Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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No summer holidays for the Insolvency Service?

0828 Noosa

Yesterday, the Government published its response to the House of Commons BIS Committee’s February 2013 report on the Insolvency Service. My immediate reaction is: it looks like the Service is going to be very busy over the summer!

The report describes plans in the areas of:

• Funding models
• CDDA work
• SIP16 – and now potential pre-pack abuse – monitoring
• Interaction with the RPBs and complaints about IPs
• S233 continuation of supply changes
• Review of IPs’ fees

In addition, the response includes reference to the Service’s ongoing plans in relation to “estate rationalisation”, which was picked up by Insolvency Today: (http://www.insolvencynews.com/article/15147/corporate/government-responds-to-insolvency-service-concerns).

The Government’s full response can be found at: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/1115/1115.pdf

Funding models

There is a BIS/Insolvency Service joint project to review potential funding models, which is also considering fee structures. The response states that they are also exploring “the possibility of fees being paid by instalments and/or linked to the discharge of the bankrupt” (paragraph 33). I thought that was an interesting addition to the mix of ideas: so instead of an automatic 1-year discharge, it could be extended until the bankrupt has paid his/her instalments? It would mean fewer recoveries via IPOs/IPAs, wouldn’t it, so the OR would have to write off more administration fees..?

CDDA work

Reference is made to the efforts of R3, the RPBs, IPs and the Insolvency Service “to simplify reporting processes, enhance guidance and ensure improved feedback on the outcomes of ‘possible misconduct’ reports provided by IPs” (paragraph 36). Personally, I feel that the efforts to put D-forms online are one step forward compared to the two steps back of the Service’s revised guidance on CDDA reporting, which adds yet more to the document/information wish-list when submitting D-reports. However, I think the Service’s presentations at courses and conferences on what they are looking for in D-reports and what IPs can dismiss as immaterial are useful – I would recommend them – albeit in some respects the points are difficult for IPs to apply in practice for fear of being criticised for using their professional judgment too liberally.

As an aside, I was interested to note the proportion of D1 reports to non-compulsory corporate cases: 35% in 2010-11 and 28% in 2011-12 (paragraph 42) – perhaps useful benchmarks for IPs, although of course every IP has his/her own make-up of appointments that will lead to more or less D1s in his/her particular case.

I found the Service’s confession of staff turnovers quite alarming. Within its Investigation and Enforcement teams in recent years, they reported a 38% internal turnover of employees, with over 60% in front-line investigation roles (paragraph 40). It is not surprising that, along with the impact of austerity measures on resources, “investigation and enforcement outputs have dipped since 2010”. The report sounds positive, however, that perhaps a corner has been turned with the agency “delivering closer to expectations” in the second half of this year (paragraph 41).

Despite these positive sounds, the response includes: “given the concerns raised by the Committee and feedback from insolvency practitioners on the numbers of ‘possible misconduct’ reports being taken forward, the Insolvency Service intends to look again at how it assesses and prioritises cases. This will be done during 2013/14, with the goal of ensuring greater transparency on its processes and shared expectations on its investigation and enforcement outputs” (paragraph 48).

Pre-packs

It seems to me that there is a shift away from focussing, excessively in my view, on SIP16 compliance towards investigating potential abuse of the pre-pack process – personally, I welcome this shift.

However, I feel that the response unsatisfactorily addresses the Committee’s recommendation that the Service’s SIP16 monitoring should include “feedback to each insolvency practitioner… where SIP16 reports have been judged to be non-compliant”. The response simply refers to: (i) the Service’s education programme “including a webinar” to ensure that the requirements of the SIP are understood; (ii) reporting significant issues to the relevant RPB; (iii) revising SIP16; and (iv) Dear IP 42 issued in October 2009. It seems nonsensical to me that the Service would spend time reviewing the SIP16s, deciding whether they are compliant or not including, as acknowledged in the report “minor and technical” non-compliances, and then do not inform the IPs direct of their conclusion. Fine, report the serious cases to the relevant RPB, but how does the Service expect IPs to learn by their mistakes if they are not told about them?!

The Government response highlights proposed changes to SIP16, which “will require IPs to move faster in informing creditors about pre-packs. It will also require a specific and explicit statement by the IP to confirm that a pre-pack was the most appropriate method of producing the best return for creditors” (paragraph 58). Personally, those proposed changes to the SIP, as appearing in recent RPB consultation, do not concern me, but does that mean that the rejection of the lengthening of the SIP16 bullet point information list (as per the consultation draft SIP16) will not be a deal-breaker with the Service? The Government doesn’t seem too concerned about adding to the list. I think I know what my consultation response will be…

As I mentioned, I am pleased to see the Service’s apparent new focus on cases “where there is evidence of material detriment to creditors as a result of IP behaviours” (paragraph 60) and “targeted investigation… going beyond simply reviewing SIP compliance to assess potential abuse of the pre-pack procedure” (paragraph 63). The Service “has been investigating, on a risk assessed basis, the use of pre-packs by small to medium sized IP firms where there have been a number of previous instances of breaches of SIP16 [and] monitoring the relationship between IPs and online introducers to see whether the pre-pack process is being abused through misleading advertising” (paragraph 52). I hope that this monitoring moves on to getting under the skin of the cases, so that it doesn’t just turn into a statistical review black-marking IPs simply working in a particular market irrespective whether there is any real abuse – and for that, perhaps we should look to the RPBs dealing with the Service’s referrals – but overall I say “Hurrah!”

The Government response also confirms that a review into pre-packs “will be launched in the summer after the Service has reported on its current monitoring of pre-packs… and the new SIP 16 controls on pre-packs have been put in place” (paragraph 51).

Interaction with the RPBs and complaints about IPs

Nestled within the pre-pack comments is this: “The Insolvency Service is strengthening its role as the oversight regulator of the IP profession. A new senior post to lead related activities will be filled shortly. This will include working with the insolvency regulators to drive action on commitments that will enhance enforcement and improve confidence in the proper use of insolvency frameworks” (paragraph 57).

The response also states that “common sanction guidance is close to implementation. This is expected to be in place over coming months” (paragraph 58). It also refers to a summer implementation of the new complaints gateway, which will mean that “in future virtually all complaints about IPs will come first to the Insolvency Service, where they will be subject to an initial assessment before being forwarded, as appropriate, to the relevant RPB for action” (paragraph 73). We also await the Insolvency Service’s Annual Review of IP Regulation.

S233 continuation of supply changes

A short one this: the Enterprise and Regulatory Reform Bill – now “Act”, as the Bill received Royal Assent on 24 April 2013 (see https://www.gov.uk/government/news/enterprise-and-regulatory-reform-bill-receives-royal-assent – although that’s another story entirely) – includes the power to create of secondary legislation to extend the scope of S233. However, we still await the consultation before the Government decides “how and in what terms to exercise the new powers” (paragraph 70).

Review of IPs’ fees

Another short one: Professor Kempson’s review “is expected to produce final recommendations for consideration by the Secretary of State and the Minister with responsibility for insolvency issues by the end of June 2013” (paragraph 77).

Goodness, what a busy summer it will be!

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HoC BIS Committee recommendations on the Insolvency Service: will they help?

Goodness, what a busy week it has been! Consultations, draft Regulations, a DMP Protocol, and a bit of a backlog of High Court decisions… but they will have to wait.

Although the release of the House of Commons’ BIS Select Committee’s report on the Insolvency Service has already been reported widely, I wonder if you, like me, sigh at the tone of the press coverage, which all seems to lie somewhere on the spectrum between cold neutrality and wholehearted support. Don’t you wish people would come out and say what they really think? Therefore, I thought I would give it a go…

If you want to read all the Committee’s recommendations, this is not the place for you – I have only described the ones that have raised my hackles or got me thinking. You can access the report in full at: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/675/675.pdf

Changes to debtors’ bankruptcy fees

“At present, individual debtor bankrupts have to pay an upfront fee of £525. Given the level of debt relief they can receive we agree with the Insolvency Service that it would not be unreasonable to increase that fee, possibly on a sliding scale. We also agree that the fee should not be automatically required to be paid up front but could be staggered along similar lines as payments to debt management companies. We will expect the Insolvency Service to set out progress in both of these areas in its response to this Report.” (paragraph 43)

It is clear that the Insolvency Service’s sums currently do not add up; something must change (and the BIS Committee made other recommendations to this effect). However, I had always thought that the charges relating to the bankruptcy process reflected the work carried out (setting aside the need for cross-subsidisation, which gives rise to another debate entirely). How does the service provided differ depending on a debtor’s level of debt? Whatever the individual’s liabilities, he/she has to go through pretty much the same process to enter bankruptcy as anyone else. True, the higher the debt level, often the more time-consuming the bankruptcy administration, but this is usually also reflected in the asset values, and as asset realisations attract a percentage fee, this already means that a high-liability bankruptcy is paying more.

I am not saying that individuals with large debts should not pay more, but I feel it is quite a step-change to structure fees, not as proportionate to the work undertaken, but to reflect somehow the level of debt relief that the individual is receiving. I am certain that it would not work in other fields of insolvency: could an IP justify basing the cost of putting a company into liquidation on the level of creditors’ claims, rather than on how much work was involved in preparing the Statement of Affairs and convening/holding the meetings? There is a Dear IP (no. 18, July 1991) warning against such a practice!

It is widely accepted that the cost of the petition and court fee restricts access to bankruptcy for many individuals. Graham Horne told the Committee that the Service would look at the DMCs’ model of paying fees in instalments. However, from the consultation and response on bankruptcy petition reform, it appears to me that the Service is looking only at the possibility of individuals paying instalments prior to entering bankruptcy, not after bankruptcy. Quite simply, this is not the DMCs’ model, which involves providing the service of administering a debt management plan whilst being paid the fee by instalments. It will be of little use to individuals to have to make payments to the Service… over how long, 6 months, 12 months..? but not get the relief of a bankruptcy order until the £700 (or more) is paid in full. I can imagine the Service’s suspense account soon bulging with countless numbers of one or two months’ staged payments from individuals who intended to go bankrupt, but because of the continuing stress of fighting off creditors they handed their affairs over to a DMC simply for a break from it all.

If a bankruptcy order cannot be made until the petition and court fees have been paid in full, it is still an up-front fee notwithstanding whether this is paid in instalments, and it will remain a barrier to bankruptcy for many.

Would the Service contemplate providing for the fees to be paid after bankruptcy? The Service already charges £1,625 to each bankruptcy estate and the report acknowledges that this is not recouped “in the majority of cases” (paragraph 35), so a post-bankruptcy application fee would simply be another unrecovered cost to write-off. There would be a few cases that could bear this cost, but then who really would be paying? The creditors.

Pre-packs

“We therefore recommend that together, the Department and the Insolvency Service commission research to renew the evidential basis for pre-pack administrations.” (paragraph 72)

Some have greeted this with an “oh please, not this old chestnut again!” Personally, I would welcome this step. Arguments against the use of pre-packs as a principle (or at least those that involve connected parties, “phoenixes”) usually relate to the perception that the connected party has achieved an unfair advantage – the directors have been able to under-cut their competitors because they have left creditors standing with Oldco and they have bought the business and assets at a steal. There is the additional allegation that there is no overall benefit to the economy because, whilst jobs may be saved in the business transfer from Oldco to Newco, jobs are lost in rival companies and/or with creditors. I think that the difficulty the insolvency profession has in responding to these arguments is that all IPs can do is their best, their statutory duty to maximise realisations of the insolvent company’s assets; even if these anti-pre-pack arguments were valid and that pre-packs were not good for the world at large, if IPs were to adjust their actions somehow to accommodate these wider concerns, i.e. resist completing a pre-pack in favour of a break-up or an expensive trading-on in the hope that an independent buyer comes along, they could be failing in their statutory duties.

If these arguments against pre-packs hold water, then let’s see the evidence and then watch the policy-makers decide whether some or all pre-packs should be banned in the public interest. In the meantime, all IPs can do is their best to fulfil their statutory duties in relation to each insolvency over which they are appointed.

One small point: I sincerely hope that the researchers avoid falling into the trap occupied by the pre-pack protesters. The arguments of unfair advantage and of creditors being left high and dry whilst the phoenix rises apply to business sales to connected parties, not to pre-packs. If an IP trades on a business in administration and then sells it to a connected party, the same allegations apply, don’t they? It seems strange to me that there is so much antagonism towards pre-packs when, really, I see little difference between a pre-pack administration and the Receivership business sales of the 1990s. In fact, I would suggest that pre-pack administrations are an improvement over Receivership business sales because at least the administrator is an officer of the court with wider responsibilities to creditors as a whole.

I’m not sure how the researchers will test the allegations. However, if they limit the research to a comparison of the direct outcomes of pre-pack sales compared with longer-running administration business sales, then I do not believe it will do anything to answer those who cry unfairness.

SIP16

“Despite the introduction of Statement of Insolvency Practice Note 16 and additional guidance, pre-pack administrations remain a controversial practice. The Insolvency Service is committed to continue to monitor SIP 16 compliance, but to make this effective, non-compliance needs to be followed through with stronger penalties by way of larger fines and stronger measures of enforcement. We have some sympathy with the concerns of the regulator R3, which argues that noncompliant insolvency practitioners are not made aware of the criteria on which they are being judged by The Insolvency Service, or given any feedback on their reports. We recommend that the Insolvency Service amend its monitoring processes to include feedback to each insolvency practitioner and their regulatory body where SIP 16 reports have been judged to be non-compliant. We further recommend that the criteria by which SIP 16 reports are judged should be published alongside the guidance.” (paragraphs 80 and 81)

This time I will cry: “oh please, not this old chestnut again!” Given the perceptions of unfairness surrounding pre-packs – or to describe the issue more accurately, business sales to connected parties – as explained above, it is not surprising that “despite the introduction of SIP16 and additional guidance, pre-pack administrations remain a controversial practice”. Even with 100% compliance with SIP16, the controversy would never fall away. SIP16 is simply about helping creditors to understand why the pre-pack sale was conducted; it will never answer the allegations that the practice of pre-packing businesses in general is unfair.

However, this limitation of SIP16 disclosures can never be an excuse for IPs failing to meet the requirements of the SIP. It is not beyond the ability of professional IPs to get this right.

Unfortunately, the key principle of SIP16 of “providing a detailed explanation and justification of why a pre-packaged sale was undertaken so that [creditors] can be satisfied that the administrator has acted with due regard for their interests” (SIP16, paragraph 8) does not fit well with a checklist of pieces of information. If an IP were to sit a creditor down and say “let me tell you why I did this sale this way”, I believe that it is very likely that, on a case-by-case basis, not every last detail required by SIP16 paragraph 9 would always be relevant to telling this story and it may even be that other factors not strictly required by SIP16 paragraph 9 would be valuable in helping the creditor understand. It makes me wonder how we got into this position – where unique stories describing a vast range of demised businesses and complex rescues are reduced to a monitoring exercise on a par with recounting Old Macdonald Had a Farm!

However, I repeat: this limitation of SIP16 monitoring should never be allowed to fuel the pre-pack critics. If IPs are being judged on strict compliance with SIP16, why can we not get it right?

There is no doubt in my mind that the absence of Insolvency Service feedback on each individual SIP16 disclosure has not helped. It also seems insensible to me that the Service would make these assessments and not inform each IP where they thought he/she had gone wrong. What on earth was the point of carrying out the review in the first place?!

However, I foresee a problem: in 2011, there were 1,341 appointment-taking IPs and 723 pre-packs. I appreciate that an average of 0.5 pre-packs per IP does not reflect reality, but even so it would seem to me that pre-packs are not that common; IPs might only conduct one or two each year and some IPs might go years before doing another pre-pack. In 2011, the Insolvency Service only reviewed 58% of all SIP16 disclosures, so there’s a big chunk of all SIP16s where no feedback is possible. In addition, 32% of the 2011 SIP16 disclosures reviewed were considered non-compliant by the Service. If our profession is lucky, it might be that these non-compliant SIP16s are being produced by the same bunch of IPs. However, my hunch (having worked in the IPA’s regulation department) is that sometimes an IP gets it right, sometimes he/she misses something. If this is the case, then years might pass before (i) an IP receives feedback on where he/she slipped up with SIP16 compliance and then when (ii) he/she can apply that feedback to his/her next pre-pack. Waiting for IPs to apply the Service’s feedback will not crack this nut: I suspect that, if the 2013 SIP16 monitoring report shows similar levels of non-compliance, there will be hell to pay!

Thus, I feel it is down to each and every IP to work at producing perfect SIP16 disclosures. Some may rebel at this formulaic approach to recounting the skills used in getting the best out of an insolvent company – I do! – but the threat of more legislation, which I suggest could be even more prescriptive and restrictive than SIP16, remains loud. Can we not just try to get it right?

Continuation of supply

“We recommend that the Department undertake a consultation as a matter of urgency on the rules relating to the continuation of supply to businesses on insolvency in order to assess whether a greater number of liquidations or further damage to businesses could be avoided if that supply was better protected.” (paragraph 86)

I shall use this opportunity to update you on the progress of the Enterprise and Regulatory Reform Bill. On 21 January, I reported that the House of Lords was considering a proposed amendment to S233 regarding the continuation of utilities and other contracted services and goods (https://insolvencyoracle.com/2013/01/21/more-on-the-err-bill-and-two-cases-1-scottish-court-shows-more-than-the-usual-interest-in-provisional-liquidators-fees-and-2-court-avoids-unpardonable-waste-or-scarce-resources/). Unfortunately, the Grand Committee threw the amendments out in full on the ground that there needed to be proper consideration of the consequences of such amendments. In hindsight, I can see that it was very unlikely that such changes could be slipped in to the Bill at such a late stage, but I guess that at least it keeps the issue on the table.

My personal view is that, whilst changes to S233 will be welcome, I do feel that some are over-egging the advantages. The BIS Committee picked up on R3’s research suggesting that “over 2,000 additional businesses could be saved each year, rather than being put into liquidation”, if suppliers were obliged to continue to supply on insolvency (paragraph 82). I bow to R3’s and IPs’ greater experience, however I cannot help but wonder whether companies really are resorting to liquidation, rather than trading on in an administration, simply because contracts with suppliers are terminated on insolvency. I would have thought that there were far more substantial barriers to trading-on that will remain even after S233 is changed.

Regulating the RPBs

“We agree that the Insolvency Service, in regulating the recognised professional bodies (RPBs), should have a wider range of powers, very much akin to those that the RPBs themselves have in disciplining their members.” (paragraph 97)

I note this simply because I was stunned at this non sequitur – none of the preceding paragraphs hinted that there was a problem with the RPBs that needed to be fixed or that this was any solution.

Having said that, personally I have no issues with the Service having such powers. In my experience at the IPA, whilst there may have been some tendency to want to push back on some of the Service’s recommendations from time to time (to be perfectly honest, usually more on my part than on the part of my employer!), it would always end up with the RPB taking the required action. I cannot see that the Service needs to be able formally to warn, fine, or restrict RPBs, but if it helps perception, why not?

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As I mentioned at the start, there were other Committee recommendations, which I would encourage you to read if you have not already done so, as I believe they help us to see how the profession is viewed from the outside and, whether we agree with them or not, those views will continue to influence the shape of our profession in the years to come.


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More on the ERR Bill and two cases: (1) Scottish Court shows more than the usual interest in provisional liquidator’s fees; and (2) Court avoids “unpardonable waste of scarce resources” by striking out evidence

I present a bit of a mixed bag here:
• The Enterprise & Regulatory Reform Bill – developments since my blog post of 12 January
Nimmo – the Scottish Court of Session takes more than a passing interest in a provisional liquidator’s fees
Secretary of State v Potiwal – despite the seeming absence of a technical argument, the court saves the taxpayers’ money in proving a case a second time

Update on the Enterprise & Regulatory Reform Bill

New Bankruptcy Application Process

On 12 January, I posted to this blog my thoughts on the insolvency parts of the ERR Bill. Last week, some interesting tweaks to the Bill had been proposed: that the adjudicator be allowed to apply to the court for directions (which might have helped if the adjudicator had been presented with a bankruptcy application with tricky COMI dimensions); and that, if the adjudicator felt that an alternative remedy were more suitable, the individual be given ten days to seek advice and potentially withdraw the bankruptcy application. Unfortunately, both these proposals were withdrawn following the House of Lords’ debate.

In relation to the subject of applying to court for directions, Viscount Younger of Leckie said: “Persons appointed as adjudicators will have the skills they need to do the job without the need for recourse to the court. It is acknowledged that the court still has a role to play. Where the adjudicator refuses to make a bankruptcy order because the criteria are not met, the debtor will have the right to appeal to the court. That provides a route to court in those cases where it is needed” (Lords Hansard on House of Lords Grand Committee 16 January 2013, http://www.publications.parliament.uk/pa/ld201213/ldhansrd/text/130116-gc0002.htm).

With regard to allowing the individual time to explore alternative solutions, Viscount Younger said: “I reassure noble Lords that before making their bankruptcy application, applicants will be strongly encouraged to take independent debt advice to ensure that bankruptcy is really the right option for them. My officials will work with the Money Advice Service and providers within the debt advice sector to ensure that applicants have the information they need to make an informed decision. Furthermore, within the electronic application process itself, we propose to include a series of warnings to ensure that applicants are made fully aware of the serious implications of bankruptcy before they make their application. We will also ensure that the process flags up any alternative debt remedies that may better suit their circumstances. The Government consider that these safeguards are sufficient to ensure that debtors are empowered to make an informed decision as to whether or not bankruptcy is the right option for them before they take the serious step of making a bankruptcy application. The Government believe that these amendments would unnecessarily complicate the process by requiring the adjudicator to exercise discretion on a case-by-case basis. That would increase administration costs with an impact on the application fee. It would also delay access to debt relief for the debtor, who would have elected for bankruptcy in full knowledge of their other options.”

Whilst I understand the government’s intention to formulate a simple administrative process to replace the current court-led debtor’s bankruptcy petition process (although those IA86 provisions are not being repealed via the Bill, presumably so that individuals who cannot/do not wish to apply online can still instigate their own bankruptcy), it seems inevitable to me that such a process will be ill equipped to deal with out-of-the-norm cases.

Continuation of contracted supplies in corporate insolvencies

It seems that R3’s “Holding Rescue to Ransom” campaign is paying off! Added to the list of proposed amendments to the Bill are the following proposed changes to S233 of IA86:

• To include “a supply of computer hardware or software or infrastructure permitting electronic communications” as another utility that must continue to be supplied (subject to the current S233 conditions) on request by the office holder.
• Utility supplies to be caught by the provisions irrespective of the identity of the supplier.
• To include that “any provision in a contract between a company and a supplier of goods or services that purports to terminate the agreement, or alter the terms of the contract, on the happening of any of the events specified in subsection (1) [i.e. administration, administrative receivership, S1A moratorium, CVA, liquidation, or appointment of a provisional liquidator] is void” – this does not seem to be limited only to utility supplies.

It remains to be seen, however, if these proposed changes survive the debate in the House of Lords (next sitting is scheduled for 28 January 2013).

Scottish Court of Session not content to take as read the court auditor’s and reporter’s recommendations of approval of provisional liquidator’s fees

Nimmo, as liquidator of St Margaret’s School, Edinburgh, Limited [2013] ScotCS CSOH 4 (11 January 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH4.html

Summary: Despite both the reporter and the court auditor recommending that the provisional liquidator’s remuneration of c.£120,000 be allowed, the court sought further information in justification of the fee. Whilst IPs can take some comfort in the result that the judge allowed the fees in full, his comments suggest some lingering concern and hinted at a desire for a review of the court procedures.

The Detail: Over 20 days, a provisional liquidator managed “a high profile and extremely sensitive appointment” (paragraph 9) over a school and incurred time costs of c.£120,000. Later, the IP was appointed liquidator of the same company with his fees for the liquidation being approved by the liquidation committee. Interestingly, Lord Malcolm disapproved of the use of the word “cost” when referring to as yet unauthorised remuneration: “For the future I would advise that in reports to committees the proposed fee should not be described as ‘a cost’ already incurred by the liquidator. It should be made clear that the committee is being asked to exercise a judgment as to whether the proposed remuneration is reasonable and appropriate (or words to that effect). A proposed fee is in a different category from outlays. The scope for disagreement or questioning should be obvious to the readers of the report” (paragraph 31). The IP’s fees as provisional liquidator remained to be approved by the court.

Both the reporter and the court auditor considered that the provisional liquidator’s fees were reasonable, but the judge requested further information. Despite learning of the complexities handled by the IP, Lord Malcolm stated: “nonetheless I retain a sense of surprise and concern at a proposed fee of over £120,000 (exclusive of vat) for 20 days work, and I suspect that many will find it remarkable that the winding up of a middling size private school can generate fees of over £620,000 (again exclusive of vat)” (paragraph 31). However, the judge allowed the fee, noting that “the court cannot simply reject the clear advice of the reporter and the auditor of court without cogent and objectively justifiable reasons for doing so” (paragraph 35).

Lord Malcolm’s closing comments suggest a desire for more widespread consideration of the issue of insolvency office-holders’ remuneration: “Perhaps it is no bad thing that, now and again, an opinion is issued which shows how these matters are presented to, and addressed by the court. Generally they are resolved without any public hearing or publicity. There is at least a risk that the fee levels and general practices and procedures seen as normal in the corporate insolvency world become, when the court is asked to adjudicate, in a sense self-fulfilling. This highlights the important role of the auditor of court in the current system, given that he is not directly involved in such work. It may also be that, from time to time, and in the light of experience, the judges should review current practice to check whether there is room for improvements in the court’s procedures which might help it to exercise its jurisdiction under the insolvency rules” (paragraph 38).

Court avoids “unpardonable waste of scarce resources” by striking out director’s evidence in disqualification proceedings

Secretary of State for Business, Innovation & Skills v Potiwal (Rev 4) [2012] EWHC 3723 (Ch) (21 December 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3723.html

Summary: In relation to disqualification proceedings, the Secretary of State (“SoS”) sought to rely on the fact that a VAT Tribunal had already proven a director’s knowledge of his company’s fraud. The court found that, although the SoS’ argument that the director was estopped from denying knowledge failed because the SoS and HMRC were not privies, it agreed that it would be manifestly unfair and it would bring the administration of justice into disrepute to require the SoS to prove the director’s knowledge a second time.

The Detail: An earlier VAT Tribunal had concluded that the director knew of the company’s VAT fraud, but in evidence to defend disqualification proceedings the director denied having such knowledge. The SoS sought to have that part of the director’s evidence struck out on the grounds that he was estopped from denying that he had this knowledge; or that his denial was an abuse of process, as it would be manifestly unfair for the SoS to be put to the substantial cost and delay of proving the allegation; and/or that to permit the issue to be re-litigated would bring the administration of justice into disrepute.

For the argument of estoppel to win out, the parties to the disqualification proceedings – the SoS and the director – had to be in privity with the parties to the earlier VAT Tribunal – HMRC and the insolvent company. Given the director’s role in the company and in the VAT Tribunal proceedings, the judge had no difficulty in concluding that the director and his company were privies. However, he decided that the SoS and HMRC were not privies: “I consider that it would therefore go against the grain of the development of the law about abuse of process to identify for the first time a new class of privity of interest between two very different arms of government pursuing different aspects of the public interest, and being motivated in particular cases by different policy and funding considerations when doing so” (paragraph 21). Consequently, in relation to the first ground, Mr Justice Briggs concluded that, because there was no privity of interest between the SoS and HMRC, the proven position in the VAT Tribunal could not be carried forward into the disqualification proceedings.

However, Briggs J then considered whether “hundreds of thousands of pounds” of tax-payers’ money should be used to prove the allegation a second time. Having considered the circumstances of the VAT Tribunal, which was funded by the taxpayer throughout, the judge concluded that it would be manifestly unfair to impose the cost of re-litigating the issue on the SoS. With regard to the argument that re-litigation would also bring the administration of justice into disrepute, Briggs J stated: “Where, as here, the issue as to a director’s knowledge of a complex MTIC fraud has been fully and fairly investigated by an experienced tribunal and the director found to have had the requisite knowledge, it seems to me that right-thinking members of the public would regard it as an unpardonable waste of scarce resources to have that issue re-litigated merely because, by a simple denial and without deducing any fresh evidence, Mr Potiwal seeks to require the complex case against him to be proved all over again” (paragraph 29). Thus, he ordered that parts of the director’s evidence be struck out as an abuse of process.


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Soapboxing on the Enterprise & Regulatory Reform Bill

I don’t know about you, but I could do with a break from all these case law blog posts, so I thought I’d catch up with insolvency’s appearance in the Enterprise & Regulatory Reform Bill (“ERR Bill”).

Helpfully, John Tribe has posted extracts from the Bill (as at 18 October 2012) at http://www.jordansinsolvencylaw.com/articles/bankruptcy-applications-determination-by-adjudicators-draft-legislation; he also has reproduced the 16 October 2012 House of Commons’ debate on the insolvency part of the Bill at http://www.jordansinsolvencylaw.com/articles/interesting-recent-hansard-on-bankruptcy-hc-report-stage-debate-re-bankruptcy-amendments-16-10-12 (my references below to comments from MPs are drawn from this article). To follow the Bill’s progress through Parliament, take a look at http://services.parliament.uk/bills/2012-13/enterpriseandregulatoryreform.html. As you will see, the Bill has emerged from the House of Commons and is now working its way through the House of Lords.

What is in the Bill?

In brief, the Bill provides for an individual to apply to an “adjudicator” for a bankruptcy order, rather than petitioning the court. Adjudicators will hold office within the Insolvency Service, but will not be a role for Official Receivers. Once a bankruptcy order has been made under this route, the bankruptcy will be administered in the same manner as currently; the Bill includes consequential amendments to the Act so that the making of a bankruptcy application has the same effect as the presentation of a petition (e.g. S341 will be amended so that the relevant times for preferences and transactions at undervalue will be counted from the date the bankruptcy application is made).

To obtain a bankruptcy order, the individual must:
• be unable to pay his/her debts at the date of the adjudicator’s determination;
• not have a bankruptcy petition pending; and
• have a COMI in England/Wales or his/her COMI is not in an EC Regulation-relevant state, but he/she is: domiciled in E/W or, within the past three years, has been ordinarily resident, or has had a place of residence, or has carried on business, in E/W (the Bill also proposes to make changes to S265 so that the conditions for creditors’ petitions will be exactly the same).

The debtor must pay a fee, which Ms Swinson MP stated is anticipated to comprise an administration fee of £525, as presently, and an application fee of £70 (as compared with the current court fee of £175).

If the adjudicator is satisfied that the above criteria are met, he “must” make the bankruptcy order; if he is not so satisfied, he must refuse to make an order. During the “determination period”, the adjudicator may ask for more information to come to a conclusion, but he must either make or refuse to make an order before the end of this period.

If the adjudicator has refused to make an order, the debtor may ask him to review the information, provided the debtor’s request is made before the end of the “prescribed period”. If the adjudicator then confirms the refusal, the debtor may appeal to court before the end of the prescribed period.

The Bill does not prescribe the periods – presumably this is a detail for supporting rules to follow if/when the Bill obtains Royal Assent.

The Bill also removes S279(2) from the Act, so that bankrupts will no longer be able to be discharged early upon the filing of the Official Receiver’s notice.

Is it controversial?

A significant part of the Insolvency Service’s proposals – that consideration of creditors’ bankruptcy petitions also be moved away from the courts – proved particularly controversial and therefore has not been taken forward, demonstrating to me that responding to consultations does work!

Some also have concerns about debtors’ petitions being moved away from the courts, however the 2011/12 consultation did not ask a direct question on this matter, I presume because it had already been addressed in previous consultations. For example, 90% of those who responded to a February 2010 consultation were of the opinion that consideration of debtors’ bankruptcy applications should be the responsibility of someone within the Insolvency Service (http://webarchive.nationalarchives.gov.uk/+/http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/DPRefResponses/DPrefIndex.htm).

I do not believe that it is the core principle that concerns some – after all, a company can resolve to wind itself up outside of any court procedure so, arguably, why should an individual not be granted a similar power? – but it seems to me there remain some questions surrounding the proposed process.

Will the individual always understand his/her options?

Of course, it could be argued that the current debtor’s petition process does not safeguard against individuals taking the so-called last resort without adequately considering the other options. However, I do wonder whether the apparent steps to improve access to bankruptcy detract from the seriousness of the act with the result that it risks losing its “last resort” status.

In the House of Commons’ debate, Ms Swinson recognised that “for many, other debt remedies will continue to be more appropriate. We will therefore encourage debtors to take independent debt advice before making their bankruptcy applications. We will work with the Money Advice Service and providers in the debt advice sector to ensure that all debtors have the information that they need in order to make an informed decision.” Thus, there will be no requirement for individuals to have obtained advice before applying for their bankruptcy; they will simply be encouraged to do so.

In that respect, it seems to me that the Insolvency Service will be following Scotland’s lead where an individual may apply direct to the Accountant in Bankruptcy. My knowledge of Scotland’s process is scanty, but having looked on the AiB website it seems to me that an individual can download the application pack and post it off to the AiB and, provided the criteria are met (receiving independent advice seems to be a prerequisite only if the individual is taking the Certificate of Sequestration route), sequestration follows. The AiB publishes a Debt Advice and Information Package (which, personally, I feel is not a touch on the Insolvency Service’s “In Debt – Dealing with your creditors” publication) that the AiB’s Guidance for Trustees states must be provided to debtors before they sign up a Trust Deed, but this does not appear to be part of the debtor’s bankruptcy application process. Do I have this right? The application form has a warning that “the consequences of bankruptcy can be severe” – although according to the form they are limited to the effects on one’s credit rating, and possibly to employment prospects, bank accounts and utility supplies! – and a strong recommendation to seek advice with some contact details provided, but is that seen as sufficient safeguard against individuals taking the last resort when another option may be more appropriate? Coming from a world where so much diligence is expected of IPs before agreeing to help an individual propose an IVA, this seems to me somewhat lightweight. I appreciate, however, that this process has been operating in Scotland for many years, so I am sure that the Insolvency Service has access to evidence of its effectiveness in ensuring that people do not end up bankrupt when an alternative process would have been more appropriate.

Would the Post Office providing a service to bankruptcy applicants, similar to the passport application “check and send” service, further erode the image of bankruptcy as the last resort? 65% of consultation respondents said that they did not believe this was a “useful” service (perhaps the consultation should have asked if it was thought “appropriate”). However, Ms Swinson told the House of Commons: “The Post Office is looking at a wide range of ways in which it can increase its services and its revenue. Playing a wider role in identity checks, as was mentioned, is one of those… On the issues relating to advice, there are examples of more credit union facilities and a wider range of financial services being able to be accessed through post offices”.

Will access to alternatives be cut off?

Ss273 and 274 provide that, in the right circumstances, a debtor’s petition for his/her bankruptcy can result in an IVA. I understand that these provisions are very rarely used (although there are plenty of cases of IVAs being proposed after a debtor has been made bankrupt), but at least there is an opportunity for the court and debtor to consider this alternative to bankruptcy. There is no provision in the ERR Bill for the debtor to exit the bankruptcy application process with an IVA; for the debtor to withdraw from the process, if he/she decides at the last minute to propose an IVA; or for the adjudicator to suggest the possibility of an IVA – if the debtor meets the criteria, then the bankruptcy order is made.

Similarly, S274A provides for the court to stay proceedings on a debtor’s petition, if the court thinks that it would be in the debtor’s interests to apply for a Debt Relief Order. Again, there is no provision in the Bill for the new bankruptcy application process to result in a DRO.

Will “bankruptcy tourism” be tackled?

The recent case of O’Donnell & Anor v The Bank of Ireland ([2012] EWHC 3749 (Ch)), on which I commented a week ago (https://insolvencyoracle.com/2013/01/04/three-pre-christmas-judgments-1-bankrupt-refused-suspension-of-discharge-to-pursue-iva-2-another-failed-attempt-to-prove-england-comi-and-3-receiver-refused-payment-of-costs-after-restraining/), demonstrates some of the difficulties in assessing whether the court has jurisdiction to grant bankruptcy orders and there are many more cases involving diverse circumstances that give rise to COMI issues.

Although the Insolvency Service’s consultation document suggested that bankruptcy applications might be referred to court where there is a dispute, there is no such provision in the ERR Bill. I wonder if an adjudicator’s referral to court was considered unnecessary in view of the fact that the new process now is limited to debtors’ applications. The Bill only provides for a referral to court in the event that an individual wishes to appeal the adjudicator’s confirmation of refusal to make a bankruptcy order; the adjudicator has only two choices on receipt of an application: make, or refuse to make, an order.

Ms Swinson was asked about the risk of “bankruptcy tourism”. She replied: “There is no evidence of widespread abuse, but the official receiver or a creditor can apply to court to annul the bankruptcy order if abuse takes place”. Evidence of widespread abuse there may not be, but it is a shame that the valuable gatekeeper role of the court (and others, e.g. the Official Receiver, who opposed Mr Benk’s bankruptcy petition (see https://insolvencyoracle.com/2012/09/07/two-case-summaries-comi-and-a-rejected-administration-order-application/)) will be removed and then it will be up to the OR or creditors to seek to unravel the bankruptcy after the event.

Ms Swinson was also asked about the skills of the adjudicator and she responded: “On the question about the adjudicator, the Insolvency Service is already looking at this for the debt relief orders that it administers and it will be able to do exactly the same in relation to the way in which adjudicators conduct their business. On the qualifications of adjudicators, they will be making an objective decision by reference to prescribed criteria and there will be a right of appeal for an applicant if the adjudicator refuses to make an order. Obviously, they will need appropriate qualifications and experience to function effectively, and the Secretary of State will make sure that people appointed to that role are appropriately qualified. They will be based within the Insolvency Service which, as the House knows, is an executive agency of BIS, and will already have extensive experience of administering an electronic administrative process similar to the debt relief order regime”. I imagine that it is unlikely that much, if any, “DRO tourism” exists given the low level of debt criterion for a DRO, so it is worrying that the new bankruptcy application process is being put on the same footing as a DRO application. Will Insolvency Service staff really be equipped to decide on complex COMI issues, a topic which already has taken up so much court time and effort?

Will paying by instalment work?

Although the majority of consultation respondents (possibly up to 61%) were opposed to the proposal that individuals may pay the fee by instalment, Ms Swinson informed the House of Commons that this would be part of the process, although it is not clear whether this is to apply only to the application fee, anticipated at £70, or also to the administration fee of £525.

The consultation document highlighted the difficulties of refunding instalment payments, but the summary of responses did not report how the two questions on this topic were answered nor is it known what the current plan is. Presumably, an application will not be considered as having been made until the fee has been paid in full. What is the individual supposed to do in the meantime? Will it really help individuals to trickle through payments over months but without any change in their status and with the risk that the monies will not be refunded if they decide to withdraw from the process?

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Of course, we live in a world of cost-saving efforts, so it is not surprising that this process, which in most cases is simply an administrative function, is considered a candidate for change (although some of the figures in the Impact Assessment, e.g. the estimated court time in dealing with a petition, seem a little over-cooked). As always, there are risks that a “streamlined” process introduces loop-holes or is not so well-equipped to deal with extraordinary circumstances. This does not make it wrong to make changes, but those risks should be understood and managed as best they can.


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Anticipated Changes to the Insolvency Regulatory Landscape in 2013 and Beyond

We seem to have avoided major changes in 2012: no new/revised SIPs, no significant changes to legislation… does that mean it is all being stored up for 2013?

Here are a few developments that I’ll be looking out for next year:

• A Ministerial review on IPs’ fees – preliminary report expected in April 2013 with final recommendations in June 2013: http://bis.gov.uk/insolvency/insolvency-profession/review-of-ip-fees

• Changes to the RPBs’ complaints systems, including common sanctions guidance and an Insolvency Service-hosted site for lodging complaints and for publicising sanctions: http://insolvency.presscentre.com/Press-Releases/Jo-Swinson-announces-insolvency-fees-review-and-single-complaints-gateway-6853e.aspx

• HM Treasury’s review of the Special Administration regime for investment banks – report to the Treasury by the end of January 2013 with a fuller report expected by end of June 2013: http://www.hm-treasury.gov.uk/press_124_12.htm

• Changes to collective redundancy legislation… will there be any reference to any insolvency exemptions? Draft regulations expected in the New Year, to come into effect on 6 April 2013: http://news.bis.gov.uk/Press-Releases/Boost-for-business-as-government-sets-out-plans-to-update-employment-legislation-68512.aspx

• Progression of the Enterprise & Regulatory Reform Bill – currently at the House of Lord Committee stage: http://discuss.bis.gov.uk/enterprise-bill/

• Outcome of the Red Tape Challenge on insolvency – Insolvency Service to set out proposals to be considered by Ministers in early 2013: Dear IP 56 (not yet posted to the Service’s website)

• Revised SIP3 and SIP16 to be issued for consultation (per IPA autumn roadshows)?

• Development of the Scottish Government’s plans for bankruptcy law reform: http://www.aib.gov.uk/news/releases/2012/11/scottish-government%E2%80%99s-response-consultation-bankruptcy-law-reform

• The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 come into force on 2 January 2013 (thanks to Jo Harris for pointing these out) – I guess they are what they are, but I would like to see a user-friendly summary of them: http://www.legislation.gov.uk/uksi/2012/3013/pdfs/uksi_20123013_en.pdf

• The Financial Services Act comes into force on 1 April 2013… with what direct impact on IPs? I confess that it is not something that I know a lot about, but I do know that from it is created the Financial Conduct Authority, which (from 1 April 2014) will take on consumer credit regulation from the OFT so it may well affect IPs’ (and RPBs’ group) consumer credit licences: http://www.hm-treasury.gov.uk/press_126_12.htm

• And further afield, changes to the EC’s 2000 Insolvency Regulations (although perhaps further away than 2013?): http://ec.europa.eu/justice/newsroom/civil/news/121212_en.htm

Have I missed anything, do you think..?

I’ll also take this opportunity to mention that I reproduce my blog posts into pdfs every couple of months or so – I have added these to a new page on this blog, but I email them direct to those who have asked. If you would like to be added to this emailing list, please drop me a line at insolvencyoracle@pobox.com. I have also started on twitter (@mbmoving); I am a complete novice, but I am hoping to use it to make immediate reference to news items on subjects such as those above (but I’ll continue to blog). Finally, I have given my blog a new look for the New Year – a photos from my trip to Patagonia in January 2012.

Have a lovely few days/weeks off, everyone, and I hope I get to meet up with some of you again sometime in the next year, when I emerge finally from all my unpleasant experiences of 2012.


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Government Issue Response to Bankruptcy Petition Reform Consultation

“The Government has decided to take forward changes just to the process for dealing with debtor bankruptcy applications and has today included the measure as a proposed new clause in the Enterprise and Regulatory Reform Bill. Instead of applying to the court for a bankruptcy order, individuals will instead make a bankruptcy application to an Adjudicator, which would be a new office based  within the Insolvency Service.” (Jo Swinson MP, 9 October 2012)

The full response is available at: http://www.bis.gov.uk/insolvency/Consultations/petition%20reform.