The Insolvency Service’s work on the modernisation of the Insolvency Rules has appeared swan-like: to the outside world, the project seems to have drifted on serenely, but I get the feeling that those on the inside have been paddling furiously. I set out here how the tome has been developing, as described in an update received from the Service last week. Please note that this project is work in progress and the items as they are described below may evolve yet further before the Rules are finalised.
The Service reports that their consultation, which closed in January 2014, generated over a thousand policy and drafting points for consideration. Their target remains to have a new set of Rules commencing in April 2016, although they are seeking to publish finalised Rules in autumn 2015 so that all of us who will be applying the Rules can get our houses in order for the big day. That means that the Insolvency Rules Committee will need to be provided with the bulk of the new Rules to review in spring 2015.
The Service has endeavoured to keep those of us who have expressed a particular interest in the project informed and engaged in the process of developing the draft Rules, holding meetings to discuss related chunks and following this up with “we’d appreciate your comments on…” email exchanges. Personally, I have been impressed by these efforts, although I have been conscious that such meetings and exchanges barely scratch the surface. Although we might expect many Rules to remain intact, I envisage that the “simple” task of ensuring consistency throughout as regards, for example, notice requirements wraps in and has a knock-on effect on a whole host of interconnected Rules. That Herculean task of dealing with the detail is left to the Insolvency Service team and, once the ever-changing impact of other government reviews and Bills is factored in, I can see why the Rules project has a projected 2016 end point.
About-Face
Good on the Service for taking the opportunity to propose some changes that were bound to upset some people! The Service’s recent update illustrates the value of consultation, as they have reported that consideration of consultation responses has resulted in some proposed changes of direction:
Withdrawal of the proposed new requirement for personal service of winding-up petition;
Return of the current requirement to disclose any prior professional relationships of proposed administrators; and
Return of the ability to have contributory members on liquidation committees.
Further Progress
The consultation responses have led to further proposed changes to the draft Rules:
Withdrawal of the requirement for the appointor and committee to check the IPs’ security;
The Rules on disclaimers and on proxies will form separate parts (in the previous draft, these appeared to be scattered somewhat within the chapters dealing with different insolvency processes); and
Clarification of the requisite majority rules for CVAs and IVAs.
I found that last item particularly interesting. It was not until I came to scrutinise the Rules – both draft and existing – when I was looking at the consultation that I saw quite how confusing the provisions are. When considering the impact of connected (or associated) creditors’ votes, I’d had the idea that these connected votes are stripped out and then one looks at which way the remaining unconnected creditors were voting: if more than 50% (in value) of those voting were voting against the VA Proposal, then the Proposal was not approved. However, I recently realised that this is not what the current Rules say.
Rule 1.19(4) (and similarly R5.23(4), the IVA equivalent) states that “any resolution is invalid if those voting against it include more than half in value of the creditors, counting in these latter only those –
a) to whom notice of the meeting was sent;
b) whose votes are not to be left out of account under [rule 1.19(3)]; and
c) who are not, to the best of the chairman’s belief, persons connected with the company.”
“The creditors” that forms the denominator in this fraction does not relate to creditors voting, but effectively to creditors entitled to vote. This is supported by Dear IP (chapter 24, article 13). Thus, chairmen should be looking, not simply at the majority of unconnected votes cast, but whether the votes cast rejecting the Proposal amount to more than half of the total of unconnected creditors’ unsecured claims.
Now, it may just be me who has misunderstood this all this time (and I hasten to add that I have not had cause to look carefully at this Rule probably since my exam days). However, I suspect I am not alone, as the draft new Rule dealt with this matter in exactly the same way, but in plainer English, which seemed to make the consequence far more stark and this resulted in quite some debate at the Service-hosted meeting that I attended as to exactly how the requisite majority rule should operate.
I am not sure whether the new draft Rules will follow the current Rules – or if it will reflect how I suspect many of us have been reading it for many years – but I am pleased to hear that the language used will be revisited so that hopefully it will be unequivocal. As the Administration equivalent – R2.43(2) – clearly refers to total creditors’ claims, not only creditors voting, I suspect the new VA Rules will be consistent with this design.
Unsettled Policy
The Service has also described some areas that are still in the process of being explored. In responding to my request that I share the Service’s update publicly, I was asked to make it very clear that this is – all – still work in progress and, particularly as regards the following items, the Service is still in inviting-comments-and-reflecting mode and they should not be treated as settled policy.
Creditors
I greeted with disappointment the news that, as some of the Administration consent requirements are contained in Schedule B1 of the Act, the Rules’ Administration approval requirements are unlikely to depart from the Act’s model. In other words, where all secured creditors’ approvals are required for a matter, this is likely to be repeated in the new Rules. I am pleased to note, however, that the Service has heard the complaints of difficulties in persuading some secured creditors to engage.
The Service seems to be a little more sympathetic to IPs’ difficulties when it comes to persuading preferential creditors to vote. They are reflecting on what exactly is meant by the approval of 50% of preferential creditors etc. (for example, in R2.106(5A)): does this mean that at least one pref creditor needs to vote or does 50% of zero equal zero..? Whether or not the new Rules will allow Para 52(1)(b) fees to be approved on a zero pref creditor basis, it seems very likely that a positive response will be needed, if not by a pref creditor, then by a secured one.
So what about the old chestnut: do paid creditors get a vote? For some time even before I had left the IPA, this debate has rumbled through many corridors. The current Rules present a problem: if one views a “creditor” as someone who had a claim at the relevant date, then, as an example, R2.106(5A) may be difficult to achieve. How do you get a secured creditor who has been paid out to respond to a request to approve fees? The key may be to seek their approval pdq on appointment before they are paid out, but what if that doesn’t happen? Do the Rules really require their approval? It hardly seems in the spirit of the Rules to give a creditor, whose debt has been – or even is going to be – discharged in full, the power to make decisions that could affect someone else’s recovery.
The Service has considered whether it might be possible to define creditors in the Rules to overcome this difficulty. At present, however, their conclusion is that, largely because of existing provisions defining certain “creditor”s and “debt”s in the Act, seeking to resolve this via the Rules will be difficult to achieve.
Progress Reports
The Service’s proposals regarding progress reports appear more promising. Several people have commented that the government’s drive to reduce costs in the insolvency process seems at odds with the ever-increasing, e.g. via the 2010 Rules, level of prescription around certain requirements such as the timing and content of progress reports. Already, the courts seem to have improved the default position of the current Rules when it comes to block transfers of insolvency cases: I understand that more often than not courts are now making orders that disapply the Rules’ requirements for progress reports by departing office holders and the re-setting of the reporting clock to the date of the transfer order (which, if not so ordered by the court, would have the unfortunate consequence that the incoming office holder would need to produce a progress report on all of his transferred-in cases on the same day each year/six months).
The Service is currently considering the following proposals:
Dropping the Rules’ requirement for a progress report on a case transfer (although the court may order, or the incoming office holder may decide, otherwise);
Dropping the requirement for a progress report to accompany an Administration extension application/request for consent, although the Administrator would need to explain why the extension was being requested; and
Because progress reports would not be required in the circumstances above, the timing of the next progress report would not be affected by the event (i.e. by the case transfer or extension request); the case would continue to follow the reporting cycle relative to the insolvency date.
Phew! It’s good to see that much progress has been made – the ugly duckling is already showing signs of maturing into a reasonably-looking bird – and I wish the team all the best in their labours of coming months.
I realise that talk of the Insolvency Service’s IP fees consultation has pretty-much smothered the draft Rules consultation. However, I’ve yet to get to grips with that one, so here are my thoughts – and a copy of my response – on the (already superceded!) draft “2015” Rules.
The consultation closed on 24 January and it seemed to me that, despite the enormity of the task, many IPs and associates went to a lot of effort to make thorough responses. Regrettably, personally I only managed to review a few of the sections in detail – and only then did I look at the consultation questions (yes, I know, that was a pretty stupid way of doing things!). I attach my response here: MB response 24-01-14. The Government’s consultation homepage is: https://www.gov.uk/government/consultations/modernisation-of-the-rules-relating-to-insolvency-law.
This is not meant to be an overview of the proposed changes – I’ve not covered the non-controversial aspects (that would be too boring!) – but I consider (but I don’t really answer – sorry!) the following:
• Just how draft are the Draft Rules and are we going to get to see how current/future initiatives impact on them?
• How huge a task will it be to absorb the changes and is there anything that can be done to make the job easier?
• Does the Consultation Document cover all the changes or do we have to look closer at the detail?
The condition of the Draft Rules
The Insolvency Service is between a rock and a hard place, but personally I think they have made the right decision in releasing these draft Rules even whilst they are draft to a greater degree than we’re accustomed for statutory instruments opened to consultation.
The Service acknowledges that the draft is a work in progress document and that there are inconsistencies across the different insolvency processes. The Service did pre-empt the outcome of the Red Tape Challenge somewhat and included within the draft Rules some of the proposed measures, such as removing more statutory meetings (which seems very odd now in the context of the fees consultation) and enabling creditors to opt out of receiving communications, but other measures arising from the Red Tape Challenge exercise – such as avoiding the payment of small dividends and effectively communicating by website alone – are not reflected in the draft Rules. Given that the RTC outcome had not been revealed when this consultation commenced, this is not surprising, but it demonstrates the moveable feast of insolvency legislation and the difficulties in seeking to set in stone – at pretty-much any point in the next half-decade or so – a revised set of Rules.
In the face of this continually moving conveyor belt of legislative proposals, it is understandable that the Service does not wish to hold up the process of revising the Rules and, personally, I am pleased that we have been given this work-in-progress look at the draft. In reading the draft, I have suppressed any nagging concern that much of my effort has already been wasted in view of more recent proposals and yet more of the draft will be overtaken by future events, because the alternative – that we don’t get to see a draft until the last minute – doesn’t bear thinking about.
But what are the Insolvency Service’s plans now? Will they continue to work on the draft, absorbing the responses to this consultation, the further RTC outcomes, the IP fees conclusions, the fall-out from Teresa Graham’s review of pre-packs, perhaps the rules around the S233 changes (which are yet to be the subject of a consultation, right?), and give us little opportunity to review a further draft on the basis that we’ve had our chance? I hope not. I hope we get to have another opportunity to comment on a draft. Whilst matters of agreed policy may not be up for debate in the Rules arena, my review of only a few sections of these draft Rules has demonstrated to me the value of having others input on the practicalities of the processes set out.
The Big Picture
I pity the first JIEB students after the Rules are enforced, although it will be a fantastic opportunity to get ahead of the pack and become the go-to person in one’s practice. How us old’uns with our rubbery neurons are going to get the hang of it all, I don’t know!
I shudder to think about the amount of time – and (non-chargeable) money – that will be expended to get internal systems, diaries, and templates new Rules-compliant… and the inevitable mistakes that will be made; after all, templates always require a bit of fine-tuning after the first (second… third…) version, don’t they? One way that firms can cushion the blow right now is to future-proof standard documents, strip out all those Rules references: after all, do readers really need to know that something has been produced pursuant to Rule xxx?
The Consultation Document is silent on a key issue, I think: are the Rules going to apply to all cases existing as at R-Day or only to new appointments after the new Rules begin to take effect? I appreciate that it would be a rare thing for the new Rules to apply to all cases, rather than just new cases, but it is not entirely unheard-of, and think of the safeguards that would need to be put in place if a firm’s case-load were a mixture of pre- and post-new Rules cases. It’s been tough enough for practices to handle the complexities of running a portfolio of mixed pre/post-2009 and pre/post-2010 Rules cases, but these changes go so much further, it will make our heads spin!
Little has been said of making any changes to the Act. I am sure there is a reluctance to go there, given the more significant difficulties in seeking changes to primary legislation. However, I think it undermines some of the effort made to modernise the Rules, if we cannot fix the Act provisions at the same time. In particular, I think the practical difficulties arising from the Enterprise Act 2002 have now become evident and it seems a wasted opportunity not to tweak those whilst we’re at it. And aren’t there Act changes, such as extending the phoenix provisions to companies that don’t survive Administration, that have been given an airing but seem to have now gone quiet? It would also seem useful to wrap in some of the other statutory instruments that involve significant overlap with the Rules, such as the Insolvency Practitioners Regulations (which will need to be revisited in view of the RTC anyway) and what about Insolvent Partnerships? Then again, I guess the Service has enough on its plate already!
The Detail
Although pretty-much all of the Rules have been re-jigged, the Consultation questions focussed around some of the more fundamental changes, such as the overall structure, which is a massive change, but well worth doing, in my view.
They invited us to comment on the format of setting out in the Rules the prescribed content of notices, forms etc., rather than prescribing a statutory form, the suggestion being that this makes “it easier to enable documents to be delivered by electronic means, preparing the system for moving to electronic delivery of information when the forms would become redundant”. I appreciate that the aim is to future-proof the process, but I don’t think we have to accommodate any transmission process other than textual, do we? We’re not exactly future-proofing for Elysium-style neural downloads, are we? Therefore, I really don’t think that it helps to do away with prescribing forms, as it just means that someone else is going to have to create them (and get paid for it). Even if every IP in the country only goes to a handful of suppliers, that’s still an unnecessary amount of duplication in my books, and micro-businesses will be burdened with a disproportionate expense. Perhaps a middle-ground would be to provide forms, but prescribe only that the information set out in the forms need be delivered? Anyway, do we know whether Companies House will stomach just any old form..?
The Consultation Document lists ten “minor and technical changes” (paragraph 42) – and I think they’re right: they are pretty minor. However, what I think is a little disingenuous is the fact that, if you have the time and the determination to scrutinise the detail of the draft Rules, I’m sure you’ll find far more technical changes that aren’t quite so minor!
I knew there was no way I’d get through the complete draft Rules, so I decided to focus on the sections that will impact mostly on Administrations – Parts 3 and 17. I managed to shoe-horn my thoughts into the consultation’s question 20 (“Do you have any other suggestions or comments on the structure or the content of the rules?”). My full response (MB response 24-01-14) lists my observations, but here are a select few:
• The current R2.48 Conduct of Business by Correspondence for approval of the Administrator’s Proposals is to be replaced by a new correspondence-based process whereby creditors can lodge a “notice of objection” (the only other option appearing to be that they keep silent) and, if 10% or more of the creditors by number or value object, the Administrator “may convene a meeting of creditors to seek their approval or seek approval of a revised statement of proposals” (R3.37). My thoughts are: what is wrong with the current process? What if a creditor just wants to modify the Proposals? How is an IP supposed to calculate whether the 10% threshold has been over-reached? This 10% threshold – of creditors by value (and sometimes by number) of the total – is repeated throughout the Rules. Research has shown that lack of creditor engagement is a recurring problem, so why erode the process whereby creditors who actually make the effort to vote are most influential?
• The Service has made yet another attempt to tidy up the filing and reporting processes when a Paragraph 83 move from Administration to CVL form is filed. This time, they are suggesting a return to the issuing of a final report simultaneously with the ADM-CVL form. However, they have drafted a requirement that, “if anything happens between the sending of the notice to the registrar of companies and its registration which the administrator would have included in the report had it happened before then”, the (former) Administrator must file and circulate “a statement of appropriate amendments to the report”. My issue is that, technically, “anything” could include the crediting of additional bank interest or even the incurring of time costs, so this could result in IPs needing to issue – at some cost – pretty meaningless statements. Ideally, I would prefer the Act (if only!) to be amended so that the date when the ADM-CVL move takes effect is the date that the form is signed, not registered, so that we can escape all this nonsense. After all, I can think of no other event such as this where the timing is in the hands of Companies House. Alternatively, if we are stuck with Companies House controlling the conversion date, couldn’t the Liquidator report on “anything” that had happened in that small window when he issues his annual report?
• The Service has made a big deal about the savings that will be made from reducing the requirements to have creditors’ meetings – and indeed the draft Rules include a general process for conduct by correspondence (in addition to R3.37 for Administrators’ Proposals). However, this excludes fees decisions, which need to be dealt with either by a committee or resolution of creditors (apart from Para 52(1)(b) cases, the provisions for which, disappointingly, are left unchanged). Given that this is pretty-much the only matter to be addressed at creditors’ meetings, I cannot see that many meetings will be avoided, other than final ones (which, let’s face it, already are a complete non-event and cost nothing other than a Gazette fee, as all the expense arises from the need to issue a final report etc.). Of course, if the IP fees consultation proposals are taken forward, we may find IPs trying harder to generate creditor interest in meetings, which erodes to some extent the Service’s message that great savings will be made by these Rules/RTC measures.
These are just a few of the intriguing changes I’ve spotted. I do sympathise with those who have the job of revising these Rules. I’ve only had to deal with few-pager SIPs and the Ethics Code before and they were tough enough. In those cases, we certainly didn’t please all the people all of the time and I am sure the same will be true of the Rules. All that I ask is that we’re kept informed, so that we can manage the transition as best we can… and, if questions continue to be raised about whether IPs are giving “value for money”, that the critics remember that it’s the enormous costs associated with these kinds of changes that IPs have no choice but to pay.
Any measures to reduce insolvency regulation are most welcome and, apart from the odd item that threatens to increase the burden on IPs, the proposals of the Insolvency Service’s Red Tape Challenge consultation promise to bring in a brave new world where website communication is the norm and meetings are a thing of the past. Whether these proposals will be seen as working against the tide of opinion seeking greater creditor engagement remains to be seen, but, for me, some of these changes cannot come soon enough.
Ever conscious that my articles are getting longer and longer, I have described my Top Seven proposals from the consultation document.
1. Abolition of Reg 13 Case Records, but there’s a sting in the tail
The first proposal in the document is a belter: let’s abolish the Reg 13 Case Record – yes, please! I remember spending what seemed so much wasted time ensuring that the Reg 13 (or Reg 17 in my day) schedules were complete and accurate – far more overall, I suspect, than the 1 hour per case estimated in the Impact Assessment (which strangely is assumed to apply to only 80% of all cases).
However, it seems the Service is twitchy about leaving IPs to their own devices and is recommending that “legislation should require IPs to maintain whatever records necessary to justify the actions and decisions they have taken on a case. It is not expected that such a provision would impose a new requirement, but rather codify what is already expected of regulated professionals” (paragraph 32). Scary! So instead of a simple, albeit useless, two-pager listing key filing dates etc. of the case, legislation will require IPs to retain certain records. This could go one of two ways: either the provision will be so bland (e.g. as the CD describes it: records to justify actions and decisions) as to be pointless, or it will be in the style of the 2010 Rules on Progress Reports, which will introduce a whole new industry of compliance workers whose job will be to cross-check case files against a statutory list.
Why does the Service see a need to “codify” this matter? If an IP is not already retaining a sensible breadth of records (and such an IP will be rare indeed), if only to protect themselves from the risk of challenge, do they think that a statutory provision is going to force them to do it? Do they think that there needs to be a statutory requirement to assist regulators in addressing any serious failures? Such a measure has the potential to increase the regulatory burden on IPs without, as far as I can see, bringing any advantage whatsoever.
2. Abolishing almost all meetings
Although I welcome these proposals, I do think that the Service has over-egged the savings. For example, the Impact Assessment suggests that £7m would be saved by abolishing final meetings. Although the Service recognises that there will be negligible saving in relation to drafting the final documentation – even if there is no final meeting, a final report etc. will still need to be produced – they have estimated that each case will save on room hire of £64, 1 hour of an administrator’s time, and half an hour of a manager’s time. Personally, I would be very surprised if any IP makes provision for anyone attending a final meeting – does the Service picture IP staff sitting in an empty hired room twiddling their thumbs just in case someone turns up? Ok, so IP staff will save time on drafting minutes of the meeting, but that’s little more than churning off a standard template; it’s hardly 1.5 hours worth.
So if most meetings are abolished, is everything going to be handled in a process similar to the Administration meeting-by-correspondence process? Not quite, although it seems that almost all matters that will require a positive response from creditors – approval of VAs and of the basis of remuneration in any insolvency process – may be handled either as a physical meeting or by correspondence votes. The CD indicates that in other circumstances, “deemed consent” may occur: “the office-holder will issue documents to the creditors informing them of an event (as happens now) and that the contents of these documents are approved (if approval is required for that document/event) unless 10% or more by value or by number of creditors object in writing” (paragraph 64). In what kind of circumstances might this apply? I’m struggling to come up with many instances. I am aware that several IPs seek approval of R&Ps, although personally I do not believe that they need to. The CD also proposes to revise the Act’s Schedules so that Liquidators can exercise more powers without consent, but I guess that, if that does not go ahead, they might be other instances. I guess there might also be case-specific events, e.g. to pursue an uncertain asset, which might be referred to creditors. But there’s nothing wholesale that in future might be handled by “deemed consent”, is there? Unless…
Although the CD excludes office-holder’s fees from “deemed consent”, it makes no mention of SoA/S98 fees. If under the present statute, these need creditors’ approval, might they be deemed approved in future. Personally, I think this is another area, if the fees are due to the IP/firm/connected party, that also needs positive creditor approval.
Professor Kempson reported that IPs estimated that 4% of creditors attended meetings. It is not clear in the report what kind of meetings these are, but I bet they are S98s in the main. Personally, I have always viewed S98s as good opportunities for IPs to communicate something to trade creditors about the insolvency process and to convey face-to-face something of the professionalism, competence, and integrity of IPs. If it is true that no one goes to these any more, then fair enough, but even if it is only the rare S98 that attracts an audience, I feel it could just widen the gap further between IPs and creditors if no S98 meeting were ever held again. Having said that, the Service estimates that there will be only 30% fewer meetings, but if statute no longer requires physical S98s, would they be held; could the cost be justified?
3. Communication by website
The Impact Assessment does not quantify the estimated savings from these proposals, suggesting that they will be smaller than those related to the proposals to allow creditors to opt out of receiving correspondence, but, unless I have misunderstood their proposal, personally I could see this provision being used extensively.
Firstly, a bit more about creditors opting out: the Service estimates that, if they could under statute, 20% of creditors would notify office-holders that they did not wish to receive any further information on a case. I’m sorry, but I really cannot see it: this would require creditors to take action to disengage from the insolvency process – if they’re not already engaged, why would they send back such a notification? And would some then worry that they might miss out on important news, e.g. that miraculously there’s a prospect of a dividend, even though statute might be designed to ensure that Notices of Intended Dividend (“NoID”) etc. be issued notwithstanding any creditor opt-out?
As I say, much more promising I think is the Service’s suggestion that office-holders could write once to creditors to tell them that all future documents are going to be accessible on a website, which is something that office-holders can do presently but only with a court order. Wouldn’t that be great? No more need to send one-pagers to creditors informing them that a progress report has been placed on the website – you’d just put in on the website, job done. I wonder how many hits the web page would get… On second thoughts, I don’t think I want to know; I think it would only make me cry at the realisation of the huge amount of money, time and trees that had been wasted over the decades in sending reports that almost no one read.
There are a couple of catches: the Service proposes that the office-holder could do this only when he/she “considers that uploading statutory documents to a website, instead of sending hard copies, will not unfairly disadvantage creditors” (paragraph 95). I would have thought that creditors might only be unfairly disadvantaged if they are unable to access the website, no? So are we talking here about a particular profile of creditor? Or is the Service thinking, not about the creditors, but about the importance of the documentation? I could see that it might be unfair to place a NoID on a website with no announcement, leaving it to creditors’ pot luck as to whether they spotted the notice in time to lodge a claim – and I’m guessing that NoIDs would be excluded from this provision. But in what other circumstances could creditors be unfairly disadvantaged?
In another section of the CD, which covers a proposal to reduce the number of statutory circulars (which has not made it to my Top Seven), the Service states that: “Important information is being passed – to attend a meeting, to know of its outcome – which we would not want dissipated” (paragraph 102). So does the Service believe that a notice of meeting needs to be circulated, rather than pop onto a website, for fear that creditors might not see it until the meeting had been held? Ok, but then what about progress reports, the issuing of which sets the clock ticking for challenges to fees: are these similarly too important to pop onto a website unannounced? Could creditors be considered to be unfairly disadvantaged by this action? But where would that leave us: what documents would be appropriate to post to a website unannounced?
4. Extend extensions by consent
The Service proposes to extend the period by which Administrations may be extended by consent of creditors to 12 months. They also invite views on whether this should be extended further.
My personal view is that it would seem practical, whilst not making it too easy for Administrations to stagnate, to allow creditors to extend Administrations indefinitely but only by, say, 6 months at a time.
I can think of few circumstances where an Administration should move to a Liquidation, particularly if another of the Service’s proposals – that the power to take fraudulent or wrongful trading actions be extended to Administrators – is implemented. The CD also suggests empowering an Administrator to pay a dividend from the prescribed part, although I would like to see the power extend to a dividend of any description (what’s so special about the prescribed part?). These changes would seem to remove the need to move a company from Administration to CVL (although I wonder if these changes will persuade HMRC to drop its practice of modifying proposals to require that the company be placed into liquidation of some description – why do they do that?!), but then some Administrations might need to be extended for significant periods – adjudicating on claims can be a lengthy business.
I think the Enterprise Act envisaged Administrations as a holding cell, allowing the office-holder to do what he/she could to get the best out of the situation, but once the end-result was established, the idea was that the company would move to liquidation, CVA, or even escape back to solvency. But that all seems a bit over-complicated and costly when, in many respects (e.g. specific bond, R&P and currently D-report/return), the successive CVL is a completely separate insolvency case. Why does the company need to move to CVL to pay a dividend?
5. Scrap small dividends
The Service proposes that, where the dividend payment to a creditor will be less than, say £5 or £10, the dividend is not paid to the creditor. The Service suggests that these unpaid dividends might be passed to its disqualification department or to HM Treasury.
The Service has spotted the key difficulty: should the threshold apply to each interim/final dividend payment or to the total dividend? Although it would not be impossible, it could be tricky applying the threshold to the total dividend – the office holder would need to keep a tally of small unpaid dividends at each interim payment and monitor when the sum total crossed the threshold. To be fair, I guess there are few insolvencies that involve interim dividends – I am assuming that this provision would not apply to VAs (unless the debtor specifically provided for it in the Proposal), but I believe that any increased burden on declaring interim dividends should be avoided.
6. “Minor” changes
The CD provides some annexes of so-called “minor” proposals for change:
• Extend the deadline for proxies up to, and including at, the meeting. Granted very few meetings are physical meetings, but I remember the days of holding CVA meetings and having someone stand by the office fax machine just in case any last-minute proxies came in – it’s not exactly cost-free.
• Apply the VA requisite majorities rule on connected party voting to liquidations and bankruptcies. Personally, I think this is quite a naughty proposal to slip in to this consultation, particularly at the tail-end of a “minor” proposals annex – it hardly seems in keeping with the Red Tape Challenge objective of abolishing unnecessary regulation! Why isn’t it already in liquidations and bankruptcies? I don’t know for sure, but I wonder if it is something to do with the fact that the resolutions taken at VA meetings decide the fate of the insolvent entity, whether to approve the VA or not. The provision is also in Administrations, which is a bit more difficult to rationalise (as are a lot of Administration rules!): perhaps it is because Administrators’ Proposals might also decide the fate of the company, whether the Administrator pursues its rescue by means of a CVA or otherwise (see, for example, Re Station Properties Limited, http://wp.me/p2FU2Z-3I). These decisions are fundamentally different from those taken at liquidation and bankruptcy meetings, where any connected party bias is far less relevant.
• “Clarify that, where ‘creditors’ is mentioned in insolvency regulation, only those creditors whose debts remain outstanding are being referred to. Currently, if a creditor has received payment in full, they would still be classed as a creditor in the insolvency (as they would have been a creditor at the commencement of the procedure, which fixes the use of that term legally). As the legislation refers to actions that can be carried out by or with the consent of creditors, engaging with those ‘creditors’ who have already received full payment (and may not consider themselves creditors any longer) can be difficult” (annex 6(a)). Well, I’m glad we got that cleared up! It makes a joke of the current position, though. For example, the ICAEW blogged that creditors need to receive copies of MVL progress reports (http://www.ion.icaew.com/insolvencyblog/26779). Although I dispute that this is the only interpretation of the Act/Rules, the consequence of the Service’s stance described above is that, despite what the Service apparently has told the ICAEW, even if creditors have been paid, they still receive copies of MVL progress reports – what nonsense! To my mind, however, the key issue arising from this conclusion is the application of R2.106(5A) – not only would paid secured creditors’ approval to the basis of fees need to be sought, but also paid preferential creditors. I wonder what the court would say if a paid creditor applied on the ground that the Administrator had failed to include them in an invitation to approve fees? I suspect: ”Go away and stop wasting the court’s time!” And don’t forget that the Administrator needs to seek all secured creditors’ approvals of the time of his/her discharge – personally, this seems unnecessarily burdensome to me anyway, but do we really need to seek the approval of creditors who are no longer owed anything? Also, the Act/Rules do not seem to allow the Administrator to get his/her discharge by means of anything other than a positive consent from all secured creditors. It’s a shame that this CD does not propose that silent secured creditors could be ignored, when seeking approval for discharge or for fees.
• “Consider the efficiency of the process by which administration can exit into dissolution or CVL and clarify them, if necessary” (annex 6(f)) – yes, please! Despite being tweaked and being the subject of much debate and consultation, it seems that the move to CVL process defies simplification. Now we have the unsatisfactory position that the Administrator needs to sign off and submit to Registrar of Companies (“RoC”) a final report covering the period up to the date that the company moves to CVL, but, because Administrators only learn of this event when they see it appear on the register at Companies House, they have already vacated office by the time they can sign and submit the report. Whilst Administrators can get the report pretty-much ready for signing before they vacate office – so at least they can be paid for the work! – there must be a way of avoiding this fudge, mustn’t there? I ask myself, why should the RoC be in control of the move date? Why couldn’t the Administrator sign a form with the effect that the company moves to CVL and statute simply provide that the form must be filed within a short time thereafter? After all, the dates of commencement of all other insolvency processes are fixed outside of RoC’s hands and the appropriate notices/resolutions are filed after the event.
7. Changes to D-report/return forms
I know that R3 has expended a lot of effort into seeking changes to the D-report/return forms and in putting them online, so I hope that I’m not dissing the Service’s proposals unduly out of ignorance. However, the CD left me puzzled.
Instead of asking IPs to express an opinion on whether the director “is a person whose conduct makes it appear to you that he is unfit” – because the Service believes that this can delay submission of the form, as the IP takes time to gather evidence – it proposes to ask IPs to provide “details of director behaviour which may indicate misconduct” (paragraph 209). From what I can gather, it seems there will be a tick-box list of behaviours that may indicate misconduct. But IPs will still be working on the basis of evidence in ticking the boxes, won’t they? So all that will be removed is the need for the IP to decide whether a D-return or report is appropriate (the Service’s plan is to have only one form). In fact, it could be more burdensome to IPs, as currently they use their own judgment in deciding that an action or behaviour does not, or is unlikely to, cross the threshold of misconduct, which would lead them to submit a clean return, end of story. However, under the proposed system, it seems to me that the IP would tick the box regarding the particular behaviour and the Service would then have to decide whether it warranted further investigation. Would that help anyone?
I appreciate IPs’ reluctance in expressing an opinion on misconduct, but I suggest that the main rationale for dropping this requirement is that, as currently, the Service will make its own mind up anyway, so what does it matter what the IP thinks? However, what will be lost under the new system will be the IP acting as a first-level filter, which I guess achieves the Red Tape Challenge objective, but it seems unhelpful in the greater scheme of things.
And is this tick-box approach going to be an improvement? Although the Service has promised a free text box (woo hoo!), it all sounds a bit restrictive to me.
One promising proposed change is that the Service will pre-populate returns with information that is already available (presumably from RoC). Not only will this make IPs’ lives a little easier, but also the receipt of a pre-populated return may act as a useful prompt to complete the task.
BIS is pursuing its “Digital by Default vision” and so views are sought on whether electronic submission of D-returns could be mandatory. Although personally I think it would not be a huge leap for all IPs to do this – provided the return was a moveable document that could be worked on and passed around a number of people in the IP’s office before finalisation and submission – I dislike the suggestion that there would be no other way of complying with the legislation and I did have to laugh at the image of an IP typing up his D-return in a public library (paragraph 205)!
The Service is also proposing to change the deadline to 3 months, on the assumption that this would be doable if IPs were not required to express an opinion and on the basis that “all of the information required for completion of the return will be available to the office-holder within that reduced period in the vast majority of cases” (paragraph 212). I’m not so sure, particularly if the IP encounters resistance in retrieving books and records and if directors are slow in submitting completed questionnaires – and these likely will include the cases where some misconduct has gone on. The CD does not mention what an IP’s duty would be in relation to any discoveries after the 3 months, but presumably a professional IP will go to the expense of informing the Service of material findings. I realise that resources are stretched extraordinarily within the Investigations department, but I’m not convinced that this is the best way to tackle the issue.
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Well, I had intended to avoid prattling on for too long, but I think I failed! Hopefully, this is a reflection of the interest I have in the Service’s proposals: despite my criticisms, Insolvency Service, I am grateful for your efforts in seeking to improve things – thank you.
Oh dear, the Official Receiver cannot seem to get it right. In the first case, his swift handover of an appointment left the Trustee with outstanding costs and no bankruptcy, but in the second case, his delay in getting to grips with a new case that clearly warranted an IP’s appointment jeopardised the continuance of an action commenced by the Provisional Liquidators. Is this “a reflection of the enormous pressure on resources, both financial and human, under which the OR is working” (TAG Capital Ventures v Potter, paragraph 31)?
The circumstances of the Appleyard case were unique (as demonstrated by the fact that it revealed a previously unreported lacuna in the 1986 Rules) and therefore I do not think that they serve as an argument for an OR to delay passing a case to an IP. However, I would suggest that the TAG Capital Ventures case demonstrates a more obvious downside of such a delay. To ensure the most beneficial outcome for creditors, I would have thought that a swift review of each case as soon as it comes into the OR’s hands – to identify the cases that are more appropriate for IPs and to get those shifted asap – surely is the best way to work, particularly with limited resources, isn’t it? Of course, it’s easy to see what needs to be done, but not so easy to do it when one is fire-fighting and this may be a one-off, but such ‘endemic, notorious, delays’ surely warrant attention.
Appleyard v Wewelwala [2012] EWHC 3302 (Ch) (23 November 2012)
Summary: An unfortunate train of events left the Trustee in Bankruptcy with outstanding costs after the debtor’s bankruptcy was overturned on appeal. The judge’s view was that the Trustee had been “unjustly left out in the cold”; he decided that the debtor’s property should stand charged with payment of the Trustee’s costs incurred up to the point when he learned that the bankruptcy order had been set aside; and he recommended amendment to the Insolvency Rules to deal with this lacuna.
The Detail: The debtor appealed the bankruptcy order on the grounds that the petitioning creditor had unreasonably refused to accept her offer to make payments by instalments. On 14 December 2011, the court provided that the bankruptcy order be set aside and that the hearing of the petition be adjourned for twelve months on the debtor’s undertaking to pay instalments to the petitioner. The order made no provision for the Trustee’s release from office or for payment of his expenses. In fact, it may have been the case that the judge did not even know that a Trustee had been appointed.
Appleyard had been appointed Trustee by the Secretary of State – the Official Receiver believing, correctly at the time, that the debtor had been refused permission to appeal. Appleyard had not been notified of the hearing – there is no provision in statute or the CPR requiring him to be notified – and he only learned of the setting aside of the bankruptcy order when the debtor telephoned him in January 2012. The Trustee had progressed the case in the usual manner, incurring costs of some £6,500.
Mr Justice Briggs felt that, as the Trustee was simply doing his job, there was no reason in principle why the Trustee’s expenses – up to the point when he learned of the successful appeal – should not be paid. In considering from whom those expenses ought to be paid, Briggs J drew on the judgment in Butterworth v Soutter, an annulment case: if the ground for annulment was where the order ought not to have been made (S282(1)(a)), then “there must be strong argument for saying that the petitioning creditor should pay the trustee’s costs” (paragraph 25), but if it were on the ground of payment/securing of the bankruptcy debts, then there is strong argument that the bankrupt should pay. This, and the decision in Thornhill v Atherton, led Briggs J to conclude that “Mr Appleyard’s right as trustee to recover his expenses, having acted entirely properly and innocently at least until January 2012, must prevail over Mrs Wewelwala’s right to enjoy to the full her estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. This is so even if, as between her and Davenham [the petitioner], it may be Davenham which was largely to blame for the circumstances leading to those expenses being innocently incurred… I do not think that it would be right to make an order against her personally, since this is more than Mr Appleyard would have been entitled to, had he remained her trustee. Nonetheless I should direct that her property… stand charged with payment of Mr Appleyard’s reasonable expenses down to January 2012, leaving him to obtain execution in that respect in such manner as he should think fit, in the absence of agreement with Mrs Wewelwala” (paragraphs 32 and 33). The judge left it open to the debtor whether she might challenge the reasonableness of the Trustee’s fees and/or to pursue a claim for compensation against the petitioner.
However, in relation to the Trustee’s costs incurred after he had learned of the setting aside, Briggs J “reached the opposite conclusion”. It seemed to him “that he [the Trustee] should have incurred no further expense without first applying to the court for directions” (paragraph 34).
Briggs J concluded: “it is most unfortunate that it was not appreciated by either of the parties to Mrs Wewelwala’s appeal last December that Mr Appleyard’s expenses need to be addressed. A trustee in bankruptcy’s expenses are as important a matter to be dealt with on an appeal against a bankruptcy order heard after his appointment, as they are in any application for rescission or for annulment. To the extent that the Insolvency Rules fail to make this clear, consideration should be given to their amendment, or to the issue of an appropriate practice direction. In any event, it is to be hoped that the reporting of this judgment may draw this aspect of bankruptcy practice and procedure to the attention of litigants and their professional advisors” (paragraph 37).
TAG Capital Ventures Limited v Potter [2012] EWHC 3323 (Ch) (23 November 2012)
Summary: The fact that the Official Receiver had not been in a position to continue an action commenced by Provisional Liquidators and a four month delay were insufficient to conclude that continuance of the action would amount to an abuse of process of the court or to discharge a freezing order made at the outset of the action.
The Detail: Immediately following their appointment, the Provisional Liquidators applied for a freezing order against director, Potter, and commenced an action against him. A trial timetable was agreed, although neither party complied with disclosure.
Hot on the heels of the OR’s appointment as Liquidator on 25 June 2012, Potter’s solicitors asked the OR about his intentions with regard to the action. They asked again on 3 October and received the response: “Based on the information we have, and the fact that the provisional liquidators have not provided the records to date, the Official Receiver is not in a position to continue this action”.
Around the same time, the OR sent a report to creditors confirming that he did not intend calling a meeting of creditors. Shortly on receipt of this report, on 5 October, the petitioners’ solicitors contacted the OR’s office and put in train the process to have one of the former Provisional Liquidators appointed as Liquidator by the Secretary of State.
On 8 October, the date for filing the pre-trial questionnaire, Potter’s solicitors notified the OR’s office that failure to discontinue the proceedings would result in their client’s own application to have the proceedings struck out. No response was received and thus the application was made.
The IP was appointed Liquidator on 23 October and was now keen on continuing the action.
Mr Justice Warren commented that, without the OR’s statement on 4 October that he was “not in a position to continue this action”, Potter’s application would be “hopeless” (paragraph 37) and that the evidence (emails between the OR and the IP) suggested that up until the end of September “the OR had made no decision at all, a fact consistent with the suggestion made by Mr Wolman [for the claimant] that there are endemic, and he would say notorious, delays within the OR’s office” (paragraph 39). The judge suggested that, even if the conclusion were that on 4 October the Company did not intend to intend to pursue the action (a conclusion on which the judge cast significant doubt), it would be “an entirely disproportionate response” to strike out the action (paragraph 45).
In considering whether any delay in progressing the action supported the discharge of the freezing order, Warren J took no account of any delay prior to the appointment of the OR, as the Company was not in a position to act prior to this point. He also stated that “the OR must, on any footing, have been given a reasonable time after his appointment in which to consider his position in relation to the proceedings. I do not say that in all cases involving an insolvent company as claimant that a defendant simply has to accept the delays caused by the insolvency process. But in the present case, Mr Potter was the controlling mind and owner of the Company and ultimately responsible in practical terms for its demise… It would be wrong, I think, for Mr Potter to be able to rely on delay resulting from the orderly implementation of an insolvency process in order to obtain the discharge of the freezing order” (paragraph 48).
However, Warren J did observe that there seemed to be a delay over and above the “proper time for those matters” of some two months and that it may have been reasonable to expect the OR to have decided in July that, in view of the existing litigation, it would have been appropriate to hand the case to an IP, but nevertheless this small delay did not warrant the discharge of the freezing order.
The judgment includes details of exchanges between the OR’s office and the Provisional Liquidators, which demonstrate that there was no constructive dialogue between these parties throughout the OR’s term of office (which was not entirely due to delays by the OR) and leaves me wondering why the OR did not conclude swiftly on his appointment that an IP should be appointed (particularly given this case’s profile) or, failing this, why it took over three months for him to issue a Notice of No Meeting to creditors.
Insolvency Oracle 