Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: Employment Rights Act


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Stepping up Scrutiny of ERA Claims

There’s no doubt that the RPBs have stepped up scrutiny of RP14/15 forms in recent months.  In this blog post, I explore what the Acts and Dear IP actually require when it comes to “verifying” RP14/15 data and the measures you can take to protect yourself from RPB criticism that you’re not doing enough.

An important resource on this subject is Dear IP chapter 11, found at: https://www.gov.uk/guidance/dear-insolvency-practitioner/11-employment-issues

What does the legislation require?

The Employment Rights Act 1996 and the Pension Schemes Act 1993 use similar language.  They require you to notify the RPS of the amount of debt that “appears” to be owed (S187(1) ERA96 and S125(3) PSA93).

However, the RP14/15 forms use much stronger language.

What do the RP forms require?

The RP14 form requires the office holder to make certain declarations including:

  • “This form and any attachments have been completed, and the information given is correct, to the best of my knowledge”

Wow: “best” is a high bar, isn’t it?  It doesn’t allow room even for inadvertent errors. 

The RP15 form includes a similar declaration:

  • “The information given in this form is correct and complete to the best of my knowledge.
  • “I have examined the claim, including the RP15A spreadsheet and the actuarial certificate if applicable, in accordance with section 125 of The Pension Schemes Act 1993”

The above reference to “examined… in accordance with section 125” seems odd, given that S125 includes the far woollier “appears to be” wording, but hey ho.

The RP14 warning

The RP14 form includes a warning that I guess the RPS is hoping will make IPs stop and think:

  • “NOTE: This information is required under section 190 of the Employment Rights Act 1996.
  • “Any refusal or wilful neglect to provide any information required by the Secretary of State, and any false statement made knowingly or recklessly in response to this requirement, may amount to a criminal offence under that section.”

Personally, I question whether this threat has any teeth. My reading of S190 is that the criminal offence can only be committed by “the employer” who provides false information or by anyone who does not cooperate in producing documents and, while S190 states that a director or similar officer can be culpable for a body corporate’s failure, it still seems to me a bit of a stretch to squeeze an office holder into this section.

But of course I would not want to chance it and in any event we don’t need the threat of a criminal conviction to persuade us to be diligent in our work, do we?  If nothing else, we need to comply with the Insolvency Code of Ethics’ fundamental principle of professional competence and due care.

RPB sanctions

Breach of this fundamental principle tends to be the primary allegation on which RPB disciplinary sanctions are made in this area.  Over the past 6 months, three relevant RPB sanctions have been published:

  • IPA (Aug-23)
    • Failed to ensure that a complete and accurate RP15 was submitted
    • Fined £2,000
  • ICAEW (Oct-23)
    • Failed to inform RPS that the IP had not verified employee claims (and other unrelated failures)
    • Fined £5,000
  • IPA (Nov-23)
    • Failed to take sufficient steps to verify employees’ claims and to carry out independent verification of information provided by directors before submitting RP14As and failed to raise any concerns with the RPS as to the veracity of the employees’ claims
    • Fined £10,000

Why has this become such a hot topic?

Protecting against fraudulent claims

All the way back in October 2008, Dear IP warned us to be on the look-out for fraudulent claims (chapter 11 article 27).  More recently, in December 2020, a more in-depth Dear IP was issued (chapter 11 article 70) flagging up the warning signs for potential fraud.  This article is well worth another read.

Alarmingly, it appears that some companies have been operated perhaps solely for the purpose of extracting fraudulent payments from the RPS.  Even some legitimately trading companies may have ghost employees on their books.  But also fraud can be at the lower level, where individuals’ rates of pay or outstanding holiday entitlements are exaggerated.

Not all the warning signs noted in the Dear IP will be spotted from a company’s records.  But what work are IPs expected to do?

Where does the “verification” requirement come from?

As we have seen, the need to “verify” information does not appear in the legislation or on the RP forms.  Where does this idea come from?

It seems to derive from Dear IP chapter 11 article 27, which states:

  • “RPS assumes that the information on the RP14a has been verified from the employer’s records before it is sent to the RPS.”

Thus, if you receive information from any source other than the employer’s records, the assumption is that this information has been verified against the employer’s records.  In my experience, the RPBs seem to have converted this into a requirement, with the IPA taking the strictest line.  Where I have referred in this article to the RPBs, generally I mean the IPA.

Are you expected to verify all data?

Interestingly, Dear IP chapter 11 article 70 suggests not necessarily:

  • “Insolvency Practitioners are reminded that they should make an assessment on a case-by-case basis to decide what reasonable checks are necessary to verify information or identities before submitting the RP14/14A to the RPS.”

Of course, you would need to have documented this assessment for the file – and it is open to an RPB to challenge such an assessment as falling short of showing professional competence or due care – but this Dear IP does appear to allow an IP to decide that verification of alldata may not be reasonable in every case.

However, in my experience, the RPBs appear to be starting from a default that all data – that is, every piece of data for each employee on the RP14A/15A – need to be verified if at all possible.  After all, isn’t that the only way you are going to be able to declare that the data is “correct to the best of my knowledge”?

A variety of data sources

Ok, so the ultimate data source is the employer’s records.  But sometimes the records just aren’t sufficient, are they?  For example, holiday entitlement data can be sketchy and sometimes non-existent in the records and many employees have a better grip on what overtime or commission they’re owed.

Are there any other acceptable sources of information?

Is it ok to use data on a spreadsheet completed by the director/employee?

It is fairly common practice to provide a pro forma spreadsheet to a director or payroll person, usually pre-appointment, and ask them to complete it with all the employee data. 

This may seem a practical way to compile data from a variety of company records that the director/employee knows inside-out.  However, going by the RPBs’ recent activity, this triggers the Dear IP need for you to “verify” the data against the company’s records.  This pretty-much defeats the object of getting someone else to complete the spreadsheet for you, doesn’t it?

Is it ok to rely on information from pension providers?

Again, this is a fairly common practice, not least as the RP15 form expects the RP15A to be completed by the pension provider.  However, the RPBs are expecting the RP15A data to be verified against the employer’s records.

Is it ok to rely on RP14As/15As drafted by employment specialists?

It appears not.  Even where the specialist has been instructed by the office holder to act as their agent, the RPBs appear to be expecting all data on the forms to be verified against the employer’s records.  The argument is: how else can the IP sign off the form as correct to the best of their knowledge?

In my mind, this seems a step too far.  Surely the RPB doesn’t expect an IP personally to cross-check all the data on an RP14A/15A form against the company’s records where one of their staff have completed the form, do they?  But how is this different from their agent, an external specialist, completing the form?

I asked an Insolvency Service person this question.  They maintained that, in order for the IP to make the declaration, the IP must have some basis on which to form an opinion that the data is correct, so this would require some cross-checking.  However, they did at least agree that it need not be all data.

Is it ok to ask the employee direct or to draw information from the RP1?

I’m sure you can guess my answer: nope, not without verifying the information against the company’s records.

However, Dear IP (chapter 11 article 70) does provide a precedent for this:

  • “Where there is insufficient evidence in the records, IPs should not use the RP1 data to complete the RP14A entry without contacting RPS first to discuss. In the absence of that discussion RPS will assume that there is evidence in the records to substantiate the RP14A”

There’s the instruction: if you have no alternative, then contact the RPS first and discuss with them the last resort of relying on the RP1 data.

What if the company’s records conflict with what an employee says they are owed?

I have heard stories of, not only employees, but also RPS staff badgering IP staff to submit an amended RP14A so that an employee’s claim can be processed.  Of course, while there may be legitimate reasons for amending an RP14A where you are satisfied that the RP14A is wrong, what if you’re simply being told by the employee that the company’s records are wrong or incomplete?

With all the emphasis on preventing fraud and relying on the company’s records, I wonder what would happen if you just said no, you’re not prepared to amend the RP14A. 

S187(2) ERA96 and S125(5) PSA93 empower the RPS to make a payment without the office holder’s “statement”, so you should not be held hostage with the threat that an amended RP14A is the only way the employee is going to get paid.  You will have submitted the original RP14A to the best of your knowledge, having verified the information as far as possible against the company’s records, so why change your mind on the employee’s say-so?

But what if you just don’t have sufficient company records?

Well, as mentioned above, if you are drawing information from an RP1, Dear IP instructs you to discuss this first with the RPS.

In all other scenarios where you use data other than that drawn directly from the employer’s records, I recommend that you notify the RPS of this action when you submit the RP14/15. 

In my mind, if you use data from another reasonable source, it could still be what “appears” to be owed and it could be “correct to the best of your knowledge”, provided that you truly do not have in your possession any other more reliable knowledge, e.g. from company bank statements, that you haven’t checked against.  The RPB sanctions above also illustrate that notifying the RPS of the limitations of your verification work is an acceptable step.

How exactly should you verify data?

As with all things in insolvency administration these days, I think it comes down to having an established procedure and checklist to document the work done and decisions made.  Here is my 6-step process.

1. Document the information you obtained, i.e. each item of data required by the RP14A or RP15A.  It would also be wise to follow Dear IP chapter 11 article 81, which sets out the RPS’ approach to directors’ claims: as the office holder signing off an RP14, you need to satisfy yourself that a director’s claims as an employee are substantiated and so it would seem reasonable to apply the same rationale as the RPS and to document your decision in this regard

2. Document the source(s) of each part of the information, i.e. if it were not all in the company’s records, how did you plug each gap?

3. Check information against the bank statements, e.g. who was paid by the company, what were they paid and when were they – and the pension scheme – last paid?

4. Note whether the company records support each item of data and, if not, what you are relying on

5. Note the bases for calculating the weekly pay and holiday rates for employees with variable rates of pay (see e.g. Dear IP chapter 11 article 72) and how you have calculated holiday entitlements

6. Tell the RPS everything, in particular the extent of your verification work and the source(s) of information where the employer’s records were insufficient

At the Compliance Alliance, we have created a checklist covering these steps and we recommend that the completed checklist be sent to the RPS at the time of submission of an RP14/15 form.

Finally also you need to keep abreast of the legislation.  For example, Dear IP chapter 11 article 82 noted several 2023 SIs that may affect the definition of “wages” or “weekly pay” and other Regulations will affect holiday pay calculations (Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023).  Alternatively, instruct employment specialists to assist.  This can take much of the pain out of the process.

That’s a crazy amount of work?!  Are the RPBs aware of how this impacts on time costs?

I asked an Insolvency Service person this question.  They appreciated that substantial time could be required to carry out this verification work.  They maintained that the RPS has a duty to ensure that payments from the NI Fund are accurate and they are therefore looking to IPs to help by providing accurate RP14/15 data.

The common theme in all this is: how else can you declare that the information you have provided on an RP14/15 is correct to the best of your knowledge?

I recently presented a webinar on this topic to clients of the Compliance Alliance.  You and all your colleagues can get access to a recording of this webinar, along with access to all the recorded webinars in our library and c.10 future webinars, for £350 + VAT for one year.  For enquiries, please email info@thecompliancealliance.co.uk.


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Not the Eurosail Supreme Court judgment

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In the middle of drafting today’s post, I noted the release of the Supreme Court’s decision in Eurosail. I think I need time to absorb that judgment, but you can find it here: http://www.supremecourt.gov.uk/news/latest-judgments.html.

Instead, I’ll plough on here with a few other judgments:

• SoS v McDonagh & Ors: post-CVA wages/HP claims arising on liquidation not payable from NI Fund
• HSBC v Tambrook: Jersey court asks English court to make an administration order via S426 IA86
• Tanner v Millar: does a friend’s blank cheque mean you’re not insolvent?
• Firstplus v Pervez: a lesson for mortgagees in getting the pre-action process right

Post-CVA arrears of wages and holiday pay not payable from the NI Fund when company moves into liquidation

Secretary of State for Business Innovation & Skills v Mr M V McDonagh & Ors [2013] UKEAT 0287/12 (14 February 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0287_12_1402.html

Summary: This Appeal Tribunal overturned the decisions of two separate Employment Tribunals that former employees of a company that had been in CVA were entitled to claim arrears of pay and holiday pay from the NI Fund when the company subsequently went into liquidation. The appeals judge decided that the relevant date for claims was the date that the company’s CVA had been approved, not when later it had been placed into liquidation.

The Detail: Two separate Employment Tribunals had decided that former employees of companies that had been in CVA were entitled to claim arrears of pay and holiday pay from the NI Fund when the companies subsequently went into liquidation. In each case, all the twelve claimant employees had been unaware that the company had been placed into CVA – they had continued to be paid for some time until their employment ended when, or shortly before, the companies went into compulsory liquidation, leaving them with claims for arrears of wages and holiday pay. The NI Fund rejected their claims on the basis that the relevant date of these claims was after the commencement of the company’s insolvency, which it claimed was the date the CVA was approved, not the date of the liquidation commencement.

The Honourable Mr Justice Langstaff noted that the original judge, who had decided in favour of the employees, had interpreted the Employment Rights Act 1996 in light of what he had assumed was Parliament’s intention, suggesting that, because the company in CVA could – and did – continue to pay wages, at that time it had not become insolvent for the purposes of the ERA96, but that this point had occurred only when the company had been placed into liquidation. “That is to apply a definition of insolvency which is not to be found in the Act” (paragraph 22). “It is incoherent to suggest that a company which is insolvent by statute becomes insolvent again or in addition or in any additional way when wound up. The underlying state of insolvency has not changed” (paragraph 35).

The judge also found no contradiction in the EC Directive, which invites Member States to fix a relevant date for wages claims alternative to the commencement of insolvency proceedings, which, contrary to the original judge’s opinion, include CVAs, but that the UK had not taken up that invitation.

Langstaff J recognised the apparent unfairness of his conclusions in this case, particularly where the employees had no knowledge of the CVA, but he pointed out that this decision only affected debts that were payable before the start of the insolvency proceeding. “Other debts would be payable afterwards. A period of notice pay, for instance, to which each of these Claimants was entitled was not excluded from guarantee” (paragraph 56).

According to counsel on this case this was the first time that this question has been raised before any court, which personally I find most surprising: there must have been many cases where employees have been left with the full range of claims after a company in CVA has moved into liquidation. Perhaps this is the first time, however, that an employee has sought to dispute the RPO’s rejection.

English court’s rejection of Jersey court’s request for assistance in making administration order swiftly reversed

HSBC Bank v Tambrook Jersey Limited [2013] EWHC 866 (Ch) (12 April 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/866.html

Summary: A secured creditor applied for an English administration order over a Jersey company. The application was supported by a letter from the Royal Court of Jersey asking that the English Court assist, pursuant to S426 of the IA86, by making the administration order. At first instance, the application was rejected on the basis that, as there was no insolvency proceeding either ongoing or intended in Jersey, the English Court could not “assist” the Jersey Court by making an English administration order. On appeal on 1 May, this decision was overturned, although the decision has yet to be published.

The Detail: Tambrook is a Jersey-registered and generally accepted to be Jersey-COMI company, although its main business activity is in England. None of the insolvency options available under Jersey statute were considered attractive by either the company director or the company’s secured creditor, but they saw significant advantages in an English administration.

As the company’s COMI is not England, the secured creditor sought to apply for an English administration via S426 of the IA86. S426(4) states that the English court “shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory”. The Royal Court of Jersey had written a letter to the English High Court requesting that it assist, pursuant to S426, by making an administration order.

In the first instance decision, Mr Justice Mann declined to make an administration order on the basis that the court was being asked to provide far more than simply assistance to the Jersey Royal Court: “this court cannot ‘assist’ another court which is not actually doing anything, or apparently intending to do anything, in its insolvency jurisdiction” (paragraph 18). Mann J came to this decision despite the applicant’s counsel referring to five Jersey cases in which he claimed administration orders had been granted in similar circumstances; the judge felt that they did not assist him in any way, as no reasoned decisions were available on those cases.

Although the full judgment has yet to be published, several sources report (e.g. http://www.mourantozannes.com/news/news/breaking-news-tambrook-overturned-on-appeal.aspx) that this decision was overturned on the hearing of an appeal on 1 May 2013.

Does a blank cheque from a friend disprove insolvency?

Tanner v Millar [2013] EWHC 750 (Ch) (23 January 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/750.html

Summary: Although this was a fairly insignificant – and unsuccessful – application for permission to appeal against a transaction at an undervalue judgment, I thought it contained an unusual twist: the beneficiary of the transaction (Tanner) sought to prove that the bankrupt had not been insolvent at the time of the transaction because Tanner had been capable and willing to pay any sum to get the bankrupt out of a hole. The judge decided that this evidence probably would not have influenced the result of the case: the district judge had found that the debtor had been insolvent at the time based on the position of his own assets and liabilities.

The Detail: In an earlier judgment, the judge had found that the bankrupt had paid away substantial sums to Tanner by way of a transaction at an undervalue and thus ordered Tanner to repay the sums to the Trustee in Bankruptcy. Tanner sought permission to appeal the decision on a number of grounds. One of the grounds was that, at the time of the transaction, Tanner had had access to substantial funds and was willing to step in to provide to the bankrupt whatever funds were necessary to meet a contingent damages claim, which had been the key to the bankrupt’s insolvency.

Mr Justice Sales refused permission to appeal, deciding that this ground – and the others – did not meet the standard tests to allow fresh evidence to be admitted. In relation to this ground, Sales J decided that, even if admitted, it probably would not have an important influence on the result of the case: “It is quite clear, as the district judge found, that the bankrupt did not have sufficient assets of his own to meet his liability to pay damages. He was therefore insolvent. The fact that he had a generous friend in the form of Mr Tanner on hand who might have been prepared to help him (but had no legal obligation to do so) does not meet the point, as determined by the district judge, that the bankrupt was himself insolvent at the relevant time” (paragraph 15).

Mortgagee’s pre-action information must not be issued too early in the process

Firstplus Financial Group Plc v Mr Khalid Pervez [2013] ScotSC 27 (22 March 2013)

http://www.bailii.org/scot/cases/ScotSC/2013/27.html

Summary: In this Scottish case, the Sheriff decided that the mortgagee had not complied with the pre-action requirements for enforcing its security because it had provided the debtor with the pre-action information at the same time as the “formal requisition” letter and before the expiry of the calling-up notice. Although different Acts resulted in different interpretations of the timing of the debtor “entering into default”, each interpretation led to a conclusion that the pre-action information had been provided too early in the process. Although the Scottish Government’s guidance suggests compliance at an earlier stage, it could not take precedence over primary legislation.

The Detail: The mortgagee, Firstplus, sought orders for the possession and sale of Pervez’s residential house. The case turned on whether Firstplus had complied with the pre-action requirements of the Applications by Creditors (Pre-Action Requirements) (Scotland) Order 2010 (“PAR Order 2010”).

Firstplus had communicated the debtor a number of times, culminating in the issuing of a “formal requisition” letter on 26 May 2011. This letter had included the required pre-action information. Later still, Firstplus served a calling-up notice on 19 July 2011. In view of the fact that the PAR Order 2010 states that the pre-action information “must be provided as soon as is reasonably practicable upon the debtor entering into default”, the key question was: when had the debtor defaulted? The question is complicated by the fact that “default” has different meanings under the different Acts to which the PAR Order 2010 refers: the Conveyancing and Feudal Reform (Scotland) Act 1970 and the Heritable Securities (Scotland) Act 1894.

The 1970 Act defines default, in part, as: “(a) where a calling-up notice in respect of the security has been served and has not been compiled with (Standard Condition 9(1)(a)); (b) where there has been a failure to comply with any other requirement arising out of the security (the court’s emphasis) (Standard Condition 9(1)(b));”. In this case, the Sheriff concluded that the calling-up notice had to be served and thus the earlier default notice was invalid and ineffective. On this basis, as the expiration of the calling-up notice had occurred after the pre-action information had been sent, the Sheriff decided that the PAR Order 2010 had not been complied with.

The Sheriff also reviewed the 1894 Act. He concluded that, although the 1894 Act does not expressly define “default”, “it is plain from the express terms of section 5 of the 1894 Act that the ‘default’ envisaged by that section can only occur ‘after formal requisition’ of the principal (my emphasis). Logically, therefore, the ‘default’ and the demand for payment cannot be simultaneous” (paragraph 59). It was Sheriff S Reid’s view that there must be a short time lapse between the issuing of the demand and the conclusion that the debtor had “made default” in terms of the 1894 Act and, although in this case the Sheriff need not have decided how long that time period should be, he expressed the view that “that time is likely to be very short – probably no more than one hour in commercial cases (Bank of Baroda v Panessar [1987] Ch. 335; Sheppard & Cooper Ltd v TSB Bank plc [1996] All ER 654), perhaps no more than a few clear banking days in non-commercial cases – being, in any event, no more than is necessary, in ordinary course, for the mechanics of a monetary transfer to be instructed and effected through recognised modern banking techniques” (paragraph 67). Therefore, because in this case the pre-action information had accompanied the “formal requisition”, the Sheriff decided that the PAR Order 2010 had not been complied with.

Firstplus had argued that it had been obliged to comply with the Scottish Government’s “Guidance on Pre-Action Requirements for Creditors”, which states that the pre-action information had to be provided as soon as the debtor enters into default “for example, by falling into arrears”, which would appear to suggest a far earlier point than that indicated by the 1970 and 1894 Acts. The Sheriff’s response was that “In my judgment, while creditors must ‘have regard to’ any Guidance issued by the Scottish Ministers in this respect, they are not obliged to follow it, still less is the Guidance a binding or definitive statement of the law. If that Guidance was seeking to define ‘default’ for the purposes of the 1970 Act as comprising merely a debtor ‘falling into arrears’, it would have been, in my judgment, an incorrect statement of the law. The Guidance cannot take precedence over, or contradict the proper meaning of, primary legislation” (paragraph 84).

This judgment has left me with a question: given the different timings of default under the two Acts, what would have happened had the pre-action information been sent after the “formal requisition” but before the calling-up notice?