Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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A tale of two views: is a paid creditor still a creditor?

The Insolvency Service’s report on the 2016 Rules review contains some interesting gems.  It’s a detailed report, which demonstrates they have scrutinised the consultation responses.  The result is a list of proposed fixes to the Rules – most are welcomed, a few are alarming.

In this blog, I describe what I found was the most surprising and alarming statement in the report.  It relates to the age-old question: is a paid creditor still a creditor?  The report’s statement is surprising, as it is the polar opposite of a comment published by the Insolvency Service 5 years’ ago.  And it is alarming because the report states merely that the Rules need to be made “clearer”, which suggests that we have all been misinterpreting the Rules over the past 5 years.  But hey ho, we’re only talking about fee-approval and Admin extensions!

The Insolvency Service’s report is available at: https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

Is a paid creditor still a creditor?

If a creditor’s claim is discharged (and not subrogated to the payer) after the start of an insolvency proceeding, should that creditor still be treated as a creditor for decision procedures and report deliveries?

Before I left the IPA in 2012, the question began to be discussed at the JIC.  It turned out to be a hotly debated topic and I never did learn the conclusion.  I’d always hoped that there would be a Dear IP on the subject to settle the matter once and for all (subject to the court deciding otherwise, of course).  It was such a live topic at that time that surely the 2016 Rules were drafted clearly, weren’t they?

The general principle?

I had heard a rumour long ago that the Insolvency Service’s view was once-a-creditor-always-a-creditor.  I understood that the basis for this view was that creditors are generally defined as entities who have a claim as at the relevant date, so the fact that the creditor’s claim may have been discharged later does not change their status as a creditor.

Of course, this doesn’t work if, after the insolvency commences, the creditor sells their debt (or it is otherwise discharged by a third party): the purchaser/settlor tends to acquire the creditor’s rights, so the original creditor would no longer be entitled to a dividend or to engage in decision procedures – there are Rules and precedents to address these scenarios.

I can see where this view might come in handy, e.g. where an office holder had already paid creditors in full and only afterward realises that creditors have not yet approved their fees.

However, this view always seemed illogical to me: why should a paid creditor be entitled to decide matters that no longer affect them, e.g. the office holder’s fees or the extension of an Administration?  Indeed, some paid lenders refuse to engage where their debt has already been discharged, even though an Administrator may need all secured creditors’ consents to move forward.

Setting aside this issue, it could be argued that in some respects the 2016 Rules support a once-a-creditor-always-a-creditor view.  For example, R15.31(1)(c) states that in CVLs, WUCs and BKYs, a creditor’s vote is calculated on the basis of their claim “as set out in the creditor’s proof to the extent that it has been admitted”, which could indicate that post-commencement payments are ignored for voting purposes. 

But then what about R14.4(1)(d), which states that a proof must:

“state the total amount of the creditor’s claim… as at the relevant date, less any payments made after that date in relation to the claim… and any adjustment by way of set-off in accordance with rules 14.24 and 14.25”? 

Is the “claim” the original sum or the adjusted sum?  If, for the purposes of identifying the “claim” for voting purposes, conveners are supposed to ignore post-commencement payments made, then doesn’t R14.4(1)(d) (and R15.31(1) – see below) mean that they should also ignore any set-off adjustment?  That doesn’t make sense, does it?

Administrations are always “special”, aren’t they?!

R15.31(1)(a) provides that creditors’ claims for voting purposes are calculated differently for ADM decision procedures.  It states that in ADMs creditors’ votes are calculated:

“as at the date on which the company entered administration, less (i) any payments that have been made to the creditor after that date in respect of the claim, and (ii) any adjustment by way of set-off…”.

This seems pretty unequivocal, doesn’t it?  A paid creditor would have no voting power in an ADM decision procedure.

It is not surprising therefore that R15.11(1) provides that notices of ADM decision procedures must be delivered to:

“the creditors who had claims against the company at the date when the company entered administration (except for those who have subsequently been paid in full)”.

So the natural meaning of these Rules seems to be that paid creditors have no voting power and therefore do not need to be included in notices of decision procedures.  This seems logical, doesn’t it?

What about prefs-only decision procedures?

These Rules led me to ask the Insolvency Service via their 2016 Rules blog: what is the position where an Administrator is seeking a decision only from the prefs, especially where those creditors also have non-pref unsecured claims?  Do the Rules mean that, where a pref creditor’s claim has been paid in full, the pref creditor is ignored for the prefs-only decision procedure? 

Or does the fact that the creditor hasn’t actually been “paid in full” because they have a non-pref element mean they should still be included in the prefs-only process?  And does that mean that, per R15.31(1)(a), they would be able to vote in relation to their non-pref claim? 

Yes, I know this would seem a perverse interpretation, but it seemed to me the natural meaning of rules that were not designed to apply to a prefs-only process.

The Insolvency Service’s view in 2017

The Insolvency Service’s response on 21 April 2017 (available at https://theinsolvencyrules2016.wordpress.com/2016/11/30/any-questions/comment-page-1/#comments – a forum on which the Service aimed to “provide clarity on the policy behind the rules”) was:

“Our interpretation is that 15.3(1)(a) (sic) would lead an administrator to consider the value of outstanding preferential claims at the date that the vote takes place. This would only include the preferential element of claims, and if these had been paid in full then the administrator would not be expected to seek a decision from those creditors.”

Now: the Government’s “long-standing view”

However, the Insolvency Service’s Rules Review report (5 April 2022) states:

“Several respondents asked for clarification on the position of secured and preferential creditors that had received payment in full. It has been the Government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the Government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditors.”

Wow!  If only the Insolvency Service had published the Government’s long-standing view 5 years’ ago, before all those fees had been considered approved by only unpaid prefs or secureds!

Is it only a R15.11(1) issue?

The Service’s report makes no mention of the voting rights of paid prefs.  So does this mean that paid prefs should receive notice of decision procedures, but, in line with the Service’s statement in 2017, they have no voting rights?  Or do they think that R15.31(1)(a) also needs to be changed?

And what about paid secured creditors?  They’re not involved in decision procedures at all, so R15.11 is irrelevant where an Administrator is seeking a secured creditor’s approval or consent. 

What is a “secured creditor”?

A secured creditor is defined in S248 of the Act as a creditor “who holds in respect of his debt a security over property of the company”.  “Holds” = present tense.  If a secured creditor no longer holds security over the company’s property at the time when an Administrator seeks approval/consent, are they in fact a secured creditor?

It seems to me that, if the Service wishes to amend the Rules to make them clearer as regards the Government’s position, they may need to look at amending the Act too.

The consequence of a clarification of the Rules

If the report had stated that the Service intended to change the Rules to give effect to the Government’s view, I would not have been so alarmed – that would be a problem for the future.  But they have said that they want to make the Rules “clearer”.  This suggests that they believe the existing Rules could be interpreted to give effect to the Government’s view.  In that case, are we expected to apply the existing Rules in the way that this report describes?

And what about all the earlier cases in which paid secured or pref creditors’ approvals were not sought?  What effect does this have on previously-deemed approved fees, extended Administrations and discharged Administrators?

And what does this approach achieve?  Are IPs really expected to seek approvals/consents from paid creditors, most of whom have no theoretic, or even real, interest in the process?  Why should paid prefs get to decide, even if they have non-pref unsecured claims, when no other unsecured creditors have this opportunity?

Are the ADM Para 52(1)(b) Rules fit for purpose?

I have often blogged that I think the Rules around the consequences for Para 52(1)(b) ADMs are confused and illogical.  The Insolvency Service acknowledged some issues in the Rules Review report:

“Some respondents raised issues related to administration cases where statements had been made pursuant to paragraph 52(1)(b) of Schedule B1 to the Insolvency Act 1986, highlighting the difficulties that can sometimes occur when only secured and/or preferential creditors need to be consulted on certain matters under the Rules. It is clear that in some cases engagement with this smaller group of creditors can be difficult. However, we consider that the overall efficiencies provided for by the Insolvency Act and Rules across all such cases outweigh the difficulties that can occur in a minority of them.”

“The overall efficiencies”?  Is the Insolvency Service saying that, because it is useful in many cases not to have to bother with non-pref unsecureds, this outweighs the issues arising in a minority of cases?  If that’s true, then why not roll out this alleged more efficient process across all insolvency case types..?

The advantage of HMRC pref status?

Ok, a silent secured creditor can be a real headache and a silent paid secured creditor is going to be particularly reluctant to lift a finger.  But now that HMRC is a secondary pref creditor in most cases, at least this eases the problem of getting a decision from the prefs, doesn’t it?

I understand that HMRC is still acting stony in the face of many decision procedures.  Oh come on, guys!  If you want IPs to waste estate funds applying to court, you’re going the right way about it.

Other issues with the Rules Review report

This is only one of a number of issues I have with statements in the report.  In the next article, I will cover some others as well as highlight some items of good news for a change.

And apologies for my silence over the past months: an extremely busy working season and an unexpected health issue sapped me of my time and energy.  Last August, I had planned on covering other effects of the IVA Protocol – this will emerge one day.


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New SIPs, what new SIPs? Part 1: SIP9

The new SIPs might be the RPBs’ worst-kept secret: they’re available on the ICAEW’s website, but the ICAEW has yet to announce their release; in its recent webinar advert, the IPA mentioned in passing that three revised SIPs are “due to be issued in the beginning of March”; whereas ICAS has already presented a (free) webinar on them.

And thank goodness ICAS has been upfront about them!  While R3 stated that “the changes are not expected to be far reaching”, Jo and I think that they very well could be for IPs who still bill Category 2 disbursements.

 

In this blog, I take a look at the revised SIP9, which takes effect from 1 April 2021 in relation to all relevant cases, i.e. including existing cases.  My recommended to-do list includes:

  • Review whether your existing Category 2 disbursements recharges will be prohibited from 1 April and set up safeguards to avoid billing these from that date
  • Revisit all documents that refer to Category 1 or 2 disbursements and change definitions to meet the new SIP9’s, including referring now to Category 1 and 2 “expenses”
  • Ensure that fee proposal and/or progress report templates meet the enhanced disclosure requirements for:
    • The use of associates or those with whom you have a professional or personal relationship that falls short of a legal association
    • Sub-contracting work that could be done by you or your staff
    • Explaining what you expect to be paid (not only what it should cost) and an indication of the likely return to creditors in all cases
    • Making clear what direct costs are included in fixed/percentage fee bases
  • For fees estimates, check that you calculate a blended rate correctly
  • Don’t get too hung up on your MVL documentation, as MVLs are (almost) carved out of the new SIP9

You can access all the revised SIPs (for E&W) from https://www.icaew.com/regulation/insolvency/sips-regulations-and-guidance/statements-of-insolvency-practice/statements-of-insolvency-practice-sips-england

You can access ICAS’ webinar at http://ow.ly/tcGU50DKuCp

 

Changes to recharging costs to estates

Jungle drums have been rumbling for several years now on the topic of whether a cost can be recharged to an estate as an expense or whether it is an overhead that is not permitted to be recharged.  This SIP9 goes some way to clarifying the distinction:

  • Whereas the current SIP9 (I’ll call this the old SIP9 from here on) states that “basic overhead costs” are not permissible as disbursements, the new SIP9 widens the scope to “any overheads other than those absorbed in the charge out rates”.
  • The new SIP9 no longer refers to Category 1 and 2 “disbursements”, but to Category 1 and 2 “expenses”. If you managed to avoid getting into a debate about this with an RPB monitor over the past few years, you may find this an odd and subtle change.  The point is that a “disbursement” is an expense that is first paid by a party (e.g. the IP/firm) and only later recharged to the estate.  The consequence of this change is that direct payments from an estate to an associate are now Category 2 expenses (whereas under the old SIP9, such a payment would be neither a Category 1 nor 2 disbursement, as it is not a disbursement at all).  A more frustrating consequence is that lots of templates – fee proposal packs, disbursements policies, progress reports, Fees Guides – will also need changing to reflect the new terminology.
  • The most important change is the new SIP9’s statement that:

“All payments should be directly attributable to the estate from which they are being made or sought”.

 

Is this the end of Category 2 disbursements?

What does “directly attributable” mean?  Does this mean that you will no longer be able to be paid Category 2 disbursements on a roughly calculated basis, say, £x per creditor to cover stationery and photocopying?  Or internal room hire of £x per meeting?

Here’s the odd thing: although only “directly attributable” costs can be passed on, the SIP still allows “shared or allocated payments”.  An example of a shared cost that David Menzies of ICAS gave in his webinar was where an office holder hires an external conference room for physical meetings in relation to three connected insolvencies: this charge could be split up and passed on to the three cases… but as it is a shared cost, it would be a Category 2 expense… so it would need to be approved before being paid from the estate.

David Menzies helpfully suggested that, for a cost to be directly attributable, there needs to be a direct causal relationship between the cost and the case.  He suggested asking yourself the question: would the cost have been incurred if the case did not exist?  On this basis, it seems to me that photocopying and internal room hire charges could not be viewed as “shared costs”, as the firm would still incur the cost of the photocopier or premises rental whether or not the one case to which you are aiming to recharge the costs existed.

 

What is an “overhead”?

David’s own definition was that overheads are costs that are not directly attributable to an individual insolvency estate but which are incurred in support of insolvency appointments for the IP or are costs associated with other services that the IP/firm provides as part of their business.

So if the cost is incurred to support the administration of a case plus other aspects of the business, it is likely to be an overhead.  Here are some other examples from ICAS’ webinar:

  • Where an IP’s office space is used to store company records, the IP could not charge the estate for storage
  • Where an external storage company charges, e.g., £x per box per quarter, this could be charged to an estate based on the number of boxes stored on that case
  • Where an external storage company charges a global fee for the facility, which is used to store case files and office admin files, this is probably an overhead that could not be split up and charged to the estate
  • Where a mailing company produces a monthly itemised bill, the items relevant to each case could be charged to the estate as a Category 1 expense
  • Where a software provider charges on a per case basis, this could be considered an expense
  • Where a firm pays a global fee for software, e.g. a Microsoft licence, this could not be split up across the cases

I have tried to reflect as closely as possible what was said on the ICAS webinar – and I do see the logic of these examples – but please note that the strict wording of the revised SIP9 does not lead unequivocally to these conclusions.  We expect to see some additional guidance from the RPBs, which may help clearly define the boundaries explored by these examples.

 

How will this affect recharging?

Although the revised SIP comes into force on 1 April 2021, it does not relate only to new appointments from that date.  Therefore, even if you have already obtained approval for Category 2 disbursements that will not be allowed under the revised SIP, you will not be able to draw payment for them from the estate after 1 April.

I suggest that you revisit all your current Category 2 disbursements practices and decide now how you will put safeguards in place to make sure that no “overheads” are inappropriately billed after 1 April.

 

Other Category 2 clarifications: Associates

The revised SIP9 makes it clearer that even the charges from parties with whom the IP/firm has no legal association may fall within the scope of Category 2 treatment.  It states: “Where a reasonable and informed third party might consider there would be an association, payments should be treated as if they are being made to an associate”, i.e. they will need to be approved as a Category 2 expense.

But what is an “association”?  In my response to the JIC consultation, I gave the example that, as an IPA member, I have “an association” with the IPA, so does this mean that I would treat the IPA as an associate (e.g. if I were to hire its boardroom for a creditors’ meeting)?  David Menzies was helpful in his webinar: he suggested that the context here might be the Code of Ethics’ significant professional or personal relationship concept – if such a relationship were present (or might be perceived by a reasonable and informed third party to be present), then this would equate to an association for the purposes of SIP9.

The revised SIP9 adds to the required disclosure: now, office holders must disclose “the form and nature of any professional or personal relationships between the office holder and their associates”… presumably where it is proposed that the insolvent estate shall bear the associate’s fees/costs.

 

It’s not all extra burdens

I suspect that a big relief to many IPs will come in the form of a reduction in scope of SIP9.  With effect from 1 April, SIP9 will no longer apply to MVLs… “unless those paying the fees require such disclosures”.

In the ICAS webinar, it was suggested that a prospective liquidator might ask the members upfront whether they want to receive such disclosures and keep evidence that they had been so asked and what their response is.  But this isn’t in the SIP and personally I hope that this does not become the regulatory expectation for all MVLs.  Quite frankly, if a party is paying your fees, I’m sure you will give them whatever information they so require irrespective of what a SIP does or does not say.

Sensibly, the new SIP9 clarifies that it does not reach to Moratoriums, although I’m not sure that this needed saying considering there isn’t really an “estate” in a Moratorium appointment, is there, there’s simply a “client”?

 

The small print

Here are the other most material changes in the revised SIP that I have seen:

  • Proportionate payments

“All payments from an estate should be fair and reasonable and proportionate to the insolvency appointment” – how do you measure proportionality?

I often query IPs who instruct agents to deal with chattels that are only worth, say, £3,000 when they include agents’ costs of £3,000 (and in some cases, more!) in an expenses estimate.  The IPs often respond that the agents are doing much more than simply realising chattels – will arguments like this fall foul of the proportionate test in future?  Instructing solicitors is another minefield: hindsight sometimes makes such costs look disproportionate to what has been achieved.

 

  • Consider who is approving your fees

“Payments should not be approved by any party with whom the office holder has a professional or personal relationship which gives rise to a conflict of interest”.

For example… a firm’s IPs are often appointed on Admins by a secured creditor and now you need your fees approved by that secured creditor.  Or… you have paid or plan to pay the company’s accountants for helping on a Statement of Affairs, as you have done on a number of cases before, and those accountants are the only unsecured creditor to vote on your fees.

These relationships certainly give rise to self-interest threats, but do they overstep the SIP9 conflict of interests threshold?  David Menzies suggested that the barrier is reached where there is an unacceptable conflict, not simply an ethical threat that can be managed to an acceptable level with safeguards.

 

  • More disclosure on sub-contractors

The old SIP9 required disclosure where the office holder sub-contracts work that could otherwise by carried out by them or their staff.  Now the disclosure must also include “what is being done and how much it will cost”.

 

  • Not so much what it will cost, but what do you expect to be paid?

Whereas the old SIP9 included as a key issue of concern the anticipated cost of work proposed to be done, now the SIP includes the anticipated payment for the work.  So, for example, while a fees estimate may set out that time costs of £30,000 are anticipated to be incurred, it seems you now need to disclose that, due to insufficient assets, you only expect to be paid £10,000.  Also, where you are seeking (or have approved) a percentage basis, what payment will this likely equate to?

 

  • Always provide an indication of the likely return to creditors

Further crystal ball-gazing now appears necessary: whereas the old SIP stated that “where it is practical to do so”, you need to provide “an indication of the likely return to creditors when seeking approval for the basis of” fees, this has been toughened to a requirement in all cases, whether or not it is practical to do so.

 

  • What is included in your fixed/percentage fee?

Oddly, “where a set amount or a percentage basis is being used, an explanation should be provided of the direct costs included”.  I would think it were more important to be clear about what direct costs are excluded.  The new SIP continues: “The office holder should not seek to separately recover sums already included in a set amount or percentage basis fee and should be transparent in presenting any information”.

 

  • How to calculate a blended rate

Helpfully, the SIP now explains what is meant by a “blended rate”: it “is calculated as the prospective average cost per hour for the appointment (or category of work in the appointment), based upon the estimated time to be expended by each grade of staff at their specific charge out rate”.

You might think this is an obvious definition.  However, I have seen several fees estimates based on a “blended rate” calculated as simply the average of the charge-out rates, e.g. IP at £400 per hour and case-worker at £200 per hour, so the estimate is calculated at £300 per hour.  This method generates an artificially inflated fees estimate where, as you would expect, the case-worker spends the majority of time on the case.

The method that the SIP now promotes is use of a blended rate that reflects the estimated time to be spent on the case.  In the above example, if the IP is estimated to spend 10 hours and the case-worker 60 hours on the case, the blended rate would be c.£229 per hour, leading to a total fees estimate of £16,000, which is much more realistic than the £21,000 (i.e. 70 hours at £300) reflected by the earlier method.

 

There’s more

Yep, there’s a new SIP7 and SIP3.2… and we expect a revision to SIP16 before the end of April.  Never a dull moment!

 


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Compliance Hot Topics

I think we all need a break from new legislation and threats of more changes, don’t we?  How about settling back into something more familiar and, I think, strangely comforting: common non-compliances.

Usually, late spring brings us the Insolvency Service’s annual review of regulation, but there’s no sign of it this year.  But we do have the ICAEW’s reports, which are well worth a read for any IP, as they highlight common issues that I think we’re all seeing.  This year, there are three ICAEW reports, although this blog only looks at their Insolvency Monitoring Report at: www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/annual-return-and-monitoring/insolvency-monitoring-report.ashx

In the report, the ICAEW highlights the following areas that have brought IPs to the Committee’s attention:

  1. Remuneration
  2. Ethics
  3. Investigations
  4. Statutory Deadlines
  5. Insolvency Compliance Reviews
  6. Information to Debtors

The ICAEW report identifies several other areas of concern as well as providing some useful tips on conducting SIP11 reviews.

 

Issues that have led to Committee-referral

The ICAEW reports that the following have led IPs to face the Insolvency Licensing Committee (“ILC”):

1. Remuneration

The ICAEW reported instances of:

  • Drawing fees without proper authority

The issues that I have seen include: drawing pre-CVL fees that do not meet the R6.7 definition; getting in a muddle with who is required to approve Administrators’ fees (and failing to make sure that this tallies with the Proposals); and accepting shareholders’ informal approval of MVL fees, rather than getting a proper resolution.

  • Fees (or proposed fees) appearing excessive or unreasonable

When I have spoken with monitors (ICAEW and IPA), I have been given examples of excessive/unreasonable fees that truly are toe-curling, although I have seen other cases that do not appear particularly damning.  I understand that both RPBs have a number of cases working through their disciplinary procedures, but I have yet to see any sanction published under this heading.  It may be a difficult allegation to make stick, but for some time I have felt that the RPBs and the InsS have been looking for a worthy scalp.

  • Failing to follow the decision procedure rules

This one frustrates me: despite the comprehensive checklists and templates that many firms have, somehow several people still manage to overlook a key component in fee proposal packs.  Often, the missing piece is a Notice of Decision Procedure when seeking a vote by correspondence.  Sometimes, it is an Invitation to Nominate Committee Members and/or a failure to seek a decision on the formation of a Committee.  In some other cases, fee proposal packs have not been circulated to all the relevant creditors, sometimes because a bunch of creditors (usually the employees) have not been provided previously with a R1.50 website notice and sometimes because IPs have assumed that, as the RPO is the major preferential creditor, it is the only one who needs to be asked to approve an Administrator’s fees in a relevant Para 52(1)(b) case.

  • Failing to provide fee estimates, where required

This is scary, considering that the Rules changed in 2015!  Personally, I haven’t seen this in a few years now.  I do still see, however, fee proposal packs lacking details of expenses, which is a necessary statutory component of all ADM, CVL, WUC and BKY fee proposal packs (and a SIP9 expectation in all case types).

The ICAEW’s tips to improve in this area are:

  • Consider using a billing authority form so that evidence of statutory approval is provided whenever a bill is raised/paid from the estate

I agree that this is valuable, although it will not ensure that valid approval has been achieved unless minutes of meetings/records of decision are signed off with similarly rigorous checks.

  • Critically review fee proposal packs: does the pack explain clearly the work done or to be done and, in light of the explanation, do the costs seem reasonable?

Yep, I agree with this too.  When considering fee estimates, I find it useful to consider the hours being proposed.  For example, it might look like good value to estimate time costs of £5,000 to recover £30,000, but if this means you’re expecting to spend three whole days to collect one book debt, then without more explanation this will look unreasonable.

 

2. Ethics

The ICAEW reported three instances where:

  • Prior relationships had not been considered

I see this so often that it makes me want to weep.  In these cases, the reviewer’s view was that the IP should have concluded that it was unethical to accept the appointment: now, that will get you into hot water.

Unsurprisingly, the ICAEW’s tips are:

  • Simply do proper ethics reviews and write them down before appointment

I wonder if this goes wrong because people independent from the case (and/or people who don’t really understand ethics) are tasked with completing the ethics review… and then the prospective office holder signs it off without thinking.  IPs, please think before you sign off an ethics review: does it disclose all prior relationships and are they well explained and evaluated?

 

3. Investigations

The ICAEW reported:

  • A systemic failure to record sufficient SIP2 work

Over recent years, there has been a trend away from lengthy checklists.  While I can understand this for routine case administration not least as checklists are often completed after-the-event, this approach simply does not work for SIP2 investigations.  The RPBs expect to see contemporaneous evidence of what work has been done and the office-holder’s thinking on whether anything is worth looking into further.

  • Failure to pursue antecedent transactions

I have seen SIP2 investigations fail to pick up weird goings-on like money moving out of accounts after the company had apparently stopping trading.  I have also seen SIP2 checklists identify a potential action and then the trail goes cold.  Both are just not acceptable and, I think, usually stem from an overflowing caseload or disorganised case administration.

The ICAEW’s tips are:

  • Do the work at an early stage and then follow up; and
  • Document decisions not to continue pursuit

The ICAEW reminds us that litigation funders may be able to help.  Some IPs screw their noses up at this suggestion based on rejections they received many years’ ago.  Times have changed, so I would recommend trying again.  And if you still get a rejection, at least this can form part of your decision.  Of course, your decision will also be based on your target’s wealth: it may be a no-brainer decision, but always write it down.

 

4. Statutory Deadlines

The ICAEW reported:

  • An increasing number of systemic failures to meet deadlines

This isn’t an issue I have seen.  Perhaps it derives from poor diary/task templates?  I have seen some sub-standard designs since the 2016 Rules were introduced, but I think those issues have largely been ironed out now.  Could the problem be overwhelming caseloads?  Firms weren’t exactly working at full pelt last year, so if this is your problem, then heaven help you in 2020/21!  Also, try not to get into the habit of running off progress reports at the very end of the deadline (and remember that ADM deadlines are one month, not two): if you do that, then there is no wriggle-room when you have a flurry of new work.

The ICAEW’s tips are:

  • Have robust diary prompts and case-specific checklists; and
  • Consider appointing a staff member to oversee/chase compliance

If diaries are very detailed, sometimes it is difficult to see the wood for the trees.  Having this as one person’s duty (or requiring, say, all managers to monitor/chase) can help sift out the vital diary prompts from the not-so-important ones.  It also helps more junior staff to learn which diary lines are non-negotiable.

 

5. Insolvency Compliance Reviews

 The ICAEW reported:

  • Weak or non-existence ICRs

It is worth remembering that the ICAEW does take this seriously, so please do give ICRs a great deal of attention.

  • Failure to implement changes

Sometimes actually conducting the ICR is the easy bit.  The time required to make the necessary changes can be substantial.

The ICAEW’s tips are:

  • Use a robust checklist to carry out the ICR

The ICAEW provides a checklist (note: this works for corporate and personal cases): www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/corporate-insolvency-casework.  Some questions are subjective, e.g. re case progression, but if used critically with no preconceptions it covers all the major statutory bases.  The ICR also needs to consider key areas on a firm-wide basis.  The ICAEW’s Review of Internal Controls and Systems Helpsheet – at www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/insolvency-compliance-review-helpsheets – is a good start, but remember that, aside from the ICR itself, SIP11, client money and the Money Laundering Regs require more thorough individual attention.

  • Make the necessary changes

I recommend getting the easy wins, e.g. fixing document templates and diary lines, out of the way quickly.  Meatier tasks may take months to resolve, especially if they involve changing procedures, training staff and making sure that they have adapted to new requirements.  Plan to tackle these tasks methodically, assign the tasks to appropriate staff and follow up with chasers/meetings to make sure that progress continues to be made.  Then, review the effectiveness of the changes ideally before the next ICR is due and keep going until the issue is resolved.

 

6. Information to Debtors

The ICAEW reported:

  • Delivery of poor information to debtors presumably in a pre-IVA context

…including: omitting relevant options; rushing calls; leading the debtor; and not sufficiently explaining the pros and cons of options.

The ICAEW’s tips are:

  • Train staff;
  • Review and update scripts regularly;
  • Regularly review calls for quality; and
  • Ensure that calls are tailored to the individual and give them time to consider their options

Nothing more needs to be said, really.  Quality-controlling advice calls is a never-ending job and one that needs to be well-resourced.

 

The Worst of the Rest

Yes, there’s more… lots more.

The above issues will get you in front of the ILC, but the ICAEW’s report also highlights other issues that are worth double-checking:

  • Miscalculation of delivery timescales

Be careful of assuming first class delivery times and then using second class post.  Take care also to exclude the date of delivery and the date of a decision when calculating notice periods.

  • Flaws in reports and fee estimates

In addition to the issues raised above, a plethora of qualitative issues arise, e.g. does the narrative explain the WIP or fee requested; are the numbers consistent throughout the doc; and are generic statements relevant to the case in question?  Something I see missing a lot are explanations as to whether the fee and expenses estimates have been (or will be) exceeded and if so why.  In some other cases, these explanations do not stack up with the WIP analysis, e.g. it might be reported that the fee estimate has been exceeded because of difficulties pursuing a certain asset, but the WIP analysis shows the fee estimate has only been exceeded in the Admin & Planning category.  Sometimes this can point to poor time-recording practices.

  • Poor case progression and dividend practices

The ICAEW reports some delays in asset recovery and in progressing dividends, as well as miscalculation of claims, especially those of employees.  Remember that in most cases you have only 2 months after the last date for proving to declare the dividend and, if you miss that, then you will need to go through the NOID rigmarole again (and, if you don’t have a good reason for missing it, then your second attempt should be at your own cost).  The ICAEW expects payment of interim dividends in appropriate cases.  I have also seen IPs put off progressing a preferential distribution until they can see their way clear to an unsecured dividend, which is not acceptable.  The ICAEW has also highlighted an issue with IPs telling creditors that they will apply the small debt provisions and then they fail to follow this through.  I have seen some initial letters and progress reports state such an intention and, although personally I think this is not binding until the NOID is issued (R14.31), to avoid any creditor confusion, I strongly recommend removing such statements from these early circulars: if you decide later to apply the small debt rules, then you can make this clear in the NOID.

  • Inadequate annual AML tasks

The ICAEW report reminds readers about the need to review the firm-based AML risk assessment annually and to carry out a full AML review.  I’ll take a closer look at this topic in a future blog when I review the ICAEW’s other annual reports.

  • Clients’ Money Regulations: a reminder for non-ICAEW IPs

The ICAEW report highlights that its Clients’ Money Regs apply to more than just ICAEW-licensed IPs.  If you work in an ICAEW-defined firm or the ICAEW is the firm’s AML Supervisor, then you need to comply with the ICAEW’s Clients’ Money Regs whether or not you are licensed as an IP by them.  To be honest, there are few differences between the IPA’s and the ICAEW’s Regs, but one notable difference is that the ICAEW requires an annual review of the operation of a client account.

  • Inadequate GDPR checks

The ICAEW reports that some are not considering on a case-by-case basis what personal data is held by the insolvent, whether it is secure and for what purpose it is held/processed.  The ICAEW also expects IPs to check whether the entity was registered with the ICO… although it is not clear what they expect you to do subsequently.  I recall that R3 asked the ICO way back in 2018 whether IPs should be maintaining (or even initiating) insolvents’ ICO registrations, which of course would attract additional costs to the estate.  But then 2018’s problems seem so last year!

 

SIP11 Reviews

The ICAEW devotes a whole page to this topic in its report.  Noteworthy points include:

  • Make sure the financial controls and safeguards are written down in the first place

I have seen more than one firm try to carry out a SIP11 review without having taken this step.  How can you check whether the firm’s processes have been followed, if they’re not written down?  SIP11 lists nine areas in paragraph 9 to document… and then adds a tenth (insurance cover) in paragraph 11.  In effect, these areas result in a cashiering manual setting out what happens to money in, payments out, bank recs etc.

  • Then review them annually

The ICAEW report highlights that traditional ICRs will not cover everything required of a SIP11 review.  Jo and I concur: if you want us to do a SIP11 review alongside your ICR, please let us know this and expect the ICR to be longer (and more expensive).  There is no prescription as regards a SIP11 review, but the ICAEW report lists four points that could be considered:

  • Review a sample of cases to see whether procedures have been followed correctly

To some extent, this will be covered by a traditional ICR, but the reviewer may only carry out full reviews of a couple of cases, which will be insufficient for SIP11 purposes.

  • Review the findings of the annual client account compliance review

From a SIP11 perspective, key issues include: how quickly client account money is moved to estate accounts; whether all post-appointment transactions are reflected on the case’s cash-book; and what happens to any interest credited to the client account.

  • Run reports from IPS etc. to review money held and bank rec frequency

I would also recommend running reports on balances held in closed cases or in “suspense” accounts.

  • Review a sample of bank recs

I have seen bank recs with uncleared adjusting entries or uncleared receipts signed off month after month without any apparent thought as to what is behind these.  Understandably, uncleared payments can sit around for longer, but they do need to be resolved at some stage.

Although not included in the ICAEW’s list, the report does note that the firm’s bonding and insurance procedures also need to be reviewed as part of the SIP11 exercise.  This could include a comparison of your open case list against your bond insurer’s, which would help identify whether bonds are being released appropriately.  You could also review whether bond schedules are issued before the 20th day of the following month – look particularly at appointments occurring right at the end of the month, as they can easily fail to hit IPS etc. in time for the following month’s bordereau – and see how swiftly increases are arranged.  Of course, the firm’s insurances are reviewed annually on renewal, but you could prove SIP11 compliance by keeping a record of that renewal consideration by the IP(s) in the same location as the SIP11 review docs.

 


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50 Things I Hate about the Rules – Part 3: Closures… and a bit more Fees

In this post, I add to my previous list of fees-related gripes and cover some issues with the new closure processes… and, as the end of the list is nearing, if anyone has any other gripes they want me to add to the list, please do drop me a line (because, between you and me, I’m struggling to come up with 50!)

On the topic of fees, I think that my last list and these additions demonstrate how madly intricate the statutory requirements are, especially for fees in Administrations and for fees based on time costs.  Is it any wonder that so many fee non-compliances arise?  And more than a few are treated by the RPBs as “unauthorised fees” issues, thus attracting the risks of fines and other sanctions.  This seems unfair as many trip-ups only occur because the Rules are such a jungle.  There must be a simpler way, mustn’t there?

 

A Few More Fees-Related Gripes

  1. Capturing Past Work

I appreciate that the fees Rules were drafted in the expectation that office holders would seek approval for the fee basis up-front (although how the drafters believed that IPs would be able to put together a realistic, case-specific, fees estimate on Day 1, I don’t know).  However, I think the Rules should have been designed to accommodate the possibility that fee-approval would be sought after an IP has been on the case for some time.  After all, the fact that Administrators’ Proposals must address how the company’s affairs have been managed since appointment and the proposed fee basis indicates that even the drafters envisaged some occasions when work will have been done before approval is sought, not to mention all the tasks demanded of every office holder swiftly on appointment.

My problem is that the Rules’ language is all prospective: the fees estimate/proposal must provide “details of the work the IP and the IP’s staff propose to undertake” (Rs1.2 and 18.16(7)) and the IP must provide “details of the expenses the office-holder considers will be, or are likely to be incurred” (Rs18.16(4) and (7)).  I think that we’ve all interpreted this to mean that, if time or expenses have already been incurred, these need to be explained also – and indeed SIP9 has plugged this statutory gap – but it is a shame that the Service did not see the 2016 Rules as an opportunity to fix the flaws in the 2015 fees Rules, which had been so hastily pushed out.

 

  1. Capping a Fees Estimate

The Rules don’t seem to have been written with any expectation that creditors will want to agree fees on a time costs basis subject to a cap different from that set by the fees estimate.

Firstly, although the Oct-15 Rules changed the fee basis to “by reference to the time… as set out in the fees estimate” (e.g. old R4.127(2)(b)), those final words were omitted from new R18.16(2)(b), so now creditors are asked simply to approve a decision that fees be based on time costs.

Thus, if creditors want to cap those fees at anything other than the fees estimate, they have to modify the proposed decision unilaterally… which isn’t really catered for in decisions by correspondence. In effect, the creditor is proposing their own decision, which the Rules strictly provide for as a “requisitioned decision” (R15.18), but of course office holders cut to the chase by accepting the creditor’s cap if their vote is conclusive.  The alternative is to count their vote as a rejection of the office holder’s proposed decision and start again with a new decision procedure.

But then how do you frame a request to creditors to increase this kind of cap?  The process for “exceeding the fees estimate” is set down in R18.30.  Let’s say that your original fees estimate was £50,000 and the creditors agreed a cap of £30,000.  If you want to ask them to reconsider whether you can take up to £40,000, R18.30 doesn’t work.  You’re not asking to exceed the fees estimate, you’re still looking to be within your original fees estimate.

R18.29 also doesn’t work here: the fee basis has been agreed as time costs, so you’re not asking creditors to change the basis (and there may be no “material and substantial change in circumstances” from that which you’d originally estimated when you’d quoted £50,000).  It seems to me that you’re asking creditors a whole different kind of question – to lift their arbitrary cap – which is not provided for at all in the Rules.

 

  1. Trying Again for Fee Approval

Commonly, IPs will propose a fees decision to creditors and receive no response at all.  Invariably, they will try again, often emphasising to creditors that, if no one votes, they may take it to court, thus increasing the costs demanded of the insolvent estate quite substantially.

But what if your original fees estimate was for £30,000 and then, when you go back for a second attempt some time later, you think that £50,000 is more realistic?  Or maybe your first fees estimate was proposed on a milestone basis, say £30,000 for year 1, and then you go to creditors at the start of year 2 with a fees estimate for £50,000 for two years?

Do you look to R18.30 on the basis that this is an excess fee request?  After all, you are looking to exceed your original estimate, so the scenario seems to fit R18.30(1).  However, read on to R18.30(2) and a different picture emerges: R18.30(2) instructs office holders to seek approval from the party that “fixed the basis”, so if no basis has been fixed, then R18.30 cannot be the solution.

So is your original fees estimate completely irrelevant then?  Do you simply start again with a new fees estimate?  Well, if you’re issuing a progress report before the creditors agree the basis, the original fees estimate is not completely irrelevant: R18.4(1)(e)(i) states that you must report whether you are “likely to exceed the fees estimate under R18.16(4)”.  That Rule refers simply to providing the information to creditors.  It does not say that that fees estimate must have been approved.  So at the very least, you would explain in your progress report why your original £30,000 was inadequate, even though you might also be providing a new fees estimate for £50,000.

 

  1. When Administration Outcomes Change (1): Disappearing Para 52(1)(b) Statements

This question proved contentious long before the 2016 Rules: if an Administrator has achieved fee approval under R18.18(4) (as it is now), where they have issued Proposals with a Para 52(1)(b) statement, is this approval still sufficient if the circumstances of the case change and it transpires that the Para 52(1)(b) statement is no longer appropriate? And conversely, if an Administrator issued Proposals with no Para 52(1)(b) statement, is the unsecured creditors’ approval of fees still sufficient in the event that it now appears that there will not be a dividend to unsecureds (except by means of the prescribed part)?

Personally, I believe that technically the approvals are still valid.  R18.18(4) refers specifically to making a Para 52(1)(b) statement: if that statement has been made, it’s been made; the fact that the statement may no longer be appropriate does not change the fact that it was made (although issuing revised Proposals may overcome this… but how many Administrators ever issue revised Proposals..?).  Also, R18.33 provides that, if the Administrator asks to change the fee basis, amount etc. or for approval to fees in excess of an estimate, the Administrator must go to the unsecureds if the Para 52(1)(b) statement is no longer relevant.  Surely, if it were the case that Administrators needed to go to unsecureds (or indeed issue revised Proposals) every time a Para 52(1)(b) statement were no longer relevant, i.e. to ratify a fees decision previously made by secureds/prefs, the Rules would similarly demand this.

However, while I think that this is the technical position, I have sympathy with IPs who decide to go to other creditors for fee approval even though strictly-speaking it does not seem as though this is required by the Rules.  Although clearly it costs money to seek decisions from creditors, I don’t think anyone will challenge an IP who has chosen to ensure that all relevant creditor classes are in agreement.  This would also help counteract any challenge that the Proposals had made a Para 52(1)(b) statement inappropriately, thus disenfranchising the unsecureds from having a say on the Administrators’ fees.

 

  1. When Administration Outcomes Change (2): Appearing Preferential Distributions

But what is the technical position for an Administrator who has made a Para 52(1)(b) statement, thought that they would not be making a distribution to prefs, but then the outcome changed so that a distribution became likely?

I think the technical position for this scenario does create a problem.  R18.18(4) states that the basis is fixed: (i) by the secured creditors and (ii) if the Administrator has made or intends to make a distribution to prefs, then also by the prefs (via a decision procedure).  It seems to me that overnight the question of whether the Administrator’s fees have been approved or not changes.  Originally, the Administrator thought that they only needed secured creditors’ approval, so they drew fees on that basis.  But then, as soon as they intend to make a distribution to prefs, they have no longer complied with R18.18(4).  Although it would seem mighty unfair for anyone to view the Administrator’s fees drawn up to that point as unauthorised, it certainly seems to me that the Administrator must take immediate steps to seek preferential creditors’ approval.

 

Closure Processes

  1. Inconsistent Closure Processes

There is a distinct difference between the MVL closure process and those for CVLs, BKYs and compulsory liquidations (“WUCs”).  In an MVL, the liquidator issues a “proposed final account” (R5.9) and then, often 8 weeks’ later, the “final account” is issued along with a notice that the company’s affairs are fully wound up (R5.10).  However, in a CVL, before the 8-week period begins the liquidator issues a final account with a notice that the company’s affairs are fully wound up (R6.28).  BKYs and WUCs follow this CVL model.

I have no idea why there should be these differences in the two main processes.  But what I do know is that it causes confusion on what a final account should look like… even for Companies House staff.

R6.28(1) states that the CVL final account delivered to creditors at the start of the 8-week process is the one required under S106(1) – not a draft or a proposed version of the final account – and it must be accompanied by the notice confirming that the affairs are fully wound up.  Therefore, it is clear to me that this final account is pretty-much set in stone at this point.  The final account date is fixed as at the date it is issued to creditors and it does not get changed when the time comes to deliver a copy of the final account to the Registrar of Companies at the end of the 8 weeks (S106(3)).

I don’t think that this is a misinterpretation… but I have doubted myself, not least as some IPs have complained to me over the last couple of years that Companies House has rejected their final accounts, requiring them to be re-dated to the “final meeting” or “closure” date.  I have asked Companies House twice to explain to me why they believe the final account should be re-dated… and both times Companies House conceded that there is no such requirement.  Thank you, Companies House, but would it be possible for you to avoid reverting to 1986 habits again so that, over time, we might all settle into a routine of complying with the Rules?!

 

  1. Closing Bankruptcies

I explained in Gripe no. 4 that R10.87(3)(f) seems to contain an anomaly.  It states that the final notice to creditors should state that the trustee will vacate office (and (g) be released, if no creditors have objected) when the trustee files the requisite notice with the court, but there seems to be no Section/Rule that actually requires a notice to be filed with the court.

I’m repeating this gripe here because others have been puzzled over the filing requirements when closing BKYs, especially in debtor-application cases where of course there is no court file.  Quite frankly, I don’t think any of us would care, if it were not for the fact that the trustee’s release is dependent on filing a final notice with “the prescribed person” (S298(8), S299(3)(d)).  As I mentioned previously, the person at the Insolvency Service with whom I’d been communicating seemed to express the view that “the prescribed person” is the court in creditor-petition (and old debtor-petition) cases and is the OR in debtor-application cases, but my attempts to get them to be more categoric in their response (and to explain with reference to the Rules how they reach this conclusion) have been unsuccessful to date.

It is unfair that the Act/Rules deal so unsatisfactorily with the trustee’s release and it makes me wonder if, to be certain, it would be beneficial to ask the Secretary of State to confirm one’s release in debtor-application cases where filing a notice at the court seems insensible.

 

  1. Closing Fees

When I explain to clients how I see the closure process for CVLs, BKYs and WUCs working, I sometimes hear the retort: so, you’re telling to me that I have to get everything finished before I issue my final account/report at the start of the 8 weeks, are you?  But how do I get paid for being in office over that period?

It is true that, under the old Rules, it was possible for IPs to factor the costs to close into their draft final report so that they could incur the time costs during that 8-week period and draw the fees (and deal with the final VAT reclaim) before vacating office and finalising their final report.  Under the new process, this looks impossible: in order to issue a notice confirming that the affairs have been fully wound up, it seems to me that at that point the affairs must have been fully wound up 😉

Most IPs are prepared to forgo the final costs to close a case.  Let’s face it, how many cases have enough funds to pay IPs anywhere near full recovery of their costs anyway?  But, I had to agree with my client who was disgruntled at the prospect of having to work for free from the point of issuing the final report: it does seem unfair.  But there is a simple solution: why not ask creditors to consider approving your fees to close a case as a set amount?  You could propose this at the same time as seeking approval for fees on a time costs basis for all other aspects of the case.  If your closing fees were approved as a set amount, you could invoice and draw those fees long before issuing your final account/report… and this way you could also get the VAT all wrapped up in good time as well.

 

  1. Stopping a Closure

Over the years, there have been occasions when an IP has wanted to stop a closure process.  It’s true that, under the old Rules, there were no provisions cancelling a final meeting.  But under the old Rules, it was possible to re-start the closure process for example if your draft final report turned out to be flawed; in fact, the old Rules required you to re-issue a draft final report and re-advertise for a new final meeting.

But as the 2016 Rules for CVLs, BKYs and WUCs only require you to issue a final account/report and then wait 8 weeks for creditors to take any action they see fit, there seems to be no way to stop this process once it has begun.  In fact, even if a creditor objects to the office holder’s release, this does not stop the IP vacating office at the 8 weeks; it simply means that, after vacating office, the IP needs to apply to the Secretary of State for release.  The only actions that stop (or rather postpone) a closure process are a creditor exercising their statutory rights to request information or challenge fees or expenses.

 


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The Regulators present a unified front on fees

 

In an unprecedented step, the IPA and the ICAEW have issued largely consistent articles on fees, SIP9 and reporting. I think some of the points are well worth repeating, not only because in the past few months, I’ve seen more IPs get into a fix over fees than anything else, the new rules having simply compounded the complexities, but also because the articles contain some important new messages.

In this post, I explore how you can make your fee proposals bullet-proof:

  • What pre-administration work is an allowable expense?
  • What pre-administration costs detail is often missing?
  • What pre-CVL work is allowable as an expense?
  • What Rules/SIP9 detail is commonly missing from fee proposals?
  • How do the monitors view Rules/SIP9 omissions?
  • What problems can arise when using percentage or mixed basis fees?

The articles can be found at:

The effort seems to have originated from a well-received presentation at the autumn’s R3 SPG Forum, given by the ICAEW’s Manager, Alison Morgan (nee Timperley) and the IPA’s Senior Monitoring Manager, Shelley Bullman.

As the ICAEW and the IPA monitor c.90% of all appointment-taking IPs, I think this is a fantastic demonstration of how the RPBs can get out to us useful guidance. Of course, such articles do not have the regulatory clout of SIPs or statute (see below). However, I believe it is an essential part of the RPBs’ role to reach out to members in this way in written form. Although roadshow presentations are valuable, they can only reach the ears of a proportion of those in need and the messages soon settle into a foggy memory (if you’re lucky!).

  • Do the articles represent the RPBs’ views?

The IPA article ends with a disclaimer that “IPA staff responses” cannot fetter the determinations of the IPA’s committees and the ICAEW article is clearly authored by Alison Morgan, rather than being something that can strictly be relied upon as representing the ICAEW’s views (for the sake of simplicity, I have referred throughout to the articles as written by “the monitors”).

That’s a shame, but I know only so well how extraordinarily troublesome it is to push anything through the impenetrable doors of an RPB – that’s why SIPs seem to emerge so often long after the horse has bolted… and I suspect why we are still waiting for an insolvency appendix to the new CCAB MLR guidance. However, at a time when the Insolvency Service’s mind is beginning to contemplate again the question of a single regulator, issuing prompt and authoritative guidance serves the RPBs’ purposes, not only ours.

 

Pre-Administration Costs

Over the past few years, I’ve seen an evolving approach from the RPBs. In the early days, the focus was on the process of getting pre-administration costs approved. The statutory requirement for pre-administration costs to be approved by a resolution separate from the Proposals has taken a while to sink in… and the fact that the two articles repeat this requirement suggests that it is still being overlooked on occasion.

Then, the focus turned to the fact that it was, not only pre-administration fees that required approval, but also other costs. I still see cases where IPs only seek approval of their own costs, apparently not recognising that, if the Administration estate is going to be paying, say, agents’ or solicitors’ costs incurred pre-administration, these also need to go through the approval process.

  • What pre-administration work is an allowable expense?

Now, it seems that the monitors’ focus has returned to the IP’s own fees. Their attention seems fixed on the definition of pre-administration costs being (R3.1):

“fees charged, and expenses incurred by the administrator, or another person qualified to act as an insolvency practitioner in relation to the company, before the company entered administration but with a view to it doing so.”

The IPA article states that this “would exclude any insolvency or other advice that may or may not lead directly to the administration appointment” and the ICAEW article states that it “would exclude any general insolvency or other advice”.

I do wonder at the fuzzy edges: if a secured creditor who is hovering over the administration red button asks an IP to speak with a director, doesn’t the IP’s meeting with the director fit the description? Or if an IP seeks the advice of an agent or solicitor about what might happen if an administration were pursued, wouldn’t this advice count? But nevertheless, the monitors do have a point. If a firm were originally instructed to conduct an IBR, this work would not appear to fall into the definition of pre-administration costs. Also, if an IP originally took steps to help a company into liquidation but then the QFCH decided to step in with an Administration, the pre-liquidation costs could not be paid from the Administration estate.

  • What pre-administration costs detail is often missing?

As mentioned above, the monitors remind us that pre-administration costs require a decision separate from any approval of the Proposals – there is no wriggle-room on this point and deemed consent will not work. The monitors also list other details required by statute that are sometimes missing, of which these are my own bugbears:

  • R3.35(10): a statement that the payment of any unpaid pre-administration costs as an expense of the Administration is subject to approval under R3.52 and is not part of the Proposals subject to approval under Para 53 of Schedule B1
  • R3.36(a): details of any agreement about pre-administration fees and/or expenses, including the parties to the agreement and the date of the agreement
  • R3.36(b): details of the work done
  • R3.36(c): an explanation of why the work was done before the company entered administration and how it had been intended to further the achievement of an Administration objective
  • R3.36(d) makes clear that details of paid pre-administration costs, as well as any that we don’t envisage paying from the Administration estate, should be provided
  • R3.36(e): the identities of anyone who has made a payment in respect of the pre-administration costs and which type(s) of costs they discharged
  • R3.36(g) although it will be a statement of the obvious if you have provided the above, you also need to detail the balance of unpaid costs (per category)

 

Pre-CVL Costs

Another example of an evolving approach relates to the scope of pre-CVL costs allowable for payment from the liquidation estate. Again, over recent years we have seen the RPB monitors get tougher on the fact that the rules (old and new) do not provide that the IP’s costs of advising the company can be charged to the liquidation estate. This has been repeated in the recent articles, but the IPA’s article chips away further still.

  • A new category of pre-CVL work that is not allowable as an expense?

R6.7 provides that the following may be paid from the company’s assets:

  • R6.7(1): “Any reasonable and necessary expenses of preparing the statement of affairs under Section 99” and
  • R6.7(2): “Any reasonable and necessary expenses of the decision procedure or deemed consent procedure to seek a decision from the creditors on the nomination of a liquidator under Rule 6.14”.

Consequently, the IPA article states that:

“Pre-appointment advice and costs for convening a general meeting of the company cannot be drawn from estate funds after the date of appointment, even if you have sought approval for them.”

So how do you protect yourself from tripping up on this?

If you’re seeking a fixed fee for the pre-CVL work, make sure that your paperwork reflects that the fee is to cover only the costs of the R6.7(1) and (2) work listed above. Of course, SIP9 also requires an explanation of why the fixed fee sought is expected to produce a fair and reasonable reflection of the R6.7(1)/(2) work undertaken. Does this mean that you should be setting the quantum lower than you would have done under the 1986 Rules, given that you should now exclude the costs of obtaining the members’ resolutions? Well, personally, I don’t see that the effort expended under the 2016 Rules is any less than it was before, even if you cut out the work in dealing with the members, but you will need to consider (and, at least in exceptional cases, document) how you assess that the quantum reflects the “reasonable and necessary” costs of dealing with the R6.7(1)/(2) work.

Alternatively, if you’re seeking pre-CVL fees on a time costs basis, make sure that you isolate the time spent in carrying out only the R6.7(1)/(2) work and that you don’t seek to bill anything else to the liquidation estate.

Although the articles don’t cover it, I think it’s also worth mentioning that, as liquidator, you need to take care when discharging any other party’s pre-CVL costs that they fall into the R6.7(1)/(2) work.

 

Proposing a Decision on Office Holders’ Fees

  • What Rules/SIP9 detail is commonly missing from fee proposals?

The articles list some relatively common shortcomings in fee proposals (whether involving time costs or otherwise):

  • lack of detail of anticipated work and why the work is necessary
  • no statement about whether the anticipated work will provide a financial benefit to creditors and, if so, what benefit
  • no indication of the likely return to creditors (SIP9 requires this “where it is practical to do so” – personally, I cannot see how it would be impractical if you’re providing an SoA/EOS and proposed fees/expenses)
  • generic listings of tasks to be undertaken that include items irrelevant to the case in question
  • last-minute delivery of information, resulting in the approving body having insufficient time to make an informed judgment

The IPA article states that “presenting the fee estimate to the meeting is not considered to be giving creditors as a body sufficient time to make a reasoned judgement”. Personally, I would go further and question whether giving the required information to only some of the creditors (i.e. only those attending a meeting) meets the requirement in R18.16(4) to “deliver [it] to the creditors”. At the R3 SPG Forum, one of the monitors also expressed the view that, if fee-related information is being delivered along with the Statement of Affairs at the one business day point for a S100 decision, this is “likely to be insufficient time”.

  • fee estimates not based on the information available or providing for alternative scenarios or bases

I wonder whether the monitors are referring primarily to the fairly common approaches to investigation work, where an IP might estimate the time costs where nothing of material concern is discovered and those that might arise where an action to be pursued is identified down the line. You might also be tempted to set out different scenarios when dealing with, say, a bankrupt’s property: will a straightforward deal be agreed or will you need to go the whole hog with an order for possession and sale?

Some IPs’ preference for seeking fee approval only once is understandable – it would save the costs of reverting to creditors and potentially of hassling them to extract a decision – but at the SPG Forum the monitors recommended a milestone approach to deal with such uncertainties: a fee estimate to deal with the initial assessment and later an “excess fee” request for anything over and above this once the position is clearer. This approach would often require a sensitive touch, as you would need to be careful how you presented your second request as regards the next steps you proposed to undertake to pursue a contentious recovery and the financial benefit you were hoping to achieve. But it better meets what is envisaged by SIP2 and would help to justify your decision either to pursue or to drop an action.

Alternatively, perhaps the monitors have in mind the fees proposed on the basis of only a Statement of Affairs containing a string of “uncertain”-valued assets. Depending on what other information you provide, it could be questioned whether creditors have sufficient information to make an informed judgment.

  • no disclosure of anticipated expenses

Under the Rules, this detail must be “deliver[ed] to the creditors” prior to the determination of the fee basis, whether time costs or otherwise, for all but MVLs and VAs… and SIP9 and SIPs3 require it in those other cases as well. It is important to remember also that this relates to all expenses, not simply Category 2 disbursements, and including those to be paid directly from the estate, e.g. to solicitors and agents.

  •  How do the monitors view Rules/SIP9 omissions?

At the R3 SPG Forum, one of the monitors stated that, if the Rules and SIP9 requirements are not strictly complied with, the RPB could ask the IP to revert to creditors with the omitted information in order to make sure that the creditors understood what they were approving and that this would be at the cost of the IP, not the estate. The IPA’s article states that “where a resolution for fees has been passed and insufficient information is provided we would recommend that the correct information is provided to creditors at the next available opportunity and ratification of the fee sought”. Logically, such a recommendation would depend on the materiality of the omission.

When considering the validity of any fee decision, personally I would put more weight on the Rules’ requirements, rather than SIP9 (nothing personal RPBs, but I believe the court would be more concerned with a breach of the Rules). For example, I would have serious concerns about the validity of a fees decision where no details of expenses are provided – minor technical breaches may not be fatal to a fees decision, but surely there comes a point where the breach kills the purported decision.

 

Fixed and Percentage Fees

  • How can you address the SIP9 “fair and reasonable” explanation?

It is evident that in some cases the SIP9 (paragraph 10) requirement for a “fair and reasonable” explanation for proposed fixed or % fees is not being met to the monitors’ expectations. The ICAEW article highlights the need to deal with this even for IVAs… which could be difficult, as I suspect that most IPs proposing an IVA would consider that the fee that would get past creditors is both unfair and unreasonable! MVL fixed fees also are usually modest sums in view of the work involved.

The articles don’t elaborate on what kind of explanation would pass the SIP9 test. Where the fee is modest, I would have thought that a simple explanation of the work proposed to be undertaken would demonstrate the reasonableness, but a sentence including words such as “I consider the proposed fee to be a fair and reasonable reflection of the work to be undertaken, because…” might help isolate the explanation from the surrounding gumpf. For IVAs, it might be appropriate to note how the proposed fee compares to the known expectations of what the major/common creditors believe to be fair and reasonable.

  • What is an acceptable percentage?

Soon after the new fees regime began, the RPB monitors started expressing concern about large percentage fees sought on simple assets, such as cash at bank. Their concerns have now crystallised into something that I think is sensible. Although a fee of 20% of cash at bank may seem alarming in view of the work involved in recovering those funds, very likely the fee is intended to cover other work, perhaps all other work involved in the case from cradle to grave. In addressing the fair and reasonable test, clearly it is necessary to explain what work will be covered by the proposed fee. Of course, if you were to seek 20% of a substantial bank balance simply to cover the work in recovering the cash, you can expect to be challenged!

Equally, it is important to be clear on what the proposed fee does not cover. For example, as mentioned above, the extent of investigation work and potential recoveries may be largely unknown when you seek fee approval. It may be wise to define to which assets a % fee relates and flag up to creditors the potential for other assets to come to light, which may involve other work excluded from the early-day proposed fee. The IPA article repeats the message that a fee cannot be proposed on unknown assets.

 

Mixed Fee Bases

It seems to me that it can be tricky enough to get correct the fee decision and billing of a single basis fee, without complicating things by looking for more than one basis! To my relief, personally I have seen few mixed fee bases being used.

  • How is mixing time costs with fixed/% viewed?

In particular, I think it is hazardous to seek a fee on time costs plus one other basis. Only where tasks are clearly defined – for example, a % on all work related to book debt collections and time costs on everything else – could I see this working reasonably successfully. The IPA article notes that:

  • when proposing fees, you need to state clearly to what work each basis relates; and
  • your time recording system must be “sufficiently robust to ensure the correct time is accurately recorded against the appropriate tasks”.
  • I would add a third: mistakes are almost inevitable, so I would recommend a review of the time costs incurred before billing – the narrative or staff members involved should help you spot mis-postings.

 

Of course, there are plenty of other Rules/SIP areas where mistakes are commonly made – for example, the two articles highlight some common issues with progress reports, which are well worth a read. However, few breaches of Rules or SIPs have the potential to be more damaging. Therefore, I welcome the RPB monitors’ efforts in highlighting the pitfalls around fees. Prevention is far better than cure.


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The 2015 Fees Rules: One Year On

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In November last year, I gave a presentation at the R3 SPG Forum: a look back at one year under the new fees regime. Although I don’t have the benefit of my co-presenter, Maxine Reid, I thought I would set out some of my main points here, as well as some new and improved observations on Administrators’ Proposals:

  • Do more recent Proposals indicate a move away from time costs?
  • How are creditors voting now?
  • How do time costs incurred compare to fees estimates?
  • Are progress reports and excess fee requests compliant with the rules and SIP9?
  • Is the picture any clearer now on what the regulators’ expectations are on some of the finer points of the rules and SIP9?

Is there a move away from time costs?

My analysis of Proposals issued in early 2016 (https://goo.gl/bvebTz) showed that time costs was still the preferred choice: 75% of my sample (108 Proposals) had proposed fees based on time costs.

To see whether things had changed more recently, I reviewed another 67 Proposals issued between July and September 2016 (no more than two from each insolvency practice). This is how the fee bases proposed compared:

feebasis2

This suggests that not a lot has changed, which isn’t too surprising I guess as there are only a few months’ difference between the two sets of Proposals. I also suspect that, if I looked at CVLs, I’d see quite a different picture. There does seem to be a bit more experimenting going on though, especially involving percentage fees, which is a topic I’ll come back to later.

How are creditors voting?

The filing of progress reports on my early Administration sample enabled me to fill in the gaps regarding how secured creditors and committees had voted on fees:

feecaps

Although I accept that my sample is small, I think that this is interesting: the average reduction in fees approved is the same whether the decision was made by unsecured or secured creditors. I’d better explain the committee percentage: in these cases, the committees were approving fees only on the basis of time costs incurred, not on the estimated future time costs, which is also interesting: it isn’t what the fees rules envisaged, but I think it is how most committees are accustomed to vote on fees.

Have creditors’ decisions changed more recently?

As I only have the Results of Meeting to go on for the more recent cases, this is not a complete picture, but this is how the two samples compare:

  • Jan-Mar 2016 (67 Results of Meeting):
    • 11 modified; 1 rejected
    • 7 early liquidations; 4 independent Liquidators
    • 1 Administrator replaced
    • 6 fees modified (average reduction 29%)
  • Jul-Sept 2016 (55 Results of Meeting):
    • 5 modified
    • 2 early liquidations; no new IPs
    • 1 fee modified (reduction 48%)

Again, it’s only a small sample, but it seems to me that creditors’ enthusiasm to modify Proposals or cap fees has waned, although c.10% of Proposals were still modified, which is fairly substantial.

How have actual time costs compared to fees estimates?

With the filing of 6-monthly progress reports, I was able to compare time costs incurred with the fees estimates:

timecosts

Over the whole case sample, the mean average was 105%, i.e. after only 6 months of the Administration, on average time costs were 105% of the fees estimate included in the Proposals. This graph also shows that, on a couple of cases, the time costs incurred at 6 months were over 250% of the fees estimate, although to be fair a large number were somewhere between 50% and 100%, which is where I’d expect it to be given that Administration work tends to be front-loaded.

You can see that I’ve distinguished above between cases where unsecured creditors voted on the fees and the “para 52” cases where the secured (and possibly preferential) creditors voted. The graph appears to indicate that time costs exceeding the estimate is more marked in cases where unsecured creditors approve fees.

Of course, fees estimates and fees drawn are entirely different worlds, so the fact that time costs have exceeded estimates will be of no practical consequence – at least, not to creditors – where a case has insufficient assets to support the work. In around only half of the cases where time costs exceeded estimates did the progress report disclose that the Administrator was, or would be, seeking approval to excess fees. This suggests that in the other half of all cases the IPs were prepared to do the work necessary without being paid for it, which I think is a message that many insolvency onlookers (and the Insolvency Service) don’t fully appreciate.

How compliant are progress reports and excess fee requests?

Firstly, I think it’s worth summarising what the Oct-15 Rules and the revised SIP9 require when it comes to progress reports. The Rules require:

  • A statement setting out whether:
    • The remuneration anticipated to be charged is likely to exceed the fees estimate (or additional approval)
    • The expenses incurred or anticipated to be incurred are likely to exceed, or having exceeded, the details given to creditors
    • The reasons for that excess

SIP9 requires:

  • Information sufficient to help creditors in understanding “what was done, why it was done, and how much it costs”
  • “The actual costs of the work, including any expenses incurred, as against any estimate provided”
  • “The actual hours and average rate (or rates) of the costs charged for each part should be provided for comparison purposes”
  • “Figures for both the period being reported upon and on a cumulative basis”

It is clear from the above that the old-style time costs breakdown alone will not be sufficient. For one thing, some automatically-produced old-style breakdowns do not provide the average charge-out rate per work category. I also think that simply including a copy of the original fee estimate “for comparison purposes” falls short as well, especially where the fees estimate uses different categories or descriptions from the time costs breakdown.

What is required is some narrative to explain where more work was necessary than originally anticipated. The best examples I saw listed each work category (or at least those categories for which the time costs incurred exceeded the fees estimate) and gave case-specific explanations, such as that it had proven difficult to get the company records from the IT providers or that the initial investigations had revealed some questionable transactions that required further exploration.

I also saw some useful and clear tables comparing the fee estimates and actual time costs per work category. As mentioned above, in some cases, the progress reports were accompanied by a request for additional fees and in these cases the comparison tables also factored in the future anticipated time costs and there was some clear narrative that distinguished between work done and future work.

Reporting on expenses to meet the above requirements proved to be a challenge for some. Admittedly, the Rules are not ideal as they require fees estimates to provide “details of expenses” likely to be incurred and some IPs had interpreted this to require a description only of who would charge the expense and why, but it is only when you read the progress report requirements that you get the sense that the anticipated quantum of expenses was expected. For example, where an Administrators’ Proposals had stated simply that solicitors’ costs on a time costs basis were likely, it is not easy to produce a progress report that compares this with the actual costs or that states whether the actual expense had exceeded the details given previously.

What do the regulators expect?

A year ago, the regulators seemed sympathetic to IPs grappling with the new Rules and SIP9. Do they consider that a year is sufficient for us all to have worked out how to do it?

I get the sense that there may still be some forbearance when it comes to complying with every detail of the SIP, but understandably if there is a fundamental flaw in the way fees approval has been sought, it is not something on which the RPBs can – or indeed should – be light touch. Fees is Fees and the sooner we know our errors, the less disastrous it will be for us to fix them.

The S98 Fees Estimate question seems to have crystallised. There seems to be general consensus now amongst the regulators and their monitoring teams that, whilst there are risks in relying on a fees resolution passed at the S98 meeting on the basis of fees-related documentation issued prior to appointment as a liquidator, the regulators will not treat such a fees resolution as invalid on this basis alone. Fortunately, the 2016 Rules will settle this debate once and for all.

The trouble with percentage fees

From my conversations with a few monitors and from the ICAEW Roadshow last year, I get the feeling that the monitors are generally comfortable with time cost resolutions. There is a logical science behind time costs as well as often voluminous paper-trails, so the monitors feel relatively well-equipped to review them and express a view on their reasonableness. The same cannot always be said about fees based on a percentage – or indeed on a fixed sum – basis.

In her 2013 report, Professor Kempson expressed some doubts on the practicalities of percentage fees, observing that creditors could find it difficult to judge the reasonableness of a proposed percentage fee. When the Insolvency Service’s fees consultation was issued in 2014, R3 also remarked that fixed or percentage fees were not always compatible with unpredictable insolvencies and could result in unfair outcomes. The recent shift towards percentage fees, which appears more pronounced in CVLs, has put these concerns into the spot-light.

In the ICAEW Roadshow, Allison Broad expressed her concerns about fees proposed on the basis of (often quite substantial) percentages of unknown or undisclosed assets. I can see Allison’s point: how can creditors make “an informed judgment about the reasonableness of an office holder’s request” if they have no information?

Evidently, some IPs are proposing percentage fees as a kind of mopping-up strategy, so that they do not have to go to the expense of seeking creditors’ approval to fees later when they do have more information and they feel that creditors can take comfort in knowing that the IPs will not be drawing 100% of these later-materialised assets. Although a desire to avoid unnecessary costs is commendable, the message seems to be that compliance with SIP9 requires you to revert to creditors for fee-approval only when you can explain more clearly what work you intend to do and what financial benefit may be generated for creditors, e.g. what are the assets that you are pursuing or investigating.

Another difficulty with percentage fees is the quantum at which they are sometimes pitched. I have heard some stories of extraordinary percentages proposed, although I do wonder if, taken in context, some of these are justifiable, e.g. where the percentage is to cover the statutory work as well as asset realisations. Regardless of this, the message seems to be that some of us could improve on meeting SIP9’s requirement “to explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”… and you should not be lulled into a false sense of security that 15% of everything, which of course is what the OR can now draw with no justification (and indeed with no creditor approval), is always fair and reasonable.

Looking on the bright side

Although getting to grips with the Oct-15 Rules has not been easy, I guess we should count our blessings: at least we have had this past year to adapt to them before the whole world changes again. If there’s one thing we don’t want to get wrong, it is fee-approval, so at least we can face the April Rules changes feeling mildly confident that we have that one area sorted.

If you would like to hear and see more on this topic (including some names of Administration cases that I found had particularly good progress reports and excess fee requests registered at Companies House), I have recorded an updated version of my R3 SPG Forum presentation, which is now available for Compliance Alliance subscribers. For more information, email info@thecompliancealliance.co.uk.


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SIP9 – the easy bits

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There’s no doubt that the October Rules and the revised SIP9 generated many questions. However, in this blog (first published on The Compliance Alliance), I summarise the known impacts of the new SIP9 for those who want to double-check that they have the basics right.

Scope

Have you remembered that the scope of the new SIP9 reaches wider than simply cases affected by the October Rules? It also affects:

  • Pre-October 2015 appointments;
  • Case types not affected by the October Rules, i.e. CVAs, IVAs, Receiverships and MVLs; and
  • Pre-appointment fees (where these are paid from the estate), e.g. SoA/S98 fees and VA drafting fees;
  • But it does not apply to Scottish or NI appointments, which continue to be subject to the “old” SIP9.

Key disclosure

I think that paragraph 9 of SIP9 is key. Whenever you are “providing information about payments, fees and expenses to those with a financial interest in the level of payments from an insolvent estate”, you should address the following:

Prospective disclosure:

  • What work will be done
  • Why it is necessary
  • How much it will cost (both fees and expenses)
  • “Whether it is anticipated that the work will provide a financial benefit to creditors and if so what anticipated benefit (or if the work provides no direct financial benefit, but is required by statute)”

Retrospective disclosure:

  • What work has been done
  • Why it was necessary
  • How much it has cost (both fees and expenses)
  • “Whether the work has provided a financial benefit to creditors and if so what benefit (or if the work provided no direct financial benefit, but is required by statute)”

The information given should be transparent, useful and proportionate to the circumstances of the case (which makes a rigid template approach difficult and dangerous), but also consistent throughout the life of the case. Therefore, whilst you might have made wholesale changes to requests/reports for new cases, you have probably designed a half-way house for older cases.  Although the new SIP9 avoids pretty-much all reference to numerical information, if you have already provided tables for a case on the lines of the old SIP9, it seems that you cannot drop them for future reports.  However, you should review the narrative elements of pre-December 2015 case reports to make sure that they meet the new disclosure requirements.

As mentioned above, these narrative requirements also apply to fees/costs that are new to the SIP9 scope and that are not affected by the October Rules. Therefore, have you checked off your documentation relating to MVL, SoA/S98, and VA drafting/Nominees’/Supervisors’ fees?

Fixed or percentage fees

Have you ensured that, whenever you are seeking approval for fees on a fixed or percentage basis, you have included some kind of prompt/explanation as to “why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken” (paragraph 10)?

Also with SIP9 paragraph 25 in mind, have you made sure that this explanation is covered when you are hoping to get approval for the following (which are often sought on a fixed/% basis) where they are to be drawn from the estate:

  • SoA/S98 fees;
  • Nominees’ fees;
  • Supervisors’ fees; and
  • MVL fees?

SoA/S98 fees

As you can see above, the new SIP9 seems to affect SoA/S98 fees quite substantially. I believe it has been rare to see pre-S98 circulars disclose much at all about these fees.  Personally, I find it difficult to see how the principles of SIP9 can be met without disclosing in the pre-S98 circular the quantum of the proposed SoA/S98 fee, if the IP is hoping to get this approved for payment from the estate at the S98 meeting.  However, I do not think that SIP9 is at all clear on this point, so I’ll put this one in the “known unknown” category.

Numerical information

As mentioned above, the new SIP9 has distanced itself from a formulaic numbers-say-it-all approach in favour of case-tailored narrative. However, the SIP does require some numerical information, not all of which I think flows naturally.

Are your systems set up so that, for cases where (October Rules) fees estimates have been provided, the progress reports disclose:

  • “the actual hours and average rate (or rates) of the costs charged for each part… for comparison purposes” (paragraph 13); and
  • “when reporting the amount of remuneration charged [i.e. time costs incurred] or expenses incurred… figures for both the period being reported upon and on a cumulative basis” (paragraph 17)?

Having now looked at some fee estimates, I have to say that I really do not think that the average rate for each work category adds anything at all – although I can see that an overall average rate has some value – so why the JIC felt that this was so vital that it had to be prescribed, I do not know! But I do know that it has added expense to some IPs in getting their time recording systems set up to produce these numbers.

The second requirement adds further complication. The 2010 Rules require progress reports to disclose expenses incurred (whether or not paid) in the period and SIP7 requires expenses paid in the period and cumulative, but now SIP9 requires also expenses incurred on a cumulative basis: that’s four different numbers.  So much for transparency!

Back to the beginning

The new SIP9 has introduced some subtle changes as regards disclosure of parties’ rights.

Information to creditors about how to access information on their rights has been moved to earlier in the process: no longer should this occur in the first communication following appointment, but simply “within the first communication with them” (and in each subsequent report).  Therefore, have you checked that this is covered in the pre-S98 circular?  But have you also kept it as standard in any post-S98 template, just in case you take an appointment without having been the IP advising member for the S98 meeting?

Personally, I’ve been struggling to work out how to meet the requirement above for MVLs: does there exist an “official” sensible explanation of creditors’ rights in an MVL?  The Creditors’ Guide to Liquidators’ Fees doesn’t really do the job, but I am not convinced that the RPBs expect IPs to draft something themselves, do they..?  Perhaps this is another “known unknown”.

Whilst we’re on the subject of Creditors’ Guides… I think that many IPs assumed that, as the new SIP9 applies to old and new cases, the new Guides also apply to both old and new cases.  However, if we remember that the purpose behind directing creditors to the Guide is to inform them of “their rights under insolvency legislation”, then it is evident that the pre-April 2010 Guides are still relevant to pre-April 2010 cases, as new rights were introduced in April 2010.  It is regrettable, however, that all the old Guides set out the requirements of the old SIP9 – and I would suggest that this might render them no longer “suitable information” – but as regards a creditor’s statutory rights, they’re generally reasonable.

Therefore, do your circulars/reports direct creditors to the Guide appropriate to the case type and appointment date? If you display the Guides on your own website, do you have Guides covering the full range of appointment dates?  The R3 website only goes back to 1 November 2011, but the ICAEW website, http://goo.gl/kjZlJC, (for example) has Guides going way back.

Heavy hints

The new SIP9 includes several items that fall short of being prescriptive, but the language indicates to me that monitors will still be looking out for them. These include:

  • Providing “an indication of the likely return to creditors” when seeking approval of the fee basis “where it is practical to do so”;
  • Dividing narrative explanations into the six categories listed in paragraph 12… whilst making sure that not every case follows exactly the same categories (we have to demonstrate that we’ve considered each case’s specific circumstances); and
  • Using “blended rates” for fees estimates.

And don’t forget…

Some old SIP9 requirements have survived the revision process. Items that sometimes get overlooked include:

  • Disclosure of “any business or personal relationships with parties responsible for approving his or her remuneration or who provide services to the office holder in respect of the insolvency appointment where the relationship could give rise to a conflict of interest”;
  • Explanation of why any sub-contractors are being used to do work that could otherwise be done by the IP/staff; and
  • An existing SIP7 requirement: disclosure of any pre-appointment costs paid, detailing the amount paid, name of the payor, their relationship to the estate and the nature of the payment.

Simple?

I get the feeling that the RPBs have been inundated with queries over the practical application of the October Rules and the revised SIP9, many originating from compliance consultants (including The Compliance Alliance). I haven’t raised these queries here; there is no real point, as there are few reliable answers at present.

In many respects, I doubt that we will get straight answers, at least not for some time to come. A recent response from one of my RPB contacts was heavily caveated with the observation that it was only her personal understanding and that the RPB’s stance would be formed by its committees over time.  Therefore, please bear with your compliance consultants.  You might hear us saying that we don’t know how your authorising body or its monitors view a certain matter and you may find that our recommendations change over time, as we try to remain alert to the shifting sands of interpretation around the Rules and SIP.  We will do our best to highlight the issues as we see them, whether they are clear breaches or whether they fall into the currently numerous known unknowns.