Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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SIP16 and the Pool: Great Expectations as yet Unrealised?

I think we’ve all shared in the pain of SIP16 compliance. We’ve tried really hard, haven’t we? So why is it that the wholly-compliant rate dropped from 87% in 2015 to 62% last year? Where are we going wrong?

In this blog, I air my suspicions about the stats, not only on SIP16 compliance, but also on the changing profile of pre-packs and the role of the Pool, as presented in the Insolvency Service’s and the Pre Pack Pool’s 2016 Reviews. Yes, I know I’m a little late on this story (I blame the 2016 Rules!).

The Insolvency Service’s 2016 Review of IP Regulation can be found at: https://goo.gl/Jkwz19

The Pre Pack Pool’s 2016 Review is at: https://goo.gl/fPEXTe

 

SIP16 Compliance Rates Fall Back to Square One

There has been a significant drop in the reported rate of SIP16 compliance – at 62% of 2016’s SIP16 statements considered wholly compliant, it is the lowest annual rate on record (note: several years are estimates because not all SIP16 statements received were compliance-reviewed):

Why is this? It’s true that it takes time to adapt to a new SIP and this is bound to hit compliance, but is this the whole story? Or has the shift of the job of reviewing SIP16s from the Insolvency Service to the RPBs introduced an element of inconsistency into the process?

Let’s drill down into the overall compliance rate of 62% to see how the rate varies from RPB to RPB:

As you can see, the rates range from ICAS’ 100% of SIP16 statements wholly compliant to the ICAEW’s 39%.

I consider it highly unlikely that ICAEW-licensed IPs are in reality far worse at complying with SIP16 than other IPs, so this indicates strongly to me that there is a great diversity in the standards being applied. Given that the ICAEW reviewed 54% of all SIP16s received last year, it’s not surprising that the overall compliance dropped from 2015’s 87% to 62%.

The Insolvency Service’s Review does not help us to understand what might be behind the non-compliances, although it gives us some comfort. It states: “for the vast majority of non-compliant statements, the breach was not deemed to be serious and was merely of a technical nature”.

The ICAEW has published some feedback on their reviewing (Feb 2017, available to their Insolvency & Restructuring Group members at https://goo.gl/YkExP7), which suggests that the following have been lacking in some cases:

  • An explanation of the pre- and post-appointment roles of the IP (the ICAEW acknowledges that SIP16 does not strictly require this explanation in the SIP16 Statement, but it needs to be delivered to creditors and directors somewhere);
  • An explanation of why no requests were made to potential funders to fund working capital (even if in some cases, it is obvious);
  • If the business has not been marketed on the internet, an explanation why not (even if the nature of the business makes this obvious);
  • An explanation of the reasons underpinning the marketing strategy (whereas some appear to have simply provided a list of what marketing has been done);
  • An explanation of the reasons behind the length of time of the marketing (even if there were obviously financial pressures that limited this);
  • The date of the initial introduction – not simply “in December 2016”;
  • An explanation of the rationale behind the basis/bases of valuations (helpfully, the ICAEW give a clear steer on what they expect: “where you have obtained going concern and forced sale valuations, tell [creditors] that you’ve obtained valuations on both bases as you’re seeking to understand whether realisations will be maximised by breaking up the business and selling the assets on a piecemeal basis or whether it’s better to try to find a buyer for the business as a going concern”);
  • If goodwill is valued, an explanation and basis for the valuation provided; and
  • An explanation of the method by which consideration was allocated to different asset classes.

Given the prevalence of some apparent failures to state the bleedin’ obvious, perhaps other RPB reviewers are measuring compliance against a different list of tick-boxes.

 

The Shifting Profile of Pre-Packs

Probably the main difference between the old and the new SIP16 was the introduction of the “marketing essentials”, with the clear message that an absence of marketing should most definitely be the exception. Has the new SIP16 pushed up the frequency of marketing?

I certainly think that the SIP16 pressure has influenced attitudes towards marketing, as this graph indicates. Even in cases where the offer on the table looks too good to beat, I suspect that many view some marketing effort as essential to shield one from criticism. I doubt that safety-blanket marketing in these cases increases realisations and it will increase costs, but if it answers the sceptics’ questions about possible undervalue sales, then it seems to have everyone’s blessing.

Then again, perhaps I am being unfair: is it merely coincidental that the graph above shows that, as the frequency of marketing has increased, the prevalence of connected party purchasers has taken a dive? Could it be that increased marketing has widened the pool of potential purchasers, resulting in more occasions when connected interested parties lose out to the competition?

I am surprised that no one (as far as I have seen) has connected these two trends with this simple cause-and-effect explanation. Rather, perhaps I am not the only person who suspects that the fall in the number of connected purchasers is more a consequence of the new SIP16 pressures on connected party pre-packs, including the pressure to apply to the pre-pack pool. As revealed in its 2016 Review, the Pre Pack Pool is evidently of this view:

“It may be that the introduction of the Pool and the wider post-Graham reforms have deterred some connected party pre-packs from being proposed in the first place.”

But what has replaced these pre-packs? Are connected party sales avoiding the SIP16 obstacles altogether?

Perhaps hurdles are being overcome by having connected party sales accompany liquidations instead of Administrations. Well, I was surprised to discover that the numbers of Gazette notices for S216 re-use of a prohibited name do not follow a trend suggesting more sales in liquidation:

So could it be that Administration sales are being shifted out of the pre-pack definition either by being completed before Administration or perhaps negotiations are not starting until after appointment? This doesn’t ring true either: SIP16 statements as a percentage of the total number of Administrations has been fairly steady since the introduction of the Pool (2015: 29%; 2016: 24%):

* The SIP16 review actually covered 14 months, but for the purpose of this graph the number has been pro rated for 12 months.

Although the number of Administrations continues to fall, I find this picture encouraging: at least the SIP16 and Pool pressure does not seem to be persuading people to find ways around the measures. Pre-packs have a role and it seems that IPs are sticking with them.

 

Is the Pre Pack Pool making its mark?

In light of the second-hand warnings I’ve heard over the past years about how strongly the Insolvency Service feels about the need for IPs to embrace the Pool, I found the Service’s annual review surprisingly dead-pan. In contrast, the ICAEW’s release on the subject stated that the number of referrals to the pool was “disappointingly low”.

However, the ICAEW was relatively subtle about IPs’ role in the referral process: “the aim of the pool is to increase transparency and confidence around prepacks and low level use of the pool is unlikely to achieve that. We know you can’t compel a connected party to approach the pool but encouraging them to do so supports the overall aim of the pool”. I found the Pre Pack Pool less subtle: “the insolvency profession and creditors have important roles to play in ensuring connected party purchasers are informed of the option to use the Pool and putting pressure on them to do so”. How does the Pool expect IPs to “put pressure” on potential purchasers, I wonder.

The Pool also acknowledges that “creditor awareness of the Pool has been low and few have taken the time to read through administrators’ reports”. On the other hand, they report that “those connected party purchasers who have used the Pool have said it has been an important step in building credibility and trust in the ‘NewCo’ among creditors”. The Pool’s Review does not elaborate, but there are some interesting quotes in an article written by Stuart Hopewell, director of Pre Pack Pool Limited, and David Kerr, IPA’s Chief Executive, for Credit Magazine in November 2016 (www.insolvency-practitioners.org.uk/download/documents/1467).

As shown on one of the graphs above, 13% of all pre-packs were referred to the Pool. This represents 28% of all connected party pre-packs. Personally, I’m surprised it was that many! My personal view is that those who find this uptake disappointingly low had unrealistic expectations.

 

The Performance of the Pool

Given that referral to the Pool is voluntary, personally I wasn’t expecting any negative decisions to emerge. After all, if you didn’t have to sit an exam, you wouldn’t do so unless you were certain of passing it, would you? I was wrong…

The breakdown of the Pool’s opinions over the 14 months to the end of 2016 is as follows:

  • 34 referrals: the case for the pre-pack is “not unreasonable”
  • 13 referrals: the case is “not unreasonable but there are minor limitations in the evidence provided”
  • 6 referrals (although 4 were a group of connected companies): the case for the pre-pack is “not made”

I appreciate that the Pool doesn’t want to give away its secrets, but unfortunately the Review gives nothing away about what factors tipped the balance or indeed how they measure a good pre-pack from the bad. The author ends the Review by stating that “hopefully referrals to the Pool will increase in 2017 as stakeholders become more familiar with the way it works and the reassurance it provides”, but without more feedback than simple statistics I cannot see this happening.

 

The Future of Pre-Packs

As we know, the Small Business Act included a reserve power to legislate the operation of pre-packs, with a sunset clause ending in May 2020. The Service’s Review continued its dead-pan mood, simply stating that they would carry out an evaluation “in due course”.

The Pool seemed barely more enthusiastic, simply stating in its Review that “it would be a shame to lose” pre-packs.

 

The Future of the Pool?

Back in May, the Times reported (https://goo.gl/QRcVZc) that Frank Field, Labour MP and Chair of the House of Commons’ Work & Pensions Select Committee, found the number of referrals to the Pool “deeply worrying” and he raised the prospect of the Committee scrutinising the Pool after the election. Sir Vince Cable also said that the number of referrals raised “worrying questions” and said that moves should be made towards making Pool referrals mandatory.

The Pre Pack Pool may be contemplating how to enlarge its role, but not necessarily with mandatory pre-pack referrals in mind. In the Credit Magazine article mentioned earlier (www.insolvency-practitioners.org.uk/download/documents/1467), Stuart Hopewell and David Kerr considered the extension of the Pool’s remit in the context of the revision of SIP13, suggesting “perhaps there is a role for the Pool to represent [creditors’] interests in all connected sale situations?” Although I continue to be concerned that much of the media outrage at connected party sales is levelled at the liquidation equivalents of pre-packs, surely the Pool must first provide convincing evidence that it is achieving the objective for which it was created before we seek to cast its net farther afield.

Are we to conclude that Hopewell/Kerr’s perception is that SIP13 sales to connected parties is an issue and having an independent review will regulate these sales?  I am not aware of any research into whether Liquidation connected party sales need regulating, so it would seem again that the tide is pulling us to tackle perceptions. Considering that the regulatory objectives include “promoting that maximisation of the value of returns to creditors” and encouraging IPs to provide “high quality services at a cost to the recipient which is fair and reasonable”, I struggle to see how these objectives are met by contributing further to this expensive over-regulated PR exercise.

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More little gems from the Insolvency Service’s blog

As promised in my last blog (but later than planned – sorry), here is my second selection of news from the Insolvency Service’s blog and Dear IP 76 that I think is worthy of spreading… with some further commentary from me, of course.

The questions fall into the following topics:

  • S100 Decisions
  • Other Decision Processes
  • Timing Issues

As I mentioned previously, I am very pleased that the Insolvency Service has shared their views on many issues and I do hope they will continue to be this open. I would also like to thank the technical and compliance managers and consultants with whom I have spent many hours debating the rules; without these valuable exchanges, many of the issues would not have occurred to me.

 

S100 Decisions

  • Can the Statement of Affairs and SIP6 Report be delivered by website?

As the director is responsible for delivering the Statement of Affairs, it is the Insolvency Service’s view that the Statement cannot be delivered by means of a website, as the rules governing website delivery – Rs 1.49 and 1.50 – only apply to office holders. Therefore, the Statement must be either posted or emailed to creditors.

Of course, delivery of the SIP6 report is not a statutory requirement and strictly-speaking SIP6 simply requires the report to “ordinarily be available”. I understand that at least one RPB is content for the SIP6 report to be made available via a website.

  • Does an invitation to decide on whether to form a committee need to be sent along with the S100 proposed decision notice?

The question arises because R6.19 requires such an invitation where any decision is sought from creditors in a CVL, whereas usually the company is not in CVL when the S100 proposed decision notice is signed.

The Insolvency Service has answered “yes”, the director needs to seek a decision from creditors on whether to form a committee when they propose the S100 appointment.

  • Can the SoA/S100 fee be approved via deemed consent?

In view of the Insolvency Service’s approach to IPs’ fees in general, the answer to this might seem an obvious “no”. However, the background to the query was that the rules require creditors to approve the payment of the fee, not its quantum, and therefore it is not quite so obviously “a decision about the remuneration of any person”, which the Act limits to decision procedures, i.e. not including the deemed consent process.

But unsurprisingly the Service answered: “no”.

This has led some people to rethink their process of getting paid the SoA/S100 fee. We have been receiving quite a few questions on whether such fees need approval if they are paid pre-appointment and/or by a third party.

The Insolvency Service has confirmed that R6.7(5) – which requires approval of payments made to the liquidator or an associate – applies to payments referred to in R6.7(4), i.e. those made by the liquidator. R6.7(3) provides that, where payment is made from the company’s assets before the winding-up resolution, the director must provide information on the payment along with the SoA, but they do not require creditor approval.

  • Does R15.11’s timescale for decisions on the liquidator’s remuneration (when made at the same time as the S100 decision on the liquidator) apply also to decisions on the SoA/S100 fee?

R15.11 provides that at least 3 business days’ notice must be given for S100 proposed decisions on the liquidator. This rule also provides that the same timescale applies to “any decision made at the same time on the liquidator’s remuneration”. It stands to reason that, if a virtual meeting were convened to consider a decision on the SoA/S100 fee at the same time as the decision on the liquidator, the same notice requirements would apply, but does the SoA/S100 fee strictly fall under “the liquidator’s remuneration”?

The Insolvency Service has stated that R15.11 should be taken to include the proposed pre-liquidation payments referred to in R6.7(5).

 

Other Decision Processes

  • What access information needs to be provided on a notice summoning a virtual meeting?

This question arises from the requirement of R15.5 that the notice to creditors must contain “any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”.

The Insolvency Service has answered: “we think that sending a contact number or email address for creditors to contact in order to obtain such details is also acceptable under this rule”.

Personally, I am pleased with this answer, as I think it makes the logistics of virtual meetings far more manageable. It almost eliminates the risk of unknown “excluded persons”, as you would know who is planning to attend. You could also set up ways of verifying who participants are; you could contact them beforehand, maybe send them agendas and meeting packs. Also during the meeting if they get cut off, you would have a ready alternative contact for them, and it would be easier to count votes or set participants up with electronic voting. I don’t think that some kind of pre-meeting contact is too much to ask from creditors; to illustrate, if I want to sign up to an open-access webinar, I think nothing of contacting the convener beforehand in order for a link to be sent to me.

  • Can creditors ask upfront for an Administrator’s Para 52(1) Proposals to be considered at a physical meeting?

As we know, when Administrators include a Para 52(1) Statement in their Proposals, they do not ask creditors to vote on whether to approve the Proposals, but they must start a decision process going if the requisite number of creditors ask for a decision within 8 business days of delivery of the Proposals. Para 52(2) makes it clear that the request from creditors is for a decision, not a meeting as was the case before the Small Business Act. However, R15.6(1) states that “a request for a physical meeting may be made before or after the notice of the decision procedure or deemed consent procedure has been delivered”. Therefore, if the consequence of creditors asking for a Para 52(2) decision is that the Administrator issues a notice of decision procedure (say, a correspondence vote on the Proposals), then this rule seems to allow creditors to ask for a physical meeting before this notice is delivered.

The Insolvency Service has confirmed that this is the case: “there is no reason that the requisitioning creditor should not at the same time request a physical meeting. We note your comment that the request for a physical meeting is being made here before a decision process has even commenced, but we think that is it reasonable to interpret the rules this way on this occasion because the request does clearly relate to a decision”.

  • Ok, so does a creditor asking for a physical meeting to consider the Para 52(1) Proposals need to pay a deposit to cover the costs of this meeting?

R15.6 sets out how creditors’ requests for a physical meeting should be handled. It includes no reference to paying a deposit to cover the costs of the meeting. Mention of paying a deposit appears at R15.18, which relates to requisitioning decisions.

Therefore, quite rightly (albeit unfairly) in my view, the Insolvency Service has stated that “it would follow that where costs of the decision are met by the requisitioning creditor then these would be for a decision which is not made by a physical meeting. Any costs of the physical meeting over and above the security paid by the creditor for a decision process would be an expense to the estate”.

Thus, it would seem that, on receiving sufficient requests for a physical meeting to be summoned to consider Para 52(1) Proposals, the Administrator would need to calculate hypothetically how much it would cost to organise this via a non-physical-meeting procedure and ask the requisitioning creditor for this sum. As the rules require “itemised details” of this sum to be delivered to the creditor, this would take some explaining in order to put the creditor’s mind at ease that we weren’t ignoring their request for a physical meeting even though we were asking them to pay the costs for conducting, say, a correspondence vote!

  • Does a creditor need to lodge a proof of debt in support of a request for a physical meeting?

The Insolvency Service’s simple answer is “no”. This is what I thought when I read the rules, but it does seem odd… and could lead to all sorts of controversy.

  • Can approval for an Administration extension be sought by deemed consent?

Understandably I think, the Insolvency Service has answered “yes”. It almost goes without saying, however, that seeking secured creditors’ consents is not a decision process; the positive approval of each and every secured creditor is required (just thought I’d mention it).

  • How do you deal with the need to invite creditors to make a decision on whether to form a committee when seeking a decision by deemed consent?

The Insolvency Service has confirmed that this committee decision can be posed by deemed consent.

Via Dear IP 76, the Service also endorses the format of a proposed decision in the negative, i.e. that a committee shall not be formed… although it adds a sticky proviso: “in this way, if creditors have already indicated a lack of desire to appoint a committee, the office holder could simply propose that no committee be formed”. How do creditors indicate a lack of desire? In S100 CVLs, this seems straightforward enough in view of the fact that, as mentioned above, the director will have needed to invite such a decision in the first place. However, whether an absence of anything but the usual creditor concerns in, say, the first few weeks of an Administration is sufficient to indicate a lack of desire to satisfy the Service, I don’t know.

What is the alternative: that a positive deemed consent decision be posed, i.e. that a committee will be formed? The problem here is that, unless creditors object, then this decision will be made by default. In the light of probable creditor apathy, this could be unhelpful. Therefore, if a positive deemed consent decision is posed, it would seem necessary to describe it something like “a committee will be formed if there are sufficient creditors nominated by [date] and willing to act as members”, which to be fair is almost the wording set out in the Rules (e.g. R10.76). In this way, if the invitation for nominations is similarly ignored, then the positive decision, even if technically made, is of no effect.

However, it’s all a bit of a faff, isn’t it? It hardly makes for a Plain English process. I also dislike the idea that an office holder must propose a decision that he/she may not support. It doesn’t sit right with me for an IP to invite creditors to approve a decision to form a committee when the IP does not see the need or advantage in having one on the case in hand.   However an IP words the proposed decision, creditors can take action to appoint a committee and, as the Rules do not prescribe a form of words, then surely office holders are free to propose a decision as they see fit.

  • If a Notice of General Use of Website has already been issued, what is the effect of Rs3.54(3/4), 2.25(6/7) and 8.22(4/5), which require additional wording about website-delivery in certain circumstances?

This question requires some explaining. As we know, R1.50 provides that the office holder can send one notice to creditors informing them that all future circulars (with a few statutory exceptions) will be posted onto a website with no further notice to them – this is what I mean by a Notice of General Use of Website. However, we also have R1.49, which repeats the 2010 provision that each new circular can be delivered by posting out a one-pager notifying creditors that the specific document has been uploaded to a website.

Things get complicated when looking at Rs3.54, 2.25 and 8.22. These rules govern how we invite creditors to decide on an Administration extension and a CVA/IVA Proposal. They state that the notice regarding such a decision may also state that the outcome of the decision will be made available for viewing and downloading on a website and that no other notice will be delivered to creditors and these rules go on to specify additional contents of such a notice, which draw from R1.49.

So the question arises: if you have already given notice under R1.50 to confirm that a website is going to be used for (almost) everything, do you need this extra gumpf?

The Insolvency Service has clarified that you don’t. If you have already followed (or are following simultaneously) the R1.50 process, then you need not worry about adding such references to your R3.54/2.25/8.22 notices; you can simply issue the notice via the website and then issue the outcome via the website also. Of course, given that you’re inviting creditors to consider an important decision, you might also want to post something out to them, but this does not appear necessary under the rules.

 

Timing Issues

  • If an Administration has already been extended pre-April 2017, when should I next produce a progress report?

As covered in a previous blog, the issue here is that, before April 2017, an extension would have resulted in the reporting schedule moving away from 6-monthly from the date of appointment and instead it will be 6-monthly from the date of the progress report that accompanied the request to approve the extension. As drafted, the 2016 Rules had not provided a carve-out for these cases, so it seemed that the reporting schedule for these extended Admins would be reset on 6 April back to 6-monthly from the date of appointment.

An attempt was made to fix this in the Amendment Rules, but in my view it was not wholly successful. They state: “Where rules 18.6, 18.7 or 18.8 prescribe the periods for which progress reports must be made but before the commencement date an office-holder has ceased to act resulting in a change in reporting period under 1986 rule 2.47(3A), 2.47(3B) 4.49B(5), 4.49C(3), or 6.78A(4), the period for which reports must be made is the period for which reports were required to be made under the 1986 Rules immediately before the commencement date.” The intention is clear: where the 1986 Rules have moved a reporting schedule away from the date of appointment, this adjusted schedule should continue. However, the reference to an IP ceasing to act is unfortunate, because in the scenario described above, this has not happened.

The Insolvency Service acknowledged that this rule “could perhaps have been more explicit” (ahem, I think the problem is that it was too explicit), but emphasised that the intention is clear. Presumably therefore the Registrar of Companies will not reject filings made on the extended 6-monthly schedule.

Also, just in case you haven’t already picked it up, I should mention that the Amendment Rules have most definitely fixed the issue I raised some months ago about the length of a month, so progress reporting now continues pretty-much in the pre-April way… although of course we now have to factor in the time taken to deliver reports.

  • Do Administrators’ Proposals really have to include a delivery date?

Sorry, this is more just me having a whinge: R3.35(1)(e) requires Administrators’ Proposals to state the date that the Proposals “are delivered” to creditors. When the Proposals are signed off, this will be a date in the future.

The Insolvency Service has confirmed that this is the case: they require the future “deemed” delivery date to be listed.

Of course, there are practical issues with this. If you deliver Proposals using more than one method, e.g. by R1.50 general website-delivery but also by post where some creditors have asked for hard copies (which admittedly will be rare), then you may well have more than one delivery date.

More practically, how will you/your staff complete this little nugget? It is commonplace for Proposals to go through lengthy drafting processes (despite some non-appointment taking IPs’ views that Proposals should be simple to produce in the first few days especially where there has been a pre-pack); drafts are turned over to several different people, being edited as they go. It is going to be a real faff to keep an eye on this insignificant date. My personal recommendation, if the issue date cannot be guaranteed at the outset, is to keep this delivery date coloured/highlighted on draft Proposals so that it is the very last item completed just before the Proposals are signed off.

  • Do you have to wait until the MVL final account has been delivered to members before submitting a copy to the Registrar of Companies?

When closing an MVL, the liquidator is required to confirm to the Registrar that s/he “has delivered” the final account to members (R5.10(3)).

The Insolvency Service does not believe that the liquidator has to wait until the final account has been “delivered” to members at this stage; it is sufficient that the liquidator has sent it. From what I can decipher, it seems they are viewing delivery here as “deemed” delivery, i.e. once it has left your office, it will end up being delivered a couple of days’ later (if sent by post).   Personally, I still think it is odd to confirm at this point that the final account has been delivered, but at least we have an answer for any pedant who wants to debate this.

  • Do you have to wait until the Notice of Establishment of the Committee is delivered to the Registrar/Court before holding the first Committee meeting?

Despite the paradoxical “no” for the previous question, the answer to this one is “yes”.

The issue arises because R17.5(5) states that “the committee is not established (and accordingly cannot act) until the office-holder has delivered a notice of its membership” to the Registrar/Court.   The Insolvency Service has confirmed that, yes, the notice must be delivered before the first meeting is held.

The frustration here, of course, is that we will no longer be able to hold the first committee meeting immediately after any meeting that establishes it, but because the rules require us to hold a first meeting (although this can be by remote attendance), we will have to call the committee members back again.

Personally, I wonder if practically it would still be valuable to hold an informal meeting with the (elected) committee members immediately – so that matters for investigation can be discussed and so that you can help them understand how committees work, maybe even discuss the office-holder’s fee proposal with a view to agreeing this later on – and then, hopefully, the actual first meeting will be little more than a formality.

 

The next instalment..?

As we apply the new rules in practice, I am sure that more issues and ambiguities will emerge. As I mentioned previously, I am grateful to the Insolvency Service for their openness.

Emerging interpretations and views force me to revisit my previous conclusions, which is a good thing, although I am very conscious that earlier blog posts and presentations quickly become out-of-date. Even my presentation for the R3 SPG Technical Review at the end of March needed an update and this is now available to Compliance Alliance webinar subscribers (drop me a line – info@thecompliancealliance.co.uk– if you want to know more 😉 ).

I am also looking forward (err… sort-of!) to presenting on the rules at other R3 events – 6 June SPG Technical Review in Leeds; 7 June Southern Region meeting in Reading; 28 June North East Region meeting; and 4 July SPG Technical Review in Bristol. I welcome your queries and quirky observations on the rules, which will help me to make my presentations useful to the audience. I’m sure there are many more gems to unearth.


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Annual review: IPs, complaints and visits down, but sanctions up

The Insolvency Service’s 2016 Review of IP Regulation always makes for interesting reading. This year, the headlines include:

  • The number of IPs falls again
  • Regulatory sanctions generally increase and for one RPB in particular
  • Complaints handled by the RPBs drop by 28%… although 17% of all complaints seem to be held in the Gateway
  • Apparent missing of the mark for 3-yearly visits
  • Current regulatory priorities include IVAs and fees, whereas routine monitoring appears less popular

The report can be found at https://goo.gl/Jkwz19.

 

IP number falls again

The Review reveals another drop in the number of appointment-taking IPs. In fact, there was the same number on 1 January 2017 as there was on the same day in 2009: 1,303.

Is it a surprise that the number of appointment-taking IPs has dropped again? The 2016 insolvency statistics show modest increases in the numbers of CVLs and IVAs compared with 2015 and of course there was a bumper crop of MVLs in early 2016. Why is it that fewer IPs seem to be responsible for more cases?

My hunch is that the complexity of cases in general is decreasing and I suspect that the additional hurdles put in place as regards fees have encouraged IPs to look at efficiencies, to create slicker processes, and to be more risk-averse, less inclined to go out on a limb with the result that some cases are despatched more swiftly and require less IP input.

I also suspect the IP number for next January will show another drop. The expense and effort to adapt to the 2016 Rules will make some think again, won’t it?

Does the presence of the regulators breathing down one’s neck erode IPs’ keenness to remain in the profession? How worried should IPs be about the risk of a regulatory sanction?

 

Regulatory actions on the increase

The RPBs seem to have shown varying degrees of enthusiasm when it comes to taking regulatory action.

To me, this hints at regulatory scrutiny of a different kind. Is it coincidental that the ACCA issued proportionately far more sanctions than any other RPB last year? Could the Insolvency Service’s repeated monitoring visits to the ACCA over 2015 and 2016 have had anything to do with this spike?

What are behind these sanctions? Are they generated from the RPBs’ monitoring visits or from complaints?

 

Monitoring v complaints sanctions return to normality

Last year, I observed that for the first time RPBs’ investigations into complaints had generated more sanctions than their monitoring visits. Regulatory actions in 2016 returned to a more typical pattern.

Does this reflect a shifting RPB behaviour or is it more a result of the number of complaints received and/or the number of monitoring visits undertaken?

 

Dramatic fall in complaints

Well, no wonder there were fewer disciplinary actions on the back of complaints: the RPBs received 28% fewer complaints in 2016 than they did in 2015.

Why is this? Is it because fewer complaints were made? Undoubtedly, IVAs have generated a flood of complaints in recent years not least because of the issues surrounding ownership of PPI claims, but those issues were still live in 2016, weren’t they?

Perhaps we can explore this by looking at the complaint profile by case type:

Yes, it looks like IVAs continued to be contentious last year, although perhaps the worst is over. It seems, however, that the most significant drop has been felt in complaints relating to bankruptcies and liquidations. The reduction in bankruptcy complaints is understandable, as the numbers of bankruptcies have dropped enormously over the past few years, but liquidation numbers have kept reasonably steady, so I am not sure what is going on there.

But are fewer people really complaining or is there something else behind these figures?

 

An effective Complaints Gateway sift?

When the Complaints Gateway was set up in 2014, it was acknowledged that the Insolvency Service would ensure that complaints met some simple criteria before they were referred to the RPBs. There must be an indication of a breach of legislation, SIP or the Code of Ethics and the allegations should be capable of being supported with evidence. Where this is not immediately apparent, the Service seeks additional information from the complainant.

The graphs above are based on the complaints referred to the RPBs, so what is the picture as regards complaints received before the sifting process occurs?

This shows that the Complaints Gateway sifted out more complaints last year: the percentage rejected rose from 25% in 2014, to 27% in 2015, to 29% in 2016.

The Insolvency Service’s review explains that in 2016 a new criterion was added: “Complainants are now required in the vast majority of cases to have raised the matter of concern with the insolvency practitioner in the first instance before the complaint will be considered by the Gateway”. This is a welcome development, but it did not affect the numbers much: it resulted in only 13 complaints being turned away for this reason.

But this rejected pile is not the whole story. The graph also demonstrates that a significant number of complaints – 144 (17%) – were neither rejected nor referred last year, which is a much larger proportion than previous years.   Presumably these complaints are being held pending further exchanges between the Service and the complainant. Personally, I am comforted by this demonstration of the Service’s diligence in managing the Gateway, but I hope that this does not hint at a system that is beginning to get snarled up.

 

How many complaints led to sanctions?

When I looked at the Insolvency Service’s review last year, I noted that the IPA’s sanctions record appeared out of kilter to the other RPBs. It is interesting to note that 2016 appears to have been a more “normal” year for the IPA, but instead the ACCA seems to have had an exceptional year. As mentioned above, I wonder if the Insolvency Service’s focus on the ACCA has had anything to do with this unusual activity (I appreciate that 2010 was another exceptional year… and I wonder if the fact that 2010 was the year that the Insolvency Service got heavy with its SIP16-reviewing exercise had anything to do with that particular flurry).

The obvious conclusion to draw from this graph might be that an ACCA-licensed IP has a 1 in 3 chance that any complaint will result in a sanction. However, perhaps these IPs can rest a little easier, given that the ACCA’s complaints-handling is now being dealt with by the IPA.

What about sanctions arising from monitoring visits? How do the RPBs compare on that front?

 

All but one RPB reported an increase in monitoring sanctions

These percentages look rather spectacular, don’t they? It gives the impression that on average almost one third of all monitoring visits result in some kind of negative outcome… and it appears that 90% of all the CAI’s monitoring visits gave rise to a negative outcome! Well, not quite. It is likely that some monitoring visits led to more than one black mark, say a plan for improvement and a targeted visit to review how those plans had been implemented.

Nevertheless, it is interesting to note that almost all RPBs recorded increases in the number of negative outcomes from monitoring visits over the previous year. I am not sure why the IPA seems to have bucked the trend. It will be interesting to see how the populations of ACCA and IPA-licensed IPs fare this year, as they are now being monitored and judged by the same teams and Committees.

 

How frequently are visits being undertaken?

The Principles for Monitoring, which forms part of a memorandum of understanding (“MoU”) between the Insolvency Service and the RPBs, state that the period between monitoring visits “is not expected to significantly exceed three years but may, where satisfactory risk assessment measures are employed, extend to a period not exceeding six years”. However, most if not all the RPBs publicise that their monitoring programmes are generally on a 3-yearly cycle.

The following graph shows that the RPBs are not quite meeting this timescale:

If we look at each RPB’s visits for the past 3 years as a percentage of their appointment-taking licence-holders, how far off the 100% mark were they..?

ICAEW’s missing of the mark is not surprising, given that they publicise that their IPs in the larger practices are on 6-year cycles. At the other end of the spectrum is the ACCA, which managed to visit all their IPs over the past 3 years and then some. However, as we know, the ACCA has relinquished its monitoring function to the IPA, so it seems unlikely that this will continue.

 

What is the future for monitoring visits?

The Insolvency Service’s 2015 review hinted that the days of the MoU may have been numbered. Their 2016 review strengthens this message:

“We propose to withdraw the MoU as soon as is reasonably feasible, subject to working through some final details”.

The review goes on to explain that the Service will be adding to their existing guidance (https://goo.gl/wDHElg). As it currently stands, prescriptive requirements such as the frequency of monitoring visits is conspicuously absent from this guidance. Instead, it is largely outcomes-based and reflects the Regulator’s Code to which the Insolvency Service itself is subject and that emphasises the targeting of monitoring resources where they should be most effective at addressing priority risks. The Service itself seems to be lightening up on its own monitoring visits: the review states that, having completed their round of full monitoring visits to the RPBs, they are now moving towards a number of risk based themed reviews. If this approach filters through to the RPBs’ monitoring visits, will we see a removal of the 3-yearly standard cycle?

 

Current priorities for the regulators

Does the 2016 review reveal any priorities for this year?

Not unsurprisingly, given one particularly high profile failure, IVAs feature heavily. The review refers to “general concerns around the volume IVA business model and developments in practice” and continues:

“The Insolvency Service is working with the profession to tackle some of these concerns; for example, through changes to guidance on monitoring and protections for client funds, and also a review of insurance arrangements. We are also engaging with stakeholder groups to better understand their concerns and how these may be tackled. We expect that this will be a key focus of our work for the coming year.”

Other projects mentioned in the review include:

  • Possible legislative changes to the bonding regime – consultation later this year;
  • Progression of the Insolvency Service’s recommendation that the RPBs introduce a compensation mechanism for complainants who have suffered inconvenience, loss or distress;
  • Publication of the Insolvency Service’s review into the RPBs’ monitoring and regulation processes, including consistency of outcomes, the extent of independence between the membership and regulatory functions, and the RPBs’ financial capabilities – report to be released within 12 months;
  • Progress on a review into the RPBs’ approach to the regulatory objective to encourage a profession which delivers services at a fair and reasonable cost, including how they are assessing compliance with the Oct-15 fee estimate regime – report to be released by the end of the year; and
  • A consultation on revisions to the Code of Ethics – expected in the spring.

 


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2017: it’s not all about the Rules

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A watched kettle never boils, so I’ll stop watching for the new Rules to land – having missed their “aim” of w/c 10/10/16, the Insolvency Service is now claiming that it was always their “plan” to have them issued this month – and instead I’ll shift my focus to what other delights the next year may bring.

 

A Review of the Bonding Regime

What do you think? Is the bonding regime fit for purpose? Does it really work as an effective protection?

The Government has issued a Call for Evidence to explore the weaknesses and reform possibilities of the bonding regime. The opportunity for submissions closes on 16 December 2016 and the Insolvency Service’s document can be found at: https://goo.gl/wiKc0K.

The document notes that the Insolvency Service has “seen evidence where the costs claimed by an insolvency practitioner in proving a bond claim are disproportionate to the loss suffered by the insolvent estate”, whilst the specific penalty bond premiums have increased for smaller firms by 200% in one year. No wonder there are questions over whether bonding is achieving its objective.

The Call for Evidence explores questions (albeit worded differently) such as:

  • Would a system similar to the legal profession’s arrangements for dealing with fraud and dishonesty work for insolvency?
  • Could a solution be a “claims management protocol” incorporating a panel of IPs to deal with bond claims and ways to limit cost?
  • Alternatively, perhaps the bonding regime should be abolished altogether?

 

Complaints-handling by the RPBs

In September, the Insolvency Service released a summary of its review into the RPBs’ complaints-handling processes.

The Service reported that “the introduction of Common Sanctions Guidance has improved transparency in decision-making but there is scope to ensure more consistency in the application of the guidance”. The Service’s answer is to work with the RPBs to make changes to the guidance.

Three other main recommendations emerged from the review:

 1.  The RPBs should ensure that information is sought from the IP, e.g. “if the complainant has not provided or is unable to provide evidence to support their complaint”, unless there is a justified reason not to do so (whatever that looks like).

The report explains that “the most common reasons for closing a complaint at the assessment stage are the complainant’s failure to respond to further enquiries or their inability to provide evidence to support their complaint”. The Service also reports that “the review identified that some cases had been closed which appeared to merit further investigation”. Thus, the Service is recommending that RPBs look to the IPs for the information and evidence.

The Service seems to be expecting the RPBs to conduct thorough investigations on receipt of nothing more than unsupported suspicions raised by parties who then go to ground as soon as they’re asked to explain or substantiate their allegations. The Service also seems to take no account of the costs to IPs in responding to RPB requests, which of course are not recoverable from the insolvent estates irrespective of whether the complaint is founded. Isn’t it about time that the Service stopped labouring onto IPs more and more expensive burdens whilst simultaneously pursuing the agenda that IPs’ fees need to be curbed?

2.  The RPBs should consider with the Service the feasibility of a regulatory mechanism whereby compensation can be paid by the IP to the complainant where they have suffered inconvenience, loss, or distress.

The Service is recommending this measure “to ensure fair treatment for complainants”, given that some RPBs (but see below) have a compensation mechanism, but others do not. But how often do the RPBs order compensation? This information is conspicuous by its absence from the report.

From the report, it seems that the ACCA is the only RPB with a formal compensation mechanism. In view of the fact that the ACCA is handing over its complaints-handling to the IPA with effect from 1 January 2017, surely the simplest way to make things “fair” to all complainants is to have no compensation mechanism, isn’t it?

I also do not understand the Service’s logic in arguing that compensation should be offered “where minor errors or mistakes have been made”, whilst accepting that “any such mechanism would not be a substitute for any legal remedies available to individual complainants through the Courts”. Next thing we know the Service will be expecting the RPBs to decide whether fees are excessive on fairly straightforward cases, whilst accepting that decisions on really meaty fees should remain with the courts. Oh hang on a minute…

Unfortunately, the IPA is making it easy for the Service to push its agenda: the report mentions that the IPA intends to introduce a formal conciliation process in any event (which is news to me, as I suspect it is to most IPA members).

3.  RPBs experiencing particular issues progressing complaints cases should discuss their plans with the Service.

I think this is directed mainly at the ACCA, which has come in for some heavy criticism, as reported in the Insolvency Service’s monitoring reports over the last couple of years. Now that the ACCA has announced its “collaboration” with the IPA, which will investigate and decide on complaints levelled at ACCA licensed IPs (as well as conduct their monitoring visits), perhaps the Service already will be happy to tick that box.

To read the full report, go to: https://goo.gl/radZpS.

 

Action on Anti-Money Laundering

This subject really deserves a blog post of its own. The prospects for change are coming from all directions.

“Consent” SARs no more

Actually, this happened in July, but I’ve not seen it covered elsewhere, so I thought I would shoe-horn it in here. Although the Proceeds of Crime Act 2002 refers to “consent”, the NCA has issued guidance clarifying that it will no longer be granting consent, but rather a “defence to a money laundering offence”.

The NCA has taken this step to counteract the “frequent misinterpretation of the effect of ‘consent’ (e.g. assuming that it results in permission to proceed, or is a statement that the money is ‘clean’ or that the NCA condoned the activity going ahead)”.

To request a “defence”, however, you will still need to tick the “consent requested” box on the SAR submission.

For a useful reminder on the purpose and process of consent/defence SARs, including the kinds of responses you might get back from the NCA, go to https://goo.gl/c8tJzk.

Allowing “joint” SARs and other proposals

In April, the Government (via HM Treasury) issued an “Action Plan”, representing “the most significant change to our anti-money laundering and terrorist finance regime in over a decade”, and the Government sought views on the proposed actions.

Amongst other things, the Government was proposing to reform SARs, given the enormous resource demand of c.400,000 SARs submitted each year. The proposals included doing away with the SARs consent/defence process altogether, which alarmed me considerably, but I was relieved to see that the Law Society and others (including R3, although I have to say that they were not as forceful as the LawSoc) urged the Government to reconsider.

The Government’s response on the consultation was issued earlier this month at https://goo.gl/pzezpx and the conclusions are reflected in the Criminal Finances Bill, which is now making its way through Parliament.

I can only see the proposed changes affecting IPs in exceptional cases, but in brief they include:

  • some changes to the SARs regime including empowering the NCA to obtain further information from SARs reporters, but the consent process will continue at least for the moment (“the Government will keep this issue under review”);
  • “establishing a new information sharing gateway for the exchange of data on suspicions… between private sector firms with immunity from civil liability” – I am interested to discover how this will be constructed, although the Government response does include reference to…
  • enabling “joint” SARs to be submitted, which I’m sure will be good news to all IPs who have been conscious of multiple SARs being submitted on cases involving external joint office holders and legal advisers;
  • introducing Unexplained Wealth Orders;
  • strengthening powers to seize and forfeit criminal proceeds in bank accounts or “portable high value items” such as gold.

The Fourth Money Laundering Directive

I understand that Brexit is unlikely to halt the progress of the EU’s Fourth Money Laundering Directive in the UK, which is set to be transposed into national law by 26 June 2017.

In September, HM Treasury issued a consultation on how the Directive should be implemented. The consultation document can be found at https://goo.gl/5AdhQd and it closes on 10 November 2016.

Items with the potential to affect IPs include:

  • a reduction in the threshold for cash or “occasional” transactions from €15,000 to €10,000;
  • changes in the criteria triggering simplified and enhanced due diligence;
  • a potential widening of the scope of those whose AML due diligence may be relied upon (which I find interesting given that the RPBs seem to recommend avoiding reliance);
  • potential prescription surrounding requirements for certain businesses to appoint compliance officers, to conduct employee screening, and to carry out independent audits;
  • a requirement to retain AML due diligence records for 10 years (up from 5 years); and
  • a requirement for certain Supervisors (i.e. the RPBs and others) to “take necessary measures to prevent criminals convicted in relevant areas or their associates from holding a management function in, or being the beneficial owners of” AML-regulated businesses (which, personally, I think is extremely unfair – for example, is it fair to curtail someone’s career because of what their father has done?). Although the consultation refers only to accountants, solicitors and some other businesses as needing this oversight, I would be surprised if IPs escape notice when any legislation is drafted.

 

More and More Changes in Scotland

Imminent changes

As we know, the new Bankruptcy (Scotland) Act 2016 (and presumably the accompanying Regulations, which are yet to be finalised) come into force on 30 November 2016.

The AiB has headlined the Act and Regulations as “business as usual” but simply a cleaner and more straightforward reorganisation of the existing statutory instruments, the most material effect being that what was the Protected Trust Deeds (Scotland) Regulations 2013 has been written into the Act (all except from the forms, which are in the 2016 Regs).

However, inevitably the AiB has taken the opportunity to slip in a couple of changes. As drafted, the MAP asset threshold will be reduced from £5,000 to £2,000 (Regulation 14).

In its response to the AiB’s informal consultation on the draft Regulations, ICAS took the opportunity to raise a number of issues, including having another dig at the AiB’s compromising positions as both supervisor and supplier of debt management/relief services. As regards these expressions of concern and ICAS’ attempt to highlight the archaic “overly penal” use of an 8% statutory interest rate, I say: “good for them!”.

ICAS also points out apparent deficiencies in the Regulations’ treatment of money advisers, who are required under the draft Regulations to have a licence to use the Common Financial Statement, but the Money Advice Trust provides licences to organisations, not individuals. There also appears to be a flaw in the Regulations in that it does not allow a non-accountant/solicitor IP to be a money adviser if they or their employers provide other financial services.

To read ICAS’ response in full, go to: https://goo.gl/xSaKkv.

Future changes to PTDs and DAS

Earlier this year, the AiB ran consultations as part of their reviews of PTDs and DAS. The AiB published summaries of the consultation responses in July 2016 (see https://goo.gl/MW6gC5) and the AiB has promised its own responses “in the coming weeks”, although these have yet to emerge (not surprising really, given everything else going on!).

The scope of the consultation questions was vast and the reviews have the potential to affect many aspects of the two procedures.

 

New Restructuring Moratoriums and Plans… but no changes to rescue finance priority

Although the Government has not yet provided its response to the consultation, “A Review of the Corporate Insolvency Framework”, which ended on in July 2016, it has issued a summary of responses at https://goo.gl/Cf0LWK.

The summary does hint, however, that the Government is likely to take forward some of the proposals.

The introduction of a pre/extra-insolvency moratorium

If the Government were to go with the majority (yes I know, that’s a big “if”), the new moratorium:

  • would be initiated by a simple court filing;
  • would have stronger/more safeguards to protect creditors’ interests than as originally proposed;
  • potentially would not suspend directors’ liability for wrongful trading;
  • would be shorter than the originally proposed 3 months, probably 21 days;
  • could be extended without the need to obtain the approval of all secured creditors;
  • would not affect the length of any subsequent Administration (woo hoo!);
  • would be supervised only by a licensed IP (double woo hoo!);
  • would provide for costs incurred during the moratorium to be paid during the moratorium or, failing that, to enjoy a first charge if an insolvency process follows on; and
  • would provide creditors with the power to seek information (with certain safeguards and exemptions).

Essential suppliers to be held to ransom?

In contrast, consultation responses were split on whether more should be done to bind essential suppliers to keep on supplying during a moratorium or indeed during an Administration, CVA or potentially new “alternative restructuring plan”. The only clear majority response was that providing suppliers with recourse to court to object to being designated by the company as “essential” was an inadequate safeguard for suppliers.

The reaction? “Government notes stakeholder concerns and is continuing to consider the matter.”

A new restructuring plan with “cram down”

Cheekily, the consultation actually didn’t ask whether we saw value in a proposed new restructuring plan. It just asked how we saw it working.

The majority were in favour of a court-approved cram down process with the suggested addition that the cram down provisions could also apply to shareholders.

Will the long grass welcome back the proposal for super-priority rescue finance?

The Government had revived its 2009 proposal for super-priority rescue funding. Again this time, the response was pretty overwhelming with 73% disagreeing with the proposals.

 

Further Education Insolvencies

In July 2016, BIS issued a consultation that explored whether the usual insolvency procedures – as well as a Special Administration Regime – should be introduced to deal with insolvent further education and sixth form colleges in England.

The proposed objectives of the education Special Administration include to “avoid or minimise disruption to the studies of the existing students of the further education body as a whole”. The Government envisages that this emphasis would “provide more time than normal insolvency procedures to mitigate the risk that a college is wound up quickly and in a way which, by focusing only on creditors, would be likely to damage learners.”

Although a Government response has yet to be issued (the consultation closed on 5 August 2016), my scanning of a few published responses indicates that there are some loud objections to the idea from those working in the sector. Many of those who responded to the consultation also expressed exasperation that BIS issued a 4-week consultation over the holiday period, which does seem particularly insensitive in view of the intended audience (which strangely did not include IPs!).

 

Recast EC Regulation on Insolvency Proceedings

This is another piece of legislation that is set to come into force on 26 June 2017.

I admit that my partner, Jo Harris, is far more knowledgeable on this subject than me and personally I’m waiting for her to record a webinar on it, so that I can learn all about it (no pressure, Jo! 😉 ).

 

SIP13, SIP15… and many others

The JIC’s consultations on revised drafts of SIP13 and SIP15 closed many months ago. I understand that a revised SIP13 is very near to being issued and the aim is to have a revised SIP15 also issued before the end of the year.

Given that many of the SIPs refer to the Insolvency Rules 1986 – SIP8 on S98 meetings comes immediately to mind – many will need to be reviewed over the next 5 months if they are to remain reliable and relevant (although admittedly it has not stopped SIP13 continuing to refer to S23 meetings and Rule 2.2 reports, despite the fact that they were abolished in 2003!). Well, it’s not as if we have anything else to do, is it?!


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The Proposed New Moratorium: the responses are in, but will the Government listen?

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I believe we can be proud of R3 and the RPBs. Given only 6 weeks for the Government’s summer consultation, they generated robust and reasoned responses with plenty of variation to evidence that each had been created independently of the others.

Having read every published response I’ve been able to find, I am left with a reasonably strong sense of consensus on many of the big questions. However, I suspect that not all will be welcome news to the Government or the Insolvency Service, so the question is: will they listen?

The original consultation, A Review of the Corporate Insolvency Framework, can be found at: https://goo.gl/Cf0LWK.

In this post, I pick through the 14 responses that I discovered, including those from bodies such as R3, some of the RPBs and turnaround professionals. I don’t envy the Insolvency Service’s job of working through 70 submissions.

 

A New Moratorium: why?

Almost everyone saw some value in the principle (if not in the detail) of the Government’s proposals to introduce new moratorium provisions, although several questioned the Government’s apparent motives: from the consultation document, it does seem that a desire to get the UK up the ladder of the World Bank’s “Doing Business” rankings is the main driver, which does not seem a sensible policy-making foundation.

Dentons solicitors believe that “the UK has one of the most flexible insolvency regimes, unburdened by high costs and lengthy court procedures and, perhaps most importantly, one of the best recovery rates for creditors worldwide”, so it is difficult to see what advantages the proposed new process will bring. The City of London Law Society went further by not supporting the wider moratorium proposals, failing to see how a potentially costly process that may not adequately protect creditors’ interests would be useful.

The FSB expressed concern at the apparent move towards a US-style Chapter 11 system, feeling that this shift “could result in the UK regime’s strengths being watered down for little demonstrable gain elsewhere”. Several noted that the absence of a specialist insolvency court was a serious obstacle in any attempts to move towards a workable Chapter 11 style regime.

Most struggled to see how the moratorium could be used successfully by SMEs. Even the turnaround professionals were forced to admit that “there will always be some businesses that are too small to avail themselves of such help”.

A few responders felt that more effort should be made to encourage directors to seek help early and the turnaround professional felt that the moratorium would be a useful tool in this regard.

 

A New Moratorium: how long?

Here is a summary of the responses to the Government’s proposals for an initial 3-month moratorium:

Mora

It should be noted that many answers on this question were dependent upon other changes being made to the proposed moratorium set-up. For example, whilst the City of London Law Society felt that 3 months may prove to be too short for larger or more complex restructurings, it also recognised the risk that the extensive nature of the 3-month moratorium as proposed may “simply encourage directors to put off dealing with a company’s financial difficulties. This could, in turn, lead to creditor anger and frustration should the company’s financial position deteriorate during the moratorium period.”

A similar point was made by R3, which referred to the risk that “providing companies with an entire financial quarter free from creditor pressure could lead to ‘drift’ rather than action.” Instead, R3 stated, a shorter moratorium would make clear that it was the company’s ‘last chance’ to avoid insolvency, thus “requiring concentrated effort and a clear direction of travel”.

 

Will it simply be jobs for the boys?

The Government proposed that a new moratorium be introduced, which would be “supervised” by anyone with relevant expertise in restructuring who is also either an IP, solicitor or accountant.

However, in general the cry for supervisors to come only from the IP population was made loud and clear. You might think this was inevitable from the likes of R3 and the IPA, but even the accountancy and solicitor bodies were generally strong on this point.

  • Not for solicitors?

The City of London Law Society pointed out that the SRA had only recently dropped regulating solicitors as IPs, so it would seem an odd development to have solicitors return to supervising something tantamount to an insolvency process.

  • Not for accountants?

The ICAEW pointed to the facts that “accountant” covers a wide range of people and that there is already “a large pool of [insolvency] practitioners and a competitive market”, so it would seem an unnecessary risk to widen the pool to include others who are not subject to such heavy regulation as IPs. ICAS made a similar observation, noting its understanding that “at least one third of the [accountancy] sector in the UK has not undertaken any training or possess a formal qualification” and repeating its call on the Government to designate accountancy as a regulated profession.

  • What about turnaround professionals?

Predictably, the EACTP and BM&T, turnaround consultancy, welcomed widening the role to more than just IPs, suggesting that the Certified Turnaround Professional qualification could qualify someone for the role.

Interestingly, these two responses were almost word-for-word the same in many respects, but they differed on one important point: BM&T believes that it is critically important for the supervisor to be clearly seen to be acting in the best interests of all stakeholders, whereas EACTP believes that the supervisor should act in the best interest of the company. I think this betrays one of the tensions in the proposals: is the moratorium intended for solvent companies that may be facing future insolvency or for insolvent ones? The City of London Law Society noted that the consultation document conflicts with the Impact Assessment on this fundamental point.

BM&T seemed alone in expressing the view that, in order to keep costs low, “supervisors should be subject to low levels of regulation”. I appreciate their point that the supervisor is not running the business, merely advising. However, given that a primary duty proposed for supervisors is ensuring that the moratorium – and not a formal insolvency process – remains appropriate, it does seem to me too high a risk activity to be largely unregulated. The ICAEW mentioned that, “if supervisors are not to be regulated persons, then greater court supervision may be required to minimise risks of abuse by directors and unfair prejudice of creditors”, which of course would increase costs and which in turn could have an altogether different impact on the World Bank rankings!

  • The case for IPs

R3 believes that a clear commitment to protecting creditors’ interests is important. The Government’s proposals put creditors firmly in the back seat, offering them only the power to take court action to challenge the moratorium or their status as an essential supplier, a status assigned them by the moratorium company. If the company’s use of a moratorium to give it time to see a way out of its troubles is to earn the trust of creditors, the obvious choice is regulated IPs, and certainly not, as currently seems possible, the company’s in-house lawyer or accountant.

R3 reminded the Insolvency Service of the efforts the profession has made to tackle the problem of ambulance chasers and unregulated advisers. If not carefully structured and controlled, the moratorium could appear an attractive tool for abuse by some.

  • A new professional?

Some responses highlighted the difficulty in ensuring that proposed supervisors meet the expertise criteria: the Government isn’t considering yet another different licence with potentially a whole new (and expensive) regulatory system, is it?

The IPA noted that the Government’s Impact Assessment made no mention of any costs of ensuring regulatory consistency in the event that the role is opened up to other professionals. It also reminded the Government of the new corporate-only insolvency licences, which would seem to lend themselves well to be used by non-IPs who want to develop in this area.

 

Consequences for Administrators

The Government’s proposals include two striking consequences for Administrations that are preceded by a moratorium:

  • An IP who had acted as the company’s moratorium supervisor would be prevented from taking the appointment as Administrator (or indeed any other insolvency office holder); and
  • The duration of the Administration would be 12 months minus the length of the moratorium.

Conflict of interest?

Few responded directly on this point. As you might expect, the ones that did respond fell into two distinct camps:

  • There may be clear benefits in having the same person throughout, which would reduce costs, and the creditors should have a say in who they want as Administrator (ICAEW, ICAS, R3); and
  • There would be a clear conflict of interest in having the IP supervisor also act as Administrator (EACTP, BM&T).

Personally, I cannot really see how the situation is different from a CVA Supervisor later being appointed as Administrator or Liquidator and I would expect the Insolvency Code of Ethics to be amended to treat the proposed subsequent appointment of a moratorium supervisor similarly.

Shorter Administrations?

Personally, I thought this second proposal was nonsense. Where is the logic behind giving Administrators less time to do their job simply because the company has had a moratorium? I appreciate that the perception may be that an Administration is all about exploring the company’s/business’ options, so if these are all but exhausted in the moratorium, then it should be time saved in the Administration. However, Administrators still need to get the job done and now must pay out any prescribed part dividend, which is by no means a 5-minute task. The ICAEW also made the point that at present the 12 months period “can be problematic, not least because of delays within HMRC and applying for extensions adds to work and cost”.

Although none of the consultation questions invited comments on this proposal, I was very pleased to see that several bodies managed to shoe-horn in their objections to shorter Administrations as a consequence of a moratorium. For heaven’s sake, Administrations are complex and costly enough as it is, please don’t make them any worse!

Having said that, the Law Society posed the sensible recommendation that the relevant date for excluding insolvency set-off and for voidable transaction claims should be measured from the start of the moratorium… although I would also suggest that, in that case, an insolvency office holder should be able to challenge certain dispositions occurring during a moratorium.

 

Directors’ liabilities

The consultation proposed that, provided the moratorium conditions continued to be met, directors would be protected from liability, e.g. in relation to wrongful trading, but that, should the conditions not be met and the moratorium fail, exposure for liability would resume.

This seemed a curious approach to me and the Law Society explained it well: “during a moratorium, directors will only be at risk once the company has reached the point at which they ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation’. Plainly, directors should also terminate a moratorium at, or before, that point, so that it is unnecessary to relieve the directors of liability whilst the conditions for a moratorium are maintained. Indeed, to do so would simply introduce unnecessary complexity into the law”.

The City of London Law Society also observed that suggesting that directors may avoid personal liability “could lead to inappropriate risk taking, particularly if directors believed that they could entirely rely on the views of the supervisor, rather than making their own assessment of the company’s prospects”.

 

Ranking of costs and expenses in the moratorium

Although a company would be required to have enough capital to discharge all debts incurred during the moratorium, what if the worst should happen?

Several responders agreed with the Government’s proposal that any unpaid debts incurred in a failed moratorium and the supervisor’s costs should enjoy a first charge in any subsequent insolvency (although there was no comment on the priorities between these categories).

However, R3 disagreed, noting that a company could stack up debts to connected parties during the moratorium, which would end up having priority, and so R3 believed that unpaid debts should rank alongside other claims in the subsequent insolvency. Personally, I don’t see that this potential abuse is sufficient reason to push moratorium creditors down the queue, especially in view of the other proposals regarding pressing “essential suppliers” into service during a moratorium.

The City of London Law Society also queried how it is proposed such costs and expenses would be approved for payment from a subsequent insolvency. Perhaps it would be something akin to the current pre-administration costs regime?

Several responders objected to the Government’s proposal that supplies during the moratorium should be paid for under the supplier’s usual terms of credit. BM&T made the connection that, if instead moratorium supplies are paid on a cash up-front basis, there should be no risk that debts would spill over into any subsequent insolvency.

 

Creditors held to ransom?

The “essential suppliers” proposals generated whole new lines of debate, such as the possible effects on the supplier’s trade credit insurance or debt factoring, which is material for another blog post.

Suffice to say, as worded in the consultation it seems that any supplier (…or only those with a contract? One example in the consultation is of a paper supplier) could be designated by the company as essential (by means of a court filing) with the result that the supplier would be required by statute to continue to supply on the existing terms, whilst its pre-moratorium arrears would be frozen, irrespective of the impact this might have on the supplier’s own solvency.

 

What’s wrong with the CVA moratorium?

The consultation claimed that the CVA moratorium is rarely used because it is limited to small companies. However, instead of proposing simply to widen the scope of the CVA moratorium (as ICAS has suggested), a new kind of moratorium is the proposal. This would be fine if the plan was simply to adapt the CVA moratorium to allow other restructuring solutions to flow from it, but the proposed new moratorium is different in many unconnected respects.

It is true that there are few CVA moratoria. Both the ICAEW and R3 suggested that the onerous responsibilities (and associated liabilities) of the CVA moratorium nominee deter use of the existing regime. Although we only have a skeleton proposal to judge at the moment, personally I don’t see that the new moratorium would deal with this obstacle any more successfully.

The ICAEW recommended that, to avoid any new moratorium suffering the same fate as the CVA moratorium, the reasons for its apparent lack of use should be analysed.

 

What’s wrong with CVAs?

As the only debtor in possession formal insolvency tool, you’d think that the Government might be interested in encouraging greater use of CVAs, but it seems to be missing the point.

The consultation stated that “the Government believes that the under utilisation of CVAs is largely caused by the inability to bind secured creditors”, however neither it nor its accompanying Impact Assessment provided any evidence to support this. The Impact Assessment stated that “the consultation will seek to understand fully the reasons behind” the under-utilisation of CVAs and the apparent fact that many fail (2014: 60%), but the consultation didn’t really address this at all. It simply stated that “many CVAs fail because of a failure to maintain agreed payment” – you don’t say!

R3 believes that “the most common reasons why CVAs fail is not because there is a problem with secured creditors but because the management is overly-optimistic in its financial assessment of the company, or the environment in which the company operates changes during the CVA.” The IPA makes a similar observation, suggesting that the CVA process is not at fault, but often the issue is with the underlying viability of the business. ICAS also reported that “anecdotally it is suggested that a significant proportion of CVA proposals will focus on financial/debt restructuring without addressing more fundamental and underlying operational restructuring or management change”.

In its response, R3 asked the Government to work with the profession and the creditor community to “to find ways to improve CVAs so that they can become a much more effective business rescue tool”, especially for SMEs, a request that also seems to have the support of the ICAEW and IPA.

 

And there’s much more

Some other meaty questions considered by the responders included:

  • Do the Government’s proposals achieve the right balance of debtor-in-possession and creditor protection?
  • If the balance swings too far away from creditors, as many responders fear, what will be the effects on lending?
  • What exactly are the supervisor’s role and duties?
  • How exactly should the moratorium entry criteria be defined and measured?
  • How will notice of the moratorium be publicised or even should it be publicised?
  • How would an extension to the moratorium be achieved and for how long should an extension be?
  • Who would be required to provide information to creditors during the moratorium and what kind of information should be provided?
  • Is there really a need to incentivise rescue funding, particularly by introducing contentious statutory provisions affecting existing secured creditors’ rights?

 

The consultation responses evidence that, within only a few summer weeks, a great deal of effort has been spent deliberating over the proposals, but the fun has only just begun.

 


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Monitoring the monitors: targeting consistency and transparency

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The Insolvency Service’s 2014 Review had the target of transparency at its core. This time, the Insolvency Service has added consistency.  Do the Annual Reviews reveal a picture of consistency between the RPBs?

My second post on the Insolvency Service’s 2015 Annual Review of IP regulation looks at the following:

  • Are the RPBs sticking to a 3-year visit cycle?
  • How likely is it that a monitoring visit will result in some kind of regulatory action?
  • What action are the RPBs likely to take and is there much difference between the RPBs?
  • What can we learn from 6 years of SIP16 monitoring?
  • How have the RPBs been faring in their own monitoring visits conducted by the Insolvency Service?
  • What have the Service set in their sights for 2016?

 

RPBs converge on a 3-yearly visit cycle

The graph of the percentages of IPs that had a monitoring visit last year gives me the impression that a 3-yearly visit cycle has most definitely become the norm:

Graph7

(Note: because the number of SoS IPs dropped so significantly during the year – from 40 to 28 – all the graphs in this article reflect a 2015 mid-point of SoS-authorised IPs of 34.)

Does this mean that IPs can predict the timing of their next routine visit? I’m not sure.  It seems to me that some standard text is slipping into the Insolvency Service’s reports on their monitoring visits to the RPBs.  The words: “[RPB] operates a 3-year cycle of rolling monitoring visits to its insolvency practitioners. The nature and timing of visits is determined annually on a risk-assessment basis” have appeared in more than one InsS report.

What do these words mean: that every IP is visited once in three years, but some are moved up or down the list depending on their risk profile? Personally, this doesn’t make sense to me: either visits are timed according to a risk assessment or they are carried out on a 3-year cycle, I don’t see how you can achieve both.  If visit timings are sensitive to risk, then some IPs are going to receive more than one visit in a 3-year period and, unless the RPB records >33% of their IP number as having a visit every year (which the graph above shows is generally not the case), the corollary will be that some IPs won’t be visited in a 3-year period.

My perception on the outside is that, generally, the timing of visits is pretty predictable and is now pretty-much 3-yearly. I’ve seen no early parachuting-in on the basis of risk assessments, although I accept that my field of vision is very narrow.

 

Most RPBs report reductions in negative outcomes from monitoring visits

The following illustrates the percentage of monitoring visits that resulted in a “negative outcome” (my phrase):

Graph8

As you can see, most RPBs are clocking up between c.10% and 20% of monitoring visits leading to some form of negative consequence and, although individual records have fluctuated considerably in the past, the overall trend across all the regulatory bodies has fallen from 30% in 2008 to 20%.

However, two bodies seem to be bucking the trend: CARB and the SoS.

Last year, I didn’t include CARB (the regulatory body for members of the Institute of Chartered Accountants in Ireland), because its membership was relatively small. It still licenses only 41 appointment-taking IPs – only 3% of the population – but, with the exit of SoS authorisations, I thought it was worth adding them to the mix.

I am sure that CARB’s apparent erratic history is a consequence of its small population of licensed IPs and this may well explain why it is still recording a much greater percentage of negative outcomes than the other RPBs. Nevertheless, CARB does seem to have recorded exceptionally high levels for the past few years.

The high SoS percentage is a little surprising: 50% of all 2015 visits resulted in some form of negative outcome – these were all “plans for improvement”. CARB’s were a mixture of targeted visits, undertakings and one penalty/referral for disciplinary consideration.

So what kind of negative outcomes are being recorded by the other RPBs? Are there any preferred strategies for dealing with IPs falling short of expected standards?

 

What responses are popular for unsatisfactory visits?

The following illustrates the actions taken by the top three RPBs over the last 4 years:

Graph9

* The figures for ICR/self certifications requested and further visits should be read with caution. These categories do not appear in every annual review, but, for example, it is clear that RPBs have been conducting targeted visits, so this graph probably does not show the whole picture for the 2012 and 2013 outcomes.  In addition, of course the ICAEW requires all IPs to carry out annual ICRs, so it is perhaps not surprising that this category has rarely featured.

I think that all this graph suggests is that there is no trend in outcome types!  I find this comforting: it might be difficult to predict what outcome to expect, but it suggests to me that the RPBs are flexible in their approaches, they will implement whatever tool they think is best fitted for the task.

 

Looking back on 6 years of SIP16 monitoring
We all remember how over the years so many people seemed to get hot under the collar about pre-packs and we recall some appallingly misleading headlines that suggested that around one third of IPs were failing to comply with regulations. Where have the 6 years of InsS monitoring of SIP16 Statements got us?  I will dodge that question, but I’ll simply illustrate the statistics:

Graph10

Note: several years are “estimates” because the InsS did not always review all the SIP16 Statements they received. Also, the Service ended its monitoring in October 2015.  Therefore, I have taken the stats in these cases and pro rated them up to a full year’s worth.

Does the graph above suggest that a consequence of SIP16 monitoring has been to discourage pre-packs? Well, have a look at this one…

Graph11

As you can see, the dropping number of SIP16s is more to do with the drop in Administrations. In fact, the percentage of pre-packs has not changed much: it was a peak of 31% of all Administrations in 2012 and was at its lowest in 2014 at 24%.

I guess it could still be argued that the SIP16 scrutiny has persuaded some to sell businesses/assets in the pre (or immediately post) liquidation period, rather than use Administration.  I’m not sure how to test that particular theory.

So, back to SIP16 compliance, the graph-but-one above shows that the percentage of Statements that were compliant has increased. It might be easier to see from the following:

Graph12

Unequivocal improvements in SIP16 compliance – there’s a good news story!

A hidden downside of all this focus on improving SIP16 compliance, I think, is the costs involved in drafting a SIP16 Statement and then, as often happens, in getting someone fairly senior in the practice to double-check the Statement to make sure that it ticks every last SIP16 box.  Is this effort a good use of resources and of estate funds?

Now that the Insolvency Service has dropped SIP16 monitoring, does that mean we can all relax a bit? I think this would be unwise.  The Service’s report states that it “will review the outcome of the RPBs’ consideration of SIP16 compliance and will continue to report details in the Annual Review”, so I think we can expect SIP16 to remain a hot regulatory topic for some time to come.

 

The changing profile of pre-packs

The Service’s reports on SIP16 Statements suggest other pre-pack trends:

Graph13

Personally, I’m surprised at the number of SIP16 Statements that disclose that the business/assets were marketed by the Administrator: last year it was 56%. I’m not sure if that’s because some SIP16 Statements are explaining that the company was behind some marketing activities, but, if that’s not the reason, then 56% seems very low to me.  It would be interesting to see if the revised SIP16, which introduced the “marketing essentials”, makes a difference to this rate.

 

Have some pity for the RPBs!

The Service claimed to have delivered on their commitments in 2015 (incidentally, one of their 2014 expectations was that the new Rules would be made in the autumn of 2015 and they would come into force in April 2016 – I’m not complaining that the Rules are still being drafted, but I do think it’s a bit rich for the Executive Foreword to report pleasure in having met all the 2014 “commitments”).

The Foreword states that the reduction in authorising bodies is “a welcome step”. With now only 5 RPBs to monitor and the savings made in dropping SIP16 monitoring (which was the reported reason for the levy hike in 2009), personally I struggle to see the Service’s justification for increasing the levy this year.  The report states that it was required in view of the Service’s “enhanced role as oversight regulator”, but I thought that the Service did not expect to have to flex its new regulatory muscles as regards taking formal actions against RPBs or directly against IPs.

However, the tone of the 2015 Review does suggest a polishing of the thumb-screws. The Service refers to the power to introduce a single regulator and states that this power will “significantly shape” the Service’s work to come.

In 2015, the Service carried out full monitoring visits to the ICAEW, ICAS and CARB, and a follow-up visit to the ACCA. This is certainly more visits than previous years, but personally I question whether the visits are effective.  Of course, I am sure that the published visit reports do not tell the full stories – at least, I hope that they don’t – but it does seem to me that the Service is making mountains out of some molehills and their reports do give me the sense that they’re concerned with processes ticking the Principles for Monitoring boxes, rather than being effective and focussing on good principles of regulation.

For example, here are some of the molehill weaknesses identified in the Service’s visits that were resisted at least in part by some of the RPBs – to which I say “bravo!”:

  • Pre-visit information requested from the IPs did not include details of complaints received by the IP. The ICAEW responded that it was not convinced of the merits of asking for this on all visits but agreed to “consider whether it might be appropriate on a visit by visit basis”.
  • Closing meeting notes did not detail the scope of the visit. The ICAEW believed that it is important for the closing meeting notes to clearly set out the areas that the IP needs to address (which they do) and it did not think it was helpful to include generic information… although it seems that, by the time of the follow-up visit to the ICAEW in February 2016, this had been actioned.
  • The Service remains “concerned” that complainants are not provided with details of the independent assessor on their case. “ACCA regrets it must continue to reject this recommendation as ACCA does not believe naming assessors will add any real value to the process… There is also the risk of assessors being harassed by complainants where their decision is not favourable to them.”
  • Late bordereaux were only being chased at the start of the following month. The Service wanted procedures put in place to “ensure that cover schedules are provided within the statutory timescale of the 20th of each month and [to] follow up any outstanding returns on 21st or the next working day of each month”. Actually, CARB agreed to do this, but it’s just a personal bug-bear of mine. The Service’s report to the ICAEW went on about the “vital importance” of bonding – with which I agree, of course – but it does not follow that any bordereaux sent by IPs to their RPB “demonstrate that they have sufficient security for the performance of their functions”. It simply demonstrates that the IP can submit a schedule on time every month. I very much suspect that bordereaux are not checked on receipt by the RPBs – what are they going to do: cross-check bordereaux against Gazette notices? – so simply enforcing a zero tolerance attitude to meeting the statutory timescale is missing the point and seems a waste of valuable resources, doesn’t it?

 

Future Focus?

The Annual Review describes the following on the Insolvency Service’s to-do list:

  • Complaint-handling: in 2015, the Service explored the RPBs’ complaint-handling processes and application of the Common Sanctions Guidance. The Service has made a number of recommendations to improve the complaints process and is in discussion with the RPBs. They expect to publish a full report on this subject “shortly”.
  • Debt advice: also in 2015, they carried out a high-level review of how the RPBs are monitoring IPs’ provision of debt advice and they are currently considering recommendations for discussion with the RPBs.
  • Future themed reviews: The Service is planning themed reviews (which usually mean topic-focussed questionnaires to all RPBs) over 2016 and 2017 covering: IP monitoring; the fees rules; and pre-packs.
  • Bonding: the Service has been examining “the type and level of cover offered by bonds and considering both the legislative and regulatory arrangements to see if they remain fit for purpose”. They are cagey about the outcomes but do state that they “will work with the industry to effect any regulatory changes that may be necessary” and they refer to “any legislative change” being subject to consultation.
  • Relationship with RPBs: the Service is contemplating whether the Memorandum of Understanding (“MoU”) with the RPBs is still needed, now that there are statutory regulatory objectives in place. The MoU is a strange animal – https://goo.gl/J6wmuN. I think that it reads like a lot of the SIPs: a mixture of principles and prescription (e.g. a 10-day acknowledgement of complaints); and a mixture of important standards and apparent OTT trivia. It would be interesting to see how the Service approaches monitoring visits to the RPBs if the MoU is removed: they will have to become smarter, I think.
  • Ethics? The apparent focus on ethical issues seems to have fallen from the list this year. In 2015, breaches of ethics moved from third to second place in the list of complaints received by subject matter (21% in 2014 and 27% in 2015), but reference to the JIC’s work on revising the Ethics Code has not been repeated in this year’s Review. Presumably the work is ongoing… although there is certainly more than enough other tasks to keep the regulators busy!

 

 


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Is the IP regulation system fair?

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The Insolvency Service’s 2015 review of IP regulation was released in March and, as usual, I’ve dug around the statistics in comparison with previous years.

They indicate that complaint sanctions have increased (despite complaint numbers dropping), but monitoring sanctions have fallen. Why is this?  And why was one RPB alone responsible for 93% of all complaints sanctions?

The Insolvency Service’s report can be found at https://goo.gl/HlATlf.

I honestly had no idea that the R3 member survey issued earlier today was going to ask about the effectiveness of the regulatory system. I would encourage R3 members to respond to the survey (but don’t let this blog post influence you!).

IP number falls to 6-year low

I guess it was inevitable: no IP welcomes the hassle of switching authorising body and word on the street has always been that being authorised by the SoS is a far different experience to being licensed by an RPB. Therefore, I think that the withdrawal from authorising by the SoS (even with a run-off period) courtesy of the Deregulation Act 2015 and the Law Societies was likely to affect the IP numbers.

Here is how the landscape has shifted:

Graph1

As you can see, the remaining RPBs have not gained all that the SoS and Law Societies have lost and ACCA’s and CARB’s numbers have dropped since last year. It is also a shame to note that, not only has the IP number fallen for the first time in 4 years, it has also dropped to below the 2010 total.

Personally, I expect the number to drop further during 2016: I am sure that the prospect of having to adapt to the new Insolvency Rules 2016 along with the enduring fatigue of struggling to get in new (fee-paying) work and of taking the continual flak from regulators and government will persuade some to hang up their boots. I also don’t see that the industry is attracting sufficient new joiners who are willing and able to take up the responsibility, regardless of the government’s partial licence initiative that has finally got off the ground.

Maybe this next graph will make us feel a bit better…

Number of regulatory sanctions fall

Graph2

Although the numbers are spiky, I guess there is some comfort to be had in seeing that the regulatory bodies issued fewer sanctions against IPs in 2015. [To try to put 2010’s numbers into context, you’ll remember that 1 January 2009 was the start of the Insolvency Service’s monitoring of the revised SIP16, which led to a number of referrals to the RPBs, although I cannot be certain that this was behind the unusual 2010 peak in sanctions.]

But what interests me is that the number of sanctions in 2015 arising from complaints far outstripped those arising from monitoring visits, which seems quite a departure from the picture of previous years. What is behind this?  Is it simply a consequence of our growing complaint-focussed society?

Complaints on the decrease

Graph3

Well actually, as you can see here, it seems that fewer complaints were registered last year… by quite a margin.

I confess that some of these years are not like-for-like comparisons: before the Complaints Gateway, the RPBs were responsible for reporting to the Insolvency Service how many complaints they had received and it is very likely that they incorporated some kind of filter – as the Service does – to deal with communications received that were not truly complaints. However, it cannot be said for certain that the RPBs’ pre-Gateway filters worked in the same way as the Service’s does now.  Nevertheless, what this graph does show is that 2015’s complaints referred to the regulatory bodies were less than 2014’s (which was c.half a Gateway year – the “Gateway (adj.)” column represents a pro rata’d full 12 months of Gateway operation based on the partial 2014 Gateway number).

It is also noteworthy that the Insolvency Service is chalking up a similar year-on-year percentage of complaints filtered out: in 2014, this ran at 24.5% of the complaints received, and in 2015, it was 26.5%.

So, if there were fewer complaints lodged, then why have complaints sanctions increased?

How long does it take to process complaints?

The correlation between complaints lodged and complaint sanctions is an interesting one:

Graph4

Is it too great a stretch of the imagination to suggest that complaint sanctions take somewhere around 2 years to emerge? I suggest this because, as you can see, the 2010/11 sanction peak coincided with a complaints-lodged trough and the 2013 sanctions trough coincided with a complaints lodged peak – the pattern seems to show a 2-year shift, doesn’t it..?

I am conscious, however, that this could simply be a coincidence: why should sanctions form a constant percentage of all complaints?  Perhaps the sanctions simply have formed a bit of a random cluster in otherwise quiet years.

Could there be another reason for the increased complaints sanctions in 2015?

One RPB breaks away from the pack

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How strange! Why has the IPA issued so many complaints sanctions when compared with the other RPBs?

I have heard more than one IP suggest that the IPA licenses more than its fair share of IPs who fall short of acceptable standards of practice. Personally, I don’t buy this.  Also more sanctions don’t necessarily mean there are more sanctionable offences going on.  It reminds me of the debates that often surround the statistics on crime: does an increase in convictions mean that there are more crimes being committed or does it mean that the police are getting better at dealing with them?

Nevertheless, the suggestion that the IPA’s licensed population is different might help explain the IPA peak in sanctions, mightn’t it? To test this out, perhaps we should compare the number of complaints received by each RPB.

Graph6

Ok, so yes, IPA-licensed IPs have received more complaints than other RPBs (although SoS-authorised IPs came out on top again this past year).  If the complaints were shared evenly, then 58% of all IPA-licensed IPs would have received a complaint last year, compared to only 43% of those licensed by the other three largest RPBs.  I hasten to add that, personally, I don’t think this indicates differing standards of practice depending on an IP’s licensing body: it could indicate that IPA-licensed (and perhaps also SoS-authorised) IPs work in a more complaints-heavy environment, as I mention further below.

Nevertheless, let’s see how these complaints-received numbers would flow through to sanctions, if there were a direct correlation. For simplicity’s sake, I will assume that a complaint lodged in 2013 concluded in 2015 – although I think this is highly unlikely to be the average, I think it could well be so for the tricky complaints that lead to sanctions.  This would mean that, across all the RPBs (excluding the Insolvency Service, which has no power to sanction SoS-authorised IPs in respect of complaints), 12% of all complaints led to sanctions.  On this basis, the IPA might be expected to issue 36 complaint-led sanctions, so this doesn’t get us much closer to explaining the 76 sanctions issued by the IPA.

I can suggest some factors that might be behind the increase in the number of complaints sanctions granted by the IPA:

  • The IPA licenses the majority of IVA-specialising IPs, which do seem to have attracted more than the average number of sanctions: last year, two IPs alone were issued with seven reprimands for IVA/debtor issues.
  • The IPA’s process is that matters identified on a monitoring visit that are considered worthy of disciplinary action are passed from the Membership & Authorisation Committee to the Investigation Committee as internal complaints. Therefore, I think this may lead to some IPA “complaint” sanctions actually originating from monitoring visits. However, analysis of the sanctions arising from monitoring visits (which I will cover in another blog) indicates that the IPA sits in the middle of the RPB pack, so it doesn’t look like this is a material factor.
  • Connected to the above, the IPA’s policy is that any incidence of unauthorised remuneration spotted on monitoring visits is referred to the Investigation Committee for consideration for disciplinary action. Given that it seems that such incidences include failures that have already been rectified (as explained in the IPA’s September 2015 newsletter) and that unauthorised remuneration can arise from a vast range of seemingly inconspicuous technical faults, I would not be surprised if this practice were to result in more than a few unpublished warnings and undertakings.

But this cannot be the whole story, can it? The IPA issued 93% of all complaints sanctions last year, despite only licensing 35% of all appointment-takers.  The previous year followed a similar pattern: the IPA issued 82% of all complaints sanctions.

To put it another way, over the past two years the IPA issued 111 complaints sanctions, whilst all the other RPBs put together issued only 14 sanctions.

What is going on? It is difficult to tell from the outside, because the vast majority of the sanctions are not published.  Don’t get me wrong, I’m not complaining about that.  If the sanctions were evenly-spread, I could not believe that c.16% of all IPA-licensed IPs conducted themselves so improperly that they merited the punitive publicity that .gov.uk metes out on IPs (what other individual professionals are flogged so publicly?!).

The Regulators’ objective to ensure fairness

This incongruence, however, makes me question the fairness of the RPBs’ processes.  It cannot be fair for IPs to endure different treatment depending on their licensing body.

You might say: what’s the damage, when the majority of sanctions went unpublished? I have witnessed the anguish that IPs go through when a disciplinary committee is considering their case, especially if that process takes years to conclude.  It lingered like a Damocles Sword over many of my conversations with the IPs.  The apparent disparity in treatment also does not help those (myself included) that argue that a multiple regulator system can work well.

One of the new regulatory objectives introduced by the Small Business Enterprise & Employment Act 2015 was to secure “fair treatment for persons affected by [IPs’] acts and omissions”, but what about fair treatment for IPs?  In addition, isn’t it possible that any unfair treatment on IPs will trickle down to those affected by their acts and omissions?

The Insolvency Service has sight of all the RPBs’ activities and conducts monitoring visits on them regularly. Therefore, it seems to me that the Service is best placed to explore what’s going on and to ensure that the RPBs’ processes achieve consistent and fair outcomes.

 

In my next blog, I will examine the Service’s monitoring of the RPBs as well as take a closer look at the 2015 statistics on the RPBs’ monitoring of IPs.

 

 

 

 

 

 


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Digital D-reporting: the Devil is in the Detail

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Many of us have been on tenterhooks, waiting to see the detail of the new D-reporting process… which comes into effect in two days!

I lost patience and got in direct contact with the Insolvency Service, who graciously allowed me an audience to convey many of my concerns and to learn more about how it is all intended to work.

We have been promised a Dear IP imminently, but here are the Service’s answers to my questions.

The Basics

I’m sure we’ve all learned the basics by now:

  • D-reporting for new appointments on or after 6 April 2016 will be carried out online via a .gov.uk portal and will need to be completed within 3 months.
  • IPs will have access to an online “dashboard” listing all their post-6 April (CDDA-relevant) appointments with the due dates for D-submissions using a traffic light system of flags.
  • The Service’s plan is that the system will allow IPs to delegate cases to staff to complete the D-report, although these will still be subject to approval by the IP. Staff access is hoped to be functional by mid/late April.
  • Submitted D-reports will remain accessible by the IP, fellow office-holders (only one submission is expected on joint appointments) and any subsequent office-holders.
  • Liquidators of Para 83 CVLs following from post-6 April Administrations will not be required to submit D-reports.
  • D-reporting for appointments prior to 6 April 2016 will continue under the old system.

The Question Bank

The new process has been “sold” to us on the basis that it will be so much simpler to complete as IPs will no longer need to decide whether, in their opinion, the directors’ conduct renders them unfit. Consequently, the Question Bank for the new D-report seeks to convey facts.  The questions are all multiple choice, the majority “simple” Yes/No, although some involve selecting from a range, e.g. regarding the number of creditors.  This is so that the answers can be processed through a rules engine to sift cases not requiring a human review.

In his webinar for the ICAEW last month, Mark Danks of the Insolvency Service did reveal some valuable information about the Question Bank, but I was left with the impression that the Service’s target was to have the process settled in June 2016, so that it is ready for receipt of the first online D-reports.

I expressed my concern to the Service that this is just not good enough. IPs would get criticised if they did not put their minds to the D-reporting task until the deadline was almost upon them and in any event it is not efficient to do so, not least because crunch-time falls in the middle of the summer holidays, so it would be ideal if IPs could get ahead of D-reporting deadlines.  How are IPs and staff supposed to prepare for the changes, if the Question Bank is not fixed and made available now?  There are checklists to amend and there is training to organise.

I was assured that the Service’s work with their IP panel indicates that the Question Bank is on the lines of current CDDA checklists and so they did not envisage (many) changes would be necessary. Now that I have seen the Question Bank, I regret to say that this is patently not the case.

If you want to revisit checklists to mirror the questions – which is how The Compliance Alliance’s revised checklist is being structured and which would be my recommendation so that you make sure that staff do the leg-work to get ready all answers before logging in – beware the following.

How can I access the Question Bank?

Unless the Service makes the Question Bank widely available, you will only be able to see it when you get a post-6 April appointment added to your dashboard. You should then be able to start the D-reporting process and click through the pages of questions.  Of course, this is not user-friendly for anyone trying to manage the work within the practice.

The Service has made available its current Question Bank to its test panel of IPs (and to others, like me, who asked). I am reluctant to provide the link here (it’s a bit too public!), but if you would like a copy of the questions, please drop me a line (insolvencyoracle@pobox.com).

I do fear, however, that the Service’s current Question Bank is not as valuable as we would hope in any event.  The Service expects these questions to change, not only before July but also thereafter, particularly when they start to see how IPs answer and react to the questions on live cases.

As Gareth Allen stated in the R3 magazine article (spring 2016): “this development is an ongoing process and we continue to refine and develop the system in response to continuous user input”. In other words, if you create a checklist to mirror the questions today, it seems to me that the chances are very high that the questions will have changed by the time your staff log in to complete the form!  I tried to stress to the Service person that I spoke to how unhelpful this would be.  I don’t want to be negative about the Service’s drive for continual improvement, but please do warn us all when/what changes are planned so that we can make appropriate changes internally in good time.  My personal preference would be that all of us on the Dear IP list (i.e. not just IPs) are given at least 3 months warning of any changes.

I know that my job is to pick at details, but I am surprised at quite how many issues I have with the current questions – some are poorly worded (e.g. “does the company appear to have ever kept records sufficient to show and explain its transactions..?” Ever? Well, yes, probably immediately on incorporation…); some are impossible for IPs to answer unless they undertake unnecessary investigation; I think that there’s a risk that some might generate false positives (e.g. “is there evidence that not all creditors have been treated equally?” Probably yes, but maybe for good reasons); and some items that I would expect to see (e.g. general misfeasance) are not covered at all.

Is the D-report just a string of multiple choice questions?

The prototype that has been made available is just this. The Service is keen to ensure that the Question Bank remains this way as far as possible so that their evaluation can be an automatic process.  If your answers hit their rules engine’s target, it will trigger a human review of the information and likely will involve an Insolvency Service staff member contacting you to ask further questions in order to decide whether it is a case worthy of taking forward.

At present, the prototype does not allow IPs to inform the Service online of any recovery actions that they intend to take/are taking, although the Service is very keen to receive this information. I understand that the ability for IPs to provide such information will form part of the online form (eventually).

What do we do if misconduct is discovered after the D-report has been submitted?

Personally, I think this is a serious disadvantage of the new process over the old. Firstly, I think that the need to submit D-reports in 3 months instead of 6 greatly increases the chances that you will discover or learn new information that would have affected your report.

However more importantly I think, the removal of the IP’s decision about unfitness removes the IP’s ability to act as any kind of filter: if you learn “new information”, you have to report it, whether or not you think it is material.  Therefore, it doesn’t mean you need only consider newly-identified “misconduct” – it goes much further than this.

What is “new information”?

The new rules define “new information” as “information which an office-holder considers should have been included in a conduct report prepared in relation to the company, or would have been so included had it been available before the report was sent”. If new information comes to the IP’s attention, he must provide this to the Insolvency Service as soon as reasonably practicable.  A failure to do so constitutes an offence.

I pointed out to the Service that, technically, “new information” could involve a wide range of immaterial changes to an IP’s original report. For example, the current questions include “what is the value of the likely dividend?”  If you answer “not known at this stage”, do the rules mean that you need to submit “new information” when this changes?

That may be an extreme example, but many other director-related questions may lead to “new information”. For example: “can all the company’s transactions with directors and any associated parties be identified?”  Just because your original “no” can later be changed to “yes”, does that mean you need to report it to the Service?  One would hope that IPs could exercise discretion in deciding whether technically “new information” is of any interest to the Service, but I do wonder if the rules prohibit this.

I am not certain how this issue can be overcome – the rules are the rules. The Service person gave me the impression that the process for delivering “new information” has not yet been formulated.  However, I hope that the Service sees – and will somehow deal with – the need to avoid burdening IPs (and Service staff) with a requirement to inform them of all “new information”.

What practically can we do to prepare for the new process?

Your to-do list might include these:

  • amend diaries for new appointments to reflect the 3-month timescale.
  • consider changing internal checklists. I guess that you don’t have to, but in my view it would be best to structure internal checklists so that every online question (and preferably no others) is addressed in turn. Certainly, this is how we at The Compliance Alliance are revising our CDDA checklists. Then the IP could review the staff’s completion of the checklist, agree the results and leave the staff member to upload the results into the online form. Ensuring that checklists mirror the online D-report will also help you make revisions whenever the Service makes changes.
  • consider staff resources. D-reporting on pre 6 April 2016 cases will continue as previously. Therefore, you are likely to see roughly double the number of D-reports falling due during July to September 2016, as you will have both 6-month deadlines on old cases and 3-month deadlines on new cases falling simultaneously. I recommend that you consider the effect on your staff resources, particularly as there will be a learning curve associated with the new process… and not to mention that most staff will want summer holidays!
  • ensure that staff are trained. Staff will need to be confident in dealing with the new process, but also important is embedding an awareness of the need to submit “new information” as and when it is discovered.
  • consider also adding a prompt to case review templates to reflect on whether all “new information” has been sent to the Service

I believe that the “new information” provisions present a particular challenge. You will need to ensure that “new information” is identified and reported as soon as reasonably practicable (even if, somehow, it is accepted by the Service and the RPBs that we need not report immaterial “new information”).  Being alert to report new information would seem to be particularly important where you have submitted a D-report before getting access to company records and where your later efforts identified misconduct.  It would also be relevant where you suspected misconduct – and answered “uncertain” or “no” where questions asked about the existence of evidence – and only later did you discover evidence.

Some other consequences of the new statutory provisions

The main statutory provisions are located in:

  • Section 107 of the Small Business Enterprise and Employment Act 2015 (http://goo.gl/NmcRlp);
  • The Insolvent Companies (Reports on Conduct of Directors) (England and Wales) Rules 2016 (http://goo.gl/6OORQn); and
  • The Insolvent Companies (Reports on Conduct of Directors) (Scotland) Rules 2016 (http://goo.gl/wZUj1K)

The Service has widely reported that old-style D-reports will continue to be received until October 2016, but in my view this overlooks the fact that there will be old-style D-reports due later than this.  For one thing, CVLs following from pre 6 April 2016 Administrations are subject to the old regime.  This will also affect old cases where you have submitted an interim D-return with the expectation of submitting a full D1 or final D2 after 6 October 2016.  Therefore, don’t delete all your old templates until you’re sure that you have reported every last old-style D-report.

From my reading of the rules, it seems to me that they provide a transitional period only up to 6 October 2016, but after this date the old D-forms will not be acceptable under the rules.  Presumably, the Service will devise a solution by October!

UPDATE 03/08/2016: I understand that the Insolvency Service would like IPs appointed on Para 83 CVLs after 6 April 2016 either (i) to send a copy of the D1/D2 submitted in the prior Administration with a letter confirming that this form presents the picture also for the CVL; or (ii) to notify the Service of developments since the Admin D1/D2 via the online DCRS system, as they would for “new information” under the new regime – a bit of a fudge, but what can one do if the legislation does not work?!  My thanks for Victoria L for sending me this information.

Liquidators following from post 6 April 2016 Administrations will not be required to submit a D-report.  Whilst this will be good news to any Administrators who keep hold of their Para 83 CVLs, I don’t think it is great for Liquidators who are new to the case.  From my reading of the legislation, it seems to me that these liquidators will be subject to the “new information” requirements and therefore will need to review what the Administrators had reported earlier.

The old rules are revoked in full (apart from the transitional provisions covering old appointments). As far as I can see, this means that there is no longer a 14-day timescale for IPs to submit a report on vacating office.  Presumably, this is because it was felt unlikely that an IP would vacate office before the 3-month deadline.

“Quicker and easier” for whom?

In theory, the move to a simple online form should be quicker and easier for everyone: IPs, their staff and the Insolvency Service alike. However, completing a D-report is more like filling in a self-assessment tax return than completing a passport application: you won’t have all the information at your finger-tips unless you do the prep work.

Most practices have their own tried-and-tested ways of gathering information, following trails, and reaching conclusions on CDDA and SIP2 matters. Structuring a D-report on a string of questions forces our hands.  To reach 4 April and not to have given all IPs access to the detail is, in my view, irresponsible.  Either it shows how little understanding the Service has of IPs’ work or it indicates that the Service has been chasing its tail with a near-impossible deadline.  Personally, I think that it’s a bit of both.


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SIP1: must you make a formal complaint?

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Sorry for the long silence. SIP9/fees have ruled my life for the past few months and I’ll share my thoughts on those when the fog has cleared.  In the meantime, I thought I’d catch up on something far less controversial (you’d think!): SIP1’s requirement to “report” IPs to the Complaints Gateway or to the RPB.  Does this mean that reports will be handled as full-blown complaints or is there another way?

Why shouldn’t all reports be handled as formal complaints? 

Well, imagine you are a licensed IP working for other licensed IPs. Maybe you’re in that boat now.  Maybe you’re in a firm’s compliance department.  Maybe you’re a case manager.  Say you become uncomfortable about something you’ve seen, something that you think triggers the SIP1 reporting requirement.  Should you to report it via the Insolvency Service’s Complaints Gateway?

What would happen next? Would the RPB write to the IP providing a copy of the report?  The IPA’s complaints procedure, for example, states that this is done in all complaint cases.

Clearly, this is unhelpful. But does elevating the need to report concerns to a SIP requirement rule out any alternative to lodging a formal complaint?

Does SIP1 allow IPs to discharge their reporting duty by whistle-blowing to the RPB?

SIP1 states:

“An insolvency practitioner who becomes aware of any insolvency practitioner who they consider is not complying or who has not complied with the relevant laws and regulations and whose actions discredit the profession, should report that insolvency practitioner to the complaints gateway operated by the Insolvency Service or to that insolvency practitioner’s recognised professional body.”

This appears to give IPs a choice: either they may lodge a (formal) complaint via the Gateway or they can report to the IP’s RPB.

What is the destiny of a “report” to the RPB?

The MoU between the Insolvency Service and the RPBs (https://goo.gl/ICqHEo) suggests that there is no practical distinction.  It defines a complaint as “a communication about a person authorised as an insolvency practitioner expressing dissatisfaction with that person’s conduct as it relates to his or her professional work as an insolvency practitioner in Great Britain, or with the conduct of others carrying out such work on that person’s behalf.”  The MoU then states: “Each Recognised Professional Body will forward to the Authority any Complaint received by it within five Working Days of receipt” and then the Authority, the Insolvency Service, will process the Complaint in the usual manner.

So this would appear to complete the circle. It appears that however an IP seeks to report a matter, it is going to be handled as a complaint sooner or later.

Is there no way to whistle-blow to a regulatory body?

So it seems that all reports will end up in the Complaints Gateway. This seems wrong, doesn’t it?  After all, the Insolvency Service is a “prescribed person” for the purposes of whistle-blowing about misconduct in companies generally (https://goo.gl/cIkGL4).  It doesn’t make sense to leave those working within the insolvency profession with nowhere to turn.

Surely the Service appreciates that IPs (and others employed by IPs) might want to use a far more discreet method than a formal complaint to bring their concerns to the attention of the regulatory bodies. I certainly hope that the Service would not look to enforce this aspect of the MoU against the RPBs.  We must be able to trust our regulatory bodies to act sensibly when dealing with such sensitive situations.

To be honest, I haven’t asked anyone at the Service for comments. However, I have sought the views of some within the RPBs.

The IPA’s view

Alison Curry gave me this answer:

“If the practitioner is reporting regulatory intelligence, in discharge of their SIP 1 obligations (and their membership rules, as the case may be) then they may do so to the RPB of the practitioner reported upon.  In such an instance, presumably, they could maintain anonymity if they chose, but could not be expected to be appraised of an outcome (i.e. they would not be a complainant in the formal sense). Presumably then the RPB will have a process by which that intelligence is fed into their monitoring processes. We certainly do and expect the IS to be monitoring that others do also.”

Alison also pointed out that, as information may end up in the monitoring stream, it could result in a referral to the Investigation Committee (which deals with complaints). However, this would be a referral from the Membership & Authorisation Committee (which deals with monitoring), so I think the whistle-blower’s identity would be unlikely to feature in the “complaint” referral, as the chances are that the IPA’s monitoring team will have gathered their own evidence in order for the M&A Committee to consider the issue in the first place.

ICAS’ view

David Menzies gave me this answer:

“You will be aware that the normal complaint procedures as agreed by the IS and the RPBs are that complaints should be made through the Complaints Gateway. RPBs also receive regulatory intelligence and it is possible that information relating to an IP’s misconduct could also be received by the RPB in that manner. In reality whether information is submitted through the complaints gateway or via an RPB is not critical, the important aspect being that the information is transmitted in the first place…

“The issue of the reporter’s identity being disclosed is of course something that no guarantees can ever be given on. If matters eventually proceeded to a disciplinary tribunal then certain documents would have to be put before the tribunal and that would most likely include correspondence with the complainer. There is also the possibility that if the IP who was being complained against submitted a subject access request under Data Protection legislation then it may be difficult to justify not disclosing the correspondence containing the complaint. There may well be circumstances where we can withhold a complainant’s identity but I think that this would need to be looked at on a case by case basis.”

The Other RPBs

I won’t quote my ACCA contact here, as it wasn’t an “official” response. Nevertheless, I did learn that ACCA’s monitoring team receives intelligence – from IPs as well as the other RPBs – and this is similarly absorbed into its monitoring processes, rather than put through the formal complaints process where the discloser doesn’t wish to lodge a formal complaint.

I suspect also that this is the case with the ICAEW and, to be fair to them, they were hoping to revert to me with a consensus view once this matter had been discussed at the Regulators’ Forum a couple of months’ ago. I expect that the demands of other SIP revisions have overtaken the publication of any guidance on this matter.

So whistle-blowing to the IP’s RPB can count as SIP1 compliance?

From the comments I have received, it would seem so. It also seems to me that the RPBs would not treat it as a formal complaint and thus pass it to the Insolvency Service for processing via the Gateway.  Confidential intelligence-delivery worked within RPBs before the revised SIP1.  The revision certainly was not intended to close any doors that were previously open.

What about your duty under your RPB’s Membership Rules?

Within all the RPBs’ membership rules/regulations, there is an obligation to report the misconduct of another member. The purpose of the revised SIP1 was to expand this obligation so that, in effect, the same rules apply whether the offending IP is a member of your RPB or not.

However, this means that, technically, if you have lodged a complaint via the Insolvency Service’s Gateway, you may need to report the matter also to your RPB so that you comply with its membership rules. This does seem a bit of unnecessary duplication, however, and I would hope that an IP would not be beaten about the head for complaining only to the Gateway.

What acts should be reported?

As quoted above, SIP1 sets out two criteria:

  • non-compliance with “the relevant laws and regulations” AND
  • actions that discredit the profession.

I am pleased to see that, at least with the IPA, its rules have been amended in the past few months clearly to bring them in line with the revised SIP1. Previously, their rules had stated “misconduct” needed to be reported, which could have constituted simply a breach of a SIP, statutory provision or the Ethics Code.  Now, the IPA has also imported reference to discrediting the profession (although also, interestingly, discredit to either the member, the IPA, or any other member) as a must-have in order to trigger the reporting requirement.

What actions discredit the profession? Actions at the far end of the spectrum will be blindingly obvious, but I reckon there is a huge swathe of greyness where subjectivity reigns.  To be fair though, we have always lived with this issue.  The revised SIP1 wasn’t meant to make our lives more difficult – I don’t think so anyway – but rather to emphasise our personal responsibility to keep our profession clean.  With this objective in mind, I have no complaints about the revised SIP1.


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A Call to shout about the obstacles to employee consultations

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As the deadline for the Call for Evidence comes to a close, do we have any hint of what might come of it?  Can we grab this opportunity to rescue the rescue process?

Rob Haynes, in ICAEW’s economia, summarises the key issue perfectly: how does government expect IPs (and insolvent businesses pre-appointment) to meet the statutory employee consultation burdens when they must act in the best interests of creditors?  Haynes’ article ends depressingly with thoughts that the EU might influence the protection pendulum to swing even further towards employees.

As I haven’t worked on the front-line for several years, I confess that my point of view is fairly theoretic.  But if we are to persuade government to make the legislation work better for this country’s insolvencies, we need to respond to the Call and I would urge those of you with current experience to put pen to paper, please?

The Insolvency Service’s Call for Evidence, “Collective Redundancy Consultation for Employers Facing Insolvency”, which closes on 12 June, can be found at: https://goo.gl/PW2AOa.

The economia article can be found at: http://goo.gl/Jfp8CX.

 

Answering the Call

As you know, this is all about the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”), which requires employers to consult with employee representatives where they are proposing to make redundant 20 or more employees at an establishment.

Personally, I’ve always wondered what government hopes the employee consultation requirements will achieve, especially in insolvency situations.  The foreword to the Call states:

“The intention of this legislation is to ensure that unnecessary redundancies are avoided and to mitigate the effects of redundancies where they do unfortunately need to occur.”

Setting aside for now the realities of whether this can be achieved, if this is the intention, why does TULRCA tie in only establishments where 20 or more redundancies are proposed?  Aren’t these intentions just as valid for smaller businesses?  Does this threshold seek to recognise micro-businesses?  Maybe, although it also lets off large businesses where a relatively small number of redundancies are proposed, which bearing in mind the intention seems illogical to me.

Assuming that the threshold is intended to avoid micro-businesses carrying the cost burden of complying with consultation requirements, then this does seem to acknowledge that, in some cases, the cost to the employer is a step too far.

But who carries the cost burden in insolvency situations?  At present, the NI Fund.  If the government were to act on calls to elevate the priority of these claims, it would impact on the recoveries of creditors, or perhaps even the Administrators’ pockets if it were made an Administration expense.  Would that persuade insolvent companies/IPs to continue trading in order to consult, even if there were no realistic alternative to redundancy?  Even if trading-on were possible, it still doesn’t make it right to continue trading at a loss simply to meet the consultation requirements.

And would a change in protective award priority achieve the intention described above?  Would it avoid unnecessary redundancies or result in more redundancies, as IPs run shy of taking appointments where their options boil down to: achieve a going concern sale with most of the employees intact (but we’d rather you didn’t do a pre-pack to a connected party without an independent review) or you don’t get paid at all?  And where does this leave the skills of IPs to effect rescue and restructuring strategies?

 

City Link Stokes the Fire

The House of Commons’ Committees’ report, “Impact of the closure of City Link on Employment”, just pre-dated the Service’s Call for Evidence.  Although the subject had been bubbling away for many years, this case may have been the light on the blue touch paper leading to the Call.

The report – at http://goo.gl/BNx5MH – covers much more ground than just TULRCA, but here are some quotes on this subject:

“It is clearly in the financial interest of a company to break the law and dispense with the statutory redundancy consultation period if the fine for doing so is less than the cost of continuing to trade for the consultation period and this fine is paid by the taxpayer…

“We are greatly concerned that the existing system incentivises companies to break the law on consultation with employees.”

These reflect comments by the RMT (City Link went into Administration on 24 December):

“They… were preparing contingency plans from November. Surely at that point they should either have made the thing public, in which case it would have given more prospective buyers time to come forward, or at least given the Government bodies and the union time to consult properly with their members and represent their interests. None of this was done.”

“they deliberately flouted that [the consultation period]. They can do that, because you and I as taxpayers pick up the tab for the Insolvency Service. It is absolutely disgraceful.”

But Jon Moulton’s comment was:

“The purpose of the consultation period was consultation. These are circumstances where no consultation is reasonably possible.”

Fortunately, the Committees acknowledged the position of Administrators:

“Once a company has gone into administration, it is likely to be the case that they will be, or will be about to become, insolvent and the administrator will not have the option to allow the company to continue to trade for the consultation period.”

The Committees’ conclusion was:

“When considering the consultation period in relation to a redundancy, company directors may feel they have competing duties. We recommend that the Government review and clarify the requirements for consultation on redundancies during an administration so that employees understand what they can expect and company directors and insolvency professionals have a clear understanding of their responsibility to employees.”

Does this conclusion suggest that the Committees were swayed by the RMT’s argument, that, although directors may feel they have competing duties, in fact their duties are aligned as there may be advantages in coming out with the news earlier?  The Committees also seem to be questioning IPs’ levels of understanding of their responsibility to employees.  Although they seem to recognise an Administrator’s limited options, they also believe that the system incentivises curtailed consultation, rather than seeing it as entirely impractical.

I hope that sufficient responses to the Call for Evidence address these misconceptions.  If they don’t, responses in the vein of the RMT’s comments may monopolise ministers’ ears.

 

The Call’s Questions

Here are some of the more spicy questions in the Call for Evidence:

  1. How does meaningful consultation with a ‘view to reaching agreement’ work in practice?
  2. What do you understand to be the benefits of consultation and notification where an employer is facing, or has become insolvent?
  3. In practice, what role do employees and employee representatives play in considering options to rescue the business and to help reduce and mitigate the impact of redundancies?
  1. What factors, where present, act as inhibitors to starting consultation or notifying the Secretary when an employer is imminently facing, or has moved into an insolvency process?
  1. What factors, where present, negatively impact upon the quality and effectiveness of consultation when an employer is facing insolvency, or has become insolvent?
  2. Are advisors (accountants, HR professionals, or where an insolvency practitioner is acting as an advisor pre-insolvency) informing directors of their need to start consultation when there is the prospect of collective redundancies? How do directors respond to such advice?
  3. Are directors facing insolvency starting consultation, and notifying the Secretary of State, as soon as collective redundancies are proposed and at the latest when they first make contact with an insolvency practitioner? If not, how can this be encouraged?
  4. Normally are employee representatives already in place? What are the practicalities of appointing employee representatives when no trade union representation is in place?
  1. The current sanctions against employers who fail to consult take the form of Protective Awards. Do you think these are proportionate, effective and dissuasive in the context of employers who are imminently facing, or have become insolvent? Is the situation different as it applies to directors and insolvency practitioners respectively?

 

As this is a Call for Evidence, the Insolvency Service is looking for examples and experiences, even when they are asking for an opinion.  I am sure that many IPs and others in the profession can report a host of examples illustrating powerfully the realities and justifiable strategies in trying to make the most of an insolvent business, demonstrating that efforts to avoid redundancies certainly do feature highly in IPs’ minds.