Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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October Fees Rules: Draft in Haste, Repent at Leisure

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In my last blog, I set out a few questions that had been raised in the spring/summer R3 SPG Technical Reviews. Now that I’ve returned from my intriguing holiday in Russia, I’ll answer them.

I haven’t commented on the draft SIP9, as I shall be working on my consultation response. I also need to focus primarily on the Rules, as I’m presenting a webinar for the ICAEW on 9 September and at the R3 Regional event on 22 September. Maybe by then, we’ll have a final SIP9 that we can all work to (and then I can record a webinar for the Compliance Alliance 🙂 ). Is that too much to ask..?

 

When can/should a CVL Liquidator seek approval for his fees: (i) prior to being appointed by the shareholders; (ii) after the general meeting but before the S98 meeting (via a Centrebind); or (iii) after the S98 meeting?

This question has been covered at length by myself (http://goo.gl/9mrWl4), Gareth Limb (http://goo.gl/9LvB2U) and I’m sure many others, but as it was the most frequently-asked question – and probably affects a significant majority of IPs – I thought it was worth covering again.

The answer seems to be any of the above, but each comes with its own difficulties:

(i)    The difficulty here is that the Rules require the “liquidator” to circulate his fees estimate. I’ve heard more than one person within the Insolvency Service express the view that this is intended to encompass a fees estimate from the IP prior to his appointment as liquidator, but there has been nothing written down. I understand that a Dear IP is on its way, although there will still be an element of risk in following a Dear IP over the letter of the Rules (remember Minmar..?)

There was a rumour that the revised SIP9 would try to clarify the matter, but if the words, “an insolvency practitioner is not precluded from providing information within pre-appointment communications (such as when assisting directors in commencing an insolvency process)” (para 7, draft revised SIP9), are meant to take care of it, then I think they fall far short – and, as Gareth pointed out, a SIP cannot address a deficiency in legislation either.

(ii)    At the R3 Reviews, several expressed the view that a Centrebind can only be used when there are company assets at risk that require a liquidator to deal with them immediately. I have to say that I am not aware of any such restriction and I have not heard – at least via the IPA within the past 10 years – of any pressure to discourage IPs from engaging in Centrebinds. The fact that directors can appoint their choice of Administrator in short order, I think reduces the perception that it is somehow shady to get a non-creditors’ IP in office. Rather, I suspect that many IPs naturally avoid Centrebinds because they do not want to be appointed with only limited powers to deal with the company’s assets.

At first glance, Centrebind appears to have some value in the context of the Fees Rules, as it gives the liquidator a week or so to circulate his fees estimate before the S98 meeting but after his appointment by the members. However, what would the sequence of events be? Either the S98 notice would not be issued until after the members’ meeting (which would contravene SIP8 para 13) so that it can accompany the liquidator’s fees estimate, or the fees estimate would be sent separately, a few days’ after the S98 notice is sent. This latter sequence does not appear to be prohibited, but I would be surprised if it were the most attractive option from the regulators’ perspective, as I understand that the preference is that the fees estimate is sent along with the S98 notice and proxy form, not days later.

(iii)   There is an additional cost in convening a R4.54 general meeting of creditors after the S98 meeting so that the liquidator may issue his fees estimate. However, given the issues around the two alternatives, I cannot see why the regulators would protest. From the IP’s perspective, however, the effect of the liquidator being the chairman at a R4.54 meeting, rather than the director at the S98 meeting, is bound to increase the risk that there is no positive vote from creditors on the fees resolution. And of course, who wants to provide a fees estimate before they’re appointed? I appreciate that this was one of the ideas behind the Rules (job-tendering even being suggested), but in that case the Insolvency Service should have drafted the Rules correctly, shouldn’t they?!

 

To make life easier, you could switch from time costs to a fixed or percentage fee basis. However, if the response at the R3 Reviews is anything to go by, it does seem that IPs may be reluctant to start seeking resolutions on a fixed/percentage fee basis. In any event, this doesn’t solve the problem. Whilst it means that you won’t need to provide a “fees estimate”, you do still need to provide information on the work you propose to undertake and an expenses estimate. The draft SIP9 also adds to the list of information required to propose fixed/percentage fees, making it not quite the easy fix it originally appeared.

 

Would it be sufficient to provide a fees estimate to attendees of the S98 meeting? How else can an IP who takes the appointment from the floor of the S98 meeting deal with a fees resolution?

These have been pretty-much answered above, but I think the fact that they were asked demonstrates how we’re exploring the Fees Rules and realising that S98s will never be the same again. Dare I mention that the 2016 Rules only make matters a thousand times worse for S98s? For example, in future the Director’s Estimated Statement of Affairs will need to be circulated to all creditors with notice of the S98 “meeting”, which will mean wholesale changes to our S98 process.

Returning to 1 October, it will not be sufficient to circulate a fees estimate only to S98 meeting attendees, as the Rules state that “the liquidator must, prior to determination of which of the bases [of fees] are to be fixed, give [the estimate(s)] to each creditor of the company of whose claim and address the liquidator is aware…” Although the Rules do not state how long before “determination” of the fees basis the fees estimate needs to be circulated, I think this means it will be very difficult for an incoming IP to obtain a fees resolution at the S98 meeting. I suspect that this can only really be tackled by a subsequent R4.54 meeting.

 

What level of breakdown is needed to comply with the new rules’ requirement to provide the (time cost) fees estimate broken down by “each part of the work”? For example, is “asset realisation” sufficient, or does it need to be broken down into book debt collection, sale of business/assets, etc.?

The answer to this is not in the Rules and I understand that the Insolvency Service did not envisage a greater breakdown than the old SIP9 six categories (administration & planning, asset realisation, investigations, trading, creditors and other case-specific matters).

Neither do the Rules provide for a proportionate approach, such that a larger case may be expected to have a greater degree of breakdown than a small one. The Rules treat all cases the same and simply require fees estimates to specify, inter alia, “details of the work the insolvency practitioner and his staff propose to undertake [and] the time the insolvency practitioner anticipates each part of that work will take”.

The draft revised SIP9 avoids being prescriptive, but is worded in such a way that I think it will be an easy step for the RPB monitors to assert SIP9 breaches if its “spirit” is not observed. The draft SIP states:

“Each part of an office holder’s activities will require different levels of expertise, and therefore related cost. It will generally assist the understanding of creditors and other interested parties to divide the office holder’s explanations into areas such as:

  • Statutory compliance
  • Asset realisation
  • Distribution
  • Investigations

“These are examples of common activities and not an exhaustive list. Alternative or further sub-divisions may be appropriate, depending on the nature and complexity of the case and the bases of remuneration sought and/or approved. It is unlikely that the same divisions will be appropriate in all cases and an office holder should consider what divisions are likely to be appropriate and proportionate in the circumstances of each case. An office holder should endeavour to use consistent divisions throughout the duration of the case. The use of additional categories or further division may become necessary where a task was not foreseen at the commencement of the appointment.”

Thus, it seems that, generally, “asset realisation” is one “part of the work” and will not usually need to be broken down into sub-divisions.

 

Given that the new rules require the (time cost) fees estimate to be broken down by “each part of the work”, does the IP need to revert to creditors if the time costs are exceeded for one part of the work, but the total estimate is not exceeded?

There seem to be some differences of opinion on this question. Personally, I believe that the Rules are very clear. They state that “the [office-holder’s] remuneration must not exceed the total amount set out in the fees estimate without approval”. The Rules require no comparison of the fees estimate breakdown in reports and it seems that, once the fees estimate has been approved, the breakdown has no further relevance (although, when seeking approval for exceeding the estimate, a comparison may come in handy in order to explain the reasons for the excess and what additional work has proven necessary).

The draft SIP9 states that creditors/other interested parties will commonly be concerned with “the actual costs of the work, including any expenses incurred in connection with it, as against any estimate provided” and that the IP should report “in a way which facilitates clarity of understanding of these key issues”. I guess you can still take these words either way: does it require only a comparison of the total costs incurred against the fees estimate as a single figure? Or should a comparison be made of “each part” of the fees estimate against the actual costs incurred in each of those categories? Keeping in mind what creditors want to know (if anything!), I would argue that, if it appears that the original fees estimate will not be exceeded, then creditors are unlikely to be interested in seeing a comparison of each category.

However, the speaker’s answer at an R3 Review worried me. Although he may have been answering the question on the hoof, he indicated that there was an expectation that creditors would be asked to approve an increased fees estimate even where only one of the work categories was going to be exceeded, but where the original fees estimate in total was not under threat of being exceeded. I really cannot see that this is required by the Rules – and it is not hinted at in the draft SIP9 – and I struggle to see how an IP might be justified in incurring additional costs in seeking creditors’ approval where it is clearly not required under statute.

 

Can a (time cost) fees estimate provide a range of likely costs or does it need to be a single figure? If the latter, how should IPs estimate, for example, the costs of realising the interest in a bankrupt’s property at an early stage of the case?

The Fees Rules do not allow a range approach. The fees estimate acts as a simple cap. The draft SIP9 reinforces this message: fees estimates “may not be presented on the basis of alternative scenarios and/or provide a range of estimated charges”.

I think that Dear IP 65 attempted to answer the second question by referring to “milestone” fees estimates. This idea was reinforced at the R3 Reviews. When dealing with something like realising interest in a home, where a straightforward deal might be achieved quickly or the matter could run and run, it seems that the expectation is that the Trustee would estimate the costs for establishing a strategy and then revert to creditors if it became clear that a court application would be necessary.

I do wonder how practical this is, especially when the Rules require the expenses estimate at the initial approval stage to be the total expenses anticipated for the case. Thus, the Trustee needs to estimate his third party costs right at the start; the Rules do not provide a similar “milestone” approach for expenses estimates.

True, the Rules also do not require an expenses estimate to be approved, either up front or if it looks like it will be exceeded, but it does not help answer the question of how to present a Day One expenses estimate: should the Trustee include the likely costs of applications for possession and sales orders, especially if his fees estimate only reflects “milestone” costs not including the time costs of dealing with a court application scenario? But if he omits the likely legal costs, how transparent is the estimate and is it even compliant with the Rules?

 

What consequences does the expenses estimate have for the future administration of the case?

Finally, a bit of good news: the office holder is not constrained by the expenses estimate. If he needs to incur additional expenses, he can do so without creditor approval. The draft SIP9 seems to treat Category 2 disbursements in this way too.

Progress reports will need to include reference to whether the original expenses (and fees) estimate remains sound. If the expenses incurred/anticipated are likely to exceed (or have exceeded) the original expenses estimate, the reasons for that excess need to be included in the next – and seemingly all subsequent – progress reports (which could get a bit repetitive!). There is no requirement, however, to provide a revised estimate.

 

Can an IP stop working on a case if creditors vote against an exceeding of the fees estimate?

The R3 Review speaker’s answer was: no. The IP would need to continue with his work and, if he wanted any more fees, then he would need to use the statutory remedies such as applying to court.

When the Insolvency Service’s fees consultation was ongoing a year or so ago, I remember having a conversation with some Insolvency Service staff on this question. Their view was that IPs should not be expected to continue to work if they were not comfortable they would be paid for it.

Personally, I think both views have merit… depending on the circumstances. Clearly, an office holder has work to do in concluding a case and the Rules do not provide failure to be paid as a reason for resignation. However, I do struggle to see how an IP can be forced to take “non-statutory” steps if the creditors have not supported a request by the office holder to be paid for the work.

The Insolvency Service’s “milestone” view of the Rules seems to support the idea that an office holder can down tools. The original fees estimate needs to detail “the work the insolvency practitioner and his staff propose to undertake”, so in a milestone case the IP might propose, say, to chase the easy book debts as stage one. When things get a bit tough and the IP needs to consider taking stronger measures to squeeze out a few more pounds, perhaps this is when he proposes stage two along with a request for approval of “excess” fees. If the creditors reject this proposal, might the IP be justified in moving to close the case? Or is he required by statute to collect in the company’s assets regardless?

Wouldn’t it be correct to give creditors a choice: either I bring this to an end now and distribute what balance I have or I spend some/all of that money in pursuing an uncertain/difficult asset? Doesn’t SIP2 lead us in that direction already?

Of course, it would be a harder sell if the IP were to say: erm, the RoT claims have proven to be bigger and tougher than I’d originally contemplated, so I’m going to have to spend more of the pot resolving them, is that ok?

With these kinds of questions looming, is it any wonder that the expectation is that fees estimates will tend to be drafted on a worst-case scenario basis? Personally, I don’t see that anything else is practical.

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October Fees Rules FAQs: more Qs than As

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Earlier this year, each of the three R3 SPG Technical Reviews was opened by John Cullen’s* fantastic presentation on the October fees rules and the draft revised SIP9.

The presentation generated many questions from delegates and a few controversial answers, which I’ve been bursting to recount here. Regrettably, work demands – and, tomorrow, my holiday – have frustrated my attempts to get blogging.

Thus, I’m being a bit cheeky, setting out here the questions… and leaving the answers for another day! I will try to get back here in a couple of weeks.

  • When can/should a CVL Liquidator seek approval for his fees: (i) prior to being appointed by the shareholders; (ii) after the general meeting but before the S98 meeting (via a Centrebind); or (iii) after the S98 meeting?
  • Would it be sufficient to provide a fees estimate to attendees of the S98 meeting? How else can an IP who takes the appointment from the floor of the S98 meeting deal with a fees resolution?
  • What level of breakdown is needed to comply with the new rules’ requirement to provide the (time cost) fees estimate broken down by “each part of the work”? For example, is “asset realisation” sufficient, or does it need to be broken down into book debt collection, sale of business/assets, etc.?
  • Given that the new rules require the (time cost) fees estimate to be broken down by “each part of the work”, does the IP need to revert to creditors if the time costs are exceeded for one part of the work, but the total estimate is not exceeded?
  • Can a (time cost) fee estimate provide a range of likely costs or does it need to be a single figure? If the latter, how should IPs estimate, for example the costs of realising the interest in a bankrupt’s property, at an early stage of the case?
  • What consequences does the expenses estimate have for the future administration of the case?
  • Can an IP stop working on a case if creditors vote against an exceeding of the fees estimate?

The Draft Revised SIP9

My swift read-through of the draft revised SIP9 has prompted a few more questions in my mind:

  • The draft revised SIP9 suggests time cost categories different from those of older SIP9s. How is this going to interact with firms’ time-recording systems and the administration of pre-October cases?
  • If an IP were to change his time-recording system in the future, would he risk falling foul of SIP9’s requirement that he “should use a consistent format throughout the life of the case”?
  • How will the SIP9’s blended rates work in practice?
  • The draft new SIP9 is not amended as regards pre-appointment costs. Given that there had been suggestions in the past that this section may apply only to pre-administration costs, where does this leave treatment of pre-CVL and pre-VA costs?
  • The draft new SIP9 is not amended as regards payments to associates, but continues to state that these should be approved “in the same manner as an office-holder’s remuneration or category 2 disbursements”. Does this mean that, where payments to associates are to be based on time costs, the estimate acts effectively as a cap so that the office-holder would need to seek creditors’ approval for any excess? As statute does not strictly require such approval to be sought, would an office-holder’s time costs incurred in reverting to creditors be justified? If an associate’s costs were treated instead as a category 2 disbursement, would this avoid the estimate acting as a cap?

 

* John Cullen is the ACCA’s representative on the JIC and an IP and partner of Menzies.

 

 

 

 


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Who knew the Insolvency Service had a sense of humour?

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Well, if I didn’t laugh, I’d cry!

I am conscious that my top ten jokes below make this a fairly destructive, not constructive, post about the Insolvency Service’s “Strengthening the regulatory regime and fee structure for insolvency practitioners” consultation. In addition, I do not cover many of the common concerns about the proposals, nor do I suggest here any real solutions. Nevertheless, I do think that it’s important, not to dismiss the proposals out of hand, but to think seriously about what might work. Our own ideas may not be what the Service has in mind, but we become the joke, if we plough on claiming that we see no ships (even if, yes I know, it may look as though that’s what I’m saying below… but rarely does public opinion concern itself with facts).

I have one week left to chew over my own suggestions before setting pen to paper in my formal response. Therefore, in the meantime, here are my top ten jokes told by the Service in its consultation document and two impact assessments (“IA”), which can be found at: https://www.gov.uk/government/consultations/insolvency-practitioner-regulation-and-fee-structure.

1. “Each year IPs realise approximately £5bn worth of assets from corporate insolvency processes, and in doing so charge about £1bn in fees, distributing some £4bn to creditors” (paragraph 88 of the consultation document)

The Insolvency Service has repeated this most absurd statement from the OFT’s market study. So, I ask myself, who is paying the solicitors’ fees, the agents’ fees, all the necessary costs of insolvencies such as insurance, advertising, bond premiums etc., and finally what about the Insolvency Service’s own fees that are payable from the assets in all (bankruptcies and) compulsory liquidations in priority to everything else? This statement just cannot be true!

It also grossly distorts the position and perception of IP fees: are we really talking about £1bn of IP fees here or costs on insolvent estates? The OFT’s explanation of how they came up with the £1bn (footnote 11 at http://www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245) mixes up fees and costs, so it is difficult to be sure. However, as this debate has built up momentum, few seem bothered any longer about the facts behind the fees “problem”.

2. “Cases where secured creditors will not be paid in full and so remain in control of fees. The market works well in this instance so we do not want to interfere with the ability for secured creditors to successfully negotiate down fees” (paragraph 113 of the consultation document)

Both Professor Kempson’s report and the OFT market study drew conclusions about the effectiveness of secured creditors’ control. However, the OFT’s study looked only at Administrations and Para 83 CVLs (which are so not S98s) and Professor Kempson built on this study and therefore concentrated on the effect of IPs obtaining appointments via bank panels. And, from this relatively narrow focus, we end up with the conclusion above that the Service proposes to apply to all insolvencies (except, it is proposed, for VAs and MVLs, where it is suggested other fees controls work well… so maybe those cases have a different lesson for us about the level of engagement of those responsible for authorising the fees..?).

But, I ask myself, what about other cases involving secured creditors? What about less significant liquidations or even bankruptcies where the mortgaged home is in negative equity? Do the secured creditors really control the level of fees in these cases? It seems highly unlikely, when you remember that the bases of liquidators’ and trustees’ fees are fixed by resolutions of the unsecured creditors. And let’s not worry too much about the effectiveness (or not) of non-bank secured creditors…

Some might react: let it lie. If the Service wants to leave well alone all cases where secured creditors will not be paid in full – regardless of whether or not, in practice, they control fees – why make a fuss? The same could be said about my next point…

3. “The basis of remuneration must be fixed in accordance with paragraph (4) where… there is likely to be property to enable a distribution to be made to unsecured creditors…” (draft Rule 17.14(2)(b))

This is supposed to be the way the objective mentioned in 2 above is achieved, i.e. that fees may only be fixed on the bases described in “paragraph (4)” (i.e. percentage or set amount, but not time costs) where secured creditors are not in control of fees (plus in some other circumstances).

I am sure it has taken you less than a millisecond to work it out: “where a distribution to unsecured creditors is likely” is patently not the same as “where secured creditors do not remain in control of fees”. What about the vast majority of liquidations, which must represent by far the greatest proportion in number of insolvencies, where the asset realisations are not enough to cover all the costs (including IPs’ time costs)? In these cases, the Service’s proposal is that they would like the IP’s fees to be on a percentage or set amount, but in fact the draft Rules would entitle the liquidator to seek approval on a time cost basis. That must be a joke!

The problem for me in leaving these flaws alone is that IPs could be lumbered with Rules that do not implement the Government’s policy objectives, which may result in the Service/RPBs pressing for behaviours and approaches that are not supported by the statutory framework, which will do no one any good.

4. The use of the Schedule 6 scale rate for fees “ensures that there are funds available for distribution and not all realisations are swallowed up in fees and remuneration” (paragraph 117 of the consultation document)

Firstly, I object to “swallowed up”. It seems to me an emotive phrase, generating the image of an enormous whale greedily scooping up trillions of helpless krill in its distended maw. In fact, this image – and the reference to “excessive” fees/fee-charging, even though the consultation document acknowledges at one point that Professor Kempson did not interpret over-charging as deliberate but as largely related to inefficiencies – seems a constant throughout.

Secondly, and more fundamentally, as explained in (1) above, simply reverting to office holder fees being charged as a percentage, even the relatively low percentages of Schedule 6, will not ensure there are funds available for distribution. But this objective seems to be the raison d’etre of the fees proposals (and not just the Schedule 6 default), as Ms Willott MP explains in her foreword: “[The consultation document] also includes proposals to amend the way in which an insolvency practitioner can charge fees for his or her services, which should ensure that there will be funds available to make a payment to creditors” (page 2). This can only feed into some creditors’ misconceived expectations, not only about the post-new Rules world, but also about the insolvency process in general. If every insolvency were required to result in a distribution, there would be far more work for the OR and far fewer IPs in the country.

5. “The transfer of returns from IPs to unsecured creditors has the potential to deliver a more efficient dynamic economic allocation of resources as these creditors are more likely to reinvest these resources in growth driving activities” (paragraph 17 of the IP fees IA)

Actually, this isn’t funny; it’s just insulting. Even if you imagined a typical IP as a beer-bellied pin-striped man smoking a cigar of £50 notes, with more spilling out unnoticed from his pockets (which was the image in an Insolvency Service presentation to IPs last year), his ill-gotten gains are still going be passed on to the home sauna builders or the Michelin Star restaurants, aren’t they? But, of course, that’s beside the point; as someone who has worked decades in the insolvency profession, I take exception to the suggestion that the UK would be better off if my wages were paid to unsecured creditors.

6. “The OFT report states that some unsecured creditors say that if their recovery rate from insolvency increased, they would extend more credit. While this effect is likely to be slight, even a small increase in the £80bn of unsecured credit extended by SME’s will amount to many millions of pounds” (paragraph 56 of the IP fees IA)

How much better-off does the IA suggest unsecured creditors will be if the alleged “excessive fee charging” is passed to them? At the top end, 0.1p in the £ (paragraph 52) – will they even feel it..? Talk about a “slight” effect!

7. “We would estimate that familiarisation would take up to 1.5 hours of an IP’s time based on the assumption that this change is not complex to understand and would only need to be understood once before being applied… IPs are already required to seek the approval of creditors for the basis on which their remuneration is taken and it is anticipated that at the same time they will seek agreement to the percentage they are proposing to take. We do not therefore anticipate any additional costs associated with this” (paragraphs 35 and 43 of the IP fees IA)

1.5 hours once and nothing more? Ha ha!

For IPs to switch to a percentage basis (but only in certain circumstances/cases) will require days – weeks, perhaps months – of organising changes to systems, procedures and templates and a greater time burden per case. The challenges for systems, procedures and staff will include:

• Assessing a fair percentage of estimated future realisations to reflect the value of work done. This seems an almost impossible task on Day One. For example, book debts: will the money just fall in or will it be a tough job, involving scrutinising and collating records and re-buffing objections and procrastinations? How much do you allow for the SIP2 investigations, what if you need to follow a lead? So many questions…

• Ongoing monitoring to check if/when fees can no longer be fixed on a time cost basis. You’d think this would be relatively easy, until you read how the draft Rules deal with the tipping point for a dividend: a time cost basis falls away when “the office holder becomes aware or ought to have become aware that there is likely to be property to enable a distribution to be made to unsecured creditors” (draft R17.19(1)(b)). Hours of fun!

• Reverting to creditors when a revised fee basis needs to be sought, whether that be because the time costs basis is no longer available or because the case hasn’t progressed as originally anticipated or potential new assets are identified during a case, thus warranting a change in the percentage or set amount, with the potential for court applications if creditors don’t approve the revision.

• Calculating fees on a percentage basis. Again, it sounds easy, but… what about VAT refunds (will the use (or not) of VAT control accounts make it easier or more difficult?), trading-on sales (which are excluded under the draft Rules’ statutory scale), “the value of the property with which the administrator has to deal” (per the draft Rules)?

• Dealing with creditors’ committees, which the consultation document suggests will be encouraged under the proposed regime.

• More complex practice management to ensure that percentages are pitched correctly and potentially greater lock-up issues where IPs do not have the security of realisations in hand to fund ongoing efforts.

But these measures are intended to reduce IPs’ fees..?

8. Professor Kempson “highlights that the starting point for reforms in this area should be on providing greater oversight, therefore reducing the numbers of complaints and challenges relating to fees… Currently there are very few fee related complaints handled by the RPBs… Complaints about the insolvency profession are relatively low given the nature of insolvency, the number of creditors (and other stakeholders) involved in cases and the extent of financial losses that can be incurred” (paragraphs 29 and 46 of the IP fees IA and 1.60 of the regulation IA).

To be fair, I should put paragraph 46 in context: “Currently there are very few fee related complaints handled by the RPBs, but this is likely to be a result of RPBs stating publicly that they do not consider fee-related complaints and does not reflect the current level of concern around fees. In the past 6 months 23% of all IP related ministerial correspondence has been in relation to fees”, which admittedly does put a different colour on things.

The difficulty as I see it is: if an aim is to reduce the number of fees complaints and challenges, but the IA estimates 300 (new) fee complaints per annum and 50 appeals post-implementation of the proposals. Would such an outcome mean that the measures are hailed as a success or a failure?

9. Not taking the steps proposed by the Insolvency Service as regards regulatory objectives and oversight powers proposals “would not address concerns around an ineffective tick-box prescriptive type of regulation… The same prescriptive type of regulation would continue to exist whereas the intention is to move to a principles and objectives based regulatory system as suggested by the OFT report” (paragraphs 1.49 and 1.51 of the regulation IA)

Ooh, I could relate some stories from my time at the IPA about who was usually at the forefront in driving tick-box regulation! There were times when I had to be dragged kicking and screaming down that road. Still I should stay positive: maybe this signifies a new commitment to Better Regulation – after all, the draft regulatory objectives do not refer to ensuring that IPs meet prescriptive statutory requirements that do not contribute to delivering a quality service or maximising returns to creditors, and if value for money is an objective..?

The Service puts it this way: “As an example, rather than targeting regulatory activity to where there may be only potentially small losses to creditors from any regulatory breach, the regulators will focus attention on areas where creditors are likely to suffer larger losses” (paragraph 1.71). Oh well, that’ll put me out of a job! 🙂

10. “We do recognise that giving the RPBs a regulatory role in monitoring fees will increase the burden on them when dealing with complaints around the quantum of fees and have therefore included the estimated cost of this” (paragraph 100 of the consultation document)

Since when was “monitoring” all about dealing with complaints? The IAs provide nothing for the additional costs to RPBs of dealing with anything but complaints.

It would seem that a typical monitoring visit in the eyes of the Service would have the objective of aiming “to ensure that fees charged by IPs represent value for money and are ‘fair’ and valid for the work undertaken, by requiring the RPBs to provide a check and balance against the level of fees charged… The regulators will be expected to take a full role in assessing the fairness of an IP’s fees, including the way in which they are set, the manner in which they are drawn and that they represent value for money for the work done. This would be done via the usual monitoring visits and complaint handling processes” (paragraph 101). The Service believes that this is possible as the RPBs have “access to panels with the relevant experience, to adjudicate on fees” (paragraph 102).

Are they serious?! Do they have any idea how impossible it would be to achieve this practically, not least within the confines of the current visit timetable? And how are the “panels”, presumably the Service means committee members, going to engage in this process: is the Service really expecting them to adjudicate on fees? You might as well forget about the rest of the Act/Rules, SIPs and Ethics Code: the inspectors’/monitors’ time will be spent entirely looking at fees and RPBs’ committees/secretariat will be hard-pushed to make any adverse findings stick.

Oh, it’s alright for the Service, though; they’ve incorporated the cost of two new people in-house to handle their enhanced RPB supervisory functions. But they don’t think that this will add to RPBs’ costs in dealing with the Service’s queries, monitoring visits, demands for information on regulatory actions in general and in specific cases (apparently)?

The biggest joke of all is: where will all these costs land? In IPs’ laps, when their levies and licence fees increase. Remind me, what was the key objective of these proposals..?

Although the Service doesn’t mince words about its/the Government’s sincerity on these issues – e.g. “given the clear evidence of harm suffered by unsecured creditors, the Government feels strongly that reforms are required in order to address the market failure” (paragraph 93 of the consultation document) – I can’t help but hope that I’ll wake up a couple of days after the consultation has closed to a new announcement from the Insolvency Service: “April fool!”


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The Kempson Review of IP Fees – a case of Aussie Rules?

5436 Sydney

Whilst this atypical British weather may have brought out the Aussie in many of us, as we settle down to sipping a stubby over the barbie, Professor Kempson seems to be gazing at the Southern Cross a little more completely.

Kempson’s report to the Insolvency Service was tagged quite unceremoniously to the foot of the page, http://www.bis.gov.uk/insolvency/news/news-stories/2013/Jul/transparency-and-trust, which headines Mr Cables’ Transparency & Trust Paper. Her report even had to follow the uninspiring terms of reference of the pre-pack review and so here I will follow the antipodean theme and blog about the bottom item of that press release first.

I’ll also start from the back of Kempson’s report and summarise her recommendations, uncontaminated by any personal opinion (for the moment):

• Consideration of the potential for limited competitive tendering (section 6.1.1)
• A radical revision or replacement of SIP9 (section 6.1.2)
• Consideration of the Australian approach of providing a costs estimate at the outset of the case with an agreed cap on fees (section 6.1.2)
• The creation and adoption of a Code on the lines of the Insolvency Practitioners Association of Australia Code of Professional Practice (section 6.1.2)
• Some contextual information from an independent body to help creditors assess the reasonableness of the remuneration and disbursements (section 6.1.2)
• Greater oversight exercised by the Crown creditors, HMRC, RPS and PPF, working together (section 6.1.3)
• Consideration of Austria’s model of creditor protection associations acting on creditors’ committees (section 6.1.3)
• Reconsideration of the circumstances in which creditors’ meetings need not be held in Administrations (section 6.1.3)
• Exploration of non-time cost bases or a mixture of bases for fees (section 6.1.4)
• Increasing the debt threshold for bankruptcy petitions (section 6.1.5)
• Extending S273 to creditors’ petitions (section 6.1.5)
• Provision of information (e.g. Insolvency Service booklet) to debtors regarding the likely costs of bankruptcy (section 6.1.5)
• Provision of generic information (e.g. Insolvency Service booklet) to directors subject to personal guarantees as well as case-specific information, e.g. by treating them on a par with creditors (section 6.1.5)
• A single regulator, perhaps the Financial Conduct Authority, for IPs (section 6.1.6)
• A simple low-cost mediation and adjudication service for disputes about low-level fees, perhaps by means of the Financial Ombudsman Service (section 6.1.7)
• Alternatively, some form of independent oversight of fees, such as that used in Scotland via court reporters and the AiB (section 6.1.8)

Charge-out rates – a surprisingly positive outcome!

Given the “how much?!” reaction often resulting from a disclosure of charge-out rates, I was ready to wince at this section, but actually I think the insolvency profession comes out of it fairly well.

The report details the charge-out rates gathered via the IP survey (which was responded to by 253 IPs):

Partner/Director: average £366; range £212-£800
Manager: average £253; range £100-460
Other senior staff: average £182; range £75-445
Assistants/support: average £103; range £25-260

Encouragingly, Kempson reports that these charge-out levels “are not, however, unusual in the accountancy and legal professions to which most IPs belong” (section 3.1). From my experience, I’d also suggest that the firms that charge the top end for partners/directors usually charge junior staff at the lower end and vice versa, i.e. I doubt that any firm charges £260 for juniors and £800 for partners/directors.

Professor Kempson also acknowledges that these “headline rates” are not always charged because IPs normally agree lower rates in order to sit on banks’ panels and, in other cases, the time costs are not recovered in full due to lack of realisations. Setting aside panel cases, Kempson suggests that fees were below headline rates “in about a half of cases, including: the great majority of compulsory liquidations, about two thirds of administrations; half of creditors’ voluntary liquidations and a third of personal bankruptcy cases” (section 3.2). Putting those two observations together, is it arguable, therefore, that IPs provide a far better value for money service than others in the accountancy and legal professions?

Panel Discounts – not so great

The report states that, at appointment stage, secured creditors negotiate discounts of between 10% and 40% on IPs’ headline rates and that some banks may achieve a further discount by entertaining tenders. “The implicit sanction underpinning all negotiations was to remove a firm from the panel. None of the banks interviewed could remember a firm choosing to leave their panel because the appointments they received were un-remunerative. From this they surmised that (individual cases aside) work was being done on a lower profit margin rather than a loss” (section 4.1.1).

Kempson does not suggest it, but I wonder if some might conclude that, notwithstanding the comments made above about charge-out rates, this indicates that IPs’ headline rates could drop by 10-40% for all cases. Personally, I do wonder if banks’ pressuring for discounts from panel firms could be un-remunerative in some cases, but that firms feel locked in to the process, unable to feed hungry mouths from the infrequent non-panel work, and perhaps there is an element of cross-subsidising going on. If Kempson had asked the question, not whether firms chose to leave a panel, but whether any chose not to re-tender when the panel was up for renewal, I wonder if she would have received a different answer.

Seedy Market?

To illustrate the apparent clout of bank panels, the report describes a service “that is marketed to IPs, offering to buy out the debts of secured creditors, thereby ensuring that an IP retains an appointment and giving them greater control over the fees that they can charge” (section 4.1.1).

Is it just me or is there something ethically questionable about an IP seeking to secure his/her appointment in this manner? Presumably someone is losing out and I’m not talking about the estate just by reason of the possibly higher charge-out rates that may have not been discounted to the degree that the bank would have managed with a panel IP. Presumably there’s an upside for the newly-introduced secured creditor? How do their interest/arrangement/termination charges compare to the original lender’s? Is the insolvent estate being hit with an increased liability from this direction? And why… because an IP wanted to secure the appointment..?

Is the problem simply creditor apathy?

Reading Kempson’s report did give me an insight – a more expansive one than I’ve read anywhere else – into an unsecured creditor’s predicament. They don’t come across insolvencies very often, so have little understanding of what is involved in the different insolvency processes (so maybe I shouldn’t get twitchy over the phrase “problems when administrations fail and a liquidation ensues”!). How can they judge whether hourly rates or the time charged are reasonable? They receive enormous progress reports that give them so much useless information (I’m pleased that one IP’s comment made it to print: “… For example saying that the prescribed part doesn’t apply. Well, if it doesn’t apply, what’s the point in confusing everybody in mentioning it?” (section 4.2.3)) and they struggle to extract from reports a clear picture of what’s gone on. Many believe that they’re a small fry in a big pond of creditors, so they’re sceptical that their vote will swing anything, and they have no contact with other creditors, so feel no solidarity. Personally, I used to think that creditors’ lack of engagement was an inevitable decision not to throw good money after bad, but this report has reminded me that their position is a consequence of far more obstacles than that.

Progress Reports – what progress?

The report majored on the apparent failure of many progress reports to inform creditors. Comments from contributors include: “Unfortunately the nature of the fee-approval regime can lead to compliance-driven reports, generated from templates by junior-level staff, which primarily focus on ensuring that all of the requirements of the statute and regulation are addressed in a somewhat tick-box-like manner. This very often means that the key argument is omitted or lost in the volume, which in turn make it difficult for us to make the objective assessment that is required of us” and from the author herself: “there were reports that clearly followed the requirements of the regulations and practice notes (including SIP9 relating to fees) slavishly and often had large amounts of text copied verbatim from previous reports. Consequently, they seemed formulaic and not a genuine attempt to communicate to creditors what they might want to know, including how the case was progressing and what work had been done, with what result and at what cost” (section 4.2.3).

To what was the unhelpful structure of progress reports attributed? Kempson highlighted the 2010 Rule changes (hear hear!) but she also mentions that IPs “criticised SIP9 as being too prescriptive”. I find this personally frustrating, because long ago I was persuaded of the value – and appropriateness – of principles-based SIPs. During my time attending meetings of the Joint Insolvency Committee and helping SIPs struggle through the creation, revision, consultation, and adoption process, I longed to see SIPs emerge as clearly-defined documents promoting laudable principles, respecting IPs to exercise their professional skills and judgment to do their job and not leaving IPs at the mercy of risk-averse box-tickers. I would be one of the first to acknowledge that even the most recent SIPs have not met this ideal of mine, but SIP9?! Personally, I feel that, particularly considering its sensitive and complex subject matter – fees – it is one of the least prescriptive SIPs we have. I believe that a fundamental problem with SIP9, however, is the Appendix: so many people – some IPs, compliance people, and RPB monitors – so frequently forget that it is a “Suggested Format”. Most of us create these pointless reports that churn out time cost matrices with little explanation or thought, produce pages of soporific script explaining the tasks of junior administrators… because we think that’s what SIP9 requires of us and because we think that this is what we’ll be strung up for the next time the inspector calls. And well it might be, but why not produce progress reports that meet the key principle of SIP9 – provide “an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed [and so that creditors are] able to understand whether the remuneration charged is reasonable in the circumstances of the case” (SIP9 paragraph 14)? And if an RPB monitor or compliance person points out that you’ve not met an element of the Appendix, ask them in what way they feel that you’ve breached SIP9. Alternatively, let’s do it the Kempson way: leave the Insolvency Service to come up with a Code on how to do it!

I do wonder, however, how much it would cost to craft the perfect progress report. The comment above highlighted that reports might be produced by junior staff working to a template, but isn’t that to be expected? Whilst my personal opinion is that reports are much better produced as a free text story told by someone with all-round knowledge of the case (that’s how I used to produce them in “my day”), I recognise the desire to sausage-machine as much of the work as possible and this is the best chance of keeping costs down, which is what creditors want, right? Therefore, apart from removing some of the (statute or SIP-inspired) rubbish in reports, I am not sure that the tide can be moved successfully to more reader-friendly and useful reporting.

Inconsistent monitoring?

The report states: “During 2012, visits made by RPBs identified 12.0 compliance issues relating to fees per 100 IPs. But there was a very wide variation between RPBs indeed; ranging from 0 to 44 instances per 100 IPs. Allowing for the differences in the numbers of IPs regulated by different RPBs, this suggests that there is a big variation in the rigour with which RPBs assess compliance, since it is implausible that there is that level of variation in the actual compliance of the firms they regulate” (section 4.5). I also find this quite implausible, but, having dealt with most of the RPB monitors and having attended their regular meetings to discuss monitoring issues in an effort to achieve consistency, I do struggle with Kempson’s explanation for the variation.

Although I can offer no alternative explanation, I would point to the results on SIP9 monitoring disclosed in the Insolvency Service’s 2009 Regulatory Report, which presented quite a different picture. In that year, the RPBs/IS reported an average of 10.6 SIP9 breaches per 100 IPs – interestingly close to Kempson’s 2012 figure of 12.0, particularly considering SIP9 breaches are not exactly equivalent to compliance issues relating to fees. However, the variation was a lot less – from 1.3 to 18 breaches per 100 IPs (and the next lowest-“ranking” RPB recorded 8.1). Of course, I have ignored the one RPB that recorded no SIP9 breaches in 2009, but that was probably only because that RPB had conducted no monitoring visits that year (and neither did it in 2012). Kempson similarly excluded that RPB from her calculations, didn’t she..?

Somewhat predictably, Kempson draws the conclusion (in section 6.1.6) that there is a case for fewer regulators, perhaps even one. She suggests setting a minimum threshold of the number of IPs that a body must regulate (which might at least lose the RPB that reports one monitoring visit only every three years… how can that even work for the RPB, I ask myself). In drawing a comparison with Australia, she suggests the sole RPB could be the Financial Conduct Authority – hmm…

Voluntary Arrangements: the exception?

“We have seen that the existing controls work well for secured creditors involved in larger corporate insolvencies. But they do not work as intended for unsecured creditors involved in corporate insolvencies, and this is particularly the case for small unsecured creditors with limited or no prior experience of insolvency. The exception to this is successful company voluntary arrangements” (section 5). Why does Kempson believe that the controls work in CVAs? She seems to put some weight to the fact that the requisite majority is 75% for CVAs, but she also acknowledges that unsecured creditors are incentivised to participate where there is the expectation of a dividend. If she truly believes the situation is different for CVAs – although I saw no real evidence for this in the report – then wouldn’t there be value in examining why that is? If it is down to the fact that creditors are anticipating a dividend, then there’s nothing much IPs can do to improve the situation across cases in general. But perhaps there are other reasons for it: I suspect that IPs charge up far fewer hours administering CVAs given the relative absence of statutory provisions controlling the process. I also suspect that CVA progress reports are more punchy, as they are not so bogged down by the Rules.

But I don’t think anyone would argue with Kempson’s observation that IVAs are a completely different kettle of fish and that certain creditors have acted aggressively to restrict fees in IVAs to the extent that, as IPs told Kempson, they “frequently found this work unremunerative” (section 4.2.3).

Disadvantages of Time Costs

I found this paragraph interesting: “several authoritative contributors said that, when challenged either by creditors or in the courts, IPs seldom provide an explanation of their hourly rates by reference to objective criteria, such [as] details of the overheads included and the amount they account for, and the proportion of time worked by an IP that is chargeable to cases. Instead they generally justify their fees by claiming that they are the ‘market rate’ for IPs and other professionals. Reference is invariably made to the fact that the case concerned was complex, involved a high level of risk and that the level of claims against the estate was high. More than one of the people commenting on this said that the complexity of cases was over-stated and they were rarely told that a case was a fairly standard one, but that there were things that could have been done better or more efficiently or the realisations ought to have been higher so perhaps a reduction in fees was appropriate. They believed that, by adopting this approach, IPs undermined the confidence others have in them” (section 5.2.1). It’s a shame, however, that no mention has been made of the instances – and I know that they do occur – of IPs who unilaterally accept to write-off some of their time costs so that they can pay a dividend on a case.

But this quote hints at the key disadvantage, I think, of time costs: there is a risk that it rewards inefficiency.

Kempson first suggests moving to a percentage basis as a presumed method of setting remuneration, although she acknowledges that this wouldn’t help creditors as they would still face the difficulty on knowing what a reasonable percentage looked like. She then suggests a “more promising approach” is the rarely-used mixed bases for fees that were introduced by the 2010 Rules (section 6.1.4). She states that this should be “explored further, for example fixed fees for statutory duties; a percentage of realisations for asset realisations (with a statutory sliding scale as described above); perhaps retaining time cost for investigations”. Whilst I agree that different fee bases certainly do have the potential to deliver better outcomes – I believe that it can incentivise IPs to work efficiently and effectively whilst ensuring that they still get paid for doing the necessary work that doesn’t generate realisations – it does make me wonder: if creditors already feel confused..!

Lessons from Down Under?

Kempson is clearly a fan of the Australian regime. She recommends the scrapping or radical revision of SIP9 in favour of something akin to the IPAA’s Code of Professional Practice (http://www.ipaa.com.au/docs/about-us-documents/copp-2nd-ed-18-1-11.pdf?sfvrsn=2). At first glance (I confess I have done no more than that), it doesn’t look to have much more content than SIP9, but it does seem more explanatory, more non-IP-friendly, and the fact that Kempson clearly rates it over SIP9 suggests to me that, at the very least, perhaps we could produce something like it that is targeted at the unsecured creditor audience.

She also refers to a Remuneration Request Approval Report template sheet (accessible from: http://www.ipaa.com.au/about-us/ipa-publications/code-of-professional-practice), which she acknowledges “is more detailed than SIP9” (section 6.1.2) – she’s not kidding! To me, it looks just like the SIP9 Appendix with more detailed breakdowns of every key time category, probably something akin to the information IPs provide on a >£50,000 case.

Finally, she refers to a “helpful information sheet” provided by the Australian regulator (ASIC) (http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Approving_fees_guide_for_creditors.pdf/$file/Approving_fees_guide_for_creditors.pdf), which looks much like R3’s Creditors’ Guides to Fees, although again the content does perhaps come over more readable.

Thus, whilst I can see some value in revisiting the UK documents (or producing different ones) so that they are more useful to non-IPs (although will anyone read them?), I am not sure that I see much in the argument that moving to an Aussie Code will change radically how IPs report fees matters. I am also dismayed at Kempson’s suggestion that “a detailed Code of this kind would be very difficult to compile by committee and would require a single body, almost certainly the Insolvency Service in consultation with the insolvency profession, to do it” (section 6.1.2). Wasn’t the Service behind the 2010 Rules on the content of progress reports..?

After singing Australia’s praises, she admits: “even with the additional information disclosure described above, creditor engagement remains a problem in Australia” (section 6.1.3) – hmm… so what exactly is the value of the Australian way..?

Other ideas for creditor engagement

Kempson recommends consideration of the Austrian model of creditor protection associations (section 6.1.3), which is a wild one and not a quick fix – there must be an easier way? I was interested to note that, even though creditors are paid to sit on committees in Germany, committees are only formed on 15-20% of cases – so paying creditors doesn’t work either…

The report also seems to swing in the opposite direction to the Red Tape Challenge in suggesting that the criteria for avoiding creditors’ meetings in Administrations should be reconsidered. Kempson highlights the situation where the secured creditor is paid in full yet no creditors’ meeting is held either because there are insufficient funds to pay a dividend or because the Administrator did not anticipate there would be sufficient funds at the Proposals stage. As I mentioned in an earlier post (http://wp.me/p2FU2Z-3p), in my view these Rules just do not work – something for the Insolvency Rules Committee…

However, raising these circumstances makes me think: whilst endeavours to improve creditor engagement are admirable, could we not all agree that there are some cases that are just not worth anyone getting excited about? There must be so many cases with negligible assets that barely cover the Category 1 costs plus a bit for the IP for discharging his/her statutory duties – is it really sensible to try to drag creditors kicking and screaming to show an interest in fixing, monitoring and reviewing the IP’s fees in such a case? Whatever measures are introduced, could they not restrict application to such low-value cases?

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The fact that the release of this report seems to have made fewer ripples than the Government’s announcement of its plan to conduct the fees review makes me wonder if anyone is really listening..? However, I’m sure we all know what will happen when the next high profile case hits the headlines, when the tabloids report the apparent eye-watering sums paid to the IPs and the corresponding meagre p in the £ return to creditors. Then there will be a revived call for fees to be curbed somehow.

In the meantime, we await the Government’s response to Professor Kempson’s report, expected “later this year”.


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Some inflammatory remarks made as the BIS Committee interrogates the Insolvency Service

On 23 October 2012, the BIS Committee put questions to Dr Richard Judge, the Inspector General and Chief Executive of the Insolvency Service, and Graham Horne, the Deputy Inspector General and Deputy Chief Executive.  The recording of the session can be found in the archive section of www.parliamentlive.tv.

Here I have set out the main points I drew from it and I have used quotes to avoid putting my own spin on the proceedings (although I could not refrain completely from adding some of my own observations).  It is a long entry, I’m afraid, but here are the topics that I have covered:

  • Allegation of “age-old problem” of asset sales at an undervalue by IPs
  • What is being done about forcing suppliers to continue to supply?
  • Apparent disjoint between number of D1 reports and number of disqualifications being pursued
  • Proposals to affect pre-packs and what is to be done about continuously “disappointing” levels of SIP16 compliance?
  • Is the lower level of complaints as a whole a reflection of the current low-value cases or an indication of increased confidence in IPs?
  • The evolving plans to change complaints processes
  • Prospects for a single regulator
  • Progress in enhancing creditors’ powers to challenge excessive fees
  • Ideas arising from the Red Tape Challenge
  • “Perceived cosy relationship between IPs and asset-based lenders”

The session also covered questions on the Insolvency Service’s current and prospective resources, their projections of insolvency case numbers, the drop in their customer satisfaction rates, and more, but I realised that I had to stop somewhere!

Asset sales at an undervalue (timed at 9.47am in the recording)

Brian Binley (Conservative MP) started the discussion: “I’m particularly concerned about many small businesses who should be in receipt of some return for a sizeable build-up of debt and that build-up occurs because they daren’t be too heavy because the business has been fragile for 5 years or so and yet insolvency agents sell off at 10% irrespective and they feel very badly let down”.

I thought that Graham Horne did a reasonable job of explaining the considerable write-down of asset value on facing a fire-sale for a company in an insolvency process, but Mr Binley had not finished: “I do know how angry it makes people and particularly people running small businesses when they know the value is sizeably higher but where there is a culture of, because of the firewall (sic.) that you talk about, oh get rid of it, 10% will do…  Can I ask you seriously to look into this matter and can I ask you to come back to me because I’m not satisfied with your answers and I think they have been sizeably complacent and I think that a consideration of SME is where hopefully the growth is going to come from and it needs to be higher up your list of priorities than it appears to be.”

It seems to me that there is still much work to do, primarily by R3 I would suggest, in progressing education of the public and politicians about the realities of insolvency.  I would add that I think this is largely outside of insolvency regulation, is it not?  An IP instructs a professional agent to do a professional job; I cannot see that they can be criticised for using accredited agents (say, by RICS and/or NAVA; I’m not sure of any other such bodies) to do their job, can they?

Continuation of supplies (10.00am)

Graham Horne stated that, in relation to the “regulated industries… we should do something about it and are doing something about it, so it’s no right that regulated industries should seek to profit because a company is going insolvent, whereas with a contracting party, it’s trickier.  We’re aware of the issues; we are discussing them with IPs and others.  It will require legislation.  It’s really those unforeseen consequences – if you put a lever over here, you’re not totally sure what the consequences are over there at the moment – but certainly I think there’s a fair amount of forbearance around at the moment.”

The Insolvency Service’s record on director disqualifications (10.10am)

Mike Crockart (Lib Dem MP) observed that last year 5,401 D-reports were submitted, but only 1,151 resulted in disqualifications and he suggested that the perception is that directors who have been alleged as guilty of misconduct are not being tackled.  Dr Judge responded by explaining the Insolvency Service’s strategy in prioritising high risk cases.  He also explained that some cases are not taken forward because, inter alia, the evidence may not be there and he accepted that the Service has not been particularly good at explaining to IPs why cases have not been taken forward.

Mike Crockart responded: “You seem to be handing it back to IPs and saying, you’re sending too many… IPs are seeing something there that they believe you should be dealing with because the numbers are going up, but you seem to be quite satisfied with the number that you’re dealing with.”

I was surprised that Dr Judge responded: “To be clear on what I’ve said, there are 5,000 indications of misconduct – I say ‘indications’ because I think that’s an important point; not every one is going to be severe or even, you know, there are people who are innocent in that…”  At least Graham Horne tempered this a little with the observation that IPs are statutorily obliged to report metaphorically those driving 31mph in a 30mph zone and consequently not all cases are taken forward, but even so I thought it was interesting to hear what comes into the new Inspector General’s mind.

Pre-packs (10.22am)

The Committee Chairman started: “Widespread dissatisfaction with them [pre-packs]; proposals that had been mooted were shelved earlier this year…”  Was there scope for further reform?

Dr Judge repeated the Insolvency Service’s view that pre-packs are seen as a useful tool in the rescue culture, they have saved jobs, and in conducting their monitoring “we haven’t come across widespread evidence of abuse”.  He also explained the general view that the real concern is sales to connected parties and that SIP16 has “tried to” address concerns over transparency.

Graham Horne explained the reason the proposals for 3 days notice was shelved, due to a desire to avoid introducing legislation affecting small businesses, “although it has not been ruled out”.  He also hinted at the relevance of the director disqualifications, reporting that 161 disqualifications were where directors had entered into transactions to the detriment of creditors; 56 for misappropriating assets; and 102 for “conduct that was quasi-criminal”.

He continued: “Transparency is something that we continue to work on and we’re not satisfied that IPs are doing enough to persuade creditors that they’re doing a good job in the way that they’ve handled pre-packs.  We don’t see evidence that the pre-pack wasn’t the right thing to do or that it wasn’t the best option in the circumstances.  What I don’t think IPs are doing enough of is explaining to people why they chose that option and giving the circumstances for that”.  He confirmed that no other specific suggestions arising from the stakeholder meetings into improving confidence in pre-packs are being considered.

Brian Binley queried the relevance of the disqualification statistics.  He added: “It is about SMEs in pre-packs, small businesses who often think that the whole deal is done above their heads; they don’t get any information whatsoever and they feel either that the Inland Revenue or the banks or the big companies have wrapped it up without any recognition of the relative size of the hit to a small business.  To a bank, £50,000 is not a great deal of money, but to a small business it’s very often the difference between survival or going under and in terms of pre-packs it is often the SME, the very small business, that is totally left out of any considerations.  Is that fair and if there is a hint of concern there, what are you doing about it to find out how great that concern is?”

Personally, I do wonder at the level of acumen of a business that provides life-or-death levels of credit to a company and thus how sensibly they could contribute to, or absorb the details of, any pre pre-pack completion process.

Graham Horne responded that he understood the concern.  He believed that the forbearance of HMRC and the banks is helping; companies are not being pushed into insolvency, but he recognised that it is the absence of information before the sale that is the concern.  “That is why we’ve not ruled out going back to the idea that people should give notice and we do encourage – and it is part of the practice of IPs – to market the company’s assets because I think one answer here would be to say to people: what is anyone prepared to pay for these assets? Because this is what it’s all about… a fair open market to say what’s anyone prepared to pay? And I think the issue on pre-packs is often that it’s behind closed doors.  The SIP is supposed to be telling IPs to give information about what marketing they’ve done and this is where we pull them up and their compliance I’m afraid is disappointing”.

I was interested to note that Graham Horne referred to sales of assets, not businesses, which supports my perception that perhaps he still does not quite appreciate the damage that can be done to some businesses in indiscreetly seeking to attract purchasers before the commencement of insolvency.  Having said that, I do wonder if some IPs may still feel that as long as sale consideration is comparable to, or a slight improvement over, a valuation, then it is as good as selling on the open market and I wonder if adequate contemplation of open market selling occurs.

In response to Ann McKechin’s (Labour MP) question of whether the Service was satisfied with the last SIP16 monitoring report’s results – 32% not fully compliant and 7% substantially deficient – Graham Horne stated: “No, I’m not at all satisfied with that.  It is disappointing that the industry has been unable to get that level up to where I’d expect it to be.  I mean, they are professional people, it’s a complicated SIP and it’s got quite a lot of elements to it, but one would expect them to be able to comply with that to a far higher level that 68%.  I would say that the non-compliances are slightly technical, so it’s not as though in those cases that the pre-pack is in any way wrong or was the wrong thing to do or there was abuse.  It is simply the point that they’re not giving enough information to creditors and that’s why again as part of the reforms we are looking at strengthening the rules and regulations relating to the supply of information to really put it on a statutory footing, rather than the footing that it is with the SIP”.

I was disappointed that, whilst Ann McKechin was seeking confirmation that “the SIP is at the moment voluntary guidance provided by your department”, Graham Horne nodded and muttered “yes”.  Ms McKechin continued by asking whether Mr Horne would prefer it to be statutory.  He responded: “I’m not sure that my personal opinion particularly carries much weight, but it is something that ministers would want to look at and it’s part of the consultation that went out”.  Then Ann McKechin asked: “Have any of the professional regulators that are involved adopted the SIP16 guidance into their own regulatory environments and the fact that there are penalties for non-compliance?”  Disappointingly again, Graham Horne did not put the Committee straight on the status of SIPs within the RPBs, but he responded: “Oh there are penalties for non-compliance, yes, and when we complain, penalties are imposed, fines are imposed and undertakings are given, so there are some regulatory consequences of the failure to comply.  My disappointment is that those penalties have not had the impact of improving compliance levels and I think what we’re trying to do with the RPBs is urge them to up the game to say, look, you need to do more, to ensure they do reach acceptable levels of compliance.  I think our view is that the penalties imposed so far have not really been of the size, of the level, that we would have liked to have seen in some cases.  In some cases we think that perhaps RPBs could have taken a little bit of a firmer line with some of the non-compliance cases.”

Personally, I was really disappointed at the style and wording of SIP16 when it was released (my disappointment perhaps is heightened, as I was the IPA secretariat attendee at the JIC when the SIP was being worked on – I believe that there was plenty of effort on the IPA’s part to get the SIP into a better shape).  I do believe that the checklist style has led to some SIP16 disclosures lacking real substance or a sensible explanation of why and how the pre-pack was undertaken.  I do think that more could be done to make the disclosures useful, although I fear that the Insolvency Service’s apparent checklist style of monitoring has not helped, as I wonder if some IPs are sticking to the checklist approach in order to prove to the Service that a disclosure does meet SIP16 requirements.  If that is the case, perhaps these IPs put too much emphasis on the bullet point list in the SIP when they perhaps should be reflecting on SIP16’s paragraph 8: “It is important, therefore, that they [unsecured creditors] are provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard for their interests”.

I would hope that the JIC could be left alone to revise SIP16 (and perhaps SIP13 too?) – and when I left the IPA in May this year, a JIC working group (including someone from the Insolvency Service) was working on this endeavour.  However, it is clear that the threat of the current SIP16-style legislation remains alive.

Complaints in general (10.39am)

Ann McKechin followed up an observation that complaints against IPs had fallen by 16% with an interesting question: does this reflect the value of cases at present or is it an indication of increased confidence in the profession?  Unfortunately, the Insolvency Service did not grasp hold of this idea, but instead Graham Horne responded: “If you read the OFT report, you might think it was possibly because of a lack of awareness of how to complain and maybe there’s a little bit of an issue there about the mechanisms by which you complain, the way in which you complain.  Levels of insolvency are fairly static at the moment, so we would not expect increasing levels of complaints and IPs in fairness do a difficult job and do it well in the main and the level of complaints is comparatively small compared to the sorts of cases they deal with.”

Evolving plans for changes to complaints processes

Graham Horne immediately continued: “What we are doing is trying to work with the RPBs on a measure to have a single gateway for complaints and we’re pretty close to hopefully announcing a basket of measures where we will host a gateway for complaints so people will be able to see the way in which they can complain.”

He confirmed to Ms McKechin that this was considered an alternative to the creation of a single complaints body and he added: “we’re close to hopefully getting ministerial approval to launch shortly.  We’re also working on common sanctions so it won’t matter which body you’re complaining to, there’ll be a consistent approach to the misconduct, common appeals process as well, so you get many of the advantages of a single regulator but by bringing it together with a single front-end and approach to complaints.”

Prospects for a single regulator (10.41am)

In response to Brian Binley’s question regarding the apparent demise of the proposal for a single regulator, Graham Horne acknowledged that the consultation had generated “quite a lot of strong support for that”, but that “ministers have ruled out at this stage legislation.  The previous minister said he would want to explore achieving the same aims through voluntary means, which is this package of measures I’ve been talking about…  We haven’t ruled out and ministers haven’t ruled out a single independent regulator, needs Parliamentary time, needs to think about that, but what we’re trying to achieve through this set of measures is some of the advantages it would give us.”

Mr Binley observed that R3’s survey reported that the vast majority would like fewer regulatory bodies and asked how quickly the Service was moving, to which Mr Horne observed that it is in the hands of ministers.  Dr Judge added that they “could probably reinforce” the Service’s oversight function; he noted that they are limited to the “nuclear action”, but he pointed out that it did not stop the Service from making their expectations clear to the RPBs.

Creditors’ powers to challenge excessive fees (10.48am)

Rebecca Harris (Conservative MP) asked what progress was being made in enabling creditors to challenge excessive fees.  Graham Horne responded: “This is an area where we’ve made some progress, but I have to say not as much progress as we would have liked with our dealings with the RPBs…  They will be able to raise complaints about fees and RPBs will look at those where the circumstances surrounding the fees amount to misconduct – so an IP has not got proper authority for fees, where an IP cannot support a calculation for the fees, or where the fee levels are very egregious – so they will look at those and that will give creditors some avenues to complain. The position is still that in most cases the recourse is to the court if you’re not happy with the way IPs have handled fees.  Most fees are approved by creditors…  We are looking at whether we can push this voluntary measure a little further because the recourse again would come back to legislation and we haven’t ruled out looking at secondary legislation to give RPBs the right to examine the quantum of fees and I think their natural concern is getting into a commercial discussion/debate about: was that the appropriate fee in that particular case?  We think it is right that there should be some mechanism where someone looks at that and decides whether, not down to the last pence (he was interrupted by a Committee member asking another question)…  We are doing all we can in our role as creditor, albeit we become a creditor after the event, to use our powers as a creditor to look at IPs’ conduct and to raise issue and HMRC do quite a lot as well, although they would have to take it on a resource basis; they can’t take on every case because they are a creditor in every case.”  Mr Horne’s additional comments suggest that the Insolvency Service has devoted new resources to this endeavour and recently formed an RPO team to look particularly, from a creditor’s perspective, at how IPs have administered cases.

The Red Tape Challenge (“RTC”) (10.53am)

Graham Horne set out the timescale: the revised rules are planned to come into force in October 2014 and a set of rules will be sent to a focus group in early 2013.  He said that the revised rules would be made available to the public at least 6 months before implementation, as he appreciated that people needed time to adjust their systems.  Personally, I thought that suggestion of any public consultation on revised rules was conspicuous by its absence.

Mr Horne explained that the “D-form issue” was a particular issue arising from the RTC; the rest of the suggestions were generally around the process of insolvency, meetings, whether modern means of communication could be incorporated more widely, for example with the current need to use first class post.  He said there were no big ideas, but “incremental pruning” should make reasonably significant improvements overall.

Mike Crockart referred to the apparent desire amongst IPs for an electronic D-form, but commented that it seemed a “moratorium” had stalled this development.  Graham Horne confirmed that the idea was certainly not shelved but he acknowledged there were some legislative barriers to look at.  He also said that the Service wants to take a wider look at the whole D-report/return process, for example is a D2 nil return really necessary?  Should there be a form or reporting requirement?  He noted that the risk of a form is that it becomes something completed by rote.

“Perceived cosy relationship between IPs and asset-based lenders” (11.01am)

The above words were what the Chairman used to introduce the next subject and he then handed over to Brian Binley: “I understand you are to meet with officials from the BIS department and with the Treasury and the Campaign for Regulation of Asset-based Finance – due to take place this week”, although Graham Horne later said that discussions were ongoing, rather than confirming a meeting this week.  Mr Binley referred to a case involving a bakery which was given 2.5 days over the Jubilee period by Bibby to find other funders and then Bibby wanted a £92,000 termination fee.  He asked whether this kind of power was unfair and continued: “Some factoring companies put companies into administration and appoint a friendly insolvency firm and some go even further – they pass leads to lenders who are owned by the insolvency practice firm themselves.  Now this is pretty-much of an unacceptable mess, isn’t it?”

Dr Judge acknowledged that this was a relatively recent concern brought to the Service’s attention and pointed out that the Service’s function is limited to insolvency and that this appeared to fall to other departments.  He encouraged people to provide specific evidence of any concerning events.  Graham Horne’s follow-up comments suggest to me that the Service may not have fully grasped Mr Binley’s particular concern: “I think that the regulatory framework is in place.  We don’t need any more tools.  If people have taken out charges late-on prior to the insolvency, those charges could be rendered invalid.  These sorts of things can be looked at in the way the company’s business was restructured just before the insolvency.  This is stuff that we can do with our current powers, so what we need to do is get complaints to us.  We’ve got powerful powers to investigate companies.”

Mr Binley was keen to highlight the banks’ role in this matter, although in so doing, I wonder if he is muddling two different issues: “It’s the banks that almost stipulate that some of their small businesses actually use an associated factoring company, so the whole loop sort-of has the smell about, which is not overly savoury.”

Shortly afterward, the Chairman wrapped up the session by reminding the Service representatives that further written evidence covering a number of matters was expected – the story continues…