CVA | Insolvency Oracle

March 17, 2021
by insolvencyoracle 1 Comment

New SIP3.2: more red tape and longer docs

It would be a mistake to assume that we don’t need to think about the revised SIP3.2 until 1 April. It applies to all nominee appointments from 1 April 2021, so in view of the lead time on preparing CVA Proposals, you may well find that you already have engagements that need to comply with the new SIP3.2.

In this article, I look at the practical effects of the changes to SIP3.2.

Firstly, though, I should apologise for maligning the ICAEW. In my last blog, I’d said that they had not formally issued the revised SIPs, but I’d overlooked an email that hit my inbox two days before I posted my article. The IPA finally issued the SIPs on 10 March 2021… so if you’re an IPA member who has already issued an unchanged advice letter to deal with a nominee appointment that you expect to get after 1 April, I suggest that you have a very good excuse why the letter didn’t comply with the new SIP.

The revised SIP3.2 (E&W) can be found at https://www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/sips/england/sip-3-2-company-voluntary-arrangements-england-and-wales.ashx

More Ethical Taglines

There are several new references in the SIP to acting professionally, objectively etc. In practice, these don’t affect how IPs work, as I’m sure that your Ethics Checklists and periodic case reviews already keep these requirements in the frame. The SIP3.2 additions just seem to be another cudgel that an RPB may wield if they see unethical behaviour, although I’m not sure why the Ethics Code needs an escort.

Instead, let’s focus on what you need to change to comply with the new SIP.

“Additional Specialist Assistance”

The SIP requires the IP to have procedures in place to ensure that, at each appropriate stage of the process, the company/directors are informed about:

“whether and why the company will require additional specialist assistance which will not be provided by any supervisor appointed, including the likely cost of that additional assistance, if known”

On a similar theme, the Proposal must contain information on:

“any additional specialist assistance which may be required by the company which will not be provided by any supervisor appointed, and the reason why such assistance may be necessary.., the cost of any additional specialist assistance”

What do the drafters have in mind here? Perhaps they are thinking about restructuring professionals. “Additional specialist assistance” could also encompass other instructions, for example where the company expects to deal with something outside the ordinary course of business, such as selling assets… or dealing with a legal matter… or refinancing… or…

Of course, it makes sense to ensure that the directors are prepared to factor in such additional costs, but I am not sure I understand what this has to do with the creditors: if the Proposal sets out what net proceeds or contributions will come into the CVA together with sensible forecasts where appropriate – and further details if the IP’s firm is to receive any additional payments (as was already required by SIP3.2) – then isn’t that enough to enable them to assess the Proposal?

Changes to Advice Letters and Interview Records

In addition to covering off any additional specialist assistance, advice letters and/or interview records must now explain the directors’ responsibilities and role both before and during the CVA – “during” is new.

Instead of requiring a “face to face” meeting with the directors, the SIP now requires the initial meeting to be “in person (whether a physical meeting or using conferencing technology)”. For sole directors, would a telephone meeting be acceptable..? In any event, it might be useful to add to your interview record the method used.

More Strategy Notes

The SIP adds some new strategy note requirements, which might also be incorporated into interview records. It requires:

“A detailed note of the strategy, outlining the advantages and disadvantages of each option”, which was previously only required for Administrator/Liquidator Proposals
“…including the impact of trading within a CVA for a prolonged period and the continued viability of the business during that period” – this is new and makes sense to me: it is of course sensible to manage the directors’ expectations, make them fully aware of how tough it can be to trade on in a CVA. CVA companies may have some protection via S233 and S233A, but practically I suspect that most creditor suppliers make CVA companies go through pain. The SIP also requires:
Creditors to be “given adequate time to consider what is being planned as regards the CVA”. I find this odd: what are the RPBs’ expectations? In the ICAS webinar (http://ow.ly/tcGU50DKuCp), David Menzies suggested that IPs should document why the period of time given to creditors to consider the CVA is adequate, including factors such as the delivery time and the time creditors would need to get advice. But the company is insolvent, it is probably continuing to trade under difficult and uncertain circumstances, surely the approval of a CVA should be pursued as quickly as possible, for creditors’ sakes as well as the company’s? The Rules put a narrow timescale on the process – effectively between 14 and 28 days from delivery of the nominee’s report – so presumably the legislators felt that 14 days (post-delivery) was adequate time for creditors, doesn’t this satisfy SIP3.2?

Signposting Sources of Help

Something else to record on the strategy note might be your consideration of “signposting sources of help” “where creditors may need assistance in understanding the consequences of a CVA”.

In his webinar, David Menzies recommended that IPs should document their consideration of the creditor composition, such as their knowledge, experience and skills, and especially if the IP is not going to be signposting creditors to sources of help. He also suggested that we gather details of potential sources of help – generic and sector specific – that could be signposted to.

Ok, a generic one is the R3’s site at http://www.creditorinsolvencyguide.co.uk/, which I expect many of us added to our initial creditor letters years ago. Other than that, where would you signpost creditors to?

The elephant in the room is the British Property Federation, which was represented on the SIP3.2 working group. Additions to the Proposal’s contents listed below strongly suggest that the BPF had quite some influence over the revised SIP. True, the BPF provides guidance for landlords who receive a CVA Proposal, but I question whether it is helpful to the process to recommend that landlords issue a 33-point wishlist to nominees as “a standard document… if they do not feel they have been provided with the requisite information” (https://bpf.org.uk/media/2319/cva-creditor-friendly-document-09102019.pdf).

What about employees? Ok, employees rarely have much more than contingent claims that won’t crystallise, but particularly as they could find that not all their claims would be covered by the RPS in the event of an insolvency process following the CVA, it would seem appropriate to consider giving them access to guidance. However .gov.uk’s coverage is poor. https://www.gov.uk/your-rights-if-your-employer-is-insolvent simply lists CVA amongst the insolvency processes and states that employees might be able to make claims to the government.

Well, that’s two creditor groups that might not be helped with any existing resources. It seems that the JIC has put the cart before the horse on this one.

Much More Required in Proposals

The new SIP adds several new items to the Proposals’ tick-sheet:

Additional specialist assistance, as explained above;
The alternative options considered, both prior to and within formal insolvency by the company;
An explanation of the role and powers of the supervisor;
Details of any discussions with key creditors;
Where it is proposed that certain creditors are to be treated differently, an explanation as to which creditors are affected, how and why;
An explanation of how debts are to be valued for voting purposes, in particular where the creditors include long term or contingent liabilities;
An explanation of how debts that it is proposed are compromised will be treated should the CVA fail;
The circumstances in which the CVA may fail; and
What will happen to the company and any remaining assets subject to the CVA should the CVA fail.

Although I dislike the way SIP requirements grow and grow, most of the above additions are not disastrous and in fact several are probably addressed in most CVA Proposal templates already. At least two of the new requirements are clearly targeted at multiple landlord CVA Proposals, which one would hope are already being well crafted with the assistance of solicitors.

One of the new requirements has got us puzzling.

How to Value Votes

Firstly, is it possible to define how votes will be valued for the S3 process other than as set out by legislation and case law precedent? If the chair/convener were to value votes in any other way, wouldn’t it give rise to grounds for a challenge of material irregularity?

Secondly, what can be the point of adding to the Proposal terms setting out how claims will be valued for voting in the S3 process, when the Proposal does not take effect until after the vote has been determined? A Proposal’s terms cannot have any effect on what happens before it is approved, can it?

Presumably, therefore, the regulators only expect Proposals to set out how votes would be valued in decision processes during the course of the CVA… although that’s not what the SIP says.

But what kind of explanation do the regulators expect? If it is proposed that votes be valued by applying the Rules for statutory decision processes in CVA, e.g. by following R15.31(1) that votes will be calculated according to the claims as at the decision date and R15.31(3) that debts of unliquidated or unascertained amounts will be valued at £1 unless the chair/convener decides to put a higher value on it, is this sufficient explanation? Or do the regulators expect Proposals to set out how every single claim (especially the uncertain ones) will be valued and at every stage of the CVA, e.g. before adjudicating on claims for dividend purposes and then after having paid a dividend? What about if there is new case law that takes things in a different direction? Should a supervisor simply consider themselves bound by what the Proposal (and perhaps as modified!) dictates?

After Approval

AND breathe. In comparison, the post-approval additions don’t look too grim.

The SIP adds to the supervisor’s post-approval duties:

Sources of income of the associates of the IP in relation to the case must be disclosed (the old SIP restricted it to the IP’s and their firm’s income);
If the CVA costs have increased beyond previously reported estimates, not only should the increase be reported, but also “an explanation of the increase” should be provided;
When a CVA concludes or fails, the supervisor should ensure that the company is dealt with appropriately in accordance with the CVA Proposal (presumably where this is in the supervisor’s power?); and what is to happen should be reported to creditors.

August 17, 2016
by insolvencyoracle Leave a comment

The Proposed New Moratorium: the responses are in, but will the Government listen?

I believe we can be proud of R3 and the RPBs. Given only 6 weeks for the Government’s summer consultation, they generated robust and reasoned responses with plenty of variation to evidence that each had been created independently of the others.

Having read every published response I’ve been able to find, I am left with a reasonably strong sense of consensus on many of the big questions. However, I suspect that not all will be welcome news to the Government or the Insolvency Service, so the question is: will they listen?

The original consultation, A Review of the Corporate Insolvency Framework, can be found at: https://goo.gl/Cf0LWK.

In this post, I pick through the 14 responses that I discovered, including those from bodies such as R3, some of the RPBs and turnaround professionals. I don’t envy the Insolvency Service’s job of working through 70 submissions.

A New Moratorium: why?

Almost everyone saw some value in the principle (if not in the detail) of the Government’s proposals to introduce new moratorium provisions, although several questioned the Government’s apparent motives: from the consultation document, it does seem that a desire to get the UK up the ladder of the World Bank’s “Doing Business” rankings is the main driver, which does not seem a sensible policy-making foundation.

Dentons solicitors believe that “the UK has one of the most flexible insolvency regimes, unburdened by high costs and lengthy court procedures and, perhaps most importantly, one of the best recovery rates for creditors worldwide”, so it is difficult to see what advantages the proposed new process will bring. The City of London Law Society went further by not supporting the wider moratorium proposals, failing to see how a potentially costly process that may not adequately protect creditors’ interests would be useful.

The FSB expressed concern at the apparent move towards a US-style Chapter 11 system, feeling that this shift “could result in the UK regime’s strengths being watered down for little demonstrable gain elsewhere”. Several noted that the absence of a specialist insolvency court was a serious obstacle in any attempts to move towards a workable Chapter 11 style regime.

Most struggled to see how the moratorium could be used successfully by SMEs. Even the turnaround professionals were forced to admit that “there will always be some businesses that are too small to avail themselves of such help”.

A few responders felt that more effort should be made to encourage directors to seek help early and the turnaround professional felt that the moratorium would be a useful tool in this regard.

A New Moratorium: how long?

Here is a summary of the responses to the Government’s proposals for an initial 3-month moratorium:

It should be noted that many answers on this question were dependent upon other changes being made to the proposed moratorium set-up. For example, whilst the City of London Law Society felt that 3 months may prove to be too short for larger or more complex restructurings, it also recognised the risk that the extensive nature of the 3-month moratorium as proposed may “simply encourage directors to put off dealing with a company’s financial difficulties. This could, in turn, lead to creditor anger and frustration should the company’s financial position deteriorate during the moratorium period.”

A similar point was made by R3, which referred to the risk that “providing companies with an entire financial quarter free from creditor pressure could lead to ‘drift’ rather than action.” Instead, R3 stated, a shorter moratorium would make clear that it was the company’s ‘last chance’ to avoid insolvency, thus “requiring concentrated effort and a clear direction of travel”.

Will it simply be jobs for the boys?

The Government proposed that a new moratorium be introduced, which would be “supervised” by anyone with relevant expertise in restructuring who is also either an IP, solicitor or accountant.

However, in general the cry for supervisors to come only from the IP population was made loud and clear. You might think this was inevitable from the likes of R3 and the IPA, but even the accountancy and solicitor bodies were generally strong on this point.

Not for solicitors?

The City of London Law Society pointed out that the SRA had only recently dropped regulating solicitors as IPs, so it would seem an odd development to have solicitors return to supervising something tantamount to an insolvency process.

Not for accountants?

The ICAEW pointed to the facts that “accountant” covers a wide range of people and that there is already “a large pool of [insolvency] practitioners and a competitive market”, so it would seem an unnecessary risk to widen the pool to include others who are not subject to such heavy regulation as IPs. ICAS made a similar observation, noting its understanding that “at least one third of the [accountancy] sector in the UK has not undertaken any training or possess a formal qualification” and repeating its call on the Government to designate accountancy as a regulated profession.

What about turnaround professionals?

Predictably, the EACTP and BM&T, turnaround consultancy, welcomed widening the role to more than just IPs, suggesting that the Certified Turnaround Professional qualification could qualify someone for the role.

Interestingly, these two responses were almost word-for-word the same in many respects, but they differed on one important point: BM&T believes that it is critically important for the supervisor to be clearly seen to be acting in the best interests of all stakeholders, whereas EACTP believes that the supervisor should act in the best interest of the company. I think this betrays one of the tensions in the proposals: is the moratorium intended for solvent companies that may be facing future insolvency or for insolvent ones? The City of London Law Society noted that the consultation document conflicts with the Impact Assessment on this fundamental point.

BM&T seemed alone in expressing the view that, in order to keep costs low, “supervisors should be subject to low levels of regulation”. I appreciate their point that the supervisor is not running the business, merely advising. However, given that a primary duty proposed for supervisors is ensuring that the moratorium – and not a formal insolvency process – remains appropriate, it does seem to me too high a risk activity to be largely unregulated. The ICAEW mentioned that, “if supervisors are not to be regulated persons, then greater court supervision may be required to minimise risks of abuse by directors and unfair prejudice of creditors”, which of course would increase costs and which in turn could have an altogether different impact on the World Bank rankings!

The case for IPs

R3 believes that a clear commitment to protecting creditors’ interests is important. The Government’s proposals put creditors firmly in the back seat, offering them only the power to take court action to challenge the moratorium or their status as an essential supplier, a status assigned them by the moratorium company. If the company’s use of a moratorium to give it time to see a way out of its troubles is to earn the trust of creditors, the obvious choice is regulated IPs, and certainly not, as currently seems possible, the company’s in-house lawyer or accountant.

R3 reminded the Insolvency Service of the efforts the profession has made to tackle the problem of ambulance chasers and unregulated advisers. If not carefully structured and controlled, the moratorium could appear an attractive tool for abuse by some.

A new professional?

Some responses highlighted the difficulty in ensuring that proposed supervisors meet the expertise criteria: the Government isn’t considering yet another different licence with potentially a whole new (and expensive) regulatory system, is it?

The IPA noted that the Government’s Impact Assessment made no mention of any costs of ensuring regulatory consistency in the event that the role is opened up to other professionals. It also reminded the Government of the new corporate-only insolvency licences, which would seem to lend themselves well to be used by non-IPs who want to develop in this area.

Consequences for Administrators

The Government’s proposals include two striking consequences for Administrations that are preceded by a moratorium:

An IP who had acted as the company’s moratorium supervisor would be prevented from taking the appointment as Administrator (or indeed any other insolvency office holder); and
The duration of the Administration would be 12 months minus the length of the moratorium.

Conflict of interest?

Few responded directly on this point. As you might expect, the ones that did respond fell into two distinct camps:

There may be clear benefits in having the same person throughout, which would reduce costs, and the creditors should have a say in who they want as Administrator (ICAEW, ICAS, R3); and
There would be a clear conflict of interest in having the IP supervisor also act as Administrator (EACTP, BM&T).

Personally, I cannot really see how the situation is different from a CVA Supervisor later being appointed as Administrator or Liquidator and I would expect the Insolvency Code of Ethics to be amended to treat the proposed subsequent appointment of a moratorium supervisor similarly.

Shorter Administrations?

Personally, I thought this second proposal was nonsense. Where is the logic behind giving Administrators less time to do their job simply because the company has had a moratorium? I appreciate that the perception may be that an Administration is all about exploring the company’s/business’ options, so if these are all but exhausted in the moratorium, then it should be time saved in the Administration. However, Administrators still need to get the job done and now must pay out any prescribed part dividend, which is by no means a 5-minute task. The ICAEW also made the point that at present the 12 months period “can be problematic, not least because of delays within HMRC and applying for extensions adds to work and cost”.

Although none of the consultation questions invited comments on this proposal, I was very pleased to see that several bodies managed to shoe-horn in their objections to shorter Administrations as a consequence of a moratorium. For heaven’s sake, Administrations are complex and costly enough as it is, please don’t make them any worse!

Having said that, the Law Society posed the sensible recommendation that the relevant date for excluding insolvency set-off and for voidable transaction claims should be measured from the start of the moratorium… although I would also suggest that, in that case, an insolvency office holder should be able to challenge certain dispositions occurring during a moratorium.

Directors’ liabilities

The consultation proposed that, provided the moratorium conditions continued to be met, directors would be protected from liability, e.g. in relation to wrongful trading, but that, should the conditions not be met and the moratorium fail, exposure for liability would resume.

This seemed a curious approach to me and the Law Society explained it well: “during a moratorium, directors will only be at risk once the company has reached the point at which they ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation’. Plainly, directors should also terminate a moratorium at, or before, that point, so that it is unnecessary to relieve the directors of liability whilst the conditions for a moratorium are maintained. Indeed, to do so would simply introduce unnecessary complexity into the law”.

The City of London Law Society also observed that suggesting that directors may avoid personal liability “could lead to inappropriate risk taking, particularly if directors believed that they could entirely rely on the views of the supervisor, rather than making their own assessment of the company’s prospects”.

Ranking of costs and expenses in the moratorium

Although a company would be required to have enough capital to discharge all debts incurred during the moratorium, what if the worst should happen?

Several responders agreed with the Government’s proposal that any unpaid debts incurred in a failed moratorium and the supervisor’s costs should enjoy a first charge in any subsequent insolvency (although there was no comment on the priorities between these categories).

However, R3 disagreed, noting that a company could stack up debts to connected parties during the moratorium, which would end up having priority, and so R3 believed that unpaid debts should rank alongside other claims in the subsequent insolvency. Personally, I don’t see that this potential abuse is sufficient reason to push moratorium creditors down the queue, especially in view of the other proposals regarding pressing “essential suppliers” into service during a moratorium.

The City of London Law Society also queried how it is proposed such costs and expenses would be approved for payment from a subsequent insolvency. Perhaps it would be something akin to the current pre-administration costs regime?

Several responders objected to the Government’s proposal that supplies during the moratorium should be paid for under the supplier’s usual terms of credit. BM&T made the connection that, if instead moratorium supplies are paid on a cash up-front basis, there should be no risk that debts would spill over into any subsequent insolvency.

Creditors held to ransom?

The “essential suppliers” proposals generated whole new lines of debate, such as the possible effects on the supplier’s trade credit insurance or debt factoring, which is material for another blog post.

Suffice to say, as worded in the consultation it seems that any supplier (…or only those with a contract? One example in the consultation is of a paper supplier) could be designated by the company as essential (by means of a court filing) with the result that the supplier would be required by statute to continue to supply on the existing terms, whilst its pre-moratorium arrears would be frozen, irrespective of the impact this might have on the supplier’s own solvency.

What’s wrong with the CVA moratorium?

The consultation claimed that the CVA moratorium is rarely used because it is limited to small companies. However, instead of proposing simply to widen the scope of the CVA moratorium (as ICAS has suggested), a new kind of moratorium is the proposal. This would be fine if the plan was simply to adapt the CVA moratorium to allow other restructuring solutions to flow from it, but the proposed new moratorium is different in many unconnected respects.

It is true that there are few CVA moratoria. Both the ICAEW and R3 suggested that the onerous responsibilities (and associated liabilities) of the CVA moratorium nominee deter use of the existing regime. Although we only have a skeleton proposal to judge at the moment, personally I don’t see that the new moratorium would deal with this obstacle any more successfully.

The ICAEW recommended that, to avoid any new moratorium suffering the same fate as the CVA moratorium, the reasons for its apparent lack of use should be analysed.

What’s wrong with CVAs?

As the only debtor in possession formal insolvency tool, you’d think that the Government might be interested in encouraging greater use of CVAs, but it seems to be missing the point.

The consultation stated that “the Government believes that the under utilisation of CVAs is largely caused by the inability to bind secured creditors”, however neither it nor its accompanying Impact Assessment provided any evidence to support this. The Impact Assessment stated that “the consultation will seek to understand fully the reasons behind” the under-utilisation of CVAs and the apparent fact that many fail (2014: 60%), but the consultation didn’t really address this at all. It simply stated that “many CVAs fail because of a failure to maintain agreed payment” – you don’t say!

R3 believes that “the most common reasons why CVAs fail is not because there is a problem with secured creditors but because the management is overly-optimistic in its financial assessment of the company, or the environment in which the company operates changes during the CVA.” The IPA makes a similar observation, suggesting that the CVA process is not at fault, but often the issue is with the underlying viability of the business. ICAS also reported that “anecdotally it is suggested that a significant proportion of CVA proposals will focus on financial/debt restructuring without addressing more fundamental and underlying operational restructuring or management change”.

In its response, R3 asked the Government to work with the profession and the creditor community to “to find ways to improve CVAs so that they can become a much more effective business rescue tool”, especially for SMEs, a request that also seems to have the support of the ICAEW and IPA.

And there’s much more

Some other meaty questions considered by the responders included:

Do the Government’s proposals achieve the right balance of debtor-in-possession and creditor protection?
If the balance swings too far away from creditors, as many responders fear, what will be the effects on lending?
What exactly are the supervisor’s role and duties?
How exactly should the moratorium entry criteria be defined and measured?
How will notice of the moratorium be publicised or even should it be publicised?
How would an extension to the moratorium be achieved and for how long should an extension be?
Who would be required to provide information to creditors during the moratorium and what kind of information should be provided?
Is there really a need to incentivise rescue funding, particularly by introducing contentious statutory provisions affecting existing secured creditors’ rights?

The consultation responses evidence that, within only a few summer weeks, a great deal of effort has been spent deliberating over the proposals, but the fun has only just begun.

March 24, 2015
by insolvencyoracle Leave a comment

Regulatory Hot Topics: (1) the SIPs

Last month, I conducted a webinar for R3 with Matthew Peat, senior compliance officer with ACCA, entitled Regulatory Hot Topics. The aim was to highlight some areas that we both had seen some IPs stumble over. I thought there might be value in summarising some of the issues we covered. In this post, I cover just the SIPs.

SIP2 – Investigations by Office Holders in Administrations and Insolvent Liquidations

Some firms are using checklists that are not well-designed for the task of carrying out a SIP2 investigation. In particular:

Checklists should reflect the fundamental difference between a SIP2 investigation and considering matters of relevance for a D-report/return. SIP2 requires the administrator/liquidator to consider whether there may be any prospect of recovery in relation to antecedent transactions.
Checklists should guide you through the SIP2 requirement of conducting an initial assessment on all cases and then moving on to making a decision on what further work, if any, is merited.
Checklists should help you meet the SIP2 requirement to document findings, considerations and conclusions reached.

Other recommendations include:

Make collection of books and records a priority in the early days of an appointment.
SIP2 also requires the outcome of the initial assessment to be reported to creditors in the next progress report. Although there is an obvious tension between full disclosure and keeping one’s powder dry for progressing any claims, it is not sufficient to report in every case that all investigations are confidential, remembering that SIP2 is not referring to D-reporting matters. If nothing has been revealed that might lead to a potential recovery, this should be reported; if something has been identified, then some thought will need to be given as to what can be disclosed.

SIP3.1 & SIP3.2 – IVAs & CVAs

The “new” SIPs have been in force now for eight months, so all work should now have been done to adapt processes to the new requirements. In particular, the SIPs require “procedures in place to ensure”, which is achieved more often by clear and evidenced internal processes. It is also arguable that, even if particular problems have not appeared on the cases reviewed on a monitoring visit, you could still come in for criticism if the procedures themselves would not ensure that an issue were dealt with properly if it arose.

The SIPs require assessments to be made “at each stage of the process”, i.e. when acting as adviser, preparing the proposal, acting as Nominee, and acting as Supervisor. At each stage, files need to evidence consideration of questions such as:

Is the VA still appropriate and viable?
Can I believe what I am being told and is the debtor/director going to go through with this?
Are necessary creditors going to support it?
Do the business and assets need more protection up to the approval of the VA?

The SIPs elevate the need to keep generous notes on all discussions and, in addition to the old SIP3’s meeting notes, require that all discussions with creditors/ representatives be documented.

I would recommend taking a fresh look at advice letters to ensure that every detail of SIP3.1/3.2 is addressed. The following suggested ways of dealing with some of the SIP requirements are only indicators and do not represent a complete answer:

“The advantages and disadvantages of each available option”

Personally, I think the Insolvency Service’s “In Debt – Dealing with your Creditors” makes a better job at covering this item than R3’s “Is a Voluntary Arrangement right for me?” booklet, although neither will be sufficient on its own: in your advice letter, you should make application to the debtor’s personal circumstances so that they clearly understand their options.

Similarly, you can create a generic summary of a company’s options, which would be a good accompaniment to your more specific advice letter for companies contemplating a CVA.

“Any potential delays and complications”

This suggests to me that you should cover the possibilities of having to adjourn the meeting of creditors, if crucial modifications need to be considered.

“The likely duration of the IVA (or CVA)”

Mention of the IVA indicates that a vague reference to 5 years as typical for IVAs will not work; the advice letter needs to reflect the debtor’s personal circumstances.

“The rights of challenge to the VA and the potential consequences”

This appears to be referring to the rights under S6 and S262 regarding unfair prejudice and material irregularity. I cannot be certain, but it would seem unlikely that the regulators expect to see these provisions in detail, but rather a plain English reference to help impress on the debtor the seriousness of being honest in the Proposal.

“The likely costs of each [option available] so that the solution best suited to the debtor’s circumstances can be identified”

This is a requirement only in relation to IVAs, not CVAs, and includes the provision of the likely costs of non-statutory solutions (depending, of course, on the debtor’s circumstances).

An Addendum: SIP3.3 – Trust Deeds

After the webinar, I received a question on whether similar points could be gleaned from SIP3.3, which made me feel somewhat ashamed that we’d not covered it at all. To be fair, neither Matthew nor I has had much experience reviewing Trust Deeds, so personally I don’t feel that I can contribute much to the understanding of people working in this field, but I thought I ought to do a bit of compare-and-contrast.

An obvious difference between SIP3.3 and the VA SIPs is that the former includes far more detail and prescription regarding consideration of the debtor’s assets (especially heritable property), fees, and ending the Trust Deed. However, setting those unique items aside, I was interested in the following comparisons:

The stages and roles in the process

SIP3.3 identifies only two stages/roles: advice-provision and acting as Trustee. I appreciate that the statutory regime does involve the IP acting only in one capacity (as opposed to the two in VAs), but I am still a little surprised that there is no “right you’ve decided to enter into a Trust Deed, so now I will prepare one for you” stage.

SIP3.3 also omits reference to having procedures in place to ensure that, “at each stage of the process”, an assessment is made (SIP3.1 para 10). Rather, SIP3.3 requires only that an assessment is made “at an appropriate stage” (SIP3.3 para 18). Personally I prefer SIP3.3 in this regard, as I fear that SIP3.1/3.2’s stage-by-stage approach is too cumbersome and risks the assessment being rushed through by a bunch of tick-boxes, instead of considering the circumstances of each case more intelligently and purposefully.

The options available

There are some differences as regards the provision of information and advice on the options available, but I am not sure if this is intended to be anything more than just stylistic differences.

For example, SIP3.1 prompts for the provision of information on the advantages and disadvantages of each available option at paras 8(a) (advice), 11(a) (documentation), and 12(e) (initial advice), but SIP3.3 refers to this information only at para 20(a) (documentation). Does this mean that IPs are not required to discuss advantages and disadvantages, but just hand over details to the debtor?

In addition, SIP3.3 does not specifically require “the likely costs of each [option]” (SIP3.1 para 12(e)). The assessment section also does not include “the solutions available and their viability” (SIP3.1 para 10(a)); I wonder if this is because there is less opportunity in a Trust Deed to revisit the decision to go ahead with it, whereas in VAs the Proposal-preparation/Nominee stage can be lengthy giving rise to a need to revisit the decision depending on how events unfold.

Having said that, I do like SIP3.3’s addition that the IP “should be satisfied that a debtor has had adequate time to think about the consequences and alternatives before signing a Trust Deed” (para 34).

Additional requirements

Other items listed in SIP3.3 that an IP needs to deal with pre-Trust Deed (for which there appears to be no direct comparison with SIP3.1/3.2) include:

Advise in the initial circular to creditors, the procedure for objections (para 9);
Assess whether the debtor is being honest and open (para 18(a));
Assess the attitude (as opposed to the likely attitude in SIP3.1/3.2) of any key creditors and of the general body of creditors (para 18(c));
Maintain records of the way in which any issues raised have been resolved (para 20(d));
Summaries of material discussions/information should be sent to the debtor (para 20) (in IVAs, this need be done only if the IP considers it appropriate); and
Advise the debtor that it is an offence to make false representations or to conceal assets or to commit any other fraud for the purpose of obtaining creditor approval to the Trust Deed (para 24).

SIP9 – Payments to Insolvency Office Holders and their Associates

The SIP9 requirement to “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” fits in well with the statutory requirements governing most progress reports as regards reporting on progress in the review period. Thus, although it often will be appropriate to provide context by explaining some events that occurred before the review period, try to avoid regurgitating lots of historic information and make it clear what actually occurred in the review period.

In addition, in order to meet the SIP9 principle, it would be valuable to reflect on the time costs incurred and the narrative of any progress report. For example:

If time costs totalling £30,000 have been incurred making book debt recoveries of £20,000, why is that? Are there some difficult debts still being pursued? Or perhaps you are prepared to take the hit on time costs. If these are the case, explain the position in the report.
If the time costs for trading-on exceed any profit earned, explain the circumstances: perhaps the ongoing trading ensured that the business/asset realisations were far greater than would have been the case otherwise; or perhaps something unexpected scuppered ongoing trading, which had been projected to be more successful.
If a large proportion of time costs is categorised under Admin & Planning, provide more information of the significant matters dealt with in this category, for example statutory reporting.

Other SIP9 reminders include:

If you are directing creditors to Guides to Fees appearing online, make sure that the link has not become obsolete and that it relates directly to the Guide, rather than to a home or section page.
Make sure that the Guide to Fees referenced (or enclosed) in a creditors’ circular is the appropriate one for the case type and the appointment date.
Make sure that reference is made to the location of the Guide to Fees (or it is enclosed) in, not only the first communication with creditors, but also in all subsequent reports.

In future posts, I’ll cover some points on the Insolvency Code of Ethics, case progression, technical issues in Administrations, and some tips on how monitors might review time costs.

February 24, 2015
by insolvencyoracle Leave a comment

“Ransom” Payments – seeing things from the other side

I’m sure that your hackles were raised when you last heard IPs described as seeing a distressed debtor only as an opportunity to make money. Many of the suppliers’ responses to last year’s consultation on proposed Essential Supplies legislation struck a similar chord.

In this post, I take a look at some of the more persuasive consultation responses as well as the emerging Insolvency (Protection of Essential Supplies) Order 2015, set to come into force on 1 October 2015.

The consultation responses and the draft Order can be found at: http://goo.gl/N4Tg3c

The government press release is at: http://goo.gl/Ta0KOw

Energy Suppliers

The key issue for most suppliers is that supplying to an unpredictable business, such as one administered by an office holder in an insolvency situation, could end up as seriously loss-making for them. Not knowing for how long or how much energy an insolvent business is going to need carries huge consequences for suppliers, as they have to purchase (or sell excess) power on short term markets that trade at very different prices. If the supplier cannot pass at least some of this cost to the customer, they will be trading at a significant loss.

Some suppliers referred to the “deemed contract rates”, which apply to supplies where a contract is not in existence and thus applies in some cases where an IP does not agree to a post-appointment contract. These rates inevitably are higher than contract rates as the consumer can switch to another supplier at any moment, and thus some suppliers took exception to the suggestion that these, as well as other post-insolvency changes to manage risks, such as requiring more frequent payments or upfront deposits, in effect are “ransom” payments.

Many respondents predicted that, if they were prohibited from taking action on formal insolvency, suppliers might take precipitative action when a business shows signs of financial distress. Others felt that the increased risks would be shared by customers with poor credit ratings and new start-ups, with some suggesting that it might even be difficult for these businesses to procure a contract.

Personal guarantees

The topic of personal guarantees threw up a variety of comments. Some suppliers seemed to confuse these with undertakings that the supply would be paid for as an expense. Several asked the Insolvency Service to provide a standard form of words for PGs, as they can take a lot of time and effort to agree. Some suggested that it would save time if the IP simply gave the PG – or undertaking – within a specified timescale, rather than build into the process the need for the supplier to ask for one.

Some suppliers were sceptical that an IP could support a call on the PG, leading to requests that IPs provide proof of their assets or credit insurance and, if the supplier is not satisfied, then the supply could be terminated. Some also asked that PGs be supported by the IPs’ firms, which led one to suggest that IPs from smaller firms may have difficulty persuading suppliers that the PG was adequate. Some were nervous about the without-notice withdrawal of a PG or undertaking with one respondent stating that the PGs should have effect for the whole duration of the administration.

Timescales to termination

Many said that the proposed timescales to terminate the supply were too long: respondents are well aware of IPs’ reluctance to agree PGs and therefore felt that the 14-28 day period for suppliers to learn of the appointment and to give the office holder time to sign a PG could end up being effectively a free supply to the insolvent business, with several suggesting that the IP could design things this way whilst having no intention to seek to secure a longer supply. Many also said that they would need to get a warrant to be able to terminate the supply, which would require leave of court (in administrations), thus lengthening the process considerably.

The suppliers argued that they might not learn of the appointment until at least 14 days after commencement, which under the old draft Order would have left them already out of time to request a PG. I was surprised that several suppliers seemed to believe that office holders were under no clear obligation to tell them about the appointment, which no doubt is behind Jo Swinson’s reference to the need for guidance (see below). Some suppliers did accept that office holders might have difficulty identifying energy suppliers, especially when dealing with a large number of properties. Personally, I have also seen IPs encounter difficulties getting past the front door of some suppliers, with day one correspondence getting thrown back because an account cannot be located.

Some noted that the Impact Assessment pointed the finger more at key trade suppliers and IT suppliers (so, suggested one, why not simply wrap these suppliers into the existing statutory provisions?) and thus they questioned whether affecting how energy providers deal with insolvent businesses will deliver the projected fewer liquidations. “The proposal to change the right of only certain, specified companies to freely contract with one another, appears to be both disproportionate and an unjustified distortion of contractual law” (RWE npower).

Merchant Services

The merchant service providers came out in force, their principal argument being that their “charges”, which is the focus of the Order, fade into insignificance when compared with their exposure to the risk of chargebacks, especially when payments have been made by customers for goods/services (to be) provided by an insolvent business. Thus, the requirement that the merchant services continue to be provided on the existing terms for the 14-28 day window prior to obtaining a PG – and even after obtaining a PG, if that were even possible – was simply unbearable.

Worldpay’s response sets out the way that, at present, they believe the system works well. They seek an indemnity to be paid as an administration expense for any chargebacks, including any arising from pre-administration transactions, and they also look to agree “an administration fee with the insolvency practitioner to reflect the significant time incurred in managing the administration”… but Worldpay “does not demand ransom payments”.

Carve-out

The responses indicated that the Insolvency Service was to meet with the merchant service providers shortly after the consultation had ended and clearly they succeeded in convincing the Service of their concerns, as the scope of the Order has now been changed so that it does not extend to “any service enabling the making of payments”.

The Insolvency Profession

IPs and others involved in insolvency made – and repeated – some valuable observations about the draft Order, which regrettably have not been taken up. In some cases, this is because the issues are really with the long-passed Enterprise & Regulatory Reform Act 2013, but it also gives the impression that, once legislation has been drafted, it is extremely tough to get it amended.

R3 and KPMG asked that the scope of the new legislation be widened to encompass other supplies, such as software licences and information systems, and they struggled to see why only administrations and VAs are within the scope: omitting receiverships and liquidations unhelpfully restricts the ability of these insolvency tools to achieve better outcomes for all.

The City of London Law Society Insolvency Law Committee (“the Committee”) noted that the draft Order deviated unhelpfully from provisions covering the same territory in the Investment Bank Special Administration Regulations 2011 and the Financial Services (Banking Reform) Act 2013 (“the SIs”). Why the difference in rules?

Personal guarantees again

The Committee cast doubts over the “practical and logistical issues” surrounding the PG provisions, highlighting that IPs could encounter demands for PGs from a number of suppliers in the crucial initial days of an appointment. It “strongly encourages” the government “to reconsider the approach and, if at all possible, to amend Section 93(3), so that the ability to request a personal guarantee is restricted to the utilities currently covered by Section 233 IA”.

The Committee’s quid pro quo suggestion was that the legislation should mirror the SIs mentioned above and provide explicitly for all post-administration supplies to rank as administration expenses, suggestions also made by R3. Interestingly, the government press release stated that “suppliers will be guaranteed payment ahead of others owed money for services supplied during the rescue period”. This doesn’t seem to relate to the effect of PGs, as this is covered separately in the press release, but I don’t see where this super-priority for suppliers appears in the statute.

As a last resort, the Committee suggested the production of a pro forma guarantee to save precious time, especially considering that a number of suppliers of varying degrees of sophistication may be seeking PGs.

Unsurprisingly, R3 had strong words for the PG regime: “The provisions allowing a supplier to require a personal guarantee by the office holder are also inappropriate. This was and is an unwelcome feature of the existing 233 legislation, as it is disproportionate. In principle, there is no reason why a supplier should enjoy a greater level of comfort from an insolvency officer holder than it would from the directors of a solvent trading company… No supervisor is likely to give one.”

PwC referred to PGs as “an anathema to most IPs” and its preference seems to be that all possible options remain open for negotiation by the parties. In its response, PwC stated that “circumstances will remain where the payment of a deposit and/or a higher ‘on price’ are commercially more appropriate, and the IP should retain the discretion to negotiate case by case, supplier by supplier”.

Other flaws

There seem to be several concerns about the detail of the draft Order, concerns that I think have survived even the post-consultation revision:

The Order prevents suppliers from terminating contracts simply because of administration/VA, but it does not prevent them from altering contract terms, such as increasing prices (and perhaps then terminating the contract if the revised terms are not complied with).
The PG may reach to termination charges incurring post-administration/VA.
Because the Order focuses on terms that are triggered by administration or a VA, it does not deal with terminations/changes resulting from the triggers of pre-administration/VA events, such as the Notice of Intention to Appoint Administrators or putting forward a VA Proposal (see also below).

The Order

The Order is scheduled to come into force on 1 October 2015. The current draft differs from the earlier consultation draft in the following respects:

The 14-day timescale for suppliers to ask for a PG has been dropped. Therefore, suppliers will be able to ask for a PG at any time and then they acquire the power to terminate the supply if the PG is not given by the office holder within 14 days of the request.
The court may grant the supplier permission to terminate the contract, if satisfied that it would cause the supplier “hardship” – as opposed to the draft’s “undue hardship”.
The Order no longer applies to “any service enabling the making of payments”.

The Order turns a draft clause (the previous S233A(6), which is now S233A(2)) on its head. I think this is to deal with some suppliers’ issues that the previous draft Order would have prevented terminations “because of an event that occurred before” the administration/VA, even though the event was not connected to the formal insolvency. Now the Order states that an insolvency-related term does not cease to have effect if it entitles a supplier to terminate the contract or supply because of an event that occurs, or may occur after the administration/VA. The problem with this is that I think it eliminates the whole purpose of the previous S233A(6), which was to avoid actions resulting from pre-administration/VA events, such as the issuing of a Notice of Intention to Appoint Administrators or the proposing of a VA!

The government release points to an additional non-statutory measure: “guidance will be issued to insolvency practitioners that they should make contact with essential energy suppliers at the earliest possible time following their appointment to discuss what supply they expect to use”.

I know that Giles Frampton, R3 President, has said: “These proposals will make it easier for the insolvency profession to save businesses, save jobs, and get creditors as much of their money back as possible”. I’m not sure that I can be as positive, but a surprising outcome of the consultation for me was a greater understanding of some of the hurdles faced by suppliers. IPs are not the only ones who want to see businesses (/customers) survive.

September 25, 2014
by insolvencyoracle 2 Comments

Keeping the lights on for insolvent businesses

It is 13 days and counting until the Insolvency Service’s consultation on the extension of the IA86 provisions regarding essential supplies to insolvent businesses closes. R3 pretty much said it all in its autumn 2014 magazine (pages 8 and 9), so I shall be brief – honest!

The Insolvency Service’s consultation, impact assessment, and draft statutory instrument are at: http://goo.gl/N4Tg3c

Personal guarantees in IVAs and CVAs?

As I’m sure you know, the changes seek to wrap in to the existing S233 and S372 suppliers of a number of IT services and goods. Thus, these suppliers may not hold the IP to ransom in relation to their pre-appointment debts in order to agree to supply post-appointment… but they can seek a PG from the office holder, just as utility suppliers can do at present.

The draft statutory instrument also sets out restrictions on IT/utility suppliers’ powers to terminate pre-appointment contracts (or “do any other thing”, which the Service envisages would prevent actions such as increasing charges simply because of the administration or VA). A supplier would be entitled to terminate if, within 14 days of the commencement of the VA (or administration), the supplier has asked for a PG and one has not been provided within a further 14 days.

How likely is it that a Supervisor will agree to personally guarantee the payment of IT or utility supplies to a company or an individual in a VA?! Although I think that this is an entirely unrealistic prospect, VAs at present only work if the company/individual can reach agreements with their suppliers, so I don’t think the insolvent will be any worse off – and at least this might give them a 28 days breathing space in which to get things sorted. It is perhaps not surprising, therefore, that the impact assessment takes a cautious approach and puts no monetary benefit on the impact of this provision on companies/individuals trading whilst in VAs.

Pre-Administration/VA events

The draft SI lists aspects of what is described as “an insolvency-related term”, which ceases to have effect if a company enters administration or CVA (or an individual in business enters an IVA). One of these ineffective features of an insolvency-related term is:

“the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect”

I guess that “insolvency”, i.e. being unable to pay one’s debts as and when they fall due, is an event that occurs before administration or VA, isn’t it? Given that this frequently appears in termination clauses, could this be a catch-all that avoids termination in all cases where an administration or VA results? Well, surely the problem with this is that, when insolvency first rears its head, who knows what the final outcome will be? What if a creditor, petitioning for a winding-up order, is tussling with a company hoping to be placed into administration? It seems that suppliers might be entitled to terminate, but only if the company does not end up in an administration or VA. A statutory provision that seeks to impact on a past event is no provision at all, is it?

So does the draft SI have anything else to say about the pre-Administration/VA periods, e.g. when a Notice of Intention to Appoint an Administrator has been issued or when a Nominee is acting? The Explanatory Note indicates that a termination clause would not have effect when a VA is proposed, but this is not what the draft SI says. It states that the insolvency-related term ceases to have effect if “a voluntary arrangement approved… takes effect”.

The impact assessment uses the expression, “the onset of insolvency”, which is something else again. It uses this expression to describe the starting point of the 14 days in which the supplier can ask for a PG. However, the draft SI states that this period begins with “the day the company entered administration or the voluntary arrangement took effect”.

Therefore, it would seem to me that, in more ways than one, the period during which a Nominee is acting or when a company is preparing to go into administration falls between the cracks of the draft SI that can only work, if at all, in hindsight: are supplies assured during this period?

£54 million more to unsecured creditors

The impact assessment calculates the benefits on the basis of R3’s August 2013 survey, which suggested that 7% of liquidations could be avoided. The Service has extrapolated this to mean that these liquidations instead may be tomorrow’s administrations… and, as the OFT 2011 corporate insolvency study indicated that on average unsecured creditors recovered 4% more in administrations than in liquidations, they conclude that this could result in an additional £54 million being returned to unsecured creditors.

Personally, I would have thought that the key insolvency shift that is likely to occur from these measures – especially given the Government’s appetite to act on Teresa Graham’s recommendations – is that some pre-packs may be replaced by post-appointment business sales, as IPs’ hands are freed up (if only a little) to continue to trade the business. I think it odd, therefore, that the impact assessment does not assume there would be any change in the proportion of administrations that will involve trading-on: the Service works on an assumption – both before and after the proposed changes – that 10% of administrations involve post-appointment trading-on.

Then again, didn’t Teresa Graham’s review conclude that pre-pack sold businesses are more likely to survive than post-appointment sold businesses? If this is so, is it a good or a bad thing that there could be fewer pre-packs and more post-appointment sales? That really does depend on one’s view of pre-packs. Still, as it seems inevitable now that the hurdles to pre-packs are going to be raised, I guess that we should welcome any lowering of the high jump bar for post-appointment trading.

Over 2,000 businesses could be saved each year

That was R3’s “Holding Rescue to Ransom” tagline. Is it realistic?

Personally, I think not. However, I don’t think I’m alone: the R3 article does remind us that its original campaign highlighted the need for all suppliers of essential services to be brought into the net, not just IT services. Therefore, it remains to be seen if these provisions will provide enough breathing space to enable insolvency office holders to help more businesses to survive.

(UPDATE 24/02/2015: for a summary of the outcome of this consultation, go to: http://wp.me/p2FU2Z-9w)

June 18, 2014
by insolvencyoracle Leave a comment

New SIPs 3 – are you ready?

As the new SIPs 3 come into effect in less than two weeks’ time, I’m guessing that few of you will be interested in reading my “yes, but what exactly does that mean?!” observations below. If VAs/Trust Deeds are your thing, you will have got going on bringing practices into line with the new SIPs (and you really won’t want to read any alternative interpretations). But it’s not all gripes; I have actually tried to include some points that may be of use!

SIP3.1 (IVAs) and SIP3.2 (CVAs)

Assuming that your practices already comply with (old) SIP3 and statute, what do you need to know to bring them in line with the new SIPs? I’m afraid I don’t think it’s about easy fixes. The new SIPs are so different from the 2007 SIP3 that I would recommend trying to take a fresh and objective look at the way VAs are conducted in the round in order to apply the new SIP principles and requirements.

The revised SIPs put great emphasis on there being “procedures in place to ensure…”, so it is not simply a case of getting standard templates compliant. In my view, the key seems to be more about making sure that tasks and considerations are prompted and carried out, not just marked “N/A” (or perhaps even “done”) on a checklist completed 6 months after the event. However, the vast majority of the steps required are not rocket-science and are probably being carried out already, so if any major changes are required, they will probably involve regularising processes and evidencing the steps taken.

Having said that, some obvious easy fixes may include:

• Ensure that letters to shareholders and creditors giving notice of the meetings explain the stages and roles associated with a VA (i.e. initial advice, assisting in preparing the proposal, acting as nominee, and acting as supervisor) – per the SIPs’ first principle.

• Ensure that initial advice includes explaining “the rights of challenge to the VA and the potential consequences of those challenges”.

• If you’re confident that there are systems in place to keep alert to signs that a meeting with an individual debtor is merited, SIP3.1 allows you to lighten up on SIP3’s requirement to meet with every “trading individual” (although a meeting needs to be offered in every case).

• Check that standard Proposals templates (and procedures/documents used in drafting Proposals) include all the items listed. Although the new SIPs are not as fulsome as the old SIP3, there are some curly additions, such as “the background and financial history of the directors, where relevant”.

• Ensure that post-approval circulars make clear the “final form of the accepted VA” where a proposal is modified, which to me suggests more than simply listing the approved modifications.

• Ensure that supervisors’ reports disclose fully the VA costs and “any other sources of income of the insolvency practitioner or the practice in relation to the case” (remembering that the Ethics Code prohibits referral fees or commissions benefitting the IP/firm as opposed to the estate) and any increases in costs, if these have increased beyond previously-reported estimates. Whilst the old SIP3 already requires disclosure of increases in the supervisor’s fees, “costs” of course are wider in scope and could include solicitors, agents etc.

Other fixes may not be so easy…

Huh? No. 1

For CVAs, “the initial meeting with the directors should always be face to face”.

But what is the initial meeting; is it the first meeting? What if progression towards a solution is an iterative process? And who are the directors? Does this mean that all the directors need to be present, even if someone is out of the country? And why face to face? Is this so that you can skype but a non-visible telephone conference won’t do; where’s the sense in that?

Yes, I know I’m being picky. Trying to look at this sensibly, presumably IPs are expected to ensure that the directors discuss face-to-face the information to enable them to decide on whether to propose a CVA and what that might look like. I could see that this discussion might occur after a period of information-gathering, so it may not actually be the very first meeting with the director/s. In addition, inevitably there will be occasions when it is difficult to meet physically with all the directors, so this might require some judgment on IPs’ parts as to whether the non-attendance “face-to-face” of a particular director falls foul of the need to meet with “the directors”.

Huh? No. 2

When preparing for a VA, the IP should have procedures in place to ensure that the directors/debtor have had, or receive, appropriate advice. “This should be confirmed in writing, if the insolvency practitioner or their firm has not done so before.” (This is repeated later in SIP3.1 where an IP first gets involved at the nominee stage, i.e. where someone else has helped to prepare the IVA Proposal.)

But what is “this” that should be confirmed in writing? Is it the appropriate advice itself or is it the fact that appropriate advice has been given? I assume this means that, if someone else has been involved in getting the directors/debtor to the point of deciding on a VA before introducing them to the IP, the IP needs to be satisfied that they have been properly advised previously and confirm in writing the advice behind the decision – not merely “I understand that you have received appropriate advice from X and consequently have decided to propose a VA” – but I could be wrong…

Huh? No. 3

In assessing the VA as a solution, the SIPs require IPs to obtain a variety of information, including: “the measures taken by the directors (debtor) or others to avoid recurrence of the company’s (their) financial difficulties, if any”.

Does the “if any” refer to financial difficulties or measures taken? Would there be any occasion to propose a VA where there are no financial difficulties (even if any current difficulties to pay debts had arisen from historic, now settled, events)? Consequently, I would have thought the SIPs refer to learning of any measures taken to avoid recurrence, rather than any financial difficulties, but that does not seem to be the case, as the SIPs state later that Proposals should contain information on “any other attempts that have been made to solve their financial difficulties, if there are any such difficulties”.

Huh? No. 4

The SIPs require procedures to ensure that the proposer’s consent is sought to any modifications put forward by creditors. The SIPs state that, where a modification is adopted, in the absence of consent (from the proposer and, if appropriate, the creditors), the VA “cannot proceed”. The proposer’s consent must be recorded.

Why seek the proposer’s consent to any modification, including those that will be voted out by the majority, especially if they run contrary to the wishes of the majority? I guess that this is only fair to the creditors, but it could be confusing especially to debtors faced with a whole host of potentially conflicting and futile modifications. And what would happen if a minority creditor, say, wanted the supervisor’s fees to be reduced below that required by the majority, and the proposer consented to the reduction? Where does that leave things?

And why state that a CVA cannot proceed in the absence of the proposer’s consent? As far as I am aware, the directors’ consent to modifications is not a statutory requirement (but obviously in certain circumstances this may be essential for the successful implementation of the CVA). I also wonder if, technically, an administrator or liquidator needs to consent to modifications to their Proposals…

How should a director’s/debtor’s consent be “recorded”? Will a telephone conversation note, or even merely minutes signed by the Chairman, suffice? Where ever possible, I would recommend continuing with the now-commonplace procedure of getting the proposer to sign contemporaneously a copy of the adopted modifications, but I do wonder whether the new SIPs are suggesting that a less robust record may suffice.

SIP3.3 (Trust Deeds)

I am in no position to pass comment on the technicalities of this new SIP – I did voice some “huh?”s whilst reading it, but I will resist the urge to put my foot in it!

Overall, I am heartened to see the lightening-up on much of the prescription and consequent rigidity of SIP3A. Personally, I do think the RPBs could have gone further, however, as there still seems to me to be a fair amount of unnecessary statutory, SIP9 and Ethics Code references. There also seems to be some particularly fruitless statements: my personal favourite is “Where the decision is to grant a Trust Deed and seek its protection, the insolvency practitioner will take the necessary steps” – duh!

March 9, 2014
by insolvencyoracle Leave a comment

Not the Game appeal

Plenty of comprehensive summaries of the Game appeal have been produced, so I cover here some lesser-known judgments:

• Salliss v Hunt – a Deputy Registrar’s approval of a Trustee’s fees basis being switched from percentage to time costs comes under scrutiny
• LSI 2013 Limited v The Solar Panel (UK) Company Limited – how presenting contingent creditors in a CVA proposal may have unintended consequences
• Credit Lucky Limited v NCA – a Company’s attempt to escape a winding-up in favour of an Administration Order fails
• Day v Shaw & Shaw – spouse entitled to an equity of exoneration even though the co-owner was not the principal debtor

A couple of useful summaries of the Game appeal can be found at: http://lexisweb.co.uk/blog/randi/landlords-can-rejoice-following-the-game-administration-decision/ and http://www.11sb.com/pdf/insider-note-cofa-game-decision-26-feb-2014.pdf.

(UPDATE: Game Retail’s application for permission to appeal to the Supreme Court is expected to be heard in November 2014.)

(UPDATE 02/11/2014: The Supreme Court refused Game Retail permission to appeal on the basis that “the application does not raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal.” (http://goo.gl/cWWuDs))

Baister’s Practice Statement applied to Trustee’s request to switch fees basis from percentage to time costs

Salliss v Hunt (10 February 2014) ([2014] EWHC 229 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/229.html

The Chancellor of the High Court opened his judgment by calling this a “regrettable case of litigation”, which should have been avoided.

Mr Salliss had been made bankrupt in 1993 on the petition of Barclays Bank plc, which appeared to have been owed over £2m originally. The creditors approved the Trustee’s fees as the first £2,000 realised and thereafter on the OR’s scale.

The only assets were pension plans. These had not been realised, but when Mr Salliss reached 65 in 2007 he began working on an annulment so that he could draw down on the pensions. He paid the claims of his creditors other than Barclays, which had not submitted a proof of debt and, when pressed, confirmed that it had withdrawn its right to claim in the bankruptcy due to the age of the case.

Then the court applications began…

Salliss applied for an annulment, but the Trustee’s report indicated that his time costs were almost £40,000 and other costs and expenses were £24,000. Salliss put forward an accountant’s report that stated that strictly the Trustee was not entitled to any remuneration, in view of the basis agreed by creditors.

The Trustee applied for an order that Salliss sign the necessary forms so that the Trustee could realise his interest in the pensions. The Trustee also applied to change the basis of his fees from the agreed percentage basis to time costs. Nine months on, the Trustee’s fees and costs had increased from £64,000 to over £150,000.

All three applications came before the Deputy Registrar, who rejected the annulment application, but granted the Trustee’s two applications. He considered that time costs was the only appropriate basis “because even though the bankruptcy commenced more than 19 years ago there is still uncertainty as to what might be realised and when if it continues and in any event the extent of the time necessarily and unavoidably spent by Mr Hunt and his staff already is such that a percentage basis of any kind could not, in my view, result in appropriate remuneration, especially as yet further time would have to be spent the amount of which cannot be anticipated” (paragraph 35). He had also been reluctant to ignore Barclays’ debt entirely, given the precedent of Gill v Quinn, which had involved the rejection of an annulment because of a number of creditors’ silence to invitations to prove their debts.

At the appeal, the Chancellor’s view was that this case was quite different to Gill v Quinn and that the evidence showed that Barclays had taken “an informed policy decision that it would not then or in the future lodge a proof in respect of any debt in Mr Salliss’ bankruptcy” (paragraph 41) and therefore Barclays’ debt was irrelevant to the annulment application.

He also felt that the Deputy Registrar’s approach to the remuneration application was flawed. He felt that insufficient regard had been given to Chief Registrar Baister’s Practice Statement on the fixing and approval of the remuneration of appointees, which, contrary to the Deputy Registrar’s view, he felt was relevant to applications to have a fees basis changed as well as fixed by the court. With the Practice Direction in mind, the Chancellor stated that the proper approach “is to begin by asking what has changed and was not foreseen and could not have been foreseen when the creditors made their decision” (paragraph 51). In this case, it had always been known that the assets were limited, but the Trustee had been content to continue to act under the creditors’ resolution. The Chancellor commented that “the usual and proper course should be for the trustee to apply to the court for a change in the basis of remuneration as soon as it becomes clear that an application will be necessary in order to make the remuneration (in the words of the Practice Direction) fair, reasonable and commensurate with the nature and extent of the work properly to be undertaken by the appointee. In other words, the application should, so far as practicable, be prospective and not retrospective. Unless there is some good and proper reason to do otherwise, it is not appropriate for the trustee to wait until all the work is done and then apply to the court as a ‘fait accompli’ for a retrospective change in the remuneration resolved by the creditors” (paragraph 53).

The Chancellor decided that the annulment and the remuneration applications should be set aside, although he felt unable to determine them on the appeal. He did, however, draw attention to “the considerable increase in the bankruptcy fees and expenses… in substance due to the time, cost and expense of litigating over the costs, expenses and remuneration at the date of the Trustee’s Report” (paragraph 52) and questioned whether the matter could have been brought to a swift conclusion far earlier, when the pension plans’ lump sum might have been sufficient to meet all the costs and expenses.

The consequences of presenting contingent creditors in CVA proposals

LSI 2013 Limited v The Solar Panel (UK) Company Limited (14 January 2014) ([2014] EWHC 248 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/248.html

The Company appealed a winding-up order on the ground that the Deputy District Judge had been wrong to treat the petitioning creditor as a contingent creditor, when the petition debt was genuinely disputed on substantial grounds.

At the appeal, counsel for the petitioning creditor focussed on a draft proposal for the Company’s CVA, which had listed the petitioner as a contingent creditor, albeit only for £1, and did not refer to the claim as disputed; the IP who had drafted the CVA proposal clearly would have understood the distinction between contingent claims and disputed debts. Consequently, the Deputy District Judge had accepted that the Company was insolvent and that the petitioning creditor was a contingent creditor and thus the winding-up petition had been granted.

His Honour Judge Hodge QC felt that the Deputy District Judge had attached too much weight to the reference in the CVA proposal – which was described as draft and had not been signed by the director – that the creditor was contingent and, in any event, it also stated that £1 was the total claim the creditor would have in a terminal insolvency. Hodge HHJ also noted that the petition had not been founded on the petitioner being a contingent creditor and that the Deputy District Judge had not considered the counter-claim. The outcome was that the winding-up order was set aside and the case was remitted to the Bristol District Registry with a view to considering the merits of the dispute.

No escaping a winding-up order in favour of administration

Credit Lucky Limited & Anor v National Crime Agency (29 January 2014) ([2014] EWHC 83 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/83.html

The Company applied for the winding-up order against it to be rescinded, varied or reviewed, or alternatively stayed. Amongst its arguments were that the director wanted to pursue a tax assessment appeal, which the liquidator regarded without merit and did not intend to pursue and that, if the tax assessment were challenged successfully, the director felt that there was every prospect of the creditors being paid in full. The director also intended to apply for an Administration Order so that the Company’s goodwill, name and database could be sold to a third party, which had made an offer conditional on the winding-up order being rescinded.

The judge had several concerns over the conditional offer, which led him to reject the application for rescission. He also did not see why someone should only be prepared to purchase the goodwill, name and database from an administrator and not from a liquidator. He felt that it was implausible that these assets would be more valuable if the Company “‘cleared its name’ by prosecuting and winning the tax appeal” (paragraph 40).

He also felt it was inappropriate to grant a stay: although the liquidator is obliged to take all reasonable steps the maximise asset realisations and therefore is entitled to decide whether to pursue an action in the name of the Company, if the Company or another interested party believes that the tax appeal should be pursued, “it is open to them to apply to the court for a direction which would enable them to prosecute the Tax Appeal in the name of the company or the liquidator. That being so it is difficult to see how – on the assumption that there is, contrary to the liquidator’s view, some merit in the Tax Appeal – the refusal of a stay would result in irremediable loss” to the Company or its shareholder (paragraph 64).

Equity of exoneration with a twist

Day v Shaw & Shaw (17 January 2014) ([2014] EWHC 36 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/36.html

This case differed from the usual equity of exoneration scenario in that the principal debtor to the secured creditor was, not a co-owner of the property, but Mr Shaw’s limited company, “Avon”, that had gone into liquidation and that, although Mr and Mrs Shaw had granted a charge over their property, the debt to the bank was also secured by reason of personal guarantees by Mr Shaw and the couple’s daughter, Mrs Shergold. Mr Day’s interest in the case arose because he had obtained a charging order over Mr Shaw’s interest in the property, so he was keen to contend that Mrs Shaw was not entitled to an equity of exoneration, but that the debt due to the bank should be borne equally by the shares of Mr and Mrs Shaw in the proceeds of the sale of the property.

At first instance, the judge had decided that Mrs Shaw was entitled to an equity of exoneration. On the appeal, Mr Day contended that, if the judge had treated Avon as the principal debtor, the conclusion would have been that the equity of exoneration did not apply to the property jointly owned by Mr and Mrs Shaw.

The question for Mr Justice Morgan was whether Mr Shaw and Mrs Shergold, as guarantors, and Mr and Mrs Shaw, as mortgagors, were all sureties of the same rank or was one group effectively sub-sureties for the other? The conclusion he reached was that “it is clear that in substance, Mr Shaw and Mrs Shergold were sureties for the debt of Avon and Mr and Mrs Shaw, as mortgagors, were sub-sureties. I do not consider that the guarantors and the mortgagors can be considered to be co-sureties equally liable for the principal debt. The result is that the sub-sureties (Mr and Mrs Shaw) are entitled to be indemnified by the sureties (Mr Shaw and Mrs Shergold) in just the same way as a surety is entitled to be indemnified by a principal debtor” (paragraph 26). It follows that for the purposes of the equity of exoneration, Mrs Shaw can establish that she is entitled to be indemnified by Mr Shaw in relation to the debt owed to Barclays” (paragraph 30).

February 11, 2014
by insolvencyoracle Leave a comment

Two bankruptcy annulments, two council debts, and a decision “of potential interest to all insolvency practitioners”

Some questions answered by a few of the recent cases in the courts:

• Kaye v South Oxfordshire District Council – if an insolvency commences mid-year, how much of the year’s business rates rank as an unsecured claim?
• Yang v The Official Receiver – can a bankruptcy order be annulled if the petition debt is later set aside?
• Oraki & Oraki v Dean & Dean – on the annulment of a bankruptcy order, if the petitioning creditor cannot pay the Trustee’s costs, who pays?
• Bristol Alliance Nominee No 1 Limited v Bennett – can a company escape completion of a surrender agreement if the process is interrupted by an Administration?
• Rusant Limited v Traxys Far East Limited – is a “shadowy” defence sufficient to avoid a winding up petition in favour of arbitration?

A decision “of potential interest to all insolvency practitioners and billing authorities for business rates”

Kaye v South Oxfordshire District Council & Anor (6 December 2013) ([2013] EWHC 4165 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4165.html

HHJ Hodge QC started his judgment by stating that this decision is “of potential interest to all insolvency practitioners and billing authorities for business rates” (paragraph 1), as he disagreed with advice that appears to have been relied upon by billing authorities and Official Receivers for quite some time. This may affect CVAs, which were the subject of this decision, and all other insolvency procedures both corporate and personal.

The central issue was: how should business rates relating to a full year, e.g. from 1 April 2013 to 31 March 2014, be handled if an insolvency commences mid-year?

In this case, the council had lodged a proof of debt in a CVA for a claim calculated pro rata from 1 April to the date of the commencement of the CVA, but the Supervisor had observed to the council that he believed that the full year’s business rates ranked as an unsecured claim.

The council responded that the company had adopted the statutory instalment option (whereby the full year’s rates are paid in ten monthly instalments commencing on 1 April) and that, as this was still effective at the commencement of the CVA, the unsecured claim was limited to the unpaid daily accrued liability – with the consequence, of course, that the council expected to be paid ongoing rates by the company in CVA. The council stated that, had the right to pay by instalments been lost at the time of the CVA (by reason of the debtor’s failure to bring instalments up to date within seven days of a reminder notice), the whole year’s balance would have become due and this would have comprised the council’s claim. [This seems perverse to me: it would mean that companies would be better off postponing proposing a CVA until the business rates become well overdue, as the full year would then be an unsecured claim, rather than accruing as a post-CVA expense.] The Supervisor applied to the court for directions.

In support of the council’s view was advice (not directly related to this case) from the Insolvency Service of early 2010, which stated that, unless a bankrupt had failed to comply with a reminder notice, the Official Receiver would reject a claim for council tax for the portion of the year following a bankruptcy order. The council also provided what was said to be the current view of the Institute of Revenues and Valuation, which followed a similar approach in relation to a company’s non-domestic rates.

Hodge HHJ felt that the decision in Re Nolton Business Centres Limited [1996] was of no real assistance, because, although this had resulted in a liquidator being liable for rates falling due after appointment, he stated that it merely demonstrated the “liquidation expenses principle”: “the question was not whether the debt had been incurred before, or after, the commencement of the winding up, but whether the sums had become due after the commencement of the winding up in respect of property of which the liquidator had retained possession for the purposes of the company” (paragraph 38).

Although, in this case, the full year’s rates had not fallen due for payment by the time of the commencement of the insolvency, Hodge HHJ viewed it as “a ‘contingent liability’, to which the company was subject at the date of the [CVA]” (paragraph 54). Therefore, he felt that the full year’s non-domestic rates were “an existing liability incurred by reason of its occupation of the premises on 1st April 2013. It, therefore, seems to me that the liability does fall within Insolvency Rule 13.12” (paragraph 55) and, by reason of the CVA’s standard conditions, were provable. He also commented that it seemed that this would apply equally to liquidations and bankruptcies.

The judge decided that the council should be allowed to prove in the CVA for the full amount of unpaid rates and he felt that the company would have a good defence to the existing summons for non-payment of post-CVA rates.

My thanks to Jo Harris – I’d originally missed this case, but she’d mentioned it in her February technical update.

(UPDATE 22/07/2014: For an exploration of the application of this case to IVAs, take a look at my more recent post at http://wp.me/p2FU2Z-7y)

Absence of petition debt – council tax liability that was later set aside – was not a ground to annul bankruptcy order

Yang v The Official Receiver & Ors (1 October 2013) ([2013] EWHC 3577 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3577.html

Yang was made bankrupt on a petition by Manchester City Council for unpaid council tax of £1,103. After the bankruptcy order, Yang discharged the liability orders but also challenged the liability on the basis that the council had incorrectly classed the property as a house in multiple occupation. Subsequently, the valuation tribunal ordered the council to remove Yang from the liability.

Yang then sought to have the bankruptcy annulled, but the court ordered that the bankruptcy order be rescinded; the annulment was refused, as the court decided that there was no ground for the contention that, at the time the bankruptcy order was made, it ought not to have been: at that time, the multiple occupation assessment stood and Yang had not challenged it.

In considering Yang’s appeal, HHJ Hodge QC felt that the Council Tax (Administration and Enforcement) Regulations 1992 were relevant, which state that “the court shall make the [liability] order if it is satisfied that the sum has become payable by the defendant and has not been paid” (paragraph 20) and the court cannot look into the circumstances of how the debt arose, although the debtor is entitled to follow the statutory appeal mechanism. The judge stated: “It seems to me that the fact that a liability order is later set aside does afford grounds for saying that, at the time the bankruptcy order was made, there was no liability properly founding the relevant bankruptcy petition within the meaning of Section 282(1)(a) of the 1986 Act. But that does not mean that a bankruptcy order made on a petition founded upon such a liability order ‘ought not to have been made’” (paragraph 22) and therefore he was content that the bankruptcy order was rescinded, rather than annulled, although there remain three further grounds of the appeal to consider another day.

Innocence is relative

Oraki & Oraki v Dean & Dean & Anor (18 December 2013) ([2013] EWCA Civ 1629)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1629.html

After a long battle, the Orakis’ bankruptcies were annulled on the basis that the orders should not have been made: the petition debt related to fees charged by a man who was not a properly qualified solicitor and was not entitled to charge fees. At the same time, the judge ordered that the Trustee’s costs should be paid by the Orakis, although they were open to seek payment from the solicitor firm (Dean & Dean) and to challenge the level of the Trustee’s remuneration.

The Orakis appealed the order to pay the Trustee’s costs on the basis that they were completely innocent. Floyd LJ agreed that the Orakis were wholly innocent “as between Dean & Dean and the Orakis”, however “the confusion occurs if one seeks to carry those considerations across to the costs position as between the trustee and the Orakis. There is no clear disparity, at least at this stage, between the ‘innocence’ of the two parties” (paragraphs 36 and 37). He also stated that, whilst it was still open for the Orakis to challenge the level of costs, which appear to have increased by some £250,000 since 2008, it seemed to him to be unlikely that the Trustee would not be able to demonstrate that he is entitled to at least some costs.

Lady Justice Arden added her own comments: “the guiding principle, in my judgment, is that the proper expenses of the trustee should normally be paid or provided for before the assets are removed from him by an annulment order” (paragraph 63) and it was not clear that the Orakis’ estates would be sufficient to discharge the expenses in full, which, absent the order, would have left the Trustee with the burden of unpaid expenses. She noted that, usually, the petitioning creditor would be ordered to pay the Trustee’s costs where a bankruptcy order is annulled on the ground that it ought never to have been made. However, unusually, in this case the petitioning creditor could not pay and therefore the judge was entitled to order that the Orakis pay.

Landlord entitled to escrow monies held for part-completed surrender interrupted by Administration

Bristol Alliance Nominee No. 1 Limited & Ors v Bennett & Ors (18 December 2013) ([2013] EWCA Civ 1626)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1626.html

In 2010, A\Wear Limited (“the company”) entered into an ‘Agreement for surrender and deed of variation’ with the landlord (“Bristol”) of leased properties and £340,000 was held in escrow pending completion of the surrender and payment by the company of the VAT on the escrow amount. A similar arrangement was made in relation to another property with an escrow amount of £210,000. Shortly after the landlords served notice on the company requiring completion of the surrender, the company entered into administration and the company, acting by its administrators, refused to complete the surrender.

At first instance, the judge refused to make the order requested by the landlords for specific performance to enable the escrow amounts to be released to them, on the basis that it would have offended the principle of pari passu treatment of unsecured creditors. At the appeal, Rimer LJ disagreed: although the refusal of an order for specific performance would open up the possibility that the company’s contingent interest in the escrow monies might be realised, the monies were not part of the company’s assets and therefore ordering specific performance would not deprive the company of any assets then distributable to creditors. Rimer LJ stated that the effect of the refusal “was to promote the interests of the company’s creditors over those of Bristol in circumstances in which there was no sound basis for doing so”. “Prior to the administration, Bristol had a right, upon giving appropriate notice, as it did, to compel the company to complete the surrender. If such a claim had come before the court before the company’s entry into administration, there could have been no good reason for the court to refuse to make such an order; and the consequence of doing so would have been to entitle Bristol to the payment of the escrow money. It was manifestly the intention of the parties to the surrender agreement to achieve precisely such a commercial result. The company’s entry into administration cannot have resulted, and did not result, in any material change of circumstances. The principle underlying Bastable’s case shows that Bristol remained as much entitled to an order for specific performance as it had before” (paragraph 34). With the support of the other appeal court judges, the appeal was allowed.

Winding up petition “trumped” by arbitration agreement

Rusant Limited v Traxys Far East Limited (28 June 2013) ([2013] EWHC 4083 (Comm))

http://www.bailii.org/ew/cases/EWHC/Comm/2013/4083.html

Rusant Limited sought to restrain the presentation of a winding up petition against it by Traxys Far East Limited, which had issued a statutory demand for the repayment of a loan. However, the loan agreement included a term that “any dispute, controversy or claim… should be referred to and finally resolved by arbitration of a single arbitrator” and Rusant claimed that an extension to the loan repayments had been agreed.

Although Mr Justice Warren described Rusant’s defence as “shadowy” and stated that, apart from the arbitration agreement, he would not grant an injunction, “the arbitration agreement, it seems to me, trumps the decision which I would otherwise have made” (paragraph 33) and therefore, in consideration of the Arbitration Act 1996, he did not allow the petition to proceed.

December 27, 2013
by insolvencyoracle Leave a comment

A Janus View of Developments in Insolvency Regulation

I thought I would take a look at where we’ve got to on a few of the current developments in insolvency regulation:

• The Deregulation Bill: who says limited IP licences are a good idea?
• SIP3.2 (CVA): a preview of the final SIP3 (IVA) or an ethical minefield?
• The JIC Newsletter: grasping the nettle of the commissions issue
• Insolvency Service update to the BIS Committee: promises, promises!

It’s by no means a complete list, but it’s a start!

The Deregulation Bill: when is a consultation not a consultation?

The Joint Committee of the Houses of Lords and Commons published its report on the draft Deregulation Bill on 19 December 2013, available here: http://www.parliament.uk/business/committees/committees-a-z/joint-select/draft-deregulation-bill/news/draft-deregulation-bill-report/.

Insolvency features relatively insignificantly in the wide-ranging draft Deregulation Bill, the so-called Henry VIII Power attracting far more attention, so in some respects it is quite surprising that insolvency got a mention in the Committee report at all. However, the background to this report included oral evidence sessions, one of which was attended by Andrew Tate representing R3’s Small Practices Group. A recording of the session can be accessed at: http://www.parliamentlive.tv/Main/Player.aspx?meetingId=14073&player=windowsmedia – insolvency pops up at c.50 minutes.

Andrew had a chance to express concerns about the draft Bill’s introduction of IP licences limited to personal or corporate insolvency processes. He raised the concern, which I understand is shared by many IPs, that IPs need knowledge of, and access to, all the tools in the insolvency kit, so that they can help anyone seeking a solution, be they a company director, a practice partner, or an individual, and some situations require a combination of personal, corporate and/or partnership insolvency solutions.

What seemed to attract the attention of the Committee most, however, was learning that there had been no public consultation on the question. It’s worth hearing the nuanced evidence session, rather than reading the dead-pan transcript. It fell to Nick Howard, who was not a formal witness but presumably was sitting in the wings, to explain that there had been an “informal consultation”, which had revealed general support, and I thought it was a little unfair that a Committee member seemed sceptical of this on the basis that they had not heard from anyone expressing support: after all, I don’t think that people tend to spend time shouting about draft Bills with which they agree.

Personally, I do not share the same objections to limited licences, or at least not to the same degree. I see the value of all IPs having knowledge of both personal and corporate insolvency, but even now not all fully-licensed IPs have had experience in all fields, so some already start their licensed life ill-equipped to deal with all insolvency situations. I believe that there are more than a few IPs who have chosen a specialist route that really does mean that practically they do not need the in-depth knowledge of all insolvency areas, and, given that they will not have kept up their knowledge of, and they will have little, if any, useful experience in, insolvency processes outside their specialist field, does it really do the profession or the public any favours for them to be indistinguishable from an IP who has worked hard to maintain strong all-round knowledge and experience? Surely it would be more just and transparent for such specialists to hold limited licences, wouldn’t it?

From my perspective as a former IPA regulation manager, I believe that there would also be less risk in limited licences. As things currently stand, an IP could have passed the JIEB Administration paper years’ ago (even when it was better known as the Receivership paper) and never have touched an Administration in his life, but (Ethics Code principle of professional competence aside) tomorrow he could be talking to a board of directors about an Administration, pre-pack, or CVA. Personally, I would prefer it if IPs who specialise were clearly identified as such. Then, if they encountered a situation that exceeded their abilities, which they would be less likely to encounter because everyone could see that they had a limited licence, at least they would be prohibited from giving it a go.

Clearly, with so many facets to this issue, it is a good thing that the Committee has recommended that the clause proposing limited licences be the subject of further consultation!

The other insolvency-related clauses in the draft Bill have sat silently, but presumably if limited licences stall for further consultation, the other provisions – such as fixing the Administration provisions that gave rise to the Minmar/Virtualpurple confusion and modifying the bankruptcy after-acquired property provision, which allegedly is behind the banks’ reluctance to allow bankrupts to operate a bank account – will gather dust for some time to come.

SIP3.2 (CVA): a preview of the final SIP3 (IVA)?

I found the November consultation on a draft SIP3.2 for CVAs interesting, as I suspect that this gives us a preview of what the final SIP3 for IVAs will look like: the JIC’s winter 2013 newsletter explained that the working group had reviewed the SIP3 (IVA) consultation responses to see whether there should be any changes made to the working draft of SIP3 (CVA). Consequently, it seems that there will be few changes to the consultation draft of SIP3 (IVA)… although that hasn’t stopped me from drawing from my own consultation response to the draft SIP3 (IVA) and repeating some of those points in my consultation response to the draft SIP3 (CVA). I was pleased to see, however, that few of my issues with the IVA draft had been repeated in the CVA draft – it does pay to respond to consultations!

I’ve lurked around the LinkedIn discussions on the draft SIP3.2 and been a bit dismayed at the apparent differences of opinion about the role of the advising IP/nominee. Personally, I believe that the principles set out in the Insolvency Code of Ethics and the draft SIP3.2 handle it correctly and fairly clearly. In particular, I believe that an IP’s aim – to seek to ensure that the proposed CVA is achievable and strikes a fair balance between the interests of the company and the creditors – as described in Paragraph 6 of the draft SIP3.2 – is appropriate (even though, as often it will not be the IP’s Proposal, this may not always be the outcome). In my mind, this does not mean that the IP is aiming for some kind of mid-point between those interests, as the insolvent company’s interests at that time necessarily will have particular regard for the creditors’ interests, and so I do not believe that the SIP supports any perception that the advising IP/nominee sides inappropriately with the directors/company. However, given that apparently some have the perception that this state exists, perhaps it would be worthwhile for the working group to see whether it can come up with some wording that makes the position absolutely clear, so that there is no risk that readers might misinterpret the careful responsibility expected of the advising IP/nominee.

I would urge you to respond to the consultation, which closes on 7 January 2014.

The JIC Newsletter: all bark and no bite?

Well, what do you think of the JIC’s winter 2013 newsletter? I have to say that, having been involved in reviewing the fairly inconsequential reads of previous years whilst I was at the IPA, I was pleasantly surprised that at least this newsletter seemed to have something meaningful to say. Personally, I wish it had gone further – as really all it seems to be doing is reminding us of what the Ethics Code already states – but I am well aware of the difficulties of getting something even mildly controversial approved by the JIC members, their respective RPBs, and the Insolvency Service: it is not a forum that lends itself well to the task of enacting ground-breaking initiatives. And anyway, if there were something more than the Ethics Code or SIPs that needed to be said, a newsletter is not the place for it.

Nevertheless, I would still recommend a read: http://www.ion.icaew.com/insolvencyblog/post/Joint-Insolvency-Committee-winter-2013-newsletter (I’d love to be able to direct people to my former employer’s website, but unfortunately theirs requires member login).

Bill Burch quickly off the mark posted his thoughts on the Commissions article: http://complianceoncall.blogspot.co.uk/2013/12/dark-portents-from-jic-for-commissions.html, which pretty-much says it all. Personally, I hope that this signifies a “right, let’s get on and tackle this issue!” attitude of revived enthusiasm by the regulators, but similarly I fear that some offenders may just seem too heavy-weight to wrestle, at least publicly, although that does not mean that behaviours cannot be changed by stealth. Many would shout that this is unfair, but it has to be better than nothing, hasn’t it?

My main concern, however, is how do the regulators go about spotting this stuff? Unless a payment is made from an insolvent estate, it is unlikely to reach the eyes of the monitor on a routine visit. It’s all well and good asking an IP where he gets his work from, if/how he pays introducers, and reviewing agreements, but if someone were intent on covering their tracks..? I know for a fact that at least one of the examples described in the JIC newsletter was revealed via a complaint, so that would be my personal message: if you observe anyone playing fast and loose with the Ethics Code, please take it to the regulators, and if you don’t want to do that personally, then get in touch with R3 and they might help do it for you. If you don’t, then how really can you cry that the regulators aren’t doing enough to police your competitors?

However, the theoretic ease with which inappropriate commissions could be disguised and the multitude of relatively unregulated hangers-on to the insolvency profession, preying on the desire of some to get ahead and the fear of others of losing out to the competition, do make me wonder if this issue can ever be tackled successfully. But the JIC newsletter at least appears to more clearly define the battle-lines.

Insolvency Service Update to the BIS Committee: all good things come to those who wait

Jo Swinson’s response to the House of Commons’ Select Committee is available at: http://www.parliament.uk/documents/commons-committees/business-innovation-and-skills/20131030%20Letter%20from%20Jo%20Swinson%20-%20Insolvency%20Service%20update.pdf. It was issued on 30 October so by now many items have already moved on, but I wanted to use it as an opportunity to highlight some ongoing and future developments to look out for.

Regarding “continuation of supply”, which was included in the Enterprise and Regulatory Reform Act 2013 but which requires secondary legislation to bring it into effect, Ms Swinson stated: “We intend to consult later this year on how the secondary legislation should be framed”. I had assumed simply that the Insolvency Service’s timeline had slipped a bit – understandably so, as there has been plenty going on – but I became concerned when I read the interview with Nick Howard in R3’s winter 2013 Recovery magazine. He stated: “We are in the process of consulting on exactly how that [the supply of IT] works because the power in the Act is fairly broad and we want to ensure we achieve the desired effect”. Have I missed something, or perhaps there’s another “informal consultation” going on?

I’m guessing the Service’s timeline has slipped a bit in relation to considering Professor Kempson’s report on fees, however, as Ms Swinson had planned “to announce the way forward before the end of the year” in relation to “a number of possible options for addressing this fundamental issue [that “the market does not work sufficiently where unsecured creditors are left to ‘control’ IP fees”], by both legislative and non-legislative means. Still, I imagine this isn’t far away, albeit that Ms Swinson is now on maternity leave.

This might be old news to those with their ears to the ERA ground, but it was news to me that the Insolvency Service will be implementing the Government’s Digital by Default strategy in the RPO “with a digital approach to redundancy claims anticipated to be launched in the autumn of 2014”. My experience as an ERA administrator may date back to the 1990s when people were comforted more by the feel of paper in their hands, but I do wonder how well the news will go down with just-laid-off staff that they need to go away and lodge their claims online. A sign of the times, I guess…

Finally, don’t mention the Draft Insolvency Rules!

No summary of regulatory goings-on would be complete without referring to the draft Insolvency Rules, on which the consultation closes on 24 January 2014. And no, I’ve still not started to look at them properly; it feels a bit futile even to think about starting now. But then, if we don’t pipe up on them now, we won’t be able to complain about the result, even if that may be yet years’ away…

February 17, 2013
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Three cases: (1) Marketing failures did not amount to breach of duty to take reasonable care; (2) CVA no protection for persistent non-payer of rent; and (3) marshalling across two debtors

• Kayrul Meah v GE Home Finance Ltd – the court decided that the best price reasonably achievable for a property was obtained, despite flaws in the marketing process
• Shah Din & Sons Ltd (CVA) v Dargan Properties Management Ltd – a Northern Ireland case, which I think demonstrates the need to consider the context of a company’s activity before presenting a CVA proposal
• Highbury Pension Fund Management Company & Anor v Zirfin Investments Ltd & Ors – a case for insolvency geeks: an example of marshalling security over a second debtor

Shortcomings in marketing a property not considered fatal to discharging duty to take reasonable care to obtain the best price reasonably achievable

Kayrul Meah v GE Money Home Finance Limited ([2013] EWHC 20 (Ch)) (18 January 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/20.html

Summary: The claimant sought compensation from his mortgagee for allegedly selling a property at an undervalue. Whilst there was no formal insolvency or IP involved – the sale was conducted by the mortgagee in possession – I thought it provided some useful pointers on how the court views the duty to take reasonable care to obtain the best price reasonably achievable for a property. The judge levelled some criticisms at the marketing process, but ultimately decided that the property had been sufficiently exposed to the market.

The Detail: The property was put on the market at the beginning of 2006 for £185,000 through a local agent who had valued the property between £165,000 and £185,000. Within a matter of days, offers were received at and then above this asking price. Meah complained that the asking price had been set too low and in February 2006 GE consulted another agent who valued the property at £235,000 and suggested raising the asking price to £245,000. The local agent reluctantly did this and the property was sold in March 2006 to a developer for £221,500. Based on the value of the property post-development, Meah’s expert assessed the “true market value” of the property at the time of the sale having regard to the obvious development potential at £325,000.

The claimant’s counsel argued that the low asking price depressed offers from potential purchasers and that the low asking price had been set because the agents had failed to appreciate the property’s development potential. GE’s agent argued that the asking prices needed to be set to attract a good level of interest and that many of the recipients of the sales particulars were property developers to whom the development potential would have been obvious. The judge was not wholly convinced that putting a grossly inadequate asking price on a property to generate interest was sensible and he observed that the agent had valued the property at less than the asking price, so clearly the agent had been mistaken as to the value. Neither was the judge entirely convinced that it was sensible not even to mention the development potential in the sales particulars, although he also was not convinced that, as the claimant had argued, the agent should have gone to the length of commissioning a residual development assessment, noting that potential purchasers would carry out their own assessments. GE’s agent also came in for criticism when the court learned that he had expressed to the then front-runners who had offered £218,500 his view that the revised asking price, which he had been instructed by his clients to seek, was unrealistic. The judge referred to the principle in Raja v Austin Gray that, if the valuers were negligent, the borrower had a good claim against the receiver who did not discharge his duty of care to the borrower by entrusting the sale to apparently competent professionals.

However, notwithstanding these shortcomings, the judge concluded that the property had been sufficiently exposed to the market to enable all potential purchasers to bid for it if they so wished. With regard to the expert’s valuation of £325,000, the judge stated: “unless a bidding war developed between two or more such developers who had made similar calculations, this sum cannot be said to represent the best price reasonably achievable for the Property at that time” (paragraph 23). The judge used a phrase that IPs know well: “The market value of a property is the price which a willing purchaser is prepared to pay for the property to a willing vendor after the property has been exposed to the market for a reasonable period of time”.

It should be noted that the accepted practice of sales by mortgagee involves the advertising by so-called “public notice” in a local newspaper inviting further offers above the price accepted subject to contract. It appears that GE’s agent relied on this process to flush out the best offer, rather than seeking sealed bids.

N Ireland: CVA no protection for persistent non-payer of rent

Shah Din & Sons Limited (CVA) v Dargan Properties Management Limited ([2012] NICh 34) (5 December 2012)

http://www.bailii.org/nie/cases/NIHC/Ch/2012/34.html

Summary: Although this is a Northern Ireland case, I feel that it serves as a reminder to take care to consider the context of a company’s pursuit of a CVA, whether it is fair and whether the company’s past behaviour supports the case for its protection.

In refusing to grant relief from forfeiture in this case, the court considered “the backdrop of culpable and wilful non observance of [the company’s] obligations” (paragraph 22).

The Detail: The company in CVA applied for relief from forfeiture. The only asset in the CVA was a lease on a property that the company had vacated some six years earlier, but which the landlord had only re-entered and recovered possession of shortly before the proposal was put together. After exploring the chronology of events, the court found that the company had wilfully failed to pay rent over a number of years; Burgess J stated that the company had “to all intents and purposes taken a free ride from the outset” (paragraph 21) and he found that “the plaintiff’s attitude towards its responsibilities in the face of legal proceedings and warnings has been culpable to the highest degree” (paragraph 22). The judge also had difficulty with the terms of the arrangement, which introduced an uncertainty as to what would happen if the lease had not been assigned in the CVA’s 18-month period, noting that the landlord would continue to have to meet its obligations to the Council and to maintain the property during that time. Relief from forfeiture was refused.

A case for insolvency geeks: marshalling across two debtors

Highbury Pension Fund Management Company & Anor v Zirfin Investments Limited & Ors ([2013] EWHC 238 (Ch)) (14 February 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/238.html

Summary: This is a complex case, with which, to be honest, I only persevered out of a sense of stubbornness that I would not be beaten! It demonstrates the exception to the general rule that there must be a single debtor for marshalling. If marshalling holds no interest for you, then you might want to stop reading now… but if ever you do want to explore the principles of marshalling, this summary might come in handy.

The Detail: Barclays Bank Plc loaned monies to Zirfin Investments Limited and to four associated companies, “the Affiliates”. The loans were secured by means of legal charges over a property owned by Zirfin, “No. 31”, and properties owned by the Affiliates. As additional security for the loans to the Affiliates, Barclays also had the benefit of a guarantee from Zirfin, secured by means of the same charge over No. 31. Subsequent to Barclays’ charge, two other charges were granted over No. 31, in favour of Highbury Pension Fund Management Company and Cezanne Trading (described collectively as “Highbury”).

When Zirfin and the Affiliates defaulted on the loans, receivers were appointed over No. 31 and the eventual sale proceeds were applied to settle Zirfin’s debt to Barclays and to settle in part the Affiliates’ debt to Barclays by reason of Zirfin’s guarantee. The immediate consequence, therefore, appeared to be that Highbury had lost the benefit of their charges over No. 31 and sat as unsecured creditors in relation to the monies owed to them by Zirfin. However, this would not have been the case had Barclays looked to the Affiliates’ properties to discharge their debt, rather than calling on Zirfin’s guarantee.

To further complicate matters, the Serious Fraud Office obtained a Restraint Order over the assets of Mr Kallakis (consultant to a shareholder of Zirfin and the Affiliates) and the SFO regarded the assets held by Zirfin (including No. 31) and the Affiliates as subject to the Restraint Order.

The questions for the court were: (i) is a creditor of a guarantor entitled to marshal (or be subrogated to) securities which have been granted to another creditor of the guarantor by the primary debtor liable under the guaranteed debt and (ii) does any such claim to marshalling or subrogation take precedence over prohibitions contained in the Restraint Order?

The principle of marshalling “operates where a debtor (D) owes money to two creditors (C1 and C2), and where C1 has security over two properties (or some other call on two funds) (S1 and S2) but C2 has security over (or a right of resort to) only one (S1). In those circumstances C1 has a choice of recovering his money out of either S1 or S2. If C1 chooses to enforce the security over (or resort to) S2, then that leaves S1 available for C2. But if C1 chooses to enforce security over (or resort to) S1, then C2 has nothing to look to, and the security over S2 is not relied on at all, and becomes available to unsecured creditors (amongst whom C2 is now numbered). In that situation, in order to do justice equity applies a principle of maximum distribution and by a process akin to subrogation in effect gives C2 the benefit of C1’s unused security over S2, thereby ensuring that both C1 and C2 are paid by D as far as possible” (paragraph 15).

In this usual application of the principle, the debtor, D, is common to both creditors, C1 and C2. However, in this case, the Affiliates were debtors only to Barclays, not also to Highbury. Counsel for Highbury submitted that “although the general rule is that two or more creditors must be able to resort to two funds belonging to the debtor, this general rule is subject to an exception where… there is a common debtor who owes money to both creditors and he has a right, as between himself and a debtor who owes money to only one creditor, to ensure that the latter bears the ultimate liability” (paragraph 25). Counsel for Highbury acknowledged that there was no decided case in England and Wales that applied this principle, but relied on statements in text books and decisions in other jurisdictions.

In Norris J’s view, the doctrine of marshalling applied in this case: “Barclays has a claim against Zirfin as surety. It can look to two funds to satisfy that indebtedness. The first is the Zirfin Charge. The second is the Affiliates’ Charge. As regards Highbury’s claim to marshal, the Affiliates’ Charges can be bought into account (even though they are not over property belonging to Zirfin) because in equity Zirfin could call on the Affiliates to bear the burden of the debt and the Affiliates had the Affiliates’ Properties to enable them to do so” (paragraph 45). A limitation that Norris J noted regarding the rights acquired by Highbury on marshalling was that, “if Zirfin would not be subrogated to Barclays’ rights until such time as the Barclays debt had been entirely repaid, then Highbury cannot by a process akin to subrogation become entitled to any greater right” (paragraph 50).

Then the judge considered the SFO’s argument that Highbury has no “interest” in the Affiliates’ properties subject to the Restraint Order. Norris J did not believe that the Proceeds of Crime Act 2002 should be construed so as to “enrich the Crown by depriving Highbury of the right it otherwise would have had to marshal the securities” (paragraph 68). He therefore held “that the actions of Barclays have not deprived Highbury of the ‘interest’ which was previously recognised by the Restraint Order, and that if Highbury were to seek to bring itself within paragraph 25 of the Restraint Order or to seek a variation of the Restraint Order so as to make clear that it (rather than Barclays) was now contingently entitled to enforce the Affiliates’ Charges, the discretion given to the court ought to be exercised to permit that variation” (paragraph 70).

[UPDATE 26/11/2013: On 03/10/2013, Highbury’s appeal was allowed in relation to an element of the earlier decision that Highbury was not entitled to realise the securities until Barclays had been paid out in full (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1283.html). In a more recent post, http://wp.me/p2FU2Z-4I, I summarise the appeal decision, which highlighted the difference between rights of subrogation and equity of exoneration.]

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