruptcy law, is forum-shopping in England one of the “legitimate kind”?
  • Bank of Scotland v Waugh – what is the effect on Receivers where the charge has not been validly executed as a deed but has still been registered?
  • Airtours Holidays Transport v HMRC – what decides whether a company can reclaim the VAT paid on accountants’ review fees?
  • SoS v Weston – if a criminal court declines to disqualify directors, would the SoS have any better luck in the High Court?

Court fixes fees of Administrators who acted contrary to the committee’s wishes

Maxwell & Sadler v Brookes & Ors, Re Brilliant Independent Media Specialists Limited (23 September 2014) ([2014] EWHC B11 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/B11.html

The Administrators’ Proposals were approved with a modification that the Administration move to CVL within 6 months of the commencement of the Administration; the Liquidators were to be different IPs to the Administrators.

The 6-month time period ended on 31 May 2012. Immediately before this, the Administrators convened a creditors’ meeting to approve revised proposals providing that the Administration would move to CVL within 28 days of resolution of an issue regarding the quantum of a secured creditor’s claim.  The revised proposals were rejected and on 18 June 2012 the Administrators applied for directions.  Before this was heard, settlement was reached with the secured creditor and the Administration moved to CVL on 12 August 2012.

The Administrators’ fees had been approved on a time costs basis but the creditors’ committee refused to approve that the Administrators draw fees in relation to time costs incurred after 18 February 2012 (having approved fees incurred prior to this date). The committee asserted that it was never envisaged that the Administrators would carry out the vast amount of work for which remuneration was claimed; the committee felt that the Administrators should have worked simply to bring their appointment to an end and allow the Liquidators to fully investigate matters.  Consequently, the Administrators applied for the court to fix their fees.

Mr Registrar Jones’ consideration addressed a number of areas:

  •  Did the Administrators’ actions fall outside the approved Proposals?

The judge stated that “whilst the views of a creditors’ committee should be taken into account during an administration.., it is not for the committee to determine how the administration should be conducted. That is a decision for the office holder in performance of the duties and powers Parliament has thought fit to entrust to administrators. The outcome of such decision making… will depend upon the office holder’s assessment of how best to achieve the purpose of the administration in accordance with the powers conferred upon them by paragraph 59 of Schedule B1 and within Schedule 1 to the Act” (paragraph 26).

The judge then had to consider whether the work done by the Administrators was for the purposes of the Administration objective or otherwise formed part of the Administrators’ duties and responsibilities. He said: There will always be grey areas when deciding whether work will result in a better return and therefore should be carried out. It will not be a black and white scenario with a plain dividing line. The decision will depend upon all the circumstances and involve commercial judgment calls by the office holder in the exercise of his powers.  The court will normally not question the commercial judgments of an administrator. Usually a misunderstanding of law or apparent unfairness or a breach of duty will be required before the court will review such judgments” (paragraphs 30.6 and 30.7).  Consequently, the judge stated that it could not be concluded that the Administrators’ actions fell outside the Proposals.  He felt that this applied even in relation to activities that were not expressly referred to in the Proposals, such as in this case debt recovery efforts, given that a delay in recovery actions usually results in lower realisations.

  • Were the Administrators entitled to be paid fees for the period after the 6-month timescale when the approved Proposals provided for the move to CVL?

The judge recognised the commercial decisions taken by the Administrators in seeking to resolve the issue regarding the secured creditor’s claim, acknowledging that any delay would have been disadvantageous given the high interest rate attached to the debt. Consequently, the judge considered that the decision could not be described as “perverse” and it was a decision that “fell within the parameters of their commercial decision making powers” (paragraph 36.4).  However, the judge disagreed that the move to CVL could not have been done within the 6-month period; he felt that there were always more than enough funds to set aside to cover the maximum amount of the secured creditor’s claim plus interest.

  • Were the Administrators entitled to be paid fees after they had ceased to act, given that they worked to assist the Liquidators?

The Administrators sought approval for costs incurred in relation to a number of tasks including answering the Liquidators’ enquiries, assisting in the recovery of a director’s loan, other debts and overpayments, and dealing with the committee’s questions. The judge’s view was that R2.106 was limited only to remuneration of the Administrator whilst in office.  Therefore, the judge declined to fix the remuneration after the termination of the Administrators’ appointment, stating: “that is a matter between the Administrators and the liquidators” (paragraph 43).

  • What about the quantum of fees sought?

Then the judge turned to the detail of the Administrators’ application. The judge referred to the Practice Direction (2012) and in particular paragraph 20.4 as providing guidance on the information required to support the fees application and the judgment suggests that in a number of places the Administrators’ evidence failed to satisfy the judge as regards “briefly describing what was involved, why it was necessary and why it took the time it did” (paragraph 47).

For example, the Administrators sought fees of £23,473 in relation to “PKF/BDO Review”. The Administrator’s witness statement referred to the need to investigate potential claims quickly and early and thus such work could lead to actions that would produce a better outcome for creditors.  However, the judge observed: “This is wholly unspecific. There is no narrative describing and explaining the work, whether as to what it was or specifically as to why it was justified under the Objective” (paragraph 50.40).  The judge did not award any remuneration in relation to this activity.

The result of the judge’s examination of each task for which remuneration was sought was that, from a starting point request to fix fees at £389,341, fees of only £233,147 were approved.

The downsides of discontinuances

The Co-operative Bank Plc v Phillips (21 August 2014) ([2014] EWHC 2862 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2862.html

The Bank, having a second charge over the debtor’s properties, demanded payment from Mr Phillips as guarantor of a loan to his company. Notwithstanding that Mr Phillips’ IVA Proposal (which was approved) showed that the properties attracted negative equity after the first charge, the Bank commenced possession proceedings.  Mr Phillips applied for the claims to be struck out or dismissed as an abuse of process.  The Bank later served a notice of discontinuance and the principal questions for the court related to the treatment of the costs arising from the process.

The court was asked to consider whether the Bank was seeking possession of the properties for a collateral purpose beyond its powers as a chargee and whether the Bank’s claims to possession were an abuse of process. Despite the fact that it appeared the Bank would not gain any benefit from selling the properties (although there was some argument that the Bank might have been able to raise rental income from its possession), the judge felt that the pressure on the charger and his family resulting from the possession proceedings was neither a collateral purpose outwith the Bank’s powers nor an abuse of process.  Ultimately, the proceedings were brought for the purpose of obtaining repayment of the sums secured by the charge.

However, although the charge entitled the Bank to recover its costs incurred “in taking, perfecting, enforcing or exercising (or attempting to perfect, enforce or exercise) any power under the charge” (paragraph 8), the judge decided that the Bank’s own costs, together with its liability to pay Mr Phillips’ costs arising from the discontinuance of the proceeding, were not reasonably incurred and therefore were not recoverable under the charge: “The Bank got absolutely nothing out of these proceedings, which have been a waste of time and expense from its point of view” (paragraph 75).

Finally, because the Bank had started the proceedings after Mr Phillips’ IVA had been approved, the Bank was unable to set off its liability to pay Mr Phillips’ costs against its claim in the IVA, per clause 7(4) of the IVA’s Standard Conditions (which appear to have been R3’s standard conditions).

Suspended Petition comes home to haunt the Petitioner

Harlow v Creative Staging Limited, Re. Blak Pearl Limited (23 July 2014) ([2014] EWHC 2787 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2787.html

The Administrator had applied for the ending of the Administration, together with the dismissal of the application of Creative Staging Limited to withdrawn its winding-up petition (which, under Paragraph 40(1)(b) of Schedule B1, had been suspended on the appointment of the Administrator by the QFCH), the dismissal of the application of another creditor to be substituted as petitioner, and finally for a winding-up order on the original petition.

Why was the Administrator so keen to have the suspended petition revived, rather than to petition for the winding-up himself under Para 79? If a winding-up order were made on the original petition, then S127 would kick in to make certain pre-Administration payments (including a payment of £88,000 to the original petitioner) vulnerable to attack.  However, if the Administrator were to seek a winding-up order on a new petition, S127 would only apply from the date of presentation of the new petition.

The judge was reluctant to go to the lengths of substituting the petitioner, which would only incur additional costs. He felt that there was sufficient precedent and support under S122 enabling a court to make a winding-up order without a petition and thus the court had jurisdiction to make a winding-up order on the existing petition and under the powers of Para 79(4)(d).  The judge said (although, personally, I do wonder if he is crediting Parliament with a little too much foresight): “In all the circumstances it does seem to me that this court ought to recognise that Parliament must have intended to keep the petition in being for a reason and one of the reasons is so that an order might be made on the suspended petition, taking advantage of the doctrine of relation back, despite any objections of the Petitioner” (paragraph 53).  Thus, he allowed the appeal, waived all procedural requirements that had not otherwise been complied with, and granted the winding-up order.

Russian bankruptcy tourist entitled to escape “law of the jungle”

JSC Bank of Moscow & Anor v Kekhman & Ors (9 April 2014) (not yet reported on BAILII)

http://cisarbitration.com/wp-content/uploads/2014/08/UK-High-Court-in-Buncruptcy-Bank-of-Moscow-and-Sberbank-Leasing-v-Vladimir-Kekhman-and-others-Judgment-April-2014.pdf

At the time of his bankruptcy petition and afterwards, Mr Kekhman was a Russian citizen, domiciled and resident in the Russian Federation. He had disclosed in the petition that he was going to remain in England for only two days and he wished to be made bankrupt in England, as he had been advised that there is no personal bankruptcy law in the Russian Federation and, in view of the international reach of his affairs, “the English jurisdiction as a sophisticated jurisdiction in these matters appears appropriate to help resolve my affairs in an orderly manner that will be recognised internationally” (paragraph 11).

The matter returned to Registrar Baister, who had made the bankruptcy order, in the format of applications by two major creditors to annul or rescind the bankruptcy on the basis, amongst others, that Mr Kekhman was a ‘bankruptcy tourist’ to England, a place with which he has no real connection, in an attempt to evade Russian law. One of the creditors also contended that, contrary to Mr Kekhman’s indications that his English bankruptcy would be recognised in Russia, Russia would not recognise or enforce the bankruptcy order, which bound Mr Kekhman’s English creditors, whilst allowing his other creditors to collect in his substantial Russian assets.

Registrar Baister mentioned that, particularly in corporate contexts, “the courts here are prepared to countenance what is in reality forum shopping, albeit of a positive, by which I mean legitimate, kind… I do not see why a debtor whose petition is not governed by that restrictive jurisdictional regime should not also be able to invoke an available jurisdiction for a self-serving purpose, provided of course, that he does so properly and there are no countervailing factors to which equivalent or greater weight should be given” (paragraph 104).

Baister summarised Mr Kekhman’s connections with England, largely involving contracts providing for English law and English jurisdiction. He also put some emphasis on the purpose of bankruptcy being the debtor’s rehabilitation, observing that plenty of bankruptcy orders have been granted on English debtors’ petitions in cases where there were no likelihoods of recoveries for creditors. In any event in this case, the report of the Trustee in Bankruptcy, which explained that he was continuing to pursue certain assets, persuaded the judge that there was “utility” in the bankruptcy, Baister did not consider that utility necessarily required there to be a distribution to creditors; he found the prospect of an orderly realisation of the debtor’s assets “more attractive and more constructive that the law of the jungle advocated” by Counsel for the creditors (paragraph 141).

Baister reviewed the expert testimony of three prominent Russian academic lawyers and concluded on the balance of probabilities that the English bankruptcy order was unlikely to be recognised or enforced by the Russian courts. However, this conclusion seemed to work in Mr Kekhman’s favour: the judge noted that “if the English bankruptcy will never be recognised in Russia, then the free-for-all can continue over there in relation to the few assets that might be left over after execution; as to assets elsewhere, all the creditors will be in the same position vis-à-vis one another” (paragraph 142).

Although Baister stated that the arguments were “finely balanced”, he decided that the utility of the bankruptcy order was not outweighed by the creditors’ current complaints, “so that even if this court had known the true position regarding the problems of recognition and resulting from the arrest of the Russian assets, it still could and probably would have made the bankruptcy order on the basis that there was commercial subject matter on which it could operate, it would have enabled Mr Kekhman’s affairs to be looked into, made possible an orderly realisation of his non-Russian assets and assisted his own financial rehabilitation even if only outside the Russian Federation” (paragraph 144).

(UPDATE 14/03/15: JSC Bank’s appeal was dismissed: http://goo.gl/BkoIxd.  Although the judge agreed that the Chief Registrar had not applied the correct test, the appeal judge made his own decision that the bankruptcy order ought to have been made.  A more detailed summary of the appeal will be posted soon.)

Bank and Receivers entitled to rely on registration of a deficient deed

Bank of Scotland Plc v Waugh & Ors (21 July 2014) ([2014] EWHC 2117 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2117.html

The Bank pursued repayment of a loan to a Trust and appointed Receivers over a property. Some time later, the Trustees applied to the Registry for cancellation of the charge over the property on the basis that the charge did not comply with the Law of Property (Miscellaneous Provisions) Act 1989, primarily because none of the signatures on the charge were attested.  Subsequently, the Bank applied for summary judgment that the Trustees be estopped from denying the validity of the charge.

The judge agreed that the charge had not been validly executed as a deed and therefore it was void for the purpose of conveying or creating a legal estate. However, the charge had been registered.  “The effect of registration of the charge was to create a charge by deed by way of legal mortgage” (paragraph 66) but if the Trustees were successful in having the register rectified, this would only operate for the future, not retrospectively.  “It follows that acts (such as the appointment of Receivers) carried out by the Bank under the charge prior to any order for rectification and acts of the Receivers are not void as alleged by Mr Waugh. Both the Bank and the Receivers were entitled to rely on the effect of registration of the charge” (paragraph 67).

On the question of estoppel, however, the judge was not persuaded by the arguments that the solicitor for the Trustees had represented the document as executed and on this basis the Bank had lent the monies; because the charge simply had not been executed as a deed, the Trustees were not estopped from relying on the invalidity of the legal charge. However, the judge stated that, notwithstanding the defects, it took effect as an equitable mortgage.  Left open for another hearing is the question of whether the Bank will succeed in obtaining an order that the Trustees execute documents to perfect the legal charge.

Company paid fees but not entitled to reclaim the VAT

Airtours Holidays Transport Limited v HMRC (24 July 2014) ([2014] EWCA Civ 1033)

http://www.bailii.org/ew/cases/EWCA/Civ/2014/1033.html

PwC had been instructed to review a financially distressed group of companies as it explored and pursued a restructuring plan. The restructuring process was successful, but HMRC disputed that the company was entitled to deduct the VAT that it had been invoiced and had paid in respect of PwC’s fees.

The First Tier Tribunal (“FTT”) reviewed PwC’s letters of engagement and terms and conditions, which effectively comprised a tri-partite contract between PwC, the Group, and the “Engaging Institutions” and found that the company, as well as the Engaging Institutions, had requested and authorised the work. However, the Upper Tribunal (“UT”) disagreed with the FTT’s approach; it concluded that the substance of the transactions was that there had been a supply of services by PwC to the Engaging Institutions and that the company had not received anything of value from PwC to be used for the purpose of its business in return for payment.

Although Lady Justice Gloster led the judgment in the Court of Appeal, she was in the minority in concluding that the company’s appeal should be allowed. She felt that the company had required PwC to provide valuable services to it for the purpose of its own business – in her view, the provision of PwC’s services was the only way that the financial institutions could be persuaded to support the company’s attempts to survive and that this was a distinctive supply of services from that supplied to the Engaging Institutions.

Lord Justice Vos, however, saw the economic reality in a different light. He felt that “it was as likely that PwC might have advised the Banks to pull the rug… The substance and economic reality was that PwC was supplying its services to the Banks in exchange for Airtours’ payments” (paragraph 87) and that the UT had been correct to conclude that the company was a party really only for the purpose of paying PwC’s bills, not to receive any service from the firm.  Lord Justice Moore-Bick also noted that, although the use of “you” in the terms and conditions suggested that PwC had certain obligations to the Group, they were a standard form document that must be applied in a way that is consistent with the letter of engagement, which is the “controlling instrument” (paragraph 96).  The question was “not whether the Group needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to the Group for which the Group paid” (paragraph 99).  The majority of appeal judges decided that the service was not provided to the Group and thus the company could not reclaim the VAT input paid on PwC’s bills.

(UPDATE 14/03/15: permission to appeal to the Supreme Court has been granted.)

Court rejects attempts at second bite of the cherry

Secretary of State v Weston & Williams (5 September 2014) ([2014] EWHC 2933 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2933.html

Two directors had been found guilty and sentenced in a criminal court, which had also been asked to consider disqualification orders, but because the matter had slipped the mind of prosecuting counsel at the original trial, this was dealt with only some two months later. The judge declined to make such orders, feeling that it would be “perhaps kicking a dog whilst he is down” (paragraph 14).

The SoS later applied to the High Court for disqualification orders under S2 of the CDDA86. S2 provides that the court may make a disqualification order where the person is convicted of an indictable offence in connection with the promotion, formation, etc. of a company.  The two year timescale for the SoS to apply for disqualification orders under the usual S6 of the CDDA86 had expired.

Counsel for the directors argued that the application was an abuse of process: the High Court was being “asked to exercise exactly the same jurisdiction as the criminal court but to decide the matter the other way” (paragraph 15). The argument for the SoS was that he had not been party to the prosecution and so had not had an opportunity to contest the original decision.

Although David Cooke HHJ recognised that the SoS was not a claimant seeking to vindicate a private right, but a restriction for the public good, he also considered what was fair to the directors. He noted that there was a wide range of potential applicants under S2 of the CDDA86, including company shareholders and creditors: “Fairness to the defendant must mean, it seems to me, that he should not be exposed to the same claim on multiple occasions by different litigants unhappy with the outcome of the earlier claim or claims” (paragraph 51) and that such subsequent claims could be described as “collateral attacks” on the first decision.

Even though the judge said that, in this case, he would have made disqualification orders (if he were found wring on the issue of abuse of process): “standing back, this claim is no more than an attempt by the Secretary of State to obtain a different decision from this court than was given on identical issues by the criminal court, which had the issues placed before it and made a positive decision to refuse an order. It is in my view unfair that the defendants should be thus exposed to the same claim on two occasions. The unfairness is not relieved by the argument that the claim is being pursued by a different entity… There is the general point that where the basis of the claim and the relief sought is essentially identical it is just as much unfair to the defendant to have to face it twice at the hands of two applicants as it would be if there were only one” (paragraph 52).


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The Kempson Review of IP Fees – a case of Aussie Rules?

5436 Sydney

Whilst this atypical British weather may have brought out the Aussie in many of us, as we settle down to sipping a stubby over the barbie, Professor Kempson seems to be gazing at the Southern Cross a little more completely.

Kempson’s report to the Insolvency Service was tagged quite unceremoniously to the foot of the page, http://www.bis.gov.uk/insolvency/news/news-stories/2013/Jul/transparency-and-trust, which headines Mr Cables’ Transparency & Trust Paper. Her report even had to follow the uninspiring terms of reference of the pre-pack review and so here I will follow the antipodean theme and blog about the bottom item of that press release first.

I’ll also start from the back of Kempson’s report and summarise her recommendations, uncontaminated by any personal opinion (for the moment):

• Consideration of the potential for limited competitive tendering (section 6.1.1)
• A radical revision or replacement of SIP9 (section 6.1.2)
• Consideration of the Australian approach of providing a costs estimate at the outset of the case with an agreed cap on fees (section 6.1.2)
• The creation and adoption of a Code on the lines of the Insolvency Practitioners Association of Australia Code of Professional Practice (section 6.1.2)
• Some contextual information from an independent body to help creditors assess the reasonableness of the remuneration and disbursements (section 6.1.2)
• Greater oversight exercised by the Crown creditors, HMRC, RPS and PPF, working together (section 6.1.3)
• Consideration of Austria’s model of creditor protection associations acting on creditors’ committees (section 6.1.3)
• Reconsideration of the circumstances in which creditors’ meetings need not be held in Administrations (section 6.1.3)
• Exploration of non-time cost bases or a mixture of bases for fees (section 6.1.4)
• Increasing the debt threshold for bankruptcy petitions (section 6.1.5)
• Extending S273 to creditors’ petitions (section 6.1.5)
• Provision of information (e.g. Insolvency Service booklet) to debtors regarding the likely costs of bankruptcy (section 6.1.5)
• Provision of generic information (e.g. Insolvency Service booklet) to directors subject to personal guarantees as well as case-specific information, e.g. by treating them on a par with creditors (section 6.1.5)
• A single regulator, perhaps the Financial Conduct Authority, for IPs (section 6.1.6)
• A simple low-cost mediation and adjudication service for disputes about low-level fees, perhaps by means of the Financial Ombudsman Service (section 6.1.7)
• Alternatively, some form of independent oversight of fees, such as that used in Scotland via court reporters and the AiB (section 6.1.8)

Charge-out rates – a surprisingly positive outcome!

Given the “how much?!” reaction often resulting from a disclosure of charge-out rates, I was ready to wince at this section, but actually I think the insolvency profession comes out of it fairly well.

The report details the charge-out rates gathered via the IP survey (which was responded to by 253 IPs):

Partner/Director: average £366; range £212-£800
Manager: average £253; range £100-460
Other senior staff: average £182; range £75-445
Assistants/support: average £103; range £25-260

Encouragingly, Kempson reports that these charge-out levels “are not, however, unusual in the accountancy and legal professions to which most IPs belong” (section 3.1). From my experience, I’d also suggest that the firms that charge the top end for partners/directors usually charge junior staff at the lower end and vice versa, i.e. I doubt that any firm charges £260 for juniors and £800 for partners/directors.

Professor Kempson also acknowledges that these “headline rates” are not always charged because IPs normally agree lower rates in order to sit on banks’ panels and, in other cases, the time costs are not recovered in full due to lack of realisations. Setting aside panel cases, Kempson suggests that fees were below headline rates “in about a half of cases, including: the great majority of compulsory liquidations, about two thirds of administrations; half of creditors’ voluntary liquidations and a third of personal bankruptcy cases” (section 3.2). Putting those two observations together, is it arguable, therefore, that IPs provide a far better value for money service than others in the accountancy and legal professions?

Panel Discounts – not so great

The report states that, at appointment stage, secured creditors negotiate discounts of between 10% and 40% on IPs’ headline rates and that some banks may achieve a further discount by entertaining tenders. “The implicit sanction underpinning all negotiations was to remove a firm from the panel. None of the banks interviewed could remember a firm choosing to leave their panel because the appointments they received were un-remunerative. From this they surmised that (individual cases aside) work was being done on a lower profit margin rather than a loss” (section 4.1.1).

Kempson does not suggest it, but I wonder if some might conclude that, notwithstanding the comments made above about charge-out rates, this indicates that IPs’ headline rates could drop by 10-40% for all cases. Personally, I do wonder if banks’ pressuring for discounts from panel firms could be un-remunerative in some cases, but that firms feel locked in to the process, unable to feed hungry mouths from the infrequent non-panel work, and perhaps there is an element of cross-subsidising going on. If Kempson had asked the question, not whether firms chose to leave a panel, but whether any chose not to re-tender when the panel was up for renewal, I wonder if she would have received a different answer.

Seedy Market?

To illustrate the apparent clout of bank panels, the report describes a service “that is marketed to IPs, offering to buy out the debts of secured creditors, thereby ensuring that an IP retains an appointment and giving them greater control over the fees that they can charge” (section 4.1.1).

Is it just me or is there something ethically questionable about an IP seeking to secure his/her appointment in this manner? Presumably someone is losing out and I’m not talking about the estate just by reason of the possibly higher charge-out rates that may have not been discounted to the degree that the bank would have managed with a panel IP. Presumably there’s an upside for the newly-introduced secured creditor? How do their interest/arrangement/termination charges compare to the original lender’s? Is the insolvent estate being hit with an increased liability from this direction? And why… because an IP wanted to secure the appointment..?

Is the problem simply creditor apathy?

Reading Kempson’s report did give me an insight – a more expansive one than I’ve read anywhere else – into an unsecured creditor’s predicament. They don’t come across insolvencies very often, so have little understanding of what is involved in the different insolvency processes (so maybe I shouldn’t get twitchy over the phrase “problems when administrations fail and a liquidation ensues”!). How can they judge whether hourly rates or the time charged are reasonable? They receive enormous progress reports that give them so much useless information (I’m pleased that one IP’s comment made it to print: “… For example saying that the prescribed part doesn’t apply. Well, if it doesn’t apply, what’s the point in confusing everybody in mentioning it?” (section 4.2.3)) and they struggle to extract from reports a clear picture of what’s gone on. Many believe that they’re a small fry in a big pond of creditors, so they’re sceptical that their vote will swing anything, and they have no contact with other creditors, so feel no solidarity. Personally, I used to think that creditors’ lack of engagement was an inevitable decision not to throw good money after bad, but this report has reminded me that their position is a consequence of far more obstacles than that.

Progress Reports – what progress?

The report majored on the apparent failure of many progress reports to inform creditors. Comments from contributors include: “Unfortunately the nature of the fee-approval regime can lead to compliance-driven reports, generated from templates by junior-level staff, which primarily focus on ensuring that all of the requirements of the statute and regulation are addressed in a somewhat tick-box-like manner. This very often means that the key argument is omitted or lost in the volume, which in turn make it difficult for us to make the objective assessment that is required of us” and from the author herself: “there were reports that clearly followed the requirements of the regulations and practice notes (including SIP9 relating to fees) slavishly and often had large amounts of text copied verbatim from previous reports. Consequently, they seemed formulaic and not a genuine attempt to communicate to creditors what they might want to know, including how the case was progressing and what work had been done, with what result and at what cost” (section 4.2.3).

To what was the unhelpful structure of progress reports attributed? Kempson highlighted the 2010 Rule changes (hear hear!) but she also mentions that IPs “criticised SIP9 as being too prescriptive”. I find this personally frustrating, because long ago I was persuaded of the value – and appropriateness – of principles-based SIPs. During my time attending meetings of the Joint Insolvency Committee and helping SIPs struggle through the creation, revision, consultation, and adoption process, I longed to see SIPs emerge as clearly-defined documents promoting laudable principles, respecting IPs to exercise their professional skills and judgment to do their job and not leaving IPs at the mercy of risk-averse box-tickers. I would be one of the first to acknowledge that even the most recent SIPs have not met this ideal of mine, but SIP9?! Personally, I feel that, particularly considering its sensitive and complex subject matter – fees – it is one of the least prescriptive SIPs we have. I believe that a fundamental problem with SIP9, however, is the Appendix: so many people – some IPs, compliance people, and RPB monitors – so frequently forget that it is a “Suggested Format”. Most of us create these pointless reports that churn out time cost matrices with little explanation or thought, produce pages of soporific script explaining the tasks of junior administrators… because we think that’s what SIP9 requires of us and because we think that this is what we’ll be strung up for the next time the inspector calls. And well it might be, but why not produce progress reports that meet the key principle of SIP9 – provide “an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed [and so that creditors are] able to understand whether the remuneration charged is reasonable in the circumstances of the case” (SIP9 paragraph 14)? And if an RPB monitor or compliance person points out that you’ve not met an element of the Appendix, ask them in what way they feel that you’ve breached SIP9. Alternatively, let’s do it the Kempson way: leave the Insolvency Service to come up with a Code on how to do it!

I do wonder, however, how much it would cost to craft the perfect progress report. The comment above highlighted that reports might be produced by junior staff working to a template, but isn’t that to be expected? Whilst my personal opinion is that reports are much better produced as a free text story told by someone with all-round knowledge of the case (that’s how I used to produce them in “my day”), I recognise the desire to sausage-machine as much of the work as possible and this is the best chance of keeping costs down, which is what creditors want, right? Therefore, apart from removing some of the (statute or SIP-inspired) rubbish in reports, I am not sure that the tide can be moved successfully to more reader-friendly and useful reporting.

Inconsistent monitoring?

The report states: “During 2012, visits made by RPBs identified 12.0 compliance issues relating to fees per 100 IPs. But there was a very wide variation between RPBs indeed; ranging from 0 to 44 instances per 100 IPs. Allowing for the differences in the numbers of IPs regulated by different RPBs, this suggests that there is a big variation in the rigour with which RPBs assess compliance, since it is implausible that there is that level of variation in the actual compliance of the firms they regulate” (section 4.5). I also find this quite implausible, but, having dealt with most of the RPB monitors and having attended their regular meetings to discuss monitoring issues in an effort to achieve consistency, I do struggle with Kempson’s explanation for the variation.

Although I can offer no alternative explanation, I would point to the results on SIP9 monitoring disclosed in the Insolvency Service’s 2009 Regulatory Report, which presented quite a different picture. In that year, the RPBs/IS reported an average of 10.6 SIP9 breaches per 100 IPs – interestingly close to Kempson’s 2012 figure of 12.0, particularly considering SIP9 breaches are not exactly equivalent to compliance issues relating to fees. However, the variation was a lot less – from 1.3 to 18 breaches per 100 IPs (and the next lowest-“ranking” RPB recorded 8.1). Of course, I have ignored the one RPB that recorded no SIP9 breaches in 2009, but that was probably only because that RPB had conducted no monitoring visits that year (and neither did it in 2012). Kempson similarly excluded that RPB from her calculations, didn’t she..?

Somewhat predictably, Kempson draws the conclusion (in section 6.1.6) that there is a case for fewer regulators, perhaps even one. She suggests setting a minimum threshold of the number of IPs that a body must regulate (which might at least lose the RPB that reports one monitoring visit only every three years… how can that even work for the RPB, I ask myself). In drawing a comparison with Australia, she suggests the sole RPB could be the Financial Conduct Authority – hmm…

Voluntary Arrangements: the exception?

“We have seen that the existing controls work well for secured creditors involved in larger corporate insolvencies. But they do not work as intended for unsecured creditors involved in corporate insolvencies, and this is particularly the case for small unsecured creditors with limited or no prior experience of insolvency. The exception to this is successful company voluntary arrangements” (section 5). Why does Kempson believe that the controls work in CVAs? She seems to put some weight to the fact that the requisite majority is 75% for CVAs, but she also acknowledges that unsecured creditors are incentivised to participate where there is the expectation of a dividend. If she truly believes the situation is different for CVAs – although I saw no real evidence for this in the report – then wouldn’t there be value in examining why that is? If it is down to the fact that creditors are anticipating a dividend, then there’s nothing much IPs can do to improve the situation across cases in general. But perhaps there are other reasons for it: I suspect that IPs charge up far fewer hours administering CVAs given the relative absence of statutory provisions controlling the process. I also suspect that CVA progress reports are more punchy, as they are not so bogged down by the Rules.

But I don’t think anyone would argue with Kempson’s observation that IVAs are a completely different kettle of fish and that certain creditors have acted aggressively to restrict fees in IVAs to the extent that, as IPs told Kempson, they “frequently found this work unremunerative” (section 4.2.3).

Disadvantages of Time Costs

I found this paragraph interesting: “several authoritative contributors said that, when challenged either by creditors or in the courts, IPs seldom provide an explanation of their hourly rates by reference to objective criteria, such [as] details of the overheads included and the amount they account for, and the proportion of time worked by an IP that is chargeable to cases. Instead they generally justify their fees by claiming that they are the ‘market rate’ for IPs and other professionals. Reference is invariably made to the fact that the case concerned was complex, involved a high level of risk and that the level of claims against the estate was high. More than one of the people commenting on this said that the complexity of cases was over-stated and they were rarely told that a case was a fairly standard one, but that there were things that could have been done better or more efficiently or the realisations ought to have been higher so perhaps a reduction in fees was appropriate. They believed that, by adopting this approach, IPs undermined the confidence others have in them” (section 5.2.1). It’s a shame, however, that no mention has been made of the instances – and I know that they do occur – of IPs who unilaterally accept to write-off some of their time costs so that they can pay a dividend on a case.

But this quote hints at the key disadvantage, I think, of time costs: there is a risk that it rewards inefficiency.

Kempson first suggests moving to a percentage basis as a presumed method of setting remuneration, although she acknowledges that this wouldn’t help creditors as they would still face the difficulty on knowing what a reasonable percentage looked like. She then suggests a “more promising approach” is the rarely-used mixed bases for fees that were introduced by the 2010 Rules (section 6.1.4). She states that this should be “explored further, for example fixed fees for statutory duties; a percentage of realisations for asset realisations (with a statutory sliding scale as described above); perhaps retaining time cost for investigations”. Whilst I agree that different fee bases certainly do have the potential to deliver better outcomes – I believe that it can incentivise IPs to work efficiently and effectively whilst ensuring that they still get paid for doing the necessary work that doesn’t generate realisations – it does make me wonder: if creditors already feel confused..!

Lessons from Down Under?

Kempson is clearly a fan of the Australian regime. She recommends the scrapping or radical revision of SIP9 in favour of something akin to the IPAA’s Code of Professional Practice (http://www.ipaa.com.au/docs/about-us-documents/copp-2nd-ed-18-1-11.pdf?sfvrsn=2). At first glance (I confess I have done no more than that), it doesn’t look to have much more content than SIP9, but it does seem more explanatory, more non-IP-friendly, and the fact that Kempson clearly rates it over SIP9 suggests to me that, at the very least, perhaps we could produce something like it that is targeted at the unsecured creditor audience.

She also refers to a Remuneration Request Approval Report template sheet (accessible from: http://www.ipaa.com.au/about-us/ipa-publications/code-of-professional-practice), which she acknowledges “is more detailed than SIP9” (section 6.1.2) – she’s not kidding! To me, it looks just like the SIP9 Appendix with more detailed breakdowns of every key time category, probably something akin to the information IPs provide on a >£50,000 case.

Finally, she refers to a “helpful information sheet” provided by the Australian regulator (ASIC) (http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Approving_fees_guide_for_creditors.pdf/$file/Approving_fees_guide_for_creditors.pdf), which looks much like R3’s Creditors’ Guides to Fees, although again the content does perhaps come over more readable.

Thus, whilst I can see some value in revisiting the UK documents (or producing different ones) so that they are more useful to non-IPs (although will anyone read them?), I am not sure that I see much in the argument that moving to an Aussie Code will change radically how IPs report fees matters. I am also dismayed at Kempson’s suggestion that “a detailed Code of this kind would be very difficult to compile by committee and would require a single body, almost certainly the Insolvency Service in consultation with the insolvency profession, to do it” (section 6.1.2). Wasn’t the Service behind the 2010 Rules on the content of progress reports..?

After singing Australia’s praises, she admits: “even with the additional information disclosure described above, creditor engagement remains a problem in Australia” (section 6.1.3) – hmm… so what exactly is the value of the Australian way..?

Other ideas for creditor engagement

Kempson recommends consideration of the Austrian model of creditor protection associations (section 6.1.3), which is a wild one and not a quick fix – there must be an easier way? I was interested to note that, even though creditors are paid to sit on committees in Germany, committees are only formed on 15-20% of cases – so paying creditors doesn’t work either…

The report also seems to swing in the opposite direction to the Red Tape Challenge in suggesting that the criteria for avoiding creditors’ meetings in Administrations should be reconsidered. Kempson highlights the situation where the secured creditor is paid in full yet no creditors’ meeting is held either because there are insufficient funds to pay a dividend or because the Administrator did not anticipate there would be sufficient funds at the Proposals stage. As I mentioned in an earlier post (http://wp.me/p2FU2Z-3p), in my view these Rules just do not work – something for the Insolvency Rules Committee…

However, raising these circumstances makes me think: whilst endeavours to improve creditor engagement are admirable, could we not all agree that there are some cases that are just not worth anyone getting excited about? There must be so many cases with negligible assets that barely cover the Category 1 costs plus a bit for the IP for discharging his/her statutory duties – is it really sensible to try to drag creditors kicking and screaming to show an interest in fixing, monitoring and reviewing the IP’s fees in such a case? Whatever measures are introduced, could they not restrict application to such low-value cases?

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The fact that the release of this report seems to have made fewer ripples than the Government’s announcement of its plan to conduct the fees review makes me wonder if anyone is really listening..? However, I’m sure we all know what will happen when the next high profile case hits the headlines, when the tabloids report the apparent eye-watering sums paid to the IPs and the corresponding meagre p in the £ return to creditors. Then there will be a revived call for fees to be curbed somehow.

In the meantime, we await the Government’s response to Professor Kempson’s report, expected “later this year”.