Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Red Tape? Hang out the bunting!

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Any measures to reduce insolvency regulation are most welcome and, apart from the odd item that threatens to increase the burden on IPs, the proposals of the Insolvency Service’s Red Tape Challenge consultation promise to bring in a brave new world where website communication is the norm and meetings are a thing of the past. Whether these proposals will be seen as working against the tide of opinion seeking greater creditor engagement remains to be seen, but, for me, some of these changes cannot come soon enough.

Ever conscious that my articles are getting longer and longer, I have described my Top Seven proposals from the consultation document.

The consultation document (“CD”) can be found at: http://www.bis.gov.uk/insolvency/Consultations/RedTapeChallenge?cat=open. The deadline for responses is 10 October 2013.

1. Abolition of Reg 13 Case Records, but there’s a sting in the tail

The first proposal in the document is a belter: let’s abolish the Reg 13 Case Record – yes, please! I remember spending what seemed so much wasted time ensuring that the Reg 13 (or Reg 17 in my day) schedules were complete and accurate – far more overall, I suspect, than the 1 hour per case estimated in the Impact Assessment (which strangely is assumed to apply to only 80% of all cases).

However, it seems the Service is twitchy about leaving IPs to their own devices and is recommending that “legislation should require IPs to maintain whatever records necessary to justify the actions and decisions they have taken on a case. It is not expected that such a provision would impose a new requirement, but rather codify what is already expected of regulated professionals” (paragraph 32). Scary! So instead of a simple, albeit useless, two-pager listing key filing dates etc. of the case, legislation will require IPs to retain certain records. This could go one of two ways: either the provision will be so bland (e.g. as the CD describes it: records to justify actions and decisions) as to be pointless, or it will be in the style of the 2010 Rules on Progress Reports, which will introduce a whole new industry of compliance workers whose job will be to cross-check case files against a statutory list.

Why does the Service see a need to “codify” this matter? If an IP is not already retaining a sensible breadth of records (and such an IP will be rare indeed), if only to protect themselves from the risk of challenge, do they think that a statutory provision is going to force them to do it? Do they think that there needs to be a statutory requirement to assist regulators in addressing any serious failures? Such a measure has the potential to increase the regulatory burden on IPs without, as far as I can see, bringing any advantage whatsoever.

2. Abolishing almost all meetings

Although I welcome these proposals, I do think that the Service has over-egged the savings. For example, the Impact Assessment suggests that £7m would be saved by abolishing final meetings. Although the Service recognises that there will be negligible saving in relation to drafting the final documentation – even if there is no final meeting, a final report etc. will still need to be produced – they have estimated that each case will save on room hire of £64, 1 hour of an administrator’s time, and half an hour of a manager’s time. Personally, I would be very surprised if any IP makes provision for anyone attending a final meeting – does the Service picture IP staff sitting in an empty hired room twiddling their thumbs just in case someone turns up? Ok, so IP staff will save time on drafting minutes of the meeting, but that’s little more than churning off a standard template; it’s hardly 1.5 hours worth.

So if most meetings are abolished, is everything going to be handled in a process similar to the Administration meeting-by-correspondence process? Not quite, although it seems that almost all matters that will require a positive response from creditors – approval of VAs and of the basis of remuneration in any insolvency process – may be handled either as a physical meeting or by correspondence votes. The CD indicates that in other circumstances, “deemed consent” may occur: “the office-holder will issue documents to the creditors informing them of an event (as happens now) and that the contents of these documents are approved (if approval is required for that document/event) unless 10% or more by value or by number of creditors object in writing” (paragraph 64). In what kind of circumstances might this apply? I’m struggling to come up with many instances. I am aware that several IPs seek approval of R&Ps, although personally I do not believe that they need to. The CD also proposes to revise the Act’s Schedules so that Liquidators can exercise more powers without consent, but I guess that, if that does not go ahead, they might be other instances. I guess there might also be case-specific events, e.g. to pursue an uncertain asset, which might be referred to creditors. But there’s nothing wholesale that in future might be handled by “deemed consent”, is there? Unless…

Although the CD excludes office-holder’s fees from “deemed consent”, it makes no mention of SoA/S98 fees. If under the present statute, these need creditors’ approval, might they be deemed approved in future. Personally, I think this is another area, if the fees are due to the IP/firm/connected party, that also needs positive creditor approval.

Professor Kempson reported that IPs estimated that 4% of creditors attended meetings. It is not clear in the report what kind of meetings these are, but I bet they are S98s in the main. Personally, I have always viewed S98s as good opportunities for IPs to communicate something to trade creditors about the insolvency process and to convey face-to-face something of the professionalism, competence, and integrity of IPs. If it is true that no one goes to these any more, then fair enough, but even if it is only the rare S98 that attracts an audience, I feel it could just widen the gap further between IPs and creditors if no S98 meeting were ever held again. Having said that, the Service estimates that there will be only 30% fewer meetings, but if statute no longer requires physical S98s, would they be held; could the cost be justified?

3. Communication by website

The Impact Assessment does not quantify the estimated savings from these proposals, suggesting that they will be smaller than those related to the proposals to allow creditors to opt out of receiving correspondence, but, unless I have misunderstood their proposal, personally I could see this provision being used extensively.

Firstly, a bit more about creditors opting out: the Service estimates that, if they could under statute, 20% of creditors would notify office-holders that they did not wish to receive any further information on a case. I’m sorry, but I really cannot see it: this would require creditors to take action to disengage from the insolvency process – if they’re not already engaged, why would they send back such a notification? And would some then worry that they might miss out on important news, e.g. that miraculously there’s a prospect of a dividend, even though statute might be designed to ensure that Notices of Intended Dividend (“NoID”) etc. be issued notwithstanding any creditor opt-out?

As I say, much more promising I think is the Service’s suggestion that office-holders could write once to creditors to tell them that all future documents are going to be accessible on a website, which is something that office-holders can do presently but only with a court order. Wouldn’t that be great? No more need to send one-pagers to creditors informing them that a progress report has been placed on the website – you’d just put in on the website, job done. I wonder how many hits the web page would get… On second thoughts, I don’t think I want to know; I think it would only make me cry at the realisation of the huge amount of money, time and trees that had been wasted over the decades in sending reports that almost no one read.

There are a couple of catches: the Service proposes that the office-holder could do this only when he/she “considers that uploading statutory documents to a website, instead of sending hard copies, will not unfairly disadvantage creditors” (paragraph 95). I would have thought that creditors might only be unfairly disadvantaged if they are unable to access the website, no? So are we talking here about a particular profile of creditor? Or is the Service thinking, not about the creditors, but about the importance of the documentation? I could see that it might be unfair to place a NoID on a website with no announcement, leaving it to creditors’ pot luck as to whether they spotted the notice in time to lodge a claim – and I’m guessing that NoIDs would be excluded from this provision. But in what other circumstances could creditors be unfairly disadvantaged?

In another section of the CD, which covers a proposal to reduce the number of statutory circulars (which has not made it to my Top Seven), the Service states that: “Important information is being passed – to attend a meeting, to know of its outcome – which we would not want dissipated” (paragraph 102). So does the Service believe that a notice of meeting needs to be circulated, rather than pop onto a website, for fear that creditors might not see it until the meeting had been held? Ok, but then what about progress reports, the issuing of which sets the clock ticking for challenges to fees: are these similarly too important to pop onto a website unannounced? Could creditors be considered to be unfairly disadvantaged by this action? But where would that leave us: what documents would be appropriate to post to a website unannounced?

4. Extend extensions by consent

The Service proposes to extend the period by which Administrations may be extended by consent of creditors to 12 months. They also invite views on whether this should be extended further.

My personal view is that it would seem practical, whilst not making it too easy for Administrations to stagnate, to allow creditors to extend Administrations indefinitely but only by, say, 6 months at a time.

I can think of few circumstances where an Administration should move to a Liquidation, particularly if another of the Service’s proposals – that the power to take fraudulent or wrongful trading actions be extended to Administrators – is implemented. The CD also suggests empowering an Administrator to pay a dividend from the prescribed part, although I would like to see the power extend to a dividend of any description (what’s so special about the prescribed part?). These changes would seem to remove the need to move a company from Administration to CVL (although I wonder if these changes will persuade HMRC to drop its practice of modifying proposals to require that the company be placed into liquidation of some description – why do they do that?!), but then some Administrations might need to be extended for significant periods – adjudicating on claims can be a lengthy business.

I think the Enterprise Act envisaged Administrations as a holding cell, allowing the office-holder to do what he/she could to get the best out of the situation, but once the end-result was established, the idea was that the company would move to liquidation, CVA, or even escape back to solvency. But that all seems a bit over-complicated and costly when, in many respects (e.g. specific bond, R&P and currently D-report/return), the successive CVL is a completely separate insolvency case. Why does the company need to move to CVL to pay a dividend?

5. Scrap small dividends

The Service proposes that, where the dividend payment to a creditor will be less than, say £5 or £10, the dividend is not paid to the creditor. The Service suggests that these unpaid dividends might be passed to its disqualification department or to HM Treasury.

The Service has spotted the key difficulty: should the threshold apply to each interim/final dividend payment or to the total dividend? Although it would not be impossible, it could be tricky applying the threshold to the total dividend – the office holder would need to keep a tally of small unpaid dividends at each interim payment and monitor when the sum total crossed the threshold. To be fair, I guess there are few insolvencies that involve interim dividends – I am assuming that this provision would not apply to VAs (unless the debtor specifically provided for it in the Proposal), but I believe that any increased burden on declaring interim dividends should be avoided.

6. “Minor” changes

The CD provides some annexes of so-called “minor” proposals for change:

• Extend the deadline for proxies up to, and including at, the meeting. Granted very few meetings are physical meetings, but I remember the days of holding CVA meetings and having someone stand by the office fax machine just in case any last-minute proxies came in – it’s not exactly cost-free.

• Apply the VA requisite majorities rule on connected party voting to liquidations and bankruptcies. Personally, I think this is quite a naughty proposal to slip in to this consultation, particularly at the tail-end of a “minor” proposals annex – it hardly seems in keeping with the Red Tape Challenge objective of abolishing unnecessary regulation! Why isn’t it already in liquidations and bankruptcies? I don’t know for sure, but I wonder if it is something to do with the fact that the resolutions taken at VA meetings decide the fate of the insolvent entity, whether to approve the VA or not. The provision is also in Administrations, which is a bit more difficult to rationalise (as are a lot of Administration rules!): perhaps it is because Administrators’ Proposals might also decide the fate of the company, whether the Administrator pursues its rescue by means of a CVA or otherwise (see, for example, Re Station Properties Limited, http://wp.me/p2FU2Z-3I). These decisions are fundamentally different from those taken at liquidation and bankruptcy meetings, where any connected party bias is far less relevant.

• “Clarify that, where ‘creditors’ is mentioned in insolvency regulation, only those creditors whose debts remain outstanding are being referred to. Currently, if a creditor has received payment in full, they would still be classed as a creditor in the insolvency (as they would have been a creditor at the commencement of the procedure, which fixes the use of that term legally). As the legislation refers to actions that can be carried out by or with the consent of creditors, engaging with those ‘creditors’ who have already received full payment (and may not consider themselves creditors any longer) can be difficult” (annex 6(a)). Well, I’m glad we got that cleared up! It makes a joke of the current position, though. For example, the ICAEW blogged that creditors need to receive copies of MVL progress reports (http://www.ion.icaew.com/insolvencyblog/26779). Although I dispute that this is the only interpretation of the Act/Rules, the consequence of the Service’s stance described above is that, despite what the Service apparently has told the ICAEW, even if creditors have been paid, they still receive copies of MVL progress reports – what nonsense! To my mind, however, the key issue arising from this conclusion is the application of R2.106(5A) – not only would paid secured creditors’ approval to the basis of fees need to be sought, but also paid preferential creditors. I wonder what the court would say if a paid creditor applied on the ground that the Administrator had failed to include them in an invitation to approve fees? I suspect: ”Go away and stop wasting the court’s time!” And don’t forget that the Administrator needs to seek all secured creditors’ approvals of the time of his/her discharge – personally, this seems unnecessarily burdensome to me anyway, but do we really need to seek the approval of creditors who are no longer owed anything? Also, the Act/Rules do not seem to allow the Administrator to get his/her discharge by means of anything other than a positive consent from all secured creditors. It’s a shame that this CD does not propose that silent secured creditors could be ignored, when seeking approval for discharge or for fees.

• “Consider the efficiency of the process by which administration can exit into dissolution or CVL and clarify them, if necessary” (annex 6(f)) – yes, please! Despite being tweaked and being the subject of much debate and consultation, it seems that the move to CVL process defies simplification. Now we have the unsatisfactory position that the Administrator needs to sign off and submit to Registrar of Companies (“RoC”) a final report covering the period up to the date that the company moves to CVL, but, because Administrators only learn of this event when they see it appear on the register at Companies House, they have already vacated office by the time they can sign and submit the report. Whilst Administrators can get the report pretty-much ready for signing before they vacate office – so at least they can be paid for the work! – there must be a way of avoiding this fudge, mustn’t there? I ask myself, why should the RoC be in control of the move date? Why couldn’t the Administrator sign a form with the effect that the company moves to CVL and statute simply provide that the form must be filed within a short time thereafter? After all, the dates of commencement of all other insolvency processes are fixed outside of RoC’s hands and the appropriate notices/resolutions are filed after the event.

7. Changes to D-report/return forms

I know that R3 has expended a lot of effort into seeking changes to the D-report/return forms and in putting them online, so I hope that I’m not dissing the Service’s proposals unduly out of ignorance. However, the CD left me puzzled.

Instead of asking IPs to express an opinion on whether the director “is a person whose conduct makes it appear to you that he is unfit” – because the Service believes that this can delay submission of the form, as the IP takes time to gather evidence – it proposes to ask IPs to provide “details of director behaviour which may indicate misconduct” (paragraph 209). From what I can gather, it seems there will be a tick-box list of behaviours that may indicate misconduct. But IPs will still be working on the basis of evidence in ticking the boxes, won’t they? So all that will be removed is the need for the IP to decide whether a D-return or report is appropriate (the Service’s plan is to have only one form). In fact, it could be more burdensome to IPs, as currently they use their own judgment in deciding that an action or behaviour does not, or is unlikely to, cross the threshold of misconduct, which would lead them to submit a clean return, end of story. However, under the proposed system, it seems to me that the IP would tick the box regarding the particular behaviour and the Service would then have to decide whether it warranted further investigation. Would that help anyone?

I appreciate IPs’ reluctance in expressing an opinion on misconduct, but I suggest that the main rationale for dropping this requirement is that, as currently, the Service will make its own mind up anyway, so what does it matter what the IP thinks? However, what will be lost under the new system will be the IP acting as a first-level filter, which I guess achieves the Red Tape Challenge objective, but it seems unhelpful in the greater scheme of things.

And is this tick-box approach going to be an improvement? Although the Service has promised a free text box (woo hoo!), it all sounds a bit restrictive to me.

One promising proposed change is that the Service will pre-populate returns with information that is already available (presumably from RoC). Not only will this make IPs’ lives a little easier, but also the receipt of a pre-populated return may act as a useful prompt to complete the task.

BIS is pursuing its “Digital by Default vision” and so views are sought on whether electronic submission of D-returns could be mandatory. Although personally I think it would not be a huge leap for all IPs to do this – provided the return was a moveable document that could be worked on and passed around a number of people in the IP’s office before finalisation and submission – I dislike the suggestion that there would be no other way of complying with the legislation and I did have to laugh at the image of an IP typing up his D-return in a public library (paragraph 205)!

The Service is also proposing to change the deadline to 3 months, on the assumption that this would be doable if IPs were not required to express an opinion and on the basis that “all of the information required for completion of the return will be available to the office-holder within that reduced period in the vast majority of cases” (paragraph 212). I’m not so sure, particularly if the IP encounters resistance in retrieving books and records and if directors are slow in submitting completed questionnaires – and these likely will include the cases where some misconduct has gone on. The CD does not mention what an IP’s duty would be in relation to any discoveries after the 3 months, but presumably a professional IP will go to the expense of informing the Service of material findings. I realise that resources are stretched extraordinarily within the Investigations department, but I’m not convinced that this is the best way to tackle the issue.

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Well, I had intended to avoid prattling on for too long, but I think I failed! Hopefully, this is a reflection of the interest I have in the Service’s proposals: despite my criticisms, Insolvency Service, I am grateful for your efforts in seeking to improve things – thank you.


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Scottish Government’s Response to the Consultation on Bankruptcy Law Reform Defies Logic

I appreciate that I am a bit behind the times here – the Scottish Government’s response was published on 1 November 2012: http://www.aib.gov.uk/publications/scottish-government%E2%80%99s-response-consultation-bankruptcy-law-reform.  I won’t summarise it here, as it is a fairly brief document, which is well worth reading.  However, I could not resist commenting on some of the plans.

Fundamental Changes to Trust Deeds

It seems to me that, at present, one strength of the Trust Deed is its flexibility: with the assistance of an IP, a debtor can consider what he/she can afford and what he/she is prepared to put forward to creditors, effectively in exchange for avoiding bankruptcy.  I appreciate that, to some extent, Trust Deeds – and creditors’/creditor agents’ reviewing of them – have become standardised so that in effect we now have a “consumer” Trust Deed, which anticipates a pretty standard level of contribution over a standard three-year period, delivering a fairly standard dividend to creditors.  However, I think it should be remembered that this is not what the legislation (currently) provides and the beauty of it is that debtors can formulate a Trust Deed to fit their particular circumstances.  Not all debtors fit the “standard consumer” model.

However, the SG is now looking to “standardise the period over which an individual makes the assessed contribution in bankruptcy and protected trust deeds, to be equivalent to a minimum of 48 monthly payments”.  The response also states: “There is a strong case for setting a minimum dividend at which Trust Deeds are eligible to become protected. We recognise that there are differing views among interested parties and believe that there is a legitimate debate to be had on the level of any minimum dividend. Our view is that the level would be most appropriately set between/around 30-50p in the £.  We will engage constructively with interested groups over the coming weeks to agree on an appropriate level.”

Why take a flexible tool and impose such restrictions on its use?  And how do these conclusions stack up with the consultation responses?

One of the conclusions described in the report on the consultation responses was: “There should not be a fixed term for completion of a protected trust deed” (page 5) – 71 respondees were opposed to a fixed term and only 29 were in favour.  Perhaps the argument is that, in setting a minimum of 48 monthly payments, the SG is not setting a fixed term!

What exactly is the “strong case” for setting a minimum dividend?  The report on consultation responses observed that “in recent years some creditors have taken a greater interest in PTDs and have actively rejected the protection of trust deeds which propose a dividend of less than 10p in the £” (page 31) – so that means that the Trust Deed framework is working, doesn’t it?  In introducing a minimum dividend at which Trust Deeds become eligible for protection, isn’t the SG taking the power away from creditors to decide what they are prepared to accept?  And how does evidence of creditors rejecting Trust Deeds anticipating 10p in the £ lead to a conclusion that the minimum dividend should be 30-50p?

The report on consultation responses quotes two responses from credit unions in support of 50p in the £ and I have already described how I personally feel about these in my earlier blog post (https://insolvencyoracle.com/2012/09/13/the-aibscottish-governments-report-on-responses-to-the-bankruptcy-law-reform-consultation/).

In my mind, it is simply not logical to put a minimum dividend on a Trust Deed.  The dividend level is simply a measure of net assets/income over total liabilities; it is not a measure of what a debtor can afford to pay and neither is it a reflection of how appropriate the proposal is.  Take two people: one can raise net assets/income of £12,000 and has liabilities totalling £40,000; the other can raise net assets/income of £13,000 and has liabilities totalling £45,000.  Where is the logic in allowing the first person to acquire a Protected Trust Deed, as the dividend will be 30p in the £, but denying the second, as the dividend would be 29p in the £?

What is wrong with a Trust Deed that offers a return of 29p in the £, if the likely outcome of bankruptcy is no improvement?  I remember an IP telling me that she had arranged an Individual Voluntary Arrangement for a 1990s Lloyd’s Names individual, which proposed a return of only a fraction of 1p in the £, but it still represented the best deal for creditors and it involved some reasonable assets/income.  Surely that is the key of voluntary processes, such as IVAs and Trust Deeds – they can offer a better deal for both debtor and creditors, when compared with the alternative of bankruptcy.  They should not be restricted by the need to meet a minimum dividend, which fails to recognise the individual circumstances of the debtor.

So will the introduction of a minimum dividend lead to many more people choosing bankruptcy?  I wonder.  It seems to me that many people will do almost anything to avoid bankruptcy, even when from a purely financial perspective it is obviously the best option for them.  If they are prohibited from seeking a PTD, I wonder whether they would rather take the option of a long-term DAS or informal debt management plan or simply struggle on in no man’s land.  In introducing a minimum dividend for PTDs, it seems to me that the misery for thousands will be extended for many years.

Protected Trust Deed “Guidance”

The SG appears to be seeking to introduce a further fundamental change to the PTD process, but via “Guidance”: “New Protected Trust Deed Guidance will also be introduced, to encourage best practice to be adopted in all cases.  The Guidance will include a revised structure for trustee fees consisting of an up-front fee for setting up the trust deed and a percentage fee based on the amount of funds ingathered from the debtor’s estate.”

I believe that it is correct to avoid prescribing the basis on which Trustees should be paid via legislation, but I do wonder how the SG/AiB expects its Guidance will persuade IPs to re-structure fees to be on this fixed sum and percentage basis.  What pressure will it bring to bear on IPs who do not follow this approach that it calls “best practice”?  Will the AiB, as is stated in the paragraph preceding this, “take a more proactive role, where necessary compelling trustees to act by using their powers of direction”?  But the Guidance is just guidance, isn’t it?

Creditor applications for Bankruptcy

The SG response states that the Bankruptcy Bill will look to develop “the bankruptcy process to facilitate the ability for non-contentious creditor applications to come to AiB rather than a petition to the court for an individual’s bankruptcy”.  This plan appears most odd to me, particularly in view of the report on the consultation responses.

In the report’s summary, one of the conclusions of the consultation responses was: “creditors should continue to petition the court for an individual’s bankruptcy” (page 6), which appears unequivocal to me.  The response statistics also bear out this conclusion – there were more responses opposed to the proposal that creditor applications be submitted to the AiB than there were responses in favour and this remained the case even when the proposal was restricted to “non-contentious” creditor applications.  So what is the argument for proceeding with this plan?

Fortunately, Westminster has decided not to take forward the idea that creditor petitions for bankruptcy and company windings-up in England might avoid the courts.  It took that decision having consulted on the proposal and having received the clear message back that the majority were opposed.  It is strange that Holyrood has decided to take the opposite view on having received a similar reaction to a similar consultation question.

 

Of course, I have only commented on the plans that appear to me to be most significantly flawed – there are many more planned changes, including some that make perfect sense and are welcome.  However, some leave me asking the question: why?  What ills are these changes seeking to remedy?  Are they going to be an improvement over what we already have, which seems to me to work reasonably well on the whole?  And what kind of world will we live in when it all becomes a reality?