Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Revised R3 IVA Standard Terms: Improving with Age..?

Finally, 10 months after the 2016 Rules came into force, R3 issued 2016 Rules-adapted revised Standard Terms for IVAs. In this blog, I summarise the key changes.

Having worked on the R3 group (an inevitable consequence of saying: the work must get done!), it is difficult for me to be critical of the result. But drafting-by-committee always involves some compromises (and soooo much time!), so don’t be surprised if I slip in the odd gripe below.

The revised IVA Terms are available from the R3 website but only to logged-in R3 members, which seems odd considering the drive to go paperless for insolvency proceedings. R3’s conditions of use state that R3 members may “use” the terms, so presumably as the 2016 Rules and the Terms themselves allow delivery by website, non-members should be able to access them from R3 members’ websites over time.

While I’m on the subject of websites…

 

Website Use

The new Terms provide that Rs1.49 to 1.51 shall apply. Did the Terms need to include this? Can’t Supervisors (and Nominees) already use the 2016 Rules to deliver documents by website?

Yes, these 2016 Rules do already work for IVAs… but only for documents required under the Act or the Rules (R1.36(1)). Therefore, whilst we’ve been able to send relevant notices to wrap in website-delivery for statutory documents including the Nominee’s notice of the decision procedure to approve the IVA, progress reports and implementation/termination notices, technically the 2016 Rules do not enable website-delivery of items arising only by reason of the IVA Proposal and Terms. In other words, the methods of delivery of proposed variation decisions and outcomes are determined by the IVA Terms, not by the 2016 Rules.

The previous R3 IVA terms allowed the 2009 Rules’ process for website-delivery, i.e. by posting out a one-pager each time that something new was uploaded. The revised Terms now also allow the R1.50 process so that the despatching of one notice will enable all future documents to be uploaded onto the website with no further notice. It is doubtful that this will help when seeking a variation, but it may help with the next – new – requirement…

 

Reporting Outcomes

Where a meeting was held during the period of an IVA, the old terms required a list of creditors voting to be sent with “the chairman’s report to Creditors, the Debtor and the Court”. This was a bit odd, because firstly of course there was no requirement to send any report on meetings during an IVA to the Court. But secondly, what was “the chairman’s report”? The rules defined a chairman’s report arising from the meeting to vote on the IVA Proposal, but there were no rules or terms to define such a report for meetings after approval. Another oddity of the old terms was that there was no requirement to report to creditors on the outcome of a postal resolution.

The revised Terms plug these gaps… although not in a low-cost way. Term 69 follows the 2016 Rules’ model of “records of decisions”, which for meetings are in the form of minutes and which show how creditors voted on the decisions. Separately, Term 69 requires a list of creditors who participated and the amounts of their claims. The revised Terms require the “record of decision” to be sent to the creditors and the debtor.

This seems a little onerous and a departure from the 2016 Rules as regards decisions taken during the course of an insolvency process, where rarely is a post-decision circulation required. Couldn’t the decision outcome be delivered by a simple one-liner? Is a copy of the full record of decision/minutes really necessary? Well, it would appear so if creditors are able to exercise their rights under the Terms to appeal a decision (Term 65) or to “complain” about being excluded from a virtual meeting, which is a new right transferred in from the 2016 Rules (Term 62(7)).

As mentioned above, though, at least Supervisors may now use websites to deliver such documents easily… and it has since been pointed out to me that there is no timescale on this delivery.

 

Decision Procedures

I joined the working group thinking that we had an opportunity to take the good bits from the 2016 Rules and leave the bad. This didn’t mean that I was keen on making life easy for IPs while running rough-shod over measures designed to improve matters for the debtors and creditors. It’s just that I think we all know what works in the 2016 Rules, what balances well the objectives of reducing costs and engaging stakeholders, so why could we not learn from our early experiences of the 2016 Rules and design new Terms to improve on them?

For example, if an IP feels that a physical meeting would be the best forum in a particular case, why can’t s/he decide to summon one? Even the Insolvency Service has suggested that for other insolvency proceedings IPs might ring around creditors before notices are sent and encourage them to ask for a physical meeting. So why not design the Terms so that we can avoid this charade?

Regrettably, I was outvoted on this point as well as some other 2016 Rules that found their way into the revised Terms.

The revised Terms incorporate the following now-familiar Rules:

  • A physical meeting may only be convened if 10/10/10 creditors ask for one (Term 61(2) and (3))
  • The 2016 Rules on the creditors’ power to requisition a decision (i.e. out of the blue) generally have been replicated (Term 61(4) and 63).
  • A notice of decision procedure compliant as far as applicable with R15.8 must be issued (Term 62(2)) – note: this must be sent even if it is a vote-by-correspondence (I have seen a number of IPs omit this notice in other insolvency proceedings)
  • Other 2016 Rules on the decision procedures should be followed, e.g. the timescale for convening a physical meeting after receiving requests (Term 62(2))
  • Once a vote has been cast in a non-meeting procedure, it cannot be changed (Term 64(4))
  • As mentioned above, the 2016 Rules on excluded persons apply (Term 62(7))

But on the other hand, some departures from the 2016 Rules have been made:

  • The deemed consent process has not been transported into the Terms – it was felt that, as an IVA is effectively an agreement between the debtor and their creditors, silence-means-approval was an inappropriate way to make changes to it
  • Meetings must still be held between 10am and 4pm on a business day (Term 62(4)) (personally, I thought that IPs could be trusted to convene meetings at a sensible time such that this prescription was unnecessary – oh well)

But I guess we should be grateful for small mercies: at least we don’t need to invite creditors to form a committee every time!

 

The Debtor’s Involvement

Some changes in the Terms regarding the level of involvement of the debtor in the process may come as a surprise:

  • Notice of a meeting is no longer required to be sent to the debtor (unlike in bankruptcy – R15.14(2)/(3))
  • Debtors may request a decision (Term 61(6)), but the Supervisor need only convene a decision procedure if s/he considers it is a reasonable request
  • The Terms no longer allow the debtor to inspect proofs (Term 36)

Despite these changes, of course it must be remembered that the debtor’s participation in the IVA process, which is intended to achieve a fair outcome for all, is fundamental and crucial.

 

The Trust Clause

We all know about the Green v Wright fun-and-games, which decided that, notwithstanding that a debtor had met all their obligations under the IVA that had concluded successfully, when an asset emerged later that would have been caught by the IVA had it been known about at the time, such an asset was caught by the enduring trust.

Is this practical for cases generally? For example, how do you revive cases long-ago completed? What if you’ve destroyed the file? What if the former Supervisor has left the firm? What if they are no longer licensed?

Is this fair for cases generally? It seems fair in a bankruptcy scenario, which was how the judge came to the decision, but in an IVA where an agreement is reached with creditors (provided of course that the debtor has been entirely open and honest in formulating the Proposal), the debtor meets their side of the bargain and the creditors get what they were expecting, shouldn’t that be the end of it?

As R3’s covering note explained, on consulting with major creditor groups, it seemed that they generally were comfortable with such finality. On the whole, avoiding Green v Wright trusts capturing unknown unknowns seemed like a popular idea.

The new Terms introduce the Trust Realisation Period. This period continues after the expiry, full implementation or termination of the IVA, if there remain (known) assets included in the IVA Proposal that remain to be realised and distributed. Therefore, in theory if unknown assets emerge before the Trust Realisation Period ends, they could be caught by the trust. However, the Terms are designed so that, once the Trust Realisation Period ends, the trusts end, so any unknown assets emerging after this point should not be caught by a trust.

The new Terms also change the position on the debtor’s bankruptcy. In this case, any assets already got in or realised by the Supervisor remain for distribution to the IVA creditors, but any other assets that were caught by the IVA are freed from the trust, so as not to disturb the vesting of the bankruptcy estate in the Trustee in Bankruptcy.

 

Other Good Bits

The new Terms improve on some other areas that previously didn’t quite work:

  • Previously, a meeting could be adjourned again and again (as long as there were no more than 21 days between adjournments). Now, adjournments have a long-stop date of 14 days from the original meeting date (Term 68(3))
  • The process for a Joint Supervisor to resign has been simplified: no longer does there need to be a meeting to seek creditors’ approval of the resignation, but now all that is needed is for the Joint Supervisor’s resignation to be notified to creditors in the next progress report (Term 18(3))
  • Debts of £1,000 or less may be admitted for a dividend without the delivery of a proof (Term 39(4)). The new Terms do not prescribe how Supervisors should deliver this message to such creditors, but it would seem sensible to me for the Supervisor to follow something akin to the 2016 Rules’ process of notifying such creditors when issuing the Notice of Intended Dividend so that these creditors know how much their claim is going to be admitted for absent a proof and the timescale for submitting a proof for a different amount, if they so wish. As in the 2016 Rules, this Term does not mean that Supervisors must admit small debts – they remain in full control of whether to exercise this power.

 

On the whole, I think the new Terms are an improvement, especially now that the 2016 Rules’ Decision Procedures have bedded in generally. Of course, the odd flaw or ambiguity will always take us by surprise. But hopefully Version 4 will serve us well for a few years yet.

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Navigating Obstacles: S100s for Work-Winners

I suspect that many of you (like me) have heard plenty of theory on the New Rules’ decision-making changes. Maybe reading it from the practical perspective of the work-winner will give it a freshness.

Some non London-centric IPs who missed out on my recent presentation for R3 expressed disappointment, so I thought a blog post was warranted. Here I have concentrated only on the S100 process.

 

S100 CVLs: Deemed Consent or Virtual Meeting?

Before we start thinking about what we might discuss with directors, I think it’s worth weighing up the pros and cons of the two possible routes in to a CVL appointment… well, apart from a physical meeting, of course, but a physical meeting might be required whichever initial decision process we start with.

  • Material Transactions

The rules don’t define a material transaction, but they do say that (R6.17):

“where the statement of affairs sent to creditors… does not, or will not, state the company’s affairs at the creditors’ decision date, the directors must cause a report… to be made to the creditors… on any material transactions relating to the company occurring between the date of the making of the statement and the decision date”.

That sounds to me like it’s any transaction that changes the SoA, but the InsS people I’ve spoken to don’t see this as wrapping in, say, changes in asset class where book debts are converted into cash at bank or where a forgotten van pops up. They say they intended the rule to ensure that creditors learn of events that might impact on the independence of the proposed liquidator, i.e. things that happened with his involvement or since his appointment in Centrebind cases.

Personally, I found this interpretation most surprising, as it’s really not what the rules say – and I’d love to get this down in writing from the InsS, as I think it’ll make a huge difference to the frequency of material transactions.  (UPDATE 02/05/2017: Dear IP 76 simply states that a New Rules’ material transaction “is the same as 1986 rules 4.53B-CVL(1) and should be interpreted as such”… so we’re on our own on this one.)

So why should it matter?

Well, it won’t matter if you’re having a meeting, because you’d just report the material transaction to the meeting – it’s in our rules now, but it is never done (well I’ve never seen it done) because the SoA is usually signed off minutes before the meetings.

But it will matter if you’re working with the Deemed Consent process.

In this case, you must send out the report to creditors and if the report is delivered within 3 business days of the Decision Date, then the decision date moves to the end of 3 business days from delivery of the report.

This could leave you either in an unexpected Centrebind or needing to adjourn the members’ meeting.

  • Fees Decisions – who knows?!

I have put question marks on the table above, as the rules are very unclear when it comes to proposing fees decisions around the S100 time. That’s so helpful, isn’t it? It’s not as if fees is something we need to get absolutely spot-on, is it..?!

The only thing we do know for certain is that Deemed Consent cannot be used for “a decision about the remuneration of any person” (S246ZF(2)). The rest is unclear.

Can you propose a fees decision via a correspondence vote to run concurrently with the S100 Deemed Consent process? I struggle with this, as I cannot see who has authority under the rules to “convene” such a Decision Procedure. The IP isn’t in office (and if he is the members’ liquidator, his limited powers do not extend to seeking fee approval) and the director only has the power to convene a decision by Deemed Consent or by virtual meeting.

Can fees decisions be considered at a virtual meeting? There is nothing in the rules that expressly addresses this, but at least the director does have the power to convene the virtual meeting. Is it not arguable that tagging on (pre and post) fees decisions corresponds to what we do with S98s now (especially as the New Rules expressly provide for the “proposed liquidator” to circulate fees information – R18.16(10))?

I have received conflicting opinions on the routes available from reliable sources. As the consequences of getting this wrong are so serious, I’m very reluctant to pass further comment and I do hope that the powers-that-be will put us all out of misery and tell us categorically – and before 6 April! – how/whether fees decisions can be made at the same time as the S100 decision, as R15.11(1) seems to suggest is possible… somehow.

  • Timing

The deadline for the Deemed Consent process is 1 minute to midnight. The disadvantage here is that you won’t be certain on the decision until the next morning. I get the sense that most IPs are planning to hold their members’ meeting on the day of the Deemed Consent process, but this will still leave us with an inescapable Centrebind – it may be for only a few hours, but it’s worth thinking about it for insurance purposes at least.

On the other hand, virtual meetings can be held at anytime – the old between-10-and-4 rule has not been repeated in the New Rules. However, the convener still needs to “have regard to the convenience of those invited to participate when fixing the venue for a decision procedure” (R15.10), so the virtual meeting’s timing and “platform” (which has been added to the definition of “venue”) is still a factor to consider.

  • Excluded Persons

The rules describe an excluded person as (R15.36):

“someone who has taken all steps necessary [to attend the meeting virtually or remotely, but the arrangements] do not enable that person to attend the whole or part of that meeting.”

In other words, the technology or signal for the virtual meeting has failed.

If the chair becomes aware of an excluded person, he can continue the meeting, suspend it for up to an hour, or adjourn it. If the chair decides to continue the meeting, resolutions can be taken and these will be valid but they’re subject to complaints from the excluded person or from any other attendee who claims they were prejudiced by the exclusion.

The timescale for complaints is short – before 4pm on the next business day from the meeting or from receipt of an “indication” of what occurred at the meeting – but the consequences can be far-reaching. The chair could review the voting and conclude that the excluded person’s vote overturns resolutions that had been thought passed.

Practically, where would this leave a liquidator who thought they were free to publicise their appointment and perhaps also to complete asset sales? I am not certain that these actions would be covered by the S232 defects-deemed-valid provision.

Clearly it is vital that office holders know where they stand immediately after a meeting, but how would they know whether there were any excluded persons? They may know if someone drops out of contact mid-stream, but what if someone could not get online in the first place? Obviously, this is a risk if the notice of the virtual meeting includes all the information necessary to attend… but is this what the Rules require?

R15.5 states that the notice to creditors must provide:

“any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”

A couple of InsS people have told me that they believe that simply giving out a contact number so that creditors can ask for the login details before the meeting would satisfy this Rule – it is “necessary information”, after all. Clearly, this would be a great help in identifying excluded persons as well as going some way to “safeguard[ing] against participation by persons who are not properly entitled to participate” (SIP6) and helping to plan for sufficient access to a virtual meeting. Hopefully the InsS will confirm this in writing when they respond to a question about this on their blog.  (UPDATE 02/05/2017: Dear IP 76 describes the Insolvency Service’s view as explained here.)

 

S100 CVLs: What Directors Need to Know

Please bear in mind that it has been a loooong time since I worked on the frontline. I do not feel worthy of explaining to IPs what they should discuss with directors pre-appointment. However, with the New Rules – and new SIP6 – in mind, here are my suggestions:

  • S100/SoA fees

With the lack of clarity in the Rules, you’ll probably want to get your fees paid upfront. But what happens if you have to convene a physical meeting? Who is going to pay for that? It might be an idea to factor this in to your engagement letter: make sure that it’s clear what the fixed fee covers and what effect the cost of an additional physical meeting might make.

  • Quick information

You’ll want to line the director up to providing information very quickly, given the short timeframes for compiling the SoA and the SIP6 report (see below).

  • Post-SoA material transactions

It might be helpful to make the directors aware of the consequences of any material transactions occurring after the SoA is produced. The risk of a postponement in the Decision Date might help them to focus on giving you the whole story and avoid doing anything silly in the hiatus period.

  • Postponed decisions

Material transactions or the need for a physical meeting will delay the S100 decision. If these events happen early enough, there might be a chance to adjourn the members’ meeting. But of course, if this happens, then the directors will be in control of the company for longer. What effect will this have on the CVL strategy?

You might also want to warn the director that they may need to attend a physical meeting. And will you be around for the physical meeting? Fortunately, the new rules have been relaxed a bit so that the members’ liquidator need not attend the physical meeting, he can appoint someone else in his stead (another IP or an experienced staff member), but if a physical meeting has been requested, then you might want to make sure you’re there.

  • SIP6 additions to engagement letters

The new SIP6 states that the assisting IP should “take reasonable steps to ensure that the convener is made fully aware of their duties and responsibilities”, so you may need to beef up your engagement letter to set out the director’s duties to take appropriate action as regards objections, requests for a physical meeting, material transactions and excluded persons, all of which are the convener’s/chair’s responsibilities; and to provide the SoA/SIP6 required information swiftly.

SIP6 also requires “reasonable steps to ensure that… the instructions to the IP to assist are adequately recorded”. I’m not sure what the RPBs are getting at here, other than expecting a signed engagement letter. Do they want you to have set out whether your instructions are to proceed with the Deemed Consent or the virtual meeting route? And/or should you specify that you’ll be assisting with assessing objections and requests for physical meetings?

Connected with this is SIP6’s requirement to “take reasonable steps to ensure that the convener and/or chair is informed that it may be appropriate for them to obtain independent assistance in determining the authenticity of a prospective participant’s authority or entitlement to participate and the amount for which they are permitted to do so in the event these are called into question”. This isn’t surprising given that something similar is in SIP8 regarding the conflict risk when counting proxies, but it may be a good idea to put it in your engagement letter if it isn’t already.

  • Excluded persons

Given the risk of excluded persons changing the outcome of meetings, you might want to be careful about what you indicate to directors that you plan to do on the day of, and the day after, the meeting.

 

S100 CVLs: The Unintended Centrebind

So what does the new S100 process look like? What needs to happen when?

Here is a timeline for a no-complication Deemed Consent, demonstrating the shortest notice possible:

A virtual meeting timeline would work the same, but it would just mean that you’d be able to schedule the meeting on Business Day 7 for a sensible time instead of a minute to midnight.

In particular, note the time needed to send the SoA and SIP6 report in order to accommodate delivery in time.  (UPDATE 23/03/17: it has been pointed out to me that SIP6 only requires the report to be “made available”, so some are interpreting this to mean that it does not have to be delivered to creditors (although the SoA still does need to be).)

But what if creditors object to the Deemed Consent at the last minute (i.e. after the members’ meeting had been held on business day 7)?

(UPDATE 23/03/17: it has been pointed out to me that requests for a physical meeting must be received “between the delivery of the notice and the decision date” (R6.14(6)) and thus it has been suggested that a physical meeting request received on the decision date will be too late. (UPDATE2 02/05/2017: the Insolvency Service’s view, as set out in Dear IP 76, is explored further in my post, https://goo.gl/ygnWjg.)  The deadline for deemed consent objections, however, is “not later than the decision date” (R15.7(2)), so I believe the timelines above and below are still relevant.)

You could fit the physical meeting within the statutory 14 calendar day timescale, provided that you can get the director to move quickly to convene it, but it would leave you managing an unintended Centrebind.

The picture looks grimmer if a material transaction occurs:

 

As you can see, there isn’t enough time to deal with a material transaction and a physical meeting.  (UPDATE 02/05/2017: the Insolvency Service has expressed the view on its blog that “it is sufficient that the original decision date was within the required timescale”.)

Virtual meetings avoid this issue, as the report on the material transaction would occur at the virtual meeting. It’s not the whole answer to avoiding a Centrebind, as creditors could still request a physical meeting, but at least it could be held within the 14 days.

 

There’s More

As I mentioned at the start, I’ve limited this blog post to S100 decisions only – it’s long enough already.

If you want to listen to my whole presentation, you can purchase it via The Compliance Alliance (£250+VAT for firm-wide access to all our webinars for a year) – just drop a line to info@thecompliancealliance.co.uk.

Other topics covered include:

  • The timeline of an intended Centrebind
  • S100s for the IP acting for creditors
  • VAs: correspondence vote or virtual meeting?
  • Creditors’ powers and the process to seek an IP appointment in bankruptcies and compulsories
  • Administrations: the pros and cons of seeking approval of Proposals by Deemed Consent or a decision procedure
  • How creditors can stay in the loop on communications