Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Ethics: The Reboot

How does an Ethics Code more than triple in size overnight?  In my view, largely by adding lots of unnecessary words.  The devil, however, is in finding the detail hidden within the new Code that affects how we should be viewing and handling things differently from 1 May.

A primary reason why the new Code is substantially longer is that we now have “requirements” – highlighted in bold and given an “R” paragraph number – and “application material”, identified by normal text and “A” paragraph numbers.  This application material is “intended to help an insolvency practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement” (1.4 A1).  So don’t be misled into viewing “A” paragraphs as optional guidance: although all the “shall”s appear in the “R” paragraphs, the language of most of the “A”s indicates that they also are necessary to achieve compliance.

Although I have tried to highlight the main areas of change, I do recommend that you read through the Code in its entirety yourself.  There is a great deal more detail to explain RPB expectations and you could find that the particular circumstances of you or your firm and your engagements gives rise to ethical threats that you may have overlooked in the past.

The ICAEW’s version of the new Code can be found at www.icaew.com/-/media/corporate/files/technical/ethics/insolvency-code-of-ethics.ashx?la=en and the IPA’s version of the new Code is at www.insolvency-practitioners.org.uk/regulation-and-guidance/ethics-code (although the IPA hasn’t amended the text of the page to highlight that the link is not to the Code that came into force in 2009, nor have they archived the accompanying docs that relate to the old Code).  The ICAEW’s Code has an additional “2” at the start of each paragraph (to fit the insolvency section into its overarching Code).  In this article, I have used the IPA’s numbering.

 

Why now?

Do I think that the implementation date of the new Code should have been postponed?  Yes, I do!

True, we have been waiting a loooong time for a revised Code – the JIC’s consultation on a draft revised Code concluded in July 2017.  However, the new Code is so much different from the old one (and from the 2017 draft), it is not at all an easy read at 70 pages, and there are many new requirements in there.  Therefore, expecting IPs to have absorbed and adapted systems to the new Code and to have trained staff by 1 May is grossly unfair in these extremely difficult times.  Shame on you, IS/RPBs!

 

Surely the Fundamental Principles are the same?

Generally, yes of course.  Some look a bit different now, though.

“Integrity” has been beefed up.  In addition to the “straightforward and honest” statement, we now have that an IP (R101.2):

“shall not knowingly be associated with reports, returns, communications and other information where the insolvency practitioner believes that the information:

  • Contains a materially false or misleading statement;
  • Contains statements or information provided recklessly; or
  • Omits or obscures required information where such omission or obscurity would be misleading.”

The Code allows IPs to be viewed as not in breach of this where they “provide a modified report” (101.2 A1), although I guess they could still have fallen foul of the principle of professional competence and due care by allowing the incorrect or misleading statement to be released in the first place.

As another solution, the Code requires an IP to “take steps to be disassociated” (R101.3) from such information when they become aware of having been associated with it.  Thus, it goes further than the advertising and marketing requirements of the old Code, capturing the spoken word and information that might wriggle out of “advertising”, and it makes clear that the IP need not have a marketing agreement with the party issuing the information, the IP just needs to be “associated” with it.

Having said that, the Code’s “Advertising, Marketing and Other Promotional Activities” section (360) has also been expanded on, making unacceptable standards more explicit.

“Confidentiality” has also grown by a page and a half.  Comfortingly, though, this Code has elevated the requirement for transparency, i.e. to report openly to creditors etc., by putting it up-front at R104.2, rather than buried as at para 36 in the old Code.  Most of the new text are statements of the obvious, e.g. being alert to the possibility of inadvertent disclosure in a social environment or to family and not using confidential information for the personal advantage of the IP or of third parties.

“Professional Competence and Due Care” is now accompanied by a new 1.5 page section, “Acting with Sufficient Expertise”, but I saw nothing in here that I thought really needed to be said.

“Professional behaviour” contains a subtle change: no longer must IPs only avoid action that discredits the profession, but they are required to avoid “any conduct that the insolvency practitioner knows or should know might discredit the profession” and they “shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession” (R105.1).

 

What about the Framework Approach?

Yes, we still have the basic framework of:

  1. identifying threats;
  2. evaluating them; and
  3. eliminating or reducing those threats to an acceptable level, often with the use of safeguards.

And in case there was any risk that we might forget this, it is provided in full twice (at 1.5 A1 and R110.2) and then appears in the introduction to almost every other section.  In fact, the word “framework” appears 45 times in the new Code (and only 6 times in the old Code).

 

Ok, so what has changed?  More paperwork, right?

Yes, of course!

Some have expressed the view that the requirements to evidence pre-appointment ethical considerations haven’t increased, if we’d been documenting things properly in the first place.  As the old Code had a simple “record considerations” message, there is some truth in that, but it is difficult to deny that the new Code reflects the record-keeping mission creep that the profession has seen over this century.

To avoid doubt over the extent of documentation required, we now have a list of six items to be documented at R130.2 – they are what you would expect, but you would do well to ensure you’re your Ethics Checklists specifically prompt for these items.

In addition, this list of six items should define the structure for documenting your ethical considerations when a threat arises after appointment (130.1 A1).

Under the old Code, we were required to keep threats under review, simple as that.  This has survived the revision (R210.7), but we now have added “application material” – 210.7 A1 – that helps define what such a review process should look like:

  • has new information emerged;
  • or have the facts or circumstances changed (facts cannot change, can they..?);
  • that impact the level of a threat;
  • or that affect the IP’s conclusions about whether safeguards applied continue to be appropriate?

Again, periodic review checklists may need to be enhanced.

 

Other paperwork: using specialists (Section 320)

To be honest, I never did like the old Code’s “obtaining specialist advice and services” section.  Its meanings were ambiguous; I never really understood in what circumstances periodic reviews had to be conducted and whether these were to be on a firm-wide or a case-by-case basis.

The new Code leaves us with no (ok, fewer) doubts.

The four “R”s in the section are key:

  • R320.3: “When an insolvency practitioner intends to rely on the advice or work of another, from within the firm or by a third party, the insolvency practitioner shall evaluate whether such advice or work is warranted.”
  • R320.4: “Any advice or work contracted shall reflect best value and service for the work undertaken.”
  • R320.5: “The insolvency practitioner shall review arrangements periodically to ensure that best value and service continue to be obtained in relation to each insolvency appointment.”
  • R320.6: “The insolvency practitioner shall document the reasons for choosing a particular service provider.”

So every time an IP plans to instruct a third party (or another department within the firm) to provide advice or work, they need to determine whether the instruction is warranted and then why they have decided on the particular provider, having in mind the need to achieve best value and service.  Then, they need to review periodically whether best value and service is being achieved for each appointment.

This sounds like another checklist or file note process per instruction together with more prompts on case reviews.

To reduce the detail required on each case’s instructions, it may be possible to create a firm-wide process evaluating the value and service provided by regular suppliers – in effect, an approved supplier list.  This would seem particularly relevant when using a specific service provider (e.g. storage agents, insurers/brokers and pension and ERA specialists) across your whole portfolio.

 

And more disclosure to creditors?

Oh yes!  In relation to using specialists, the Code says: “Disclosure of the relevant relationships and the process undertaken to evaluate best value and service to the general body of creditors or to the creditors’ committee” (320.6 A6) is an example of a safeguard to address a threat arising from instructing a regular service provider in the firm or those with whom there is a business or personal relationship.

The new section, “Agencies and Referrals”, also provides as an example safeguard similar disclosure to address threats created by any referral or agency arrangement (330.5 A2).

 

What about disclosure of ethical threats generally?

This is an area that appears to have been watered down.  The old Code stated that generally, it would be inappropriate for an IP to accept an appointment where an ethical threat existed (or could reasonably be expected to arise) unless disclosure were made prior to appointment to the court or creditors.

However, the new Code simply requires IPs to consider disclosure of the threats and the safeguards applied (210.5 A3)… although as disclosure is a safeguard, IPs would do well to disclose wherever this is practical (200.3 A3).

 

New Section (330): Agencies and Referrals

I would strongly urge you to read through Section 330 in full and consider how this impacts on your firm’s processes and communications.  There are a lot of disclosure and other safeguard requirements, which, when you think about it, could encompass a number of dealings.

For example, at the immaterial end of the spectrum, how do you decide where to send directors who have a Declaration of Solvency to swear?  Do you recommend the solicitor around the corner (or, now, one who is prepared to witness swearings remotely)?  Such referrals, even if the decision is a geographical no-brainer, must be subject to the rigorous evaluation and disclosure standards.

Of course, there will be other more material referrals, e.g. when assisting businesses outside (or prior to) formal insolvency or when conflicted from taking on an appointment or from advising directors personally, as well as recommendations made to individuals in IVAs.  These will require substantial documentary evidence that the appropriateness of the referral or introduction has been carefully and objectively considered and that a great deal of information (including the alternatives) has been provided.

 

Any change to referral fees?

There are some subtle changes in Section 340.

The new Code repeats the old Code’s principle that the benefit of any referral fees or commissions received post-appointment must be passed on to the insolvent estate.  The new Code extends the reach, though, in stating that no associate (as well as neither the IP nor their firm) may accept a referral fee or commission unless it is paid into the insolvent estate (R340.7).  Associates include connected companies and those with common shareholdings or beneficial owners (340.8 A1).

The new Code also puts a duty on IPs who do not control decisions on referrals to get information on referral fees received (340.8 A6).  This could be challenging for IPs in large firms or with a wide network of associates.

Its reach also extends to “preferential contractual terms… for example volume or settlement discounts” – these must also be passed on to the insolvent estate in full (R340.8).

Also, whereas previously the IP only needed to consider making disclosure to creditors, now, where an insolvency appointment is involved, any referral fee or commission payments must be disclosed to creditors (R340.6 and 7).

 

What about paying referral fees out?

The new Code is more direct in stating simply that an IP “shall not make or offer to make any payment or commission for the introduction of an insolvency appointment” (R340.4).  It also wraps the firm and associates in this prohibition and, again, if the IP does not control the referrals paid out by their firm or associates, they nevertheless need to ascertain what they are (340.8 A6).

I am not sure why we have now lost the old “furnishing of valuable consideration” prohibition.  After all, not every benefit is couched as a “payment”.

But then the old Gifts and Hospitality section has been substantially lengthened from half a page to four and a half pages, so non-monetary inducements connected with improper motives are caught elsewhere.

 

“Inducements, including Gifts and Hospitality” (Section 350)

This is another section that I’d recommend reading in full, as it has been beefed up.

The old Code had included assessing the appropriateness of a gift by having regard to what a reasonable and informed third party would consider appropriate.  However, the new Code makes the connection more directly with motive:

  • R350.6: “An insolvency practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the insolvency practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”
  • R350.7: “An insolvency practitioner shall not accept, or encourage others to accept, any inducement that the insolvency practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”

It goes further than this too, even stating that the Code’s requirements (including the “A”s) “apply when an insolvency practitioner has concluded that there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another” (350.9 A3).

Examples of such inducements that might still create threats are where (350.9 A3):

  • “An insolvency practitioner is offered hospitality from the prospective purchaser of an insolvent business…
  • “An insolvency practitioner regularly takes someone to an event…
  • “An insolvency practitioner accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.”

The Code also imposes an obligation on IPs to remain alert to inducements being offered to, or made by, close family members and requires IPs to advise the family member not to accept or offer the inducement, if it gives rise to a threat (R350.12 and 13).

 

New Section (390): “NOCLAR”

Presumably, accountants are already familiar with this acronym for “non-compliance with laws and regulations”.  The new section in the Insolvency Code certainly seems to be a lift-and-drop from the accountancy code, but in my view a clumsy one.

For example, instead of referring to the “firm”, which had been nicely defined and otherwise used throughout the Code (except where other lift-and-drops have been unsuccessful), this section refers to the IP’s “employing organisation”, which I think could mislead some into assuming that IP business owners do not need to apply many of the requirements.

But more fundamentally, this section fails to acknowledge IPs’ relationships with insolvents.

I can see how accountants working with live clients need to understand how they should react when they discover that their client has breached a law or regulation.  Although of course IPs often deal with live clients, the vast majority of their time is taken up as office holders over non-trading entities and individuals and it’s those engagements that – very often – reveal non-compliances committed by the insolvent.

The new Code makes no distinction between non-compliance committed by: (i) the IP’s/firm’s clients; (ii) the entity/individual over which the IP has been appointed office holder; or indeed (iii) the IP or their staff themselves.  I think that each of these situations gives rise to different concerns and so they each deserve a different approach.

In a nutshell, the core requirements of this section are: to explore all non-compliances (including suspected or prospective non-compliances); and then, unless they are clearly inconsequential non-compliances (except where they are money laundering related etc.), to report them upwards within the firm and, where appropriate, to those charged with governance of the entity/business and to appropriate authorities.  In addition, if the case is an MVL of an audit client or a CVA, the IP must consider communicating it to the audit partner/auditor (R390.12 and 13).

The Code also imposes similar exploration and internal reporting duties on insolvency team members.

Of course, there is an expectation that this will all be documented, although the Code only encourages IPs/team members to document the matter and actions taken (390.16 A2 and 390.20 A2).

Setting aside all the “consider” and “where appropriate” steps, what does this section actually require an IP/team member to do in all circumstances?

  • Take timely steps to comply with the NOCLAR section (R390.9)
  • “Seek to obtain an understanding of the matter” (R390.10 for IPs and R390.17 for team members)
  • For IPs: “discuss the matter with the appropriate level of management” (R390.11) and for team members: “inform an immediate superior” or, if they appear to be involved in the matter, “the next higher level of authority within the employing organisation” (R390.18)

In my view, these cumbersome NOCLAR requirements are OTT for the vast majority of non-compliances committed by insolvents (e.g. do IPs really need to discuss all director misconduct with “the appropriate level of management”?) and indeed a fair number of those committed by the IP/staff.  You might be able to rely on the “clearly inconsequential” paragraph (390.6 A2), but experience with RPB monitors has taught me that there are diverse opinions over what non-compliances are inconsequential.

 

New Section (380): “The insolvency practitioner as an employee”

Although clearly this section is most relevant in the volume IVA market, it is an important section for all IPs who act as employees.  Unsurprisingly, it reinforces the message that, even as an employee, the IP has a personal responsibility to ensure that they comply with the Code (R380.5).

Having said that, some statements seem to me unfair or perhaps the writers are simply treating IP employees as ethical novices.  For example, 380.5 A2 describes a circumstance that might create ethical threats: where the IP is “eligible for a bonus related to achieving targets or profits”… but nowhere does the Code highlight that the business/beneficial owner IP might be exposed to a similar self-interest threat.

However, the section cuts to the core in highlighting the tension that an IP seeking to administer engagements ethically may experience with their superiors and peers across the rest of the firm.  The Code doesn’t pull punches: in some circumstances, an IP’s efforts to disassociate themselves with the matter creating the conflict may demand their resignation from employment (380.7 A1).

 

My other gripes

Ok, this is just a final section to allow me to get some gripes off my chest.  My main ones are:

  • The whole of the Ethical Conflict Resolution section (140)

It took a debate with my partner, Jo, for me to understand that these requirements did not apply to a specific kind of conflict situation.  The problem I have is that this section, which refers to “resolving ethical conflicts”, sits awkwardly alongside the rest of the Code, which refers to “managing ethical threats and keeping them under review”.  In my mind, an ethical conflict is only resolved by removing it entirely, e.g. by walking away from an appointment, whereas in most circumstances an IP applies safeguards to manage threats to an acceptable level.

  • The lack of change to the insolvency examples section

Last year, there was some consternation over the ethics of retaining an appointment over an MVL converting to CVL.  The example in the old Code made no sense.  It had stated that: “Where there has been a Significant Professional Relationship, an insolvency practitioner may continue or accept an appointment…”  But the old Code had explained that a relationship is denoted as a Significant Professional Relationship (“SPR”) where, even with safeguards, the threats cannot be reduced to an acceptable level, so the IP should conclude that their appointment is inappropriate.  Therefore, how was it possible for an IP to continue with an appointment in the face of an SPR?  The new Code was the ideal opportunity to fix that.  But there has been no change: paragraph 520.4 still states that in some cases an SPR will not block an IP’s appointment or continuation in office and this conflicts with R312.7, which more strongly states that, in the face of an SPR, the IP “shall not accept the insolvency appointment”.

I have similar issues with the example at 510.2, which deals with an IP accepting an appointment after having worked as an investigating accountant for the creditor.  For starters, not all IPs are accountants, but they may still do investigation work for a creditor – the text indicates that those IPs are in the scope of the example… so why not change the heading?!  More importantly, the instructions include impossibilities: they state that, where the secured creditor is seeking to appoint the IP as an administrator or admin receiver, the IP needs to “satisfy them self (sic.) that the company… does not object to them taking such an insolvency appointment”.  But it then explains that an IP may still take the appointment, even if the company does object or where the directors haven’t had an opportunity to object… so the IP doesn’t need to “satisfy them self” then?!

On the bright side, at least IPs taking on Scottish or Northern Irish appointments are now better represented in the examples section.

 

And now the marketing footer

My partner, Jo Harris, has recorded two webinars covering the new Ethics Code (there was just too much for one sitting).  We have also: created new checklists to address the new sections such as instructing specialists and dealing with referrals; substantially revised our main ethics checklists to address specifically the new Code’s requirements; and enhanced other docs like progress reports and case review forms.

If you would like more information on signing up for access to our webinars, document templates – we’re offering the ethics templates as a standalone package or you can subscribe to all our document packs and future updates – or technical support service, please do get in touch with us at info@thecompliancealliance.co.uk.


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Ethics hits the headlines again: should we be worried?

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The big story of last week was the disciplinary sanction ordered to an EY IP for breaches of the Ethics Code.  But I think this is just one more straw on the camel’s back.  Every new criticism of apparent poor ethical standards that is added to the pile increases the risk of a regulatory reaction that would be counter-productive to the effective and ethical work of the majority.

 

Journalistic fog

Plenty has been said about the “noise” around pre-packs.  Therefore, I was not entirely surprised – but I was disappointed and frustrated – to read that the latest sanction had been twisted to fit one journalist’s evident attempt to keep shouting: “It was the classic cosy insolvency I wrote about last month: a company calls in insolvency advisers who conduct an ‘independent business review’, take the job of administrator and act on the sale as well.  On Wind Hellas, the creditors could not see how Ernst & Young could take both appointments without compromising their integrity. Six-and-a-half years later, the professional body has at last agreed with them.” (http://goo.gl/aIY9rU)

Actually, a look at the ICAEW notice (https://goo.gl/H7jUov) suggests that they did nothing of the sort.  The relationship that got the IP into hot water related to the fact that an associated company, Ernst & Young Societe Anonyme, had carried on audit related work during the three years before the IP took the appointment as Joint Administrator of the company.

It is unfortunate that a failure to join the ethical dots between a potential insolvency appointment and the firm’s audit-related connection with the company has been used to pick at the pre-pack wound that we might have hoped was on the way to being healed.

 

Speed of complaints-handling

Is the journalist’s reference to 6½ years another distortion of the facts?  I was surprised to read an article in the Telegraph from February 2011 (http://goo.gl/8902YO).  Apparently, the ICAEW’s investigation manager wrote to the IP way back then, saying that “the threat to Ms Mills’ objectivity ‘should have caused you to decline, or resign, from that appointment’”.  Given that that conclusion had been drawn back in 2011, it does seem odd that it took a further four years for the ICAEW to issue the reprimand (plus a fine of £250,000 to the firm and £15,000 to the IP).  Perhaps the recouping of £95,000 of costs is some indication of why it took four years to conclude.

I found it a little surprising to read in the Insolvency Service’s monitoring report in June 2015 (https://goo.gl/Lm5vdU) that the Service considers the that ICAEW operates a “strong control environment” for handling complaints, although it did refer to some “relatively isolated and historical incidents” as regards delays in complaint-processing (well, they would be historic, wouldn’t they?). In addition, in its 2014 annual review (https://goo.gl/MZHeHK), the Service reported that two of the other RPBs evidenced “significant delays” in the progression of three complaints referred to the Service.

Although I do understand the complexities and the need for due process, I do worry that the regulators risk looking impotent if they are not seen to deal swiftly with complaints.  I also know that not a few IPs are frustrated and saddened by the length of time it takes for complaints to be closed, whilst in the meantime they live under a Damocles Sword.

 

Ethics Code under review

In each of the Insolvency Service’s annual reviews for the last three years (maybe longer, I didn’t care to check), the Service has highlighted ethical issues – and conflicts of interest in particular – as one of its focal points for the future.  In its latest review, it mentions participating in “a JIC working group that has been formed to consider amendments to the Code”.

Ethical issues still feature heavily in the complaints statistics… although they have fallen from 35% of all complaints in 2013 to 21% in 2014 (SIP3 and communication breakdown/failure accounted for the largest proportions at 27% apiece).  Almost one third of the 2014 ethics-based complaints related to conflicts of interest.

The Service still continues to receive high profile complaints of this nature: its review refers to the Comet complaint, which appears to be as much about the “potential conflict of interest” in relation to the pre-administration advice to the company and connected parties and the subsequent appointment as it has to do with apparent insufficient redundancy consultation.

I suspect that the question of how much pre-appointment work is too much will be one of the debates for the JIC working group.  Personally, I think that the current Ethics Code raises sufficient questions probing the significance of prior relationships to help IPs work this out for themselves… but this does require IPs to step away and reflect dispassionately on the facts as well as try to put themselves in the shoes of “a reasonable and informed third party, having knowledge of all relevant information” to discern whether they would conclude the threat to objectivity to be acceptable.

It is evident that there exists a swell of opinion outside the profession that any pre-appointment work is too much.  Thus, at the very least, perhaps more can be done to help people understand the necessary work that an IP does prior to a formal appointment and how this work takes full account of the future office-holder’s responsibilities and concerns.  Are Administrators’ Proposals doing this part of the job justice?

 

Criticisms of Disciplinary Sanctions

Taking centre stage in the Insolvency Service’s 2014 review are the Service’s plans “to ensure that the sanctions applied where misconduct is identified are consistent and sufficient, not only to deal with that misconduct, but also to provide reassurance to the wider public”.

Regrettably, the body of the review does not elaborate on this subject except to explain the plan to “attempt to create a common panel [of reviewers for complaints] across all of the authorising bodies”.  I am sure the Service is pleased to be able to line up for next year’s review that, with the departure of the Law Society/SRA from IP-licensing, the Complaints Gateway will cover all but one appointment-taking IP across the whole of the UK.

But these are just cosmetic changes, aren’t they?  Has there been any real progress in improving consistency across the RPBs?  It is perhaps too early to judge: the Common Sanctions Guidance and all that went with it were rolled out only in June 2013.  Over 2014, there were only 19 sanctions (excluding warnings and cautions) and seven have been published on the .gov.uk website (https://goo.gl/F3PaHj) this year.

A closer look at 2014’s sanctions hints at what might be behind the Service’s comment: 15 of the 19 sanctions were delivered by the IPA; and 20 of the 24 warnings/cautions were from the IPA too.  To license 34% of all appointment-taking IPs but to be responsible for over 80% of all sanctions: something has got to be wrong somewhere, hasn’t it?

The ICAEW has aired its own opinion on the Common Sanctions Guidance: its response to the Insolvency Service’s recommendation from its monitoring visit that the ICAEW “should ensure that sanctions relating to insolvency matters are applied in line with the Common Sanctions Guidelines” was to state amongst other things that the Guidance should be subject to a further review (cheeky?!).

 

Other Rumbles of Discontent

All this “noise” reminded me of the House of Commons’ (then) BIS Select Committee inquiry into insolvency that received oral evidence in March 2015 (http://goo.gl/CCmfQp).  There were some telling questions regarding the risks of conflicts of interest arising from pre-appointment work, although most of them were directed at Julian Healy, NARA’s chief executive officer.  Interestingly, the Select Committee also appeared alarmed to learn that not all fixed charge receivers are Registered Property Receivers under the RICS/IPA scheme.  Although it seems contrary to the de-regulation agenda, I would not be surprised to see some future pressure for mandatory regulation of all fixed charge receivers.

The source of potential conflicts that concerned the Select Committee was the seconding of IPs and staff to banks.  I thought that the witnesses side-stepped the issue quite adeptly by saying in effect, of course the IP/receiver who takes the appointment would never be the same IP/receiver who was sitting in the bank’s offices; that would be clearly unacceptable!  It was a shame that the Committee seemed to accept this simple explanation.  But then perhaps, when it comes to secondments, the primary issue is more about the ethical risk of exchanging consideration for insolvency appointments, rather than the risk that a seconded IP/staff member would influence events on a particular case to their firm’s advantage.

Bob Pinder, ICAEW, told the Committee: “It used to be quite prevalent that there were secondments, but he [a Big Four partner] was saying that that is becoming less so these days because of the perception of conflict… There is a stepping away from secondments generally”, so I wonder whether there might not be so much resistance now if the JIC were to look more closely at the subject of secondments when reconsidering the Ethics Code.

The FCA’s review of RBS’ Global Restructuring Group, which was prompted by the Tomlinson report (and which clearly was behind much of the Committee’s excitement), is expected to be released this summer (http://goo.gl/l96vtl).  When it does, I can see us reeling from a new/revived set of criticisms – one more straw for the camel’s back.


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The Value of RPB Roadshows: Forewarned is Forearmed

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Having just returned from a fantastic trip to Vietnam and Cambodia, I have yet to catch up on domestic news, so I thought I’d plug the silence gap with some tips that I picked up from the RPBs’ autumn roadshows.

Ethical issues featured heavily at the ICAEW roadshow, whilst the IPA roadshow raised some controversial Administration points, and both RPBs had much to say about handling complaints in the wake of the Insolvency Service’s Complaints Gateway.

Ethical Issues (ICAEW Roadshow, Birmingham, 9 October 2014)

Allison Broad of the ICAEW described the following ethical dos and don’ts:

• In order to identify any prior relationships before deciding whether to take an appointment, do not rely solely on the company director signing off confirmation that s/he is not aware of any conflicts/relationships; internal checks are still required.

• Ensure that relationships are evaluated, not merely identified. Allison gave the example of an IP who had noted on his ethics checklist that the director of the prospective appointment had been a director of eight other companies that had gone insolvent with the IP acting, but the checklist evidenced no evaluation of the threat to the ethical principles that these prior relationships presented. Personally, I have also seen cases – although not quite as striking as this – where a prior relationship existed but it was not noted on the ethics checklist. Even though an IP may have concluded that a relationship is not sufficiently significant to require the introduction of safeguards or to raise concerns about the appropriateness of taking the appointment, files should disclose the relationship and evidence the IP’s consideration of its significance. In my view, failure to do so, not only could constitute a breach of the Ethics Code (paragraphs 74 and 75), but is also bound to raise suspicions that checklists are completed on auto-pilot and insufficient thought is given to ethics matters.

• Ensure that the IP signs off the ethics checklist, if not before the appointment, then as close to it as possible in order to demonstrate that consideration of ethical matters had been considered before appointment.

• Keep ethical threats under review throughout the life of the case, e.g. by including on case reviews a question – not a simple tick-box – as regards how any safeguards employed to manage a threat have been working.

• Review regular introducers’ websites prior to taking the first appointment from those sources and regularly thereafter, as website contents are frequently refreshed. Allison acknowledged that pre-packs and phoenix services may be covered on websites, but she urged caution when dealing with introducers who position these items at the top of their lists or prominently.

• If an IP feels that the quality of an introducer’s advice to directors/debtors is below par, it is not sufficient to allow the relationship to continue on the basis that at least the IP can ensure that s/he provides good advice. The ICAEW expects IPs to write to the introducer with any concerns and ask that changes be made to their websites and practices. They would then expect IPs to check whether these had been actioned and, if the introducer does not do so, the IPs should terminate the introduction relationship.

Administration Technicalities (IPA Roadshow, London, 22 October 2014)

Caroline Sumner of the IPA highlighted several issues identified on monitoring visits.  However, I think I must have been in a particularly argumentative mood on the day, as my notes are fairly scant on Caroline’s comments about SIP16, SIP13, and the new SIPs 3 – from memory, I think that none of this was rocket science; Caroline just highlighted the need to get them right – but I went to town on some other points she made:

  • Caroline described the Insolvency Service’s view that Administrators’ Proposals should describe only one of the Para 3 administration objectives that the Administrators propose to achieve.

I have a problem with this: firstly, in what respect is this reflected by the statutory requirements?  R2.33(2)(m) requires Proposals to include “a statement of how it is envisaged the purpose of administration will be achieved”.  An old Dear IP (chapter 1, article 5) referred to this and also to Para 111(1) of Schedule B1, which states “’the purpose of administration’ means an objective specified in paragraph 3”, leading to the Service’s conclusion that “administrators should not simply include all three objectives with no attempt to identify which is the relevant objective”.  That’s all well and good – and I think that IPs have moved away from many early-style Proposals, which did reproduce Para 3 verbatim – but I do not see how these statutory provisions require an IP to pin to the mast only one Para 3 objective to endeavour to achieve.

Here’s an example: what would be wrong with an Administrator’s Proposals stating that the company in administration is continuing to trade with a view to completing a sale of the business as a going concern, which should generate a better result for creditors as a whole – and thus achieve administration objective (b) – but if a business sale is not possible, a break-up sale is likely to result only in a distribution to secured/preferential creditors – and thus achieve administration objective (c)?  In my mind, this is the most transparent, comprehensive, and helpful explanation to creditors and certainly is far better than that which the Insolvency Service seems to expect IPs to deliver: for Proposals simply to state that a going concern sale is being pursued to achieve objective (b) is to provide only half the story and, I would argue, would not comply with R2.33(2)(m), as the Proposals would not be explaining “how it is envisaged the purpose of administration will be achieved” in the event that a business sale is not completed.  Para 111(1) simply leads me to an interpretation that an Administration’s eventual outcome – not necessarily the Administrator’s prospective aim – is the achieving of a single objective, which is supported by the Act’s presentation of the objectives as an hierarchy notwithstanding that in practice it is easy to see how more than one objective might be achieved (e.g. rescue of the company and a better result for creditors as a whole).

At the roadshow, I asked Caroline whether she felt that, if the singly-selected objective turned out to be not achievable, the Administrator would need to go to the expense of issuing revised Proposals.  She accepted that, of course, the IP would need to consider that requirement (although I wonder how the decision in Re Brilliant Independent Media Specialists (https://insolvencyoracle.com/2014/10/07/how-risky-is-it-to-act-contrary-to-a-creditors-committees-wishes-and-other-questions/) impacts on this).  Is this really what the government intended?  What happened to the drive to eliminate unnecessary costs?

Finally, I think that this view puts a new colour on the statutory requirement to issue Administrators’ Proposals as soon as reasonably practicable.  Could it be argued that asarp is only reached once the Administrator is reasonably confident of the single objective that he/she envisages achieving?  The RPBs have tried hard to promote the asarp requirement, rather than the 8-week back-stop, but insisting on a single objective in Proposals could encourage a turn in the tide.

I have asked Caroline to clarify the Insolvency Service’s view.  However, if the Service does expect IPs to adopt this approach, I think they should set it down in a Dear IP – of course, assuming that my arguments hold no water – so that all IPs are forced to accept the same burdens.

  • Caroline repeated the Dear IP article that extensions should be sought at the outset only in exceptional cases where it is clear that more than 12 months will be required to complete the Administration.

Although Caroline didn’t go into the technicalities of how an extension might be agreed at an early stage, it gave me cause to revisit the Dear IP article (chapter 1 article 12).  It describes the “questionable” practice of seeking consent for an extension “with the administrator’s proposals including a conditional resolution regarding the extension of the administration, along the lines that if the administrator should think it desirable, then the administration would be extended by an additional six months”.  Over the years I have seen this done, but I have not seen it done properly, i.e. compliant with the Rules.

R2.112(2) requires requests to be accompanied by a progress report, but Proposals are not a progress report.  I guess that a Proposals circular could be fudged to fit the prescription for a progress report as set out in R2.47, but this would have consequences, such as the need to file the Proposals/report with a form 2.24B (as well as filing the Proposals individually) and the clock would be re-set so that the next progress report would be due 6 months afterwards.  Also, how does an Administrator meet the statutory requirement to issue a notice of extension as soon as reasonably practicable after consent has been granted, if s/he has obtained such a “conditional” resolution?

My recommendation would be to avoid seeking extensions in the Proposals altogether, but instead leave them until the first progress report is due.  Of course, if an Administrator has to convene a general meeting (or deal with business by correspondence) at a time other than the Para 51 meeting, this will attract some additional costs, but if the request is made at the time of the statutorily-required 6-month progress report, those additional costs are relatively small, aren’t they?

Complaints-Handling

Complaints-handling was covered at both the ICAEW and the IPA roadshow, which I suspect has as much, if not more, to do with the likely pressure from the Insolvency Service on RPBs as it has with any perceived extent of failings on the part of IPs.

Both Allison and Caroline covered the need to explain how complaints can be made to the Complaints Gateway, although I do feel that generally RPBs have not done much to publicise their “requirements”.  The only guidance I’ve seen is on the ICAEW’s blog – http://www.ion.icaew.com/insolvencyblog/post/Launch-of-the-insolvency-complaints-gateway – that refers to the need to disclose the Gateway to anyone who wants to complain and in engagement terms, if they refer to the firm’s complaints procedure.  This blog also stated that there was no need to inform creditors of existing cases, which leaves me wondering what the expectation is to communicate with creditors generally on post-Gateway cases.  Given the Insolvency Service’s emphasis on the Gateway, I am a little surprised that the RPBs seem to be relying on some kind of process of osmosis to get the message of their expectations out to IPs.

From the two roadshows that I attended, I sense that there is a general expectation that IPs’ websites will display details of the Gateway (although I hope that the RPBs will take a proportionate approach, given that some smaller practices’ websites are little more than a homepage).  I do not get the sense that the RPBs expect the Gateway’s details to be added to circulars to creditors generally, but only that they should be included in any correspondence with (potential) complainants.

Allison also highlighted that, whilst the ICAEW’s bye-laws (paragraph 1.2 at http://goo.gl/1frWQo) include a requirement that all new clients be informed of their right to complain to the ICAEW and be provided with the name of the firm’s principal to whom they should complain, when writing as an insolvency office-holder the need to refer parties to the Complaints Gateway takes precedence over this requirement.

Caroline commented that IPA monitoring visits will include a review of the practice’s internal complaints process to see how these are handled before the complainant resorts to the Gateway.  If complaints are not handled by the IP, the monitors will also be exploring how the IP is confident that complaints are dealt with appropriately.

Why Attend the Roadshows?

I hope that the above illustrates the value of attending an RPB roadshow.  However, I think it also illustrates the risk that we learn about previously unknown and not altogether satisfying views on regulatory matters.  I realise that I am not blameless in this regard: when I worked at the IPA, I also used the roadshows as a medium to convey my thoughts on issues identified in visits and self certifications, so I should not be surprised that this practice is continuing (or indeed that others hold views different to my own!).  I and many of my colleagues were ever conscious that there was no other medium for Regulation Teams to deliver such messages and forewarn IPs of hot topics and evolving regulatory expectations.  Dear IP was the only other method that came close, but as this is controlled by the Insolvency Service, I could only hope that the RPB perspective would not become lost in translation.

The Advantage of Written Guidance?

I hope that, if I’ve got the wrong end of any stick waved at either of the two roadshows, someone will shout – please?  Given the limited audience at roadshows and the risk of Chinese Whispers, it must be better for the RPBs to convey their messages in written form, mustn’t it?

“The 18 month Rule”

A recent example, however, illustrates that even written communications can be unsettling.  At http://www.ion.icaew.com/insolvencyblog/post/The-18-month-rule—it-s-for-real, a QAD reviewer’s blog starts by stating that “there is a suggestion from some compliance providers and trainers that the 18 month rule for fixing fees may not be definitive, and that you still have the option of applying to creditors after the expiry of the 18 month period”.  I shall start by confessing that it’s not me, honest: I’ve never had cause to scrutinise these provisions.  However, now that I do, I have to say that I am struggling to see how the Rules can be interpreted in the way that the Service and the ICAEW are promulgating.

The blog states: “Our interpretation is that if fees haven’t been fixed within 18 months it will be scale rate in bankruptcies or compulsories or a court application. We recently raised the issue with the Insolvency Service and their view is: ‘. . . after 18 months the liquidator is only entitled to fix fees in accordance with rule 4.127(6) unless the stated exceptions apply’.  Clearly this relates to liquidators in compulsory liquidations, but the principal extends.”

I have long thought that this indeed was what the Service had intended by the Rules amendments, but on closer inspection I’m afraid I really can’t see that this is what the Rules state.  R4.127(6) states: “Where the liquidator is not the official receiver and the basis of his remuneration is not fixed as above within 18 months… the liquidator shall be entitled to remuneration fixed in accordance with the provisions of Rule 4.127A.”

“Shall be entitled…”  When I reach state-pensioner age, I shall be entitled to travel on buses free of charge, but that does not mean that the only way I will be able to get to town is by taking a bus.  Similarly, after 18 months, the liquidator shall be entitled to remuneration on the scale rate, but does this mean that the liquidator is only entitled to fees on this basis?  What statutory provision actually prohibits the liquidator from seeking creditors’ approval of fees on another R4.127(2) basis after 18 months?

And how do the Rules “extend” this compulsory liquidation principle to CVLs?  R4.127(7-CVL) states: “If not fixed as above, the basis of the liquidator’s remuneration shall… be fixed by the court… but such an application may not be made by the liquidator unless the liquidator has first sought fixing of the basis in accordance with paragraph (3C) or (5) and in any event may not be made more than 18 months after the date of the liquidator’s appointment.”  Given that the construction of this rule is so different from R4.127(6), it is difficult to see how both rules can be considered as reflecting the same principle.  And in any event, this simply states that a court application may not be made after 18 months (which seems to be precisely the opposite of the ICAEW’s blog post!).  How can this rule be interpreted to the effect that the liquidator cannot seek creditors’ approval for fees after 18 months?  The Rule starts: “If not fixed as above…”, so the rest of the Rule is irrelevant if the fees are fixed as above, e.g. as specified in R4.127(5) by a resolution of a meeting of creditors; I see no provision “above” prohibiting the seeking of a creditors’ resolution after 18 months.

I shall be interested to see how this matter gets handled in a future Dear IP.  In the meantime, what should IPs do?  I reckon that the only certain approach is: seek approval for fees before the 18 months are ended!

(UPDATE 12/01/2015: for another view of the 18-month rule, take a look at Bill Burch’s blog, which to be fair pre-dated mine by some months: http://goo.gl/4ucKaF.  Bill posted another article today at http://goo.gl/jL3WNu, reminding IPs that the wisest course is to seek early fee approval whether or not we agree with the regulators’ interpretation.)

This blog illustrates to me that there must be a better way for the regulatory bodies to convey – considered and sound – explanations of certain Rules and their expectations to IPs.  As a compliance consultant, I suffer many a sleepless night worrying about whether my interpretation and understanding of current regulatory standards are aligned with my clients’ authorising bodies’ stance.  I do value my former colleagues’ openness and I do try to keep my ear to the ground with many of the authorising bodies – I’ll take this opportunity to make a quick plug for the R3 webinar on regulatory hot topics that I shall be presenting with Matthew Peat of ACCA in February 2015.  However, I believe there is a need and a desire in all quarters for the creation of a better kind of forum/medium for ensuring that we all – regulators, IPs, and compliance specialists – are singing from the same hymn sheet.

Have a lovely long break from work, everyone.  I’ll catch up again in the New Year.


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The Future is… Complicated

 

 

1933 Yosemite

My autumn has been a CPE marathon: SWSCA, the R3 SPG Forum, the IPA roadshow, and the ICAEW roadshow. Thus I thought I’d try to summarise all the legislative and regulatory changes currently in prospect:

Statutory Instruments

  • Enterprise & Regulatory Reform Act 2013;
  • Deregulation Bill (est. commencement: May/October 2015);
  • Small Business, Enterprise and Employment Bill (October 2015 for IP regulation items, April 2016 for remainder);
  • The exemption for insolvency proceedings from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) comes to an end on 1 April 2015;
  • New Insolvency Rules (est. to be laid in Parliament in October 2015, to come into force in April 2016); and
  • A plethora of SIs to support the Bankruptcy and Debt Advice (Scotland) Act 2014 (coming into force on 1 April 2015, but, regrettably, I feel so out of the loop on Scottish insolvency now that I don’t dare pass comment!)

Consultation Outcomes

  • IP fees (consultation closed in March 2014);
  • DROs and threshold for creditors’ petitions for bankruptcy (consultation closed in October 2014); and
  • Continuity of essential supplies to insolvent businesses (consultation closed in October 2014).

Revision of SIPs etc.

  • Ethics Code Review;
  • SIP 1;
  • SIPs 16 & 13;
  • SIP 9 (depending on how the government turns on the issue of IP fees);
  • New Insolvency Guidance Paper on retention of title; and
  • Other SIPs affected by new statute.

 

Enterprise & Regulatory Reform Act 2013

The Insolvency Service’s timetable back in 2013 was that the changes enabled by this Act would be rolled out in 2015/16, but I haven’t heard a sniff about it since. However, the following elements of the Act are still in prospect:

  • Debtors’ bankruptcy petitions will move away from the courts and into the hands of SoS-appointed Adjudicators (not ORs).
  • There was talk of the fee being less than at present (£70 plus the administration fee of £525) and of it being paid in instalments, although my guess is that the Adjudicator is unlikely to deal with an application until the fee has been paid in full.
  • The application process is likely to be handled online. Questions had been raised on whether there would be safeguards in place to ensure that the debtor had received advice before applying. This would appear important given that the Adjudicator will have no discretion to reject an application on the basis that bankruptcy is not appropriate: if the debtor meets the criteria for bankruptcy, the Adjudicator must make the order.

The ERR Act is also the avenue for the proposed revisions to Ss233 and 372 of the IA86 – re. continuity of essential supplies – as it has granted the SoS the power to change these sections of the IA86.

The Deregulation Bill

Of course, the highlight of this Bill is the provision for partial insolvency licences. It was debated in the House of Lords last week (bit.ly/1tBmMhe – go to a time of 16.46) and whilst I think that, at the very least, the government’s efforts to widen the profession to greater competition are nonsensical in the current market where there is not enough insolvency work to keep the existing IPs gainfully employed, my sense of the debate is that the provision likely will stick.

I was surprised that Baroness Hayter’s closing gambit was to keep the door open at least to press another day for only personal insolvency-only licences (rather than also corporate insolvency-only ones).  Will that be a future compromise?  What with the ongoing fuzziness of (non-FCA-regulated) IPs’ freedom to advise individuals on their insolvency options and the rareness of bankruptcies, I wonder if the days in which smaller practice IPs handle a mixed portfolio of corporate and personal insolvencies are numbered in any event.

The Deregulation Bill contains other largely technical changes:

  • Finally, the Minmar/Virtualpurple chaos will be resolved in statute when the need to issue a Notice of Intention to Appoint an Administrator (“NoIA”) will be restricted to cases where a QFCH exists.
  • The consent requirements for an Administrator’s discharge will be amended so that, in Para 52(1)(b) cases, the consent of only the secured creditors, and where relevant a majority of preferential creditors, will be required. At present Para 98 can be interpreted to require the Administrator also to propose a resolution to the unsecured creditors.
  • A provision will be added so that, if a winding-up petition is presented after a NoIA has been filed at court, it will not prevent the appointment of an Administrator.
  • In addition to the OR, IPs will be able to be appointed by the court to act as interim receivers over debtors’ properties.
  • It will not be a requirement in every case for the bankrupt to submit a SoA, but the OR may choose to request one.
  • S307 IA86 will be amended so that Trustees will have to notify banks if they are seeking to claim specific after-acquired property. The government envisages that this will free up banks to provide accounts to bankrupts.
  • The SoS’ power to authorise IPs direct will be repealed, with existing IPs’ authorisations continuing for one year after the Act’s commencement.
  • The Deeds of Arrangement Act 1914 will be repealed.

The Small Business, Enterprise and Employment Bill

I won’t repeat all the provisions in this Bill, but I will highlight some that have created some debate recently.

The proposed new process for office holders to report on directors’ conduct proved to be a lively topic at the RPB roadshows. There seemed to be some expectation that IPs would report their “suspicion – not their evidenced belief – of director misconduct” (per the InsS slide), although this was downplayed at the later R3 Forum.  My initial thoughts were that perhaps the Service was looking to produce a kind-of SARs-reporting regime and I wondered whether that might work, if IPs could have the certainty that their reports would be kept confident.

However, I suspect that the Service had recognised that IPs would have difficulty with the proposed new timescale for a report within 3 months, but hoped that this would be mitigated if IPs could somehow be persuaded to report just the bare essentials – to enable the Service to decide whether the issues merit deeper enquiries – rather than putting them under a requirement to collect together substantial evidence. I suspect that the Service’s intentions are reasonable, but it seems that, at the moment, they haven’t got the language quite right.  Let’s hope it is sorted by the time the rules are drafted.

Phillip Sykes, R3 Vice President, gave evidence on the Bill to the Public Bill Committee a couple of weeks ago (see: http://goo.gl/V1XSbX or go to http://goo.gl/jSTmI0 for a transcript).  Phillip highlighted the value of physical meetings in engaging creditors in the process and in informing newly-appointed office holders of pre-appointment goings-on.  He also commented that the proposed provision to empower the courts to make compensation orders against directors on the back of disqualifications seems to run contrary to the ending of the LASPO insolvency exemption and that the suggestion that certain creditors might benefit from such orders offends the fundamental insolvency principle of pari passu. Phillip also explained the potential difficulties in assigning office holders’ rights of action to third parties and described a vision of good insolvency regulation.  Unfortunately, he was cut off in mid-sentence, but R3 has produced a punchy briefing paper at http://goo.gl/mBeU30, which goes further than Phillip was able to do in the short time allowed by the Committee.

Last week, a new Schedule was put to the Public Bill Committee (starts at: http://goo.gl/sY5QUG), setting out the proposed amendments to the IA86 to deal with the abolition of requirements to hold creditors’ meetings and opting-out creditors.  A quick scan of the schedule brought to my mind several queries, but it is very difficult to ascertain exactly how practically the new provisions will operate, not least because they refer in many places to processes set out in the rules, which themselves are a revision work in progress.

IP Fees

The consultation, which included a proposal to prohibit the use of time costs in certain cases, closed in March 2014 and there hasn’t exactly been a government response. All that has been published is a ministerial statement in June that referred to “discussing further with interested parties before finalising the way forward” (http://goo.gl/IbQsLd).  The recent events I have attended indicate that the Service’s current focus is more on exploring the value of providing up-front fee estimates together with creditors’ consent (or non-objection) to an exceeding of these estimates, rather than restricting the use of the time costs basis.  I understand that the government is expected to make a decision on how the IP fees structure might be changed by the end of the year.

Revision of SIPs etc.

I have Alison Curry of the IPA to thank for sharing with members at the recent roadshows current plans on these items:

  • A JIC review of the Insolvency Code of Ethics has commenced. Initial findings have queried whether the Code needs to incorporate more prescription, as it has been suggested that the prevalence of “may”s, rather than “shall”s, can make it difficult for regulators to enforce. The old chestnuts of commissions, marketing and referrals, also may be areas where the Code needs to be developed.
  • Although RPB rules include requirements for their members to report any knowledge of misconduct of another member, it has been noted that, of course, this is not effective where the misconduct involves a member of a different RPB. Therefore, the JIC is looking to amend SIP1 with a view to incorporating a profession-wide duty to report misconduct to the relevant RPB or perhaps via the complaints gateway.
  • As expected, SIP16 is being reviewed in line with Teresa Graham’s recommendations. This is working alongside the efforts to create the Pre-pack Pool, which will consider connected purchasers’ intentions and viability reviews. A consultation on a draft revised SIP16 is expected around Christmas-time. I had heard that the target is that a revised SIP16 will be issued by 1 February 2015 and the Pool will be operational by 1 March 2015, but that seems a little optimistic, given the need for a consultation.
  • SIP13 is ripe for review (in my opinion, it needed to be reviewed after the Enterprise Act 2002!) and it is recognised that it needs to be revised in short order after SIP16.
  • A new IGP on RoT has been drafted and is close to being issued. We received a preview of it at the IPA roadshow. To be honest, it isn’t rocket science, but then IGPs aren’t meant to be.


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A Janus View of Developments in Insolvency Regulation

IMGP4139

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The JIC Newsletter: all bark and no bite?

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

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

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

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

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

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

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

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

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

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

Finally, don’t mention the Draft Insolvency Rules!

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