Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Stepping up Scrutiny of ERA Claims

There’s no doubt that the RPBs have stepped up scrutiny of RP14/15 forms in recent months.  In this blog post, I explore what the Acts and Dear IP actually require when it comes to “verifying” RP14/15 data and the measures you can take to protect yourself from RPB criticism that you’re not doing enough.

An important resource on this subject is Dear IP chapter 11, found at: https://www.gov.uk/guidance/dear-insolvency-practitioner/11-employment-issues

What does the legislation require?

The Employment Rights Act 1996 and the Pension Schemes Act 1993 use similar language.  They require you to notify the RPS of the amount of debt that “appears” to be owed (S187(1) ERA96 and S125(3) PSA93).

However, the RP14/15 forms use much stronger language.

What do the RP forms require?

The RP14 form requires the office holder to make certain declarations including:

  • “This form and any attachments have been completed, and the information given is correct, to the best of my knowledge”

Wow: “best” is a high bar, isn’t it?  It doesn’t allow room even for inadvertent errors. 

The RP15 form includes a similar declaration:

  • “The information given in this form is correct and complete to the best of my knowledge.
  • “I have examined the claim, including the RP15A spreadsheet and the actuarial certificate if applicable, in accordance with section 125 of The Pension Schemes Act 1993”

The above reference to “examined… in accordance with section 125” seems odd, given that S125 includes the far woollier “appears to be” wording, but hey ho.

The RP14 warning

The RP14 form includes a warning that I guess the RPS is hoping will make IPs stop and think:

  • “NOTE: This information is required under section 190 of the Employment Rights Act 1996.
  • “Any refusal or wilful neglect to provide any information required by the Secretary of State, and any false statement made knowingly or recklessly in response to this requirement, may amount to a criminal offence under that section.”

Personally, I question whether this threat has any teeth. My reading of S190 is that the criminal offence can only be committed by “the employer” who provides false information or by anyone who does not cooperate in producing documents and, while S190 states that a director or similar officer can be culpable for a body corporate’s failure, it still seems to me a bit of a stretch to squeeze an office holder into this section.

But of course I would not want to chance it and in any event we don’t need the threat of a criminal conviction to persuade us to be diligent in our work, do we?  If nothing else, we need to comply with the Insolvency Code of Ethics’ fundamental principle of professional competence and due care.

RPB sanctions

Breach of this fundamental principle tends to be the primary allegation on which RPB disciplinary sanctions are made in this area.  Over the past 6 months, three relevant RPB sanctions have been published:

  • IPA (Aug-23)
    • Failed to ensure that a complete and accurate RP15 was submitted
    • Fined £2,000
  • ICAEW (Oct-23)
    • Failed to inform RPS that the IP had not verified employee claims (and other unrelated failures)
    • Fined £5,000
  • IPA (Nov-23)
    • Failed to take sufficient steps to verify employees’ claims and to carry out independent verification of information provided by directors before submitting RP14As and failed to raise any concerns with the RPS as to the veracity of the employees’ claims
    • Fined £10,000

Why has this become such a hot topic?

Protecting against fraudulent claims

All the way back in October 2008, Dear IP warned us to be on the look-out for fraudulent claims (chapter 11 article 27).  More recently, in December 2020, a more in-depth Dear IP was issued (chapter 11 article 70) flagging up the warning signs for potential fraud.  This article is well worth another read.

Alarmingly, it appears that some companies have been operated perhaps solely for the purpose of extracting fraudulent payments from the RPS.  Even some legitimately trading companies may have ghost employees on their books.  But also fraud can be at the lower level, where individuals’ rates of pay or outstanding holiday entitlements are exaggerated.

Not all the warning signs noted in the Dear IP will be spotted from a company’s records.  But what work are IPs expected to do?

Where does the “verification” requirement come from?

As we have seen, the need to “verify” information does not appear in the legislation or on the RP forms.  Where does this idea come from?

It seems to derive from Dear IP chapter 11 article 27, which states:

  • “RPS assumes that the information on the RP14a has been verified from the employer’s records before it is sent to the RPS.”

Thus, if you receive information from any source other than the employer’s records, the assumption is that this information has been verified against the employer’s records.  In my experience, the RPBs seem to have converted this into a requirement, with the IPA taking the strictest line.  Where I have referred in this article to the RPBs, generally I mean the IPA.

Are you expected to verify all data?

Interestingly, Dear IP chapter 11 article 70 suggests not necessarily:

  • “Insolvency Practitioners are reminded that they should make an assessment on a case-by-case basis to decide what reasonable checks are necessary to verify information or identities before submitting the RP14/14A to the RPS.”

Of course, you would need to have documented this assessment for the file – and it is open to an RPB to challenge such an assessment as falling short of showing professional competence or due care – but this Dear IP does appear to allow an IP to decide that verification of alldata may not be reasonable in every case.

However, in my experience, the RPBs appear to be starting from a default that all data – that is, every piece of data for each employee on the RP14A/15A – need to be verified if at all possible.  After all, isn’t that the only way you are going to be able to declare that the data is “correct to the best of my knowledge”?

A variety of data sources

Ok, so the ultimate data source is the employer’s records.  But sometimes the records just aren’t sufficient, are they?  For example, holiday entitlement data can be sketchy and sometimes non-existent in the records and many employees have a better grip on what overtime or commission they’re owed.

Are there any other acceptable sources of information?

Is it ok to use data on a spreadsheet completed by the director/employee?

It is fairly common practice to provide a pro forma spreadsheet to a director or payroll person, usually pre-appointment, and ask them to complete it with all the employee data. 

This may seem a practical way to compile data from a variety of company records that the director/employee knows inside-out.  However, going by the RPBs’ recent activity, this triggers the Dear IP need for you to “verify” the data against the company’s records.  This pretty-much defeats the object of getting someone else to complete the spreadsheet for you, doesn’t it?

Is it ok to rely on information from pension providers?

Again, this is a fairly common practice, not least as the RP15 form expects the RP15A to be completed by the pension provider.  However, the RPBs are expecting the RP15A data to be verified against the employer’s records.

Is it ok to rely on RP14As/15As drafted by employment specialists?

It appears not.  Even where the specialist has been instructed by the office holder to act as their agent, the RPBs appear to be expecting all data on the forms to be verified against the employer’s records.  The argument is: how else can the IP sign off the form as correct to the best of their knowledge?

In my mind, this seems a step too far.  Surely the RPB doesn’t expect an IP personally to cross-check all the data on an RP14A/15A form against the company’s records where one of their staff have completed the form, do they?  But how is this different from their agent, an external specialist, completing the form?

I asked an Insolvency Service person this question.  They maintained that, in order for the IP to make the declaration, the IP must have some basis on which to form an opinion that the data is correct, so this would require some cross-checking.  However, they did at least agree that it need not be all data.

Is it ok to ask the employee direct or to draw information from the RP1?

I’m sure you can guess my answer: nope, not without verifying the information against the company’s records.

However, Dear IP (chapter 11 article 70) does provide a precedent for this:

  • “Where there is insufficient evidence in the records, IPs should not use the RP1 data to complete the RP14A entry without contacting RPS first to discuss. In the absence of that discussion RPS will assume that there is evidence in the records to substantiate the RP14A”

There’s the instruction: if you have no alternative, then contact the RPS first and discuss with them the last resort of relying on the RP1 data.

What if the company’s records conflict with what an employee says they are owed?

I have heard stories of, not only employees, but also RPS staff badgering IP staff to submit an amended RP14A so that an employee’s claim can be processed.  Of course, while there may be legitimate reasons for amending an RP14A where you are satisfied that the RP14A is wrong, what if you’re simply being told by the employee that the company’s records are wrong or incomplete?

With all the emphasis on preventing fraud and relying on the company’s records, I wonder what would happen if you just said no, you’re not prepared to amend the RP14A. 

S187(2) ERA96 and S125(5) PSA93 empower the RPS to make a payment without the office holder’s “statement”, so you should not be held hostage with the threat that an amended RP14A is the only way the employee is going to get paid.  You will have submitted the original RP14A to the best of your knowledge, having verified the information as far as possible against the company’s records, so why change your mind on the employee’s say-so?

But what if you just don’t have sufficient company records?

Well, as mentioned above, if you are drawing information from an RP1, Dear IP instructs you to discuss this first with the RPS.

In all other scenarios where you use data other than that drawn directly from the employer’s records, I recommend that you notify the RPS of this action when you submit the RP14/15. 

In my mind, if you use data from another reasonable source, it could still be what “appears” to be owed and it could be “correct to the best of your knowledge”, provided that you truly do not have in your possession any other more reliable knowledge, e.g. from company bank statements, that you haven’t checked against.  The RPB sanctions above also illustrate that notifying the RPS of the limitations of your verification work is an acceptable step.

How exactly should you verify data?

As with all things in insolvency administration these days, I think it comes down to having an established procedure and checklist to document the work done and decisions made.  Here is my 6-step process.

1. Document the information you obtained, i.e. each item of data required by the RP14A or RP15A.  It would also be wise to follow Dear IP chapter 11 article 81, which sets out the RPS’ approach to directors’ claims: as the office holder signing off an RP14, you need to satisfy yourself that a director’s claims as an employee are substantiated and so it would seem reasonable to apply the same rationale as the RPS and to document your decision in this regard

2. Document the source(s) of each part of the information, i.e. if it were not all in the company’s records, how did you plug each gap?

3. Check information against the bank statements, e.g. who was paid by the company, what were they paid and when were they – and the pension scheme – last paid?

4. Note whether the company records support each item of data and, if not, what you are relying on

5. Note the bases for calculating the weekly pay and holiday rates for employees with variable rates of pay (see e.g. Dear IP chapter 11 article 72) and how you have calculated holiday entitlements

6. Tell the RPS everything, in particular the extent of your verification work and the source(s) of information where the employer’s records were insufficient

At the Compliance Alliance, we have created a checklist covering these steps and we recommend that the completed checklist be sent to the RPS at the time of submission of an RP14/15 form.

Finally also you need to keep abreast of the legislation.  For example, Dear IP chapter 11 article 82 noted several 2023 SIs that may affect the definition of “wages” or “weekly pay” and other Regulations will affect holiday pay calculations (Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023).  Alternatively, instruct employment specialists to assist.  This can take much of the pain out of the process.

That’s a crazy amount of work?!  Are the RPBs aware of how this impacts on time costs?

I asked an Insolvency Service person this question.  They appreciated that substantial time could be required to carry out this verification work.  They maintained that the RPS has a duty to ensure that payments from the NI Fund are accurate and they are therefore looking to IPs to help by providing accurate RP14/15 data.

The common theme in all this is: how else can you declare that the information you have provided on an RP14/15 is correct to the best of your knowledge?

I recently presented a webinar on this topic to clients of the Compliance Alliance.  You and all your colleagues can get access to a recording of this webinar, along with access to all the recorded webinars in our library and c.10 future webinars, for £350 + VAT for one year.  For enquiries, please email info@thecompliancealliance.co.uk.


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The Rules’ complexities: get used to them!

In their report on the 2016 Rules’ review, the Insolvency Service all but acknowledges that some of the Rules leave IPs playing Twister, being forced into shapes that just won’t fit.  However, there are few admissions that things need to change.  Generally, all we can hope for is a review-on-the-review, which will consider further what, if anything, should change.

In this article, I cover:

  • The CVL process – top of the InsS’ list for change
  • The InsS maintains a general reluctance to fix fees
  • The new decision processes – successful or too complicated?
  • The InsS sees few problems with committees, dividends, the lack of prescribed forms, SoAs and personal data
  • But there are a handful of odds-and-sods that the InsS intends to change

The InsS report on their review can be found at https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

My personal consultation response is at https://insolvencyoracle.com/consultation-responses/

CVLs to change

One area that the InsS does appear committed to change is the CVL process.  In scope for consideration are:

  • The fact that the Rules only empower an office holder, not a director (or an IP acting on their instructions), to deliver documents by website
  • The fact that, although the Temporary Insolvency Practice Direction allows remote statutory declarations, a more permanent change to verifying Statements of Affairs would be beneficial
  • The fact that the Rules do not provide for the liquidation estate to pay any non-R6.7 pre-appointment expenses, e.g. the costs of seeking the shareholders’ resolution to wind up
  • Some respondents’ requests for more time to consider S100 decisions and SoAs

I find the last point a irritating: the new Rules’ S100 process for commencing CVLs is already more creditor-friendly than the IR86’s S98.  Now, the Statement of Affairs must be received by creditors at the latest the business day before the decision date, whereas under the IR86 the SoA only needed to be provided to the meeting.  Also, the new Rules’ 3-business-days-between-delivery-and-the-decision-date means that the notice period is usually one day longer than it was under the IR86. 

True, few CVLs need to happen quickly, but an extension in the period really must be accompanied by wider scope for the advising IP’s costs, as well as those of agents and solicitors, to be paid from the estate where the work is done with a view to the CVL.

 

A lacklustre response on fees

It was disappointing to read the InsS’ opening comment on the general subject of fees that:

“It is not certain that the rules on a necessarily moderately complex topic can be made clearer”. 

Pah!  You’re just not thinking hard enough, guys.

But at least we have some comfort that the InsS has “particularly noted concerns around rules 18.24 to 18.27 on changes to the bases of remuneration”, a topic on which I have blogged on several occasions, and they propose to review these fees rules “at a future date”.

While the InsS notes “concerns that the new Rules are not effective for small cases, including the absence of the ability of remuneration in a CVL to default to Schedule 11 scales”, they stated that “stakeholders”suggested “that reintroducing this measure… would make the process more complicated”.  Strange, I’m not sure why anyone would be against this measure.

They also stated that it might make “the process burdensome and more expensive rather than more efficient” if the rules were to provide different fee criteria for small cases, although the report does not make clear to what suggestion this was alluding. 

In my consultation response, I had suggested a de minimis statutory fee (after all, the OR has a set fee of £6,000) in recognition of the basic statutory and regulatory requirements of all CVLs, BKYs and WUCs.  This IP statutory fee either could be granted as automatic or, if the InsS weren’t comfortable in taking off all the reins, could be approved using the deemed consent process.  Personally, I was not suggesting different fee criteria for small cases, I was suggesting that this could be the standard for all cases, leaving the office holder to seek approval in the usual way for any fees above this de minimis level. 

I’m not entirely surprised that they’ve ignored such a suggestion from little me.  However, to suggest that there is no process by which the Rules could be changed to help IPs avoid the burden and expense of seeking the court’s approval where creditors refuse to engage in a decision procedure on fees is disappointingly defeatist and, I suspect, reflects a persistent lack of understanding of the difficulties encountered by many IPs.

Not even fees estimates to change

The report also noted that several respondents had made suggestions to simplify the fees estimate requirements.  The InsS gave several reasons why they felt there should be no changes, including:

  • the fees estimate provisions align with the statutory objective that regulators ensure that IPs provide high quality services at a fair and reasonable cost (hmm… does spending truck-loads of time creating a fees estimate pack really achieve this?);
  • “the level of fees charged by officeholders have often been a cause of complaint amongst creditors and sanctions by their regulators” (“often”?  Really??  The InsS Regulatory Report for 2021 reported that 5 out of 423 complaints were about fees and only one of the 53 regulatory sanctions listed was about the level of fees); and
  • “amending the Rules in the ways that have been suggested would have the effect that creditors would once again find it difficult to scrutinise and challenge remuneration due to a lack of timely information”. 

It’s a shame that the InsS appears to view the time that IPs spend in complying with the copious information requirements as time – and cost to the estate – well spent.

The case for physical meetings

Before the new Rules came into force, I think that many of us thought that removing the power to convene a physical meeting and replacing this with a variety of decision processes was unhelpful and an unnecessary complication.  Although the InsS report indicates that these views have persisted, personally I think that 5 years of experience with the new decision processes, as well as the pandemic lockdowns, has led many of us to think that maybe this new normal of decision-making isn’t so disastrous after all. 

But I do struggle to accept the report’s contention that “there is some suggestion that the new processes have not been detrimental to creditor engagement”, unless by “engagement” they simply mean “voting”.  It seems the InsS is arguing that correspondence and deemed consent decision processes “may encourage creditor engagement precisely because they reduce the need to spend time and money actively interacting with officeholders in cases of lesser interest”.  Hmm… this might explain why it seems that some creditors lodge objections to deemed consents and then fail to engage when the IP is forced thereafter to convene another decision procedure. 

I also had to smile at the InsS’ suggestion that the increased number of creditor complaints over the complexity of the decision processes may actually reflect creditors’ increased interest in engaging!

Decisions, decisions…

Fundamentally, the InsS report concludes that the new processes require no material changes.  In particular:

  • The InsS is happy with the 11.59pm cut-off time;
  • The InsS is happy that non-meeting votes cannot be changed (R15.31(8)); they state that, to provide otherwise “would require a framework to govern exactly how and when that could happen” (Would it really?  It’s not as if we have a framework for changing a vote submitted by proxy, do we?)
  • The InsS is happy that there is no ability to adjourn a non-meeting process; they consider that “naturally officeholders would not use a non-meeting process where there was any indication that an adjournment might be needed”
  • The InsS is happy that their Dear IP 76 encouragement for IPs to take a pragmatic approach as regards the statutory timescales for delivering documents to overseas creditors is sufficient
  • In response to some comments that office holders would value the discretion to convene a physical meeting, the InsS believes that at present “the restriction on physical meetings is operating correctly, this does not rule out future changes in this area”

But the InsS has indicated that a couple of suggestions are worthy of further consideration:

  • That creditors with small debts should not be required to prove their debt in order to vote
  • Fixing the apparent inconsistency in requiring meetings, but not non-meeting decision procedures, to be gazetted

Information overload

The InsS report does acknowledge that “information overload” as regards creditors’ circulars for decisions is “a core concern”.  However, they suggest that this is in part because some IPs “are still in the process of determining how best to use and present the new decision-making options”.  Charming!  But, InsS, you cannot escape the truth that the new Rules require an extraordinary amount of information – R15.8 alone covers a page and a half of my Sealy & Milman!

Surely we can cut out some of the gumpf, can’t we?  For example, some people raised the point that R15.8(3)(g) requires pre-appointment notices to include statements regarding opted-out creditors even though no such creditors would exist at that stage.  The InsS suggests the solution lies in adding yet further information in such notices if IPs “think that reproducing the literal wording of the rules could cause confusion”. 

This implied confirmation that IPs do need to provide such irrelevant statements in notices is frustrating, given that the court had previously expressed the view (in re Caversham Finance Limited [2022] EWHC 789 (Ch)) concerning the similarly irrelevant requirement of R15.8(3)(f) for notices to refer to creditors will small debts:

“I think that Parliament cannot have intended that redundant information should be included on the notice”. 

Well, the InsS has spoken: they do require such redundant information.

Are decisions like dominoes?

I love it when the InsS writes something that makes me go “ooh!” 

The report describes the scenario where a decision procedure was convened to address several decisions, but then “a physical meeting is requested in one of those decisions but not the others”.  Someone had suggested that the physical meeting be convened to cover all the original proposed decisions or that the Rules make clear that the request applies only to one. 

The InsS has responded that they consider that:

“the Rules are clear that each decision is treated separately for the purposes of requests for physical meetings”. 

While I can see this from Ss 246ZE(3) and 379ZA(3) – these refer to creditors requesting that “the decision be made by a creditors’ meeting” – I have not seen this being applied in practice. 

So this means that every time a creditor asks for a physical meeting, it seems the director/office-holder should ask them what decision(s) they want proposed at the meeting and, if there are any decisions that they don’t list, then these decisions should be allowed to proceed to the original decision date.  Interesting.

What about concurrent decision processes?

The report noted comments that the Rules are unclear as to whether a decision procedure can run concurrently with a S100 deemed consent process in order to seek approval of pre-CVL expenses or the basis of the liquidator’s fees. 

The InsS’ reaction to this issue is curious.  The report merely flags the “risk” that the decision procedure on fees would be ineffective where the creditors nominate a different liquidator to that resolved by the company (would it?  Why??). 

So… does this mean that the InsS doesn’t see any technical block to these concurrent processes?  Are we any clearer on this debate that has been running since 2017?

What about the reduced scope for resolutions at S100 meetings?

The report notes that the new Rules have excluded the IR86’s provision that S98 meetings may consider “any other resolution which the chairman thinks it right to allow for special reasons”, which was previously used as the justification for S98 meetings also considering the approval of pre-CVL fees.  Does this omission affect the ability for fees/expenses decisions to be made at S100 meetings?

The InsS’ response to this one is equally cryptic.  They appear to be saying that, as “rule 6.7 now includes expenses that were omitted from the Insolvency Rules 1986”, the “any other resolution” provision is no longer necessary. 

I don’t get it: R6.7 is no wider in scope than the old Rs 4.38 and 4.62, so there’s no remedied omission as far as I can see.  The problem is that the new Rules still lack an explicit provision that the initial S100 meeting may consider other resolutions, such as approval of the R6.7 expenses and indeed the basis of the liquidator’s fees.  At least it’s nice to have the InsS’ view that there is no problem, I suppose!

Committee complexities

The InsS report does not pass comment on whether respondents’ questioning “the value of continually requesting that creditors decide whether to create a committee” was a good point worth taking forward.

The report does suggest that the InsS won’t be taking forward issues around the establishment of a committee where there are more than 5 nominations.  The InsS considers that the decision in Re Polly Peck International Plc (In Administration) (No. 1), [1991] BCC 503, “remains relevant”.  This decision concluded that, “where more nominations are received than available seats on the committee, that a simple election should be held with those nominees who receive the greatest number of votes (by value) filling the vacancies”.  Ah yes, the simple election – simples! 

The more recent decision, Re Patisserie Holdings Plc (In Liquidation) ([2021] EWHC 3205 (Ch)), suggests that even where fewer than 5 nominations are received, those nominations will only be decisive where they have been made by the majority creditors.  Therefore, it seems to me that we are still left with a cumbersome committee-formation process stretching over two decision processes.

No going back on prescribed forms

The InsS is of the view that the decision to abolish prescribed forms was the correct one.  The report states that there does not appear “to be truly widespread difficulty” and they maintain that their impact assessment had accommodated the familiarisation cost appropriately. 

Although I think this unfairly plays down the impact on small businesses, I do think the boat has sailed on this debate.  I would have loved the InsS to have provided optional templates to support the prescribed content rules, but given that even the InsS’ own proof of debt form does not help creditors to meet all the Rules’ requirements, it is probably safer that they did not.

No easy fixes for dividends

An age-old bugbear is the hassle for all parties where a dividend payment is paltry.  It does the profession no favours when office holders are required to post out cheques for sums smaller than the postage stamp. 

I understand that the InsS did consider the pre-IR16 request to provide a statutory threshold for dividend payments below which they need not be paid.  But I’d heard that this had been considered unconstitutional, as every creditor has the right to the dividend no matter how small.  Instead, the InsS gave us the “small debts” provisions, which I think do the opposite and only increase the likelihood that office holders will be sending small payments to creditors who consider it is just not worth their trouble. 

This time around, it was suggested to the InsS that creditors be entitled to waive their dividend rights in favour of a charity or that this process could be automatic for payments below a certain amount.  The InsS rejected this suggestion, citing that it would simply add a different administrative burden onto office holders and creation of an automatic process would impair creditors’ rights to repayment.

The report does a good job of explaining why a NoID for an ADM must be sent to all creditors, not just those who have not proved as in other cases.  This is because the ADM NoID triggers the set-off provisions of R14.24, so all creditors need to know about it.  So no change there either.

Some respondents commented on the generally unnecessary duplication of requiring employees to submit proofs even though the IP receives information about their claims sent to the RPO.  This is an area that the InsS has noted for future consideration.

SoAs and personal data

I’m sure we remember the kerfuffle created by Dear IP chapter 13 article 97, which seems (or attempts) to grant IPs the discretion to breach the Rules requiring the circulation to creditors of personal data in Statements of Affairs.  Well, it seems that the InsS has already forgotten it.

As regards suggestions that the Rules might restrict the circulation of the personal details of employee and consumer creditors, the report states that the InsS is:

“satisfied that the current balance struck by the Rules remains an appropriate one” 

Oh!  So does that mean they will be recalling the Dear IP article?

Respondents also raised other concerns regarding the disclosure of personal details:

  • the requirement for non-employee/consumer creditors’ details to be filed at Companies House, so this would include personal addresses of self-employed creditors etc.
  • the need to disclose an insolvent individual’s residential address on all notices
  • the fact that, if the InsS is truly concerned with creditors being able to contact each other, then wouldn’t email addresses be more relevant?

The report states that “these issues will remain under consideration for amendment in future updates to the Rules”.

The opt-out process: who cares?

In my view, far too much space in the report was devoted to explaining the feedback of the creditor opt-out process, with the conclusion that the InsS “will give further thought to whether there should be any changes to, or removal of, these provisions”. 

I was not surprised to read that few creditors – “less than 1%” (personally, I would put it at less than 0.1%) – have opted out.  One respondent had a good point: don’t the opt-out provisions give the impression “that information provided by officeholders has no value or interest”?  Even the report referred to creditors opting out of “unwanted correspondence”.  Doesn’t this suggest something more fundamental, that in many respects the Rules are overkill and that communications could be made far more cost-effective?

Odds-and-sods to fix

The report acknowledged the following deficiencies in the Rules… or in some cases the InsS admitted merely the potential for confusion:

  • ALL: the court’s ruling in Manolete Partners plc v Hayward and Barrett Holdings Limited & Ors ([2021] EWHC 1481 (Ch)), which highlighted the limited scope of “insolvency applications” in R1.35 leading to additional costs – this issue has been singled out by the InsS as being one of the “most pressing” to resolve
  • ADM: the requirement for the notice of appointment of Administrators to state the date and time of their appointment – in view of the expansive comments by the courts on this topic, it is surprising the InsS only intends to “give further consideration to removing this requirement”
  • ADM/CVL/MVL/WUC: oddly, the report states that, as R18.3(1)(b) does not explicitly require a progress report to include details of the company (but just the bankrupt), this “gives the appearance of an error so may be confusing”.  However, R18.3(1)(a) states that reports need to identify “the proceedings”, which under R1.6 includes information identifying the company, so I don’t understand the problem.  In contrast with some of the items mentioned above, the InsS apparently thinks that this issue is of such significance that they “will look to rectify this in a future update to the Rules”.  Guys, where are your priorities?!
  • CVL: “The differing use of the word ‘between’ in rules 6.14(6)(a) and 15.4(b)” (i.e. in one case, the InsS believes it does not include the days either side of the “between”, but in the other case, I think they believe it does) – the InsS has set aside for further review whether the contexts make this inconsistency sufficiently clear
  • BKY: the fact that R10.87(3)(f) lists the contents of a notice being that the Trustee will vacate office once they have filed a final notice with the court, but the Act/Rules do not require the Trustee to file such a notice
  • BKY/WUC: the 5-day period in which to nominate a liquidator or trustee after the date of the OR’s notice – the InsS acknowledged that the short timescale has caused issues (indeed! Especially considering this seems to be the only Rules’ timescale that does not start on delivery of the notice, but rather on the date of the notice)
  • CVA/IVA: Rs 2.44(4) and 8.31(5) appear to have caused some confusion as they now state that a supervisor “must not” (previously: “shall not”) vacate office until the final filing requirements have been met
  • CVA: the fact that there is no provision to file at Companies House any notice of a change of supervisor – again, the InsS’ response is surprisingly non-committal; they will merely “consider whether this justifies creating an additional filing requirement for officeholders”
  • IVA: R8.24 was overlooked in the EU Exit changes and still reflects the wording required when the UK was part of the EU

So much to do, so little opportunity

This article demonstrates the Insolvency Service’s long to-do list.  And this is only the Rules’ review.  Last month, the InsS issued a call for evidence on the personal insolvency framework and they will have a fundamental role in the statutory debt repayment plan process expected to be rolled by the end of this year… and of course no doubt behind the scenes they are working on the response to the proposed single regulator consultation. 

With such high profile projects, when on earth are they going to find the time to get back to the Rules?!


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

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

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

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

Is a paid creditor still a creditor?

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

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

The general principle?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What about prefs-only decision procedures?

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

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

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

The Insolvency Service’s view in 2017

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

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

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

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

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

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

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

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

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

What is a “secured creditor”?

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

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

The consequence of a clarification of the Rules

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

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

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

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

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

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

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

The advantage of HMRC pref status?

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

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

Other issues with the Rules Review report

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

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


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It’s not just connected pre-packs and it’s not just legislation

If the draft regs and pre-packs were a Venn diagram…

The new draft legislation requiring an evaluator’s opinion on connected pre-packs has drawn most attention.  But the measures will affect more than just connected pre-packs and the Insolvency Service’s report reveals other planned efforts to influence IPs’ activities and disclosures.

In this article, I focus on the less-publicised changes that are afoot, including:

  • The impact on post-appointment connected party sales
  • The option of seeking creditors’ approval, rather than getting an independent opinion
  • The government’s desire to increase the use of viability statements
  • The emphasis on SIP16’s “comply or explain” requirement
  • The government’s wish for RPBs to probe into cases where marketing is not undertaken
  • The need for greater compliance with SIP16’s disclosure requirements

The Insolvency Service’s Pre-Pack Sales in Administration Report and the draft regulations are at: https://www.gov.uk/government/publications/pre-pack-sales-in-administration.

 

The draft regulations are not about pre-packs

No, really, they’re not.  The draft regulations impose new requirements on:

  • Connected party sales only
  • But not just connected party pre-packs, also any sales of “all or a substantial part of the company’s business or assets” within 8 weeks of the start of the Administration
  • How is a “substantial part” defined? It isn’t.  It will be up to Administrators to form an opinion about whether a sale involves a substantial part
  • And the regs will capture not just sales, but also the “hiring out” of all or a substantial part of the business or assets

 

Why interfere with post-appointment sales?

The Insolvency Service’s report does not explain or seek to justify this step.  It seems to suggest that, because the SBEE Act’s power to legislate extended to all connected party sales, they were free to regulate all such sales.  However, they have graciously decided “only” to apply the requirements to sales within 8 weeks of the start of the Administration.

So… a secured lender appoints Administrators perhaps in a hostile manner.  The Administrators have had no contact with the director before their appointment, but they soon learn that the director is anxious to hold onto the business so will offer almost anything.  The Administrators are keen to recover as much as possible for their appointor and, as is their statutory duty, to care also for other creditors’ interests, so they play hard ball to squeeze out the best deal.  The Administrators’ agents recommend that they snap up the offer – maybe they’ve now carried out some marketing, maybe it’s a no brainer that no unconnected party in their right mind would offer anything approaching the director’s offer – the secured lender is happy with it, and the Administrators make sure that the purchaser is good for the money.  But still the purchaser must instruct an independent evaluator?

 

What will the evaluator evaluate?

The evaluator’s report must state whether or not they are:

“satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances”

It seems to me that the people best-placed to evaluate whether the consideration is reasonable are professional agents, aren’t they?  Shame that independent, qualified, PII’d agents instructed by the Administrators to do just that cannot be trusted with this task, isn’t it?

How does someone assess whether “the grounds for the substantial disposal” are reasonable?  It’s not “the grounds for Administration”, so this will not address the cynics’ belief that directors engineer companies into Administration to “dump debts” and start again.  I’m not saying this happens often, if at all.  Unnecessarily putting yourself through an Administration and then battling to restore, or to build new, trust of suppliers, employees, and customers seems a drastic step to take.  I think that many connected purchasers underestimate the struggles ahead of them.

Presumably, “the grounds for the substantial disposal” relates to the question: could a better price be achieved by a different strategy?  This sounds like a debate about the marketing strategy, the prospects of alternative offers, and going concern v break-up, so again professional and experienced agents seem best-placed to make this evaluation.

 

But why not just ask the Pool?

I understand the noises of: what’s wrong with simply asking the Pre-Pack Pool?  But I return to the question: why have an opinion in the first place?  It won’t dispel the suspicions that the whole thing has been designed by the directors who shouldn’t be allowed to use Administration or Liquidation and it won’t answer the many who just believe that it’s wrong for a director to be allowed to buy the business or assets from an Administrator or Liquidator.  The public comments below The Times’ articles on pre-packs say it clearly: some people call connected party sales (and CVAs) “fraud” or “legal theft”.  How do you persuade these people to see things differently?

The strongest argument I could find in the Insolvency Service report for a Pool opinion was:

“Whilst some stakeholders said that an opinion from the Pool (or lack of one) would not affect their decision to trade with a business that was sold to a connected party purchaser, other creditor groups said that their members valued the Pool’s decision, and that the opinion did influence their decision as to whether to trade with the new company.  They also stated that where the Pool had been utilised, the opinion given helped to demonstrate to creditors that in some circumstances a sale to a connected party provided a reasonable outcome for creditors.”

So some say it helps, some say it doesn’t.

Somehow the Insolvency Service concluded that their “review has found that some connected party pre-packs are still a cause for concern for those affected by them and there is still the perception that they are not always in the best interests of creditors”, but I saw nowhere in the report where those perceptions originate.  The report referred to the media and the CIG Bill Parliamentary debates.  Is that your evidence?  Oh yes, some Parliamentarians have been very colourful in their descriptions of pre-packs; one said that the directors offer “a nominal sum – maybe only £1 or a similarly trivial sum”.  Their ignorance – or the way they have been misled to believe this stuff – is shameful and on the back of such statements, distrust of connected party pre-packs grows and so the case for an independent opinion is made.

And now the R3 President is reported as saying that “effectively anyone will be allowed to provide an independent opinion on a connected party pre-pack sale, which risks abuse of the system that undermines the entire rationale of these reforms”.  Again, we feed the beast that bellows that IPs – and professional agents – cannot be trusted.

So, ok, if it makes you happy, fine, let it be a Pre-Pack Pool opinion.  In my view, they have fallen far short of justifying their existence, but if it shuts the mouths of some who see pre-packs as “Frankenstein monsters” (The Times) or at least gives them pause, then so be it.

 

Getting creditors’ approval as an alternative

The draft regulations provide that, as an alternative to getting an evaluator’s opinion, a substantial disposal to a connected party may be completed if:

“the administrator seeks a decision from the company’s creditors under paragraph 51(1) or paragraph 52(2) of Schedule B1 and the creditors approve the administrator’s proposals without modification, or with modification to which the administrator consents”

This must be achieved before the substantial disposal is made, so it will not be available for pre-packs… unless you can drag out the deal for 14+ days.

Could it help for post-appointment business sales?  Provided that you don’t make a Para 52(1)(a), (b) or (c) statement in your proposals, it might.  And let’s face it, if you’re issuing proposals immediately on appointment and before you’ve sold the business and assets, you may be hard pressed to make any positive statement about the outcome of the Administration.

But if you issue proposals immediately, i.e. before you have negotiated a potential deal with anyone, what exactly would the creditors be approving?  Presumably, they would be informed of your strategy to market the business and assets and shake out the best deal from that.  They would not be informed of what offers (if any) are on the table and it would be commercial suicide for the proposals to include valuations.  Would such vague proposals achieve what the Insolvency Service is expecting from this statutory provision?

Could it be that the Service recognises that true post-appointment connected party sales (i.e. not those that avoid the pre-pack label by resisting negotiation until a minute past appointment) do not require independent scrutiny and this is their way of avoiding putting them all in that basket?

 

Smartening up on SIP16 statement compliance

The Insolvency Service reports that SIP16 statement compliance has improved: since the RPBs took on monitoring compliance in late 2015, the annual non-compliance rate has dropped from 38% to 23%.  The report states, however, that:

“the level of non-compliance continues to be a concern, as SIP16 reporting is a key factor in ensuring transparency and maintaining stakeholder confidence in pre-pack sales”

Hang on, when did SIP16 require a “report”?  The Insolvency Service refers throughout to a SIP16 report.  It’s funny, isn’t it, how something that started off as “disclosure”, then became a “statement”, and now is considered a “report”?  I think this demonstrates how the SIP16 disclosure requirements have grown legs.  And, while the report acknowledges that the RPBs state that most of the non-compliances are “minor technical breaches” and that there is “now more information available to creditors as a result of the SIP16 changes”, it seems to suggest that stakeholder confidence can only be enhanced if we eliminate even those minor breaches.

The report focuses on three areas where it seems that “greater consistency needs to be promoted across the profession”: viability statements, marketing activity and valuations.

 

The value of viability statements

The report indicated that, of the 2016 connected party SIP16 statements reviewed, 28% of them “stated viability reviews/cash flow forecasts had been provided”.  69% of the purchasers in these cases were still trading 12 months later.  However, in the category of cases where no viability statements were evidenced, 87% of those purchasers were still trading after 12 months.  This suggests to me that disclosure of a viability statement does not particularly help Newco to gain trust with creditors!

Of course, rightly so the report states that the purchasers may well have carried out their own viability work but have been unwilling to share it.  What I was far less pleased about was that the report stated that “alternatively, it may be that the insolvency practitioner… is not requesting the purchaser to provide a viability statement, which would indicate non-compliance with the requirements of SIP16”.  The cheek of it!  If a progress report omitted the date that creditors had approved an office holder’s fees, would the Service suspect that this was because it never happened?  Actually, I can believe that they would.  The Insolvency Service has no evidence of non-compliance in this regard, but they can’t help but stick the boot in and foment doubts over IPs’ professionalism and competence.

Having said that, IPs would do well to double-check that they are asking for viability statements and making sure that there’s evidence of requests on the file, don’t you think..?

I wonder whether a future change will be that the RPBs will ask to be sent, not only the SIP16 statement, but also evidence of having asked the purchaser for a viability statement.

The report’s conclusion is puzzling:

“In discussions with stakeholders no concerns were raised regarding the lack of viability statements. However, the government considers that there continue to be benefits to completing viability statements for the reasons highlighted in the Graham Review. Therefore, we will work with stakeholders to encourage greater use.”

Hmm… so no one seems bothered about their absence, but the government wants to see more of them.  Logical.

 

Compliance with the SIP16 marketing essentials

The review sought to analyse 2016 connected party SIP16 statements as regards explaining compliance with the six principles of marketing set out in the SIP.  The report states:

“the principles that encourage exposure of the business to the market ‘publicised’ (54% compliance), ‘broadcast’ (53% compliance) and ‘marketed online’ (56% compliance) have only been complied with in just over 50% of cases.”

Given that they were reviewing only the SIP16 statements, I’m not sure they can say that the marketing principles have not been complied with.  Might it just be that the IPs failed to explain compliance in the SIP16 statement?

Having said that, the review also revealed that, “of those that deviated from the marketing principles, over 80% of administrators provided justification for their marketing strategy”, i.e. they complied with the SIP16 “comply or explain” principle.  This suggests to me that 20% of that c.50% need to try harder to get their SIP16 statements complete.

 

The value of marketing

The report acknowledges that “in some limited cases it may be acceptable for no marketing… to be undertaken”.  I think that many would go further than this: in some limited cases, it may be advantageous not to market.  The review stated that no marketing had been carried out in 21% of the 2016 connected pre-packs reviewed.  This does seem high to me and I think does not help counteract suspicions of undervalue selling.

Interestingly, though, where marketing was undertaken, 46% of those connected party sales were below the valuation.  But where marketing was not undertaken, 43% were below “the valuation figure”.  As most IPs get valuations on both going concern/in situ and forced sale bases, I’m not sure which “figure” the Service is measuring against here.  But nevertheless perhaps this is some comfort that marketing doesn’t make a whole lot of difference… unless of course it attracted an independent purchaser, which would have taken the case outside the scope of the Service’s review entirely.  Shame that they didn’t analyse any unconnected SIP16s!

 

The compliance problem

The government’s response to the diversity in approach to marketing and to SIP16 disclosure includes that they will:

“work with the regulators to ensure: there is greater adherence to the principles of marketing”; and “there is a continued increase in compliance with the reporting requirements under SIP16”.

As I mentioned above, the report stated that SIP16 statement non-compliance was at 23% in 2019… but in her recent virtual roadshow presentation, Alison Morgan of the ICAEW stated that their IPs’ 2019/2020 rate was at c.50%.  We must do better, mustn’t we?!

I too am frustrated about the levels of compliance with SIP16.  I realise it’s a killer of a SIP – some of the requirements don’t follow chronologically or logically and some leave you wondering what you’re being asked to disclose.  I realise that almost no pre-packs fit neatly into the from-a-to-b SIP16 ticksheet.  But I don’t know when I last saw a 100% fully compliant SIP16 disclosure!  I know I’m harsh, harsher it seems that some of the RPB reviewers, but whatever SIP16 asks for, please just write it down… and tell your staff not to mess with templates – they/you may think that some statements are pointless or blindingly obvious, but please just leave it in.

 

Expect to be “probed”!

Another part of the government’s response is to:

“ensure that where no marketing has been undertaken, the explanation provided by the administrator is probed by the regulator where necessary”.

True, SIP16 allows for a “comply or explain” approach, but if a large proportion of businesses are not being marketed, it just opens us up to the cheap shot that the sale might have been at an undervalue, doesn’t it?

What is a valid reason for not marketing?  Again in her recent presentation, Alison Morgan indicated that a fear of employees walking out or of a competitor stealing the business may not in themselves be sufficient justification.

 

SIP16 changes in prospect

So what changes will we see in SIP16?  The government response is that they:

“will work with the industry and the RPBs to prepare guidance to accompany the regulations and to ensure SIP16 is compatible with the legislation.”

Guidance?  Sigh!  If it’s anything like the moratorium guidance, then I don’t see why they bother: what more can they say apart from regurgitate the regulations, which are only 6 pages long?

And how is SIP16 incompatible with the regulations?  Well, obviously in referring specifically to getting an opinion from the Pre-Pack Pool… but I wonder how the regulations will look when they’re finalised.  With all the murmurings about almost anyone being able to call themselves an evaluator, I suspect it may be the regulations that will be brought more into line with SIP16 on this point!

But let’s hope that SIP16 is not changed to accommodate the regulations’ capture of all connected party Administration business/”substantial” asset sales within the first 8 weeks.  That truly would be sledgehammer-nut territory, wouldn’t it?

The government has also threatened to:

“look to strengthen the existing regulatory requirements in SIP 16 to improve the quality of information provided to creditors”.

“Strengthen” the requirements?  I wonder what they have in mind…

 

What about valuations?

Oh yes, I forgot: that was the third area the government highlighted for greater consistency.

Right, well, they weren’t happy that 18% of the SIP16s they reviewed failed to state whether the valuer had PII.  I don’t know what they think IPs do, have a chat with a guy in a pub?  So, yes, we need to check that our SIP16 ticksheets are working on that point.

The report also noted that some SIP16s didn’t have enough information to compare valuations to the purchase price, although they didn’t make a big deal of it.  In her recent roadshow presentation, Alison Morgan repeated her request that IPs produce SIP16s that neatly detail the valuations per asset category alongside the price paid.  (You’ll have gathered that Alison had a lot to say about SIP16 compliance – I recommend her presentation!)  Although I share Alison’s view, working through the SIP’s requirements in the order listed is not conducive to presenting the valuation figures alongside the sale price, so this is definitely a SIP16 area that I think could be usefully changed.

 

What if SIP16 compliance does not improve?

Ooh, the government is waving its stick about here:

“Should these non-legislative measures be unsuccessful in improving regulatory compliance, the quality of the information provided to creditors and the transparency of pre-pack sales in administration, government will consider whether supplementary legislative changes are necessary.”

SIPs have pretty-much the same degree of clout as legislation.  In the case of SIP16, arguably it carries a greater threat.  There have been several RPB reprimands for SIP16 breaches published over recent years.  How many court applications does the government think will result if they enshrine SIP16 in legislation?  More than the number of RPB reprimands?  If IPs are failing to comply with SIP16, it’s not because the SIP is toothless.

 

Will the measures solve the pre-pack “problem”?

In my view, no.  There is just too much general cynicism about IPs being in cahoots with directors and about directors being determined to stiff their creditors.

What I think might help a little is if our regulators – the Insolvency Service and the RPBs – reported a balanced perspective of SIP16 compliance.  I know that the report acknowledges that most SIP16 disclosure breaches are “minor technical” ones, but the simple stats grab the headline.  We also need a simpler SIP16 so that compliance is easier to achieve and to measure.  Concentrating on the minutiae and concluding that the statement is non-compliant just does not help.  Are the minutiae really necessary?  Does it improve the “quality” of the information and the transparency of the sale?  I know, I know, the SIP isn’t going to get any simpler, is it?

I think the regulators might also help if they were to defend themselves and in so doing defend IPs as a whole.  Do they not realise that the perceptions that pre-packs are not in creditors’ best interests is also a slight on how they may be failing to regulate IPs effectively?  No one naïvely claims that all IPs are ethical and professional, so what steps have the RPBs taken to tackle the actual, suspected or alleged abusers of the process?  If they have identified them and are dealing with them, then can they not publicise that fact and confirm that the rest of the IP population are doing the right thing?  Instead, all we hear especially from the Insolvency Service is that, while pre-packs are a useful tool, IPs do a poor job of acting transparently and that there needs to be an independent eye scrutinising the proposed deal to give creditors confidence.  Are not the regulators the policemen in this picture?


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Welcome measures to help IPs in these times

In my last blog post, I published a wishlist of measures that would help IPs to do their jobs in these difficult times.  Since then, some extraordinary steps have been taken very quickly to address many of them.  Here, I summarise those actions.

Taking on New Appointments

  • Notices of intention to appoint, and of appointment of, administrators: the Temporary Insolvency Practice Direction (judiciary.uk/publications/temporary-insolvency-practice-direction-approved-and-signed-by-the-lord-chancellor/) came into force on 6 April. Although it states that a statutory declaration by video conference may constitute a formal defect or irregularity, it confirms that this by itself shall not be regarded as causing substantial injustice, provided that the declaration is carried out in the manner specified in the Practice Direction:

“9.2.1. The person making the statutory declaration does so by way of video conference with the person authorised to administer the oath;

9.2.2 The person authorised to administer the oath attests that the statutory declaration was made in the manner referred to in 9.2.1 above; and

9.2.3 The statutory declaration states that it was made in the manner referred to in paragraph 9.2.1 above.”

UPDATE 31/03/2021: a new Temporary Insolvency Practice Direction (https://www.judiciary.uk/publications/extended-temporary-insolvency-practice-direction-approved-and-signed-by-lord-wolfson/) comes into force tomorrow, which keeps the above in place until 30 June 2021.

UPDATE 01/07/2021: a further Temporary Insolvency Practice Direction has been issued (https://www.judiciary.uk/publications/extended-temporary-insolvency-practice-direction-approved-and-signed-by-lord-wolfson-2/) extending the provisions to 30 September 2021.

UPDATE 12/10/2021: another TIPD has been issued (https://www.judiciary.uk/guidance-and-resources/temporary-insolvency-practice-direction/).  This Direction remains in force “unless amended or revoked by a further insolvency practice direction”.

UPDATE 30/05/2020: Please note that the authority for statutory declarations to be administered virtually in Scotland derives from Schedule 4 para 9 of the Coronavirus (Scotland) (No. 2) Act 2020 (http://www.legislation.gov.uk/asp/2020/10/enacted), which came into force on 27 May 2020.  The provisions are temporary only and have an expiry date of 30 September 2020, although this can be extended by regulations. 

UPDATE 27/09/2020: the expiry date has been extended to 31 March 2021 by means of the Coronavirus (Scotland) Acts (Amendment of Expiry Dates) Regulations 2020.

UPDATE 31/03/2021: the expiry date has been extended again to 30 September 2021 by means of the Coronavirus (Scotland) Acts (Amendment of Expiry Dates) Regulations 2021.

UPDATE 04/09/2021: the expiry date has been extended again to 31 March 2022 by means of the Coronavirus (Extension and Expiry) (Scotland) Act 2021.

UPDATE 05/04/2022: the expiry date has been extended again to 30 September 2022 by means of the Coronavirus (Scotland) Acts (Amendment of Expiry Dates) Regulations 2022 and the Coronavirus (Recovery and Reform) Scotland Bill proposes to make the amendment permanent.

UPDATE 05/07/22: the Coronavirus (Recovery and Reform) Scotland Bill was passed on 29 June 2022.  It takes effect from 1 October 2022, making remote statutory declarations for Scottish processes permanent.

  • There have been no regulatory measures to help directly with posting mailouts, but many IPs have been exploring outsourcing options. Although I’m sure there are many providers, I understand that Postworks is used successfully by several IPs.  Widespread use of delivery by email, I think, is still a work in progress: Turnkey and others are geared up to assist, but I think the issues are in compiling a list of email addresses that can be used.  Many IPs had moved to website delivery via a single R1.50 notice before the lockdown and I suspect that this process has become even more popular.
  • HMRC S100 documents: I have seen nothing to move forward from the Dear IP article (insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26) that stated that the HMRC email address is only to be used for “the initial pre-appointment notifications under the deemed consent or virtual meeting procedures”, so it seems to me that Statements of Affairs and adjournment notices etc. must still be posted.
  • Court activities: as far as I can tell and as set out in the Temporary Insolvency Practice Direction, the courts are doing a phenomenal job in keeping their virtual doors open. Bravo!
  • Physical meetings: the RPBs published guidance that: “where procedural meetings are required, virtual meetings will suffice in order to avoid breaching social distancing requirements.  A reasonable approach will be required to handling any creditor requests for physical meetings” (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic). Personally, I’m not sure how we’re supposed to take this.  Some may consider it reasonable to convene a physical meeting in a space large enough to accommodate social distancing.  Some others could consider it reasonable to dismiss creditors’ requests for a physical meeting altogether!  In my view, the reasonable approach would be to contact the requesting creditors to explore whether their concerns can be addressed in another way, e.g. an informal discussion or, if there are formal decisions to be made, insist that the “physical” meeting be held entirely remotely, thus requiring just a little departure from R15.6(6).
  • It seems that the Government’s intention to suspend the wrongful trading provisions has been met with some negativity by IPs (e.g. r3.org.uk/press-policy-and-research/news/more/29337/covid-19-corporate-insolvency-framework-changes-r3-response/), whereas the House of Commons’ briefing paper quotes other bodies, including the IoD and ILA, as welcoming the news (https://commonslibrary.parliament.uk/research-briefings/cbp-8877/). Although the change has not yet been made, the Government plans that it will be retrospective from 1 March 2020 and it will continue for 3 months thereafter.

Statutory Filings / Deliveries

  • The RPBs’ statement referred to above did not explain their expectations specifically in keeping up with progress reports, but it did acknowledge that the current difficulties could amount to a “reasonable excuse” defence for breaching statutory requirements. The statement highlighted the need to “have followed ethical principles and have justifiable, sound and well documented reasons for making those decisions”, i.e. where “reasonable steps to comply” are not enough to overcome the difficulties caused by the restrictions imposed on us in these extraordinary times.
  • The news on Tuesday that Companies House is now accepting filings by email was extremely welcome (https://content.govdelivery.com/accounts/UKIS/bulletins/28550aa). Understandably, it seems to be taking some time for Companies House to register documents at the moment and, if you physically mailed documents before they opened their doors to emails, you might consider sending them again by email.  I’m sure that Companies House won’t thank me for that though, so only seriously time-critical documents, e.g. ADM-CVL conversions, might merit such a second attempt.  The announcement included several warnings about how a failure to follow the instructions for emailing docs would result in them being rejected and, as Companies House filings by email are excluded from the deemed delivery provisions in R1.45, you would do well to ensure that staff follow the instructions to the letter.
  • I’m a little surprised that the InsS hasn’t sought to extend the deadline for D-reports, especially as they have clearly considered the logistics of collecting books and records. At first glance, Dear IP 95 appeared to concede that IPs didn’t need to take extreme measures to collect books and records, but when I looked closely, it did not such thing.  It replaced the previous instruction that IPs should locate and ensure that books and records are secured and listed as appropriate with a requirement that IPs “should continue to take all possible steps to locate and secure” them (https://content.govdelivery.com/accounts/UKIS/bulletins/284baba).  “All possible steps”?  Well, we weren’t going to be taking impossible ones!  It’s a shame that the InsS hasn’t confirmed that IPs can limit steps to reasonable ones in these times.

Case Administration

  • Although communications from the InsS, RPBs and HMRC regarding general case administration have been welcome, there has been little that has helped avoid cumbersome rules and other regulatory requirements. This is understandable, as the rules are the rules until a statutory instrument says otherwise.  However, at least the announcements have given us some comfort that the bodies appreciate some of our difficulties.
  • Included in these are, from the RPBs (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic):
    • “IPs may defer, on a short-term basis, non-priority work on existing cases (for instance investigatory work) and focus on new/urgent areas. IPs must take all reasonable steps to progress case administration in the longer term and ensure stakeholder financial interests are not prejudiced.” (Jo and I have been debating how, if on the other hand IPs have found that new engagements have taken a dip, now would be a good time to try to clear the decks for the future busy times.)
    • It may be acceptable to allow markets to recover before selling assets.
    • “Where a Notice of Intended Dividend has already been issued, we acknowledge that the payment of the dividend can be postponed and may be unable to be paid within two months”… but you will need to remember that, in these circumstances, the NoID process will need to begin again later (R14.33(3)).
    • “In order to provide flexibility for IPs to focus on new/urgent matters and to allow time for market recovery, we are relaxing the expectation in existing MVLs that creditors will be paid in full within 12 months provided that the IP continues to consider the company will be solvent in the medium term when markets have recovered.”
    • “When considering MVLs moving to a CVL (s.95), IPs may take longer than the deadline of seven days to notify creditors that the company is unable to pay debts in full within 12 months.”
    • “We acknowledge that it is not likely to be possible to comply with the SIP 3.1 requirement to respond to debtor enquiries ‘promptly’ and to close IVAs ‘promptly’ and accept that IPs will need to prioritise their work through the crisis period.”
    • The RPBs have also acknowledged that IPs will exercise their discretion in relation to CVAs and IVAs and they “accept that the discretion afforded to IPs in order to manage cases affected by the current crisis is necessarily wide”. I’m not sure how to take this: if a VA Proposal allows the Supervisor to exercise discretion, they hardly need the RPBs to tell them that they can do so, but if the Proposal does not allow any such discretion, then they cannot.  There seems to be a veiled message here, much like a lot of the revised Ethics Code, which seems to have been written with the practices of volume/consumer IVA providers in mind.
  • HMRC’s guidance (icaew.com/-/media/corporate/files/technical/insolvency/insolvency-news/coronavirus-insolvency-bulletin.ashx?la=en) includes:
    • A similar peculiar statement that they would expect IPs to exercise any VA discretion “to its maximum, with reference to creditors only if essential”. Well yes, that’s how a discretion should be exercised, isn’t it?  Let’s hope that HMRC is now realising how unhelpful it is to IPs to have modified out many of the discretions that originally had been proposed!
    • HMRC confirms that it will support a 3-month contribution break for coronavirus-impacted “customers”, but I think its in-bold confirmation that “there is no need to contact HMRC to request this deferment” risks misleading some, not least debtors who may expect an automatic payment break. If a VA’s terms do not allow the Supervisor to permit such a payment break, then this statement does not overcome this hurdle and creditors’ approval must be sought.
    • More helpfully, the guidance confirms that HMRC will not view post-VA VAT as due where the Government has already arranged for those VAT payments to be deferred. Unfortunately, the link HMRC has provided is already obsolete and the HMRC guidance does not refer also to the deferral of self-assessment income tax, but presumably the same principles apply?
  • The InsS continues to move into the electronic age, arranging for the following (to reduce the risks of fraudulent attempts, I’m not providing links):
    • ISA payment requests to be submitted with an electronic signature;
    • ISA payment requests and other CAU forms to be received by email; and
    • IVA registration fees to be paid by BACS.
  • HMRC has done likewise with its opening the way for all dividends to be paid via BACS. Unfortunately, if you have any dividends to pay to HMRC by cheque, HMRC has asked that you “hold on to them” (9 April release on insolvency-practitioners.org.uk/press-publications/recent-news UPDATE: additional guidance on paying dividends to HMRC by BACS is on this IPA page, dated 22/04/20).

And there’s more

Finally, some miscellaneous notifications include:

  • Must IPs complete file reviews in these times? Whilst not an official response, an RPB monitor emailed me swiftly after my last blog post.  She observed that, of course, the objective of a file review is to ensure that the case progresses as it ought to and that a firm’s reviewing policies should be designed to achieve this objective.  Thus, if an IP decides to relax their firm’s policy on file reviews in these extraordinary times, they should be considering how they can still try to achieve this objective and document why the firm’s adjusted policy will not compromise effective and compliant case administration wherever possible in the circumstances.  The monitor expressed the view that some kind of file review surely would still be possible in these times, even if access to the full case files is restricted.
  • Can office holders furlough employees? The ICAEW blogged references from .gov.uk guidance (https://ion.icaew.com/insolvency/b/weblog/posts/the-coronavirus-job-retention-scheme—clarity-for-administrators-and-directors), which describes the ability of Administrators to furlough staff as well as some of the finer points about directors’ positions.  Unfortunately, the .gov.uk guidance is not cut-and-dried and furloughing depends on the “reasonable likelihood of rehiring the workers”, so understandably IPs are exercising a great deal of caution before treading a path that could lead to an expensive challenge down the line.
  • Should IPs furlough their own staff? The ICAEW and the IPA have both issued warnings that they would not expect IPs to furlough to the extent that it compromises their ability to meet regulatory requirements (https://ion.icaew.com/insolvency/b/weblog/posts/business-continuity-for-insolvency-practitioners-during-covid-19).  The IPA has also required its members to keep it informed of the numbers and job titles of all furloughed staff as well as those unable to work through serious Covid-19 illness.
  • Are IPs key workers? R3 blogged (r3.org.uk/technical-library/england-wales/technical-guidance/covid-19-contingency-arrangements/more/29316/page/1/is-the-insolvency-profession-classed-as-a-key-sector-24-march-2020/) that likely they are, especially when administering cases that involve managing businesses that themselves are in the key sectors.  R3 also observed that the InsS considers that certain staff working in the RPS, Estate Accounts and ORs’ offices are delivering “essential public services”.  As much of an IP’s work is necessary to enable such InsS staff to deliver these public services, it would seem to follow that the IPs/staff would also be key workers.  Shortly after this post, however, the IPA emailed its members reminding them that it is a decision for each employer per the guidance at www.gov.uk/government/publications/coronavirus-covid-19-maintaining-educational-provision/guidance-for-schools-colleges-and-local-authorities-on-maintaining-educational-provision.
  • Showing us southerners that it can be done, the Scottish Government brought into force the Coronavirus (Scotland) Act 2020 in a matter of a couple of weeks. Amongst other things, it has extended the pre-insolvency moratorium period for individuals from 6 weeks to 6 months.  More details can be found at aib.gov.uk/news/releases/20202020/0404/coronavirus-scotland-act

Stay safe and keep well, everyone.


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How can the Insolvency Service and RPBs help in this time?

When the work-place exodus started, I was heartened to read the ICAEW’s acknowledgement that inevitably some statutory deadlines would be missed (although they hoped that remote-working would result in little disruption).  In contrast, the IPA’s two emails to members expressed the expectation that steps would be taken to ensure that statutory compliance continues.

But to be fair, those notices were issued a couple of weeks’ ago when our world looked quite different.  More recently in Dear IP 92, Steve Allinson, Chairman of the Insolvency Service Board, expressed his intention for the Service to do its best to support IPs on their assignments, stressing the need for us all to come together at this time (while keeping our social distance, of course!).

Steps that the InsS has already taken to facilitate the remote-operating of ISAs are very welcome and I hope that these mark just the beginning of changes needed to keep the insolvency wheels moving.

The insolvency technical and compliance community has long practised coming together to resolve difficulties.  Below is a summary of the suggestions of many who are struggling to help insolvency continue to work in these times.  We hold out hope that the InsS and the RPBs will help.

Taking on New Appointments

  • MVL Declarations of Solvency need to be sworn in front of a solicitor/commissioner for oaths. Solicitors are of the view that they must be in the physical presence of the one swearing (although the Law Society guidance is a little woollier).  Could guidance be given to solicitors/IPs on how this could be done virtually?  Better still, could the Act/Rules be temporarily relaxed to allow the author to verify these instead with a Statement of Truth.
  • ADM Notices of Intention to Appoint and Notices of Appointment present the same issue, so similar guidance/relaxation would be invaluable.
  • Posting mailouts is generally problematic – some IPs use commercial mailing providers, but often IPs/staff are simply using their own stash of stamps and making trips to the Post Office/Box, which is not wise – and we cannot be certain that there will be anyone physically present at the recipients’ offices to open the post in any event. The Act/Rules already allow for some mailouts to be dealt with by advertisement notice (e.g. Para 49(6) of Schedule B1 IA86 and R3.38(1) IR16), but not in relation to circulars to creditors (except with court permission).  Could there be a general power for an office holder to publish a notice, say in a Gazette (and such other way if they see fit), informing creditors who to contact/how to access the mailout and that this advertisement would be taken as satisfying the delivery provisions?  Of course, pre-CVL circulars are the responsibility of the director, so any such changes will also need to cover directors’ notifying about the S100 decision process (including any subsequent physical meeting notice) and the Statement of Affairs.
  • If the above is considered a step too far, then it would be useful to be able to write a one-pager to creditors inviting them to access the Statement of Affairs and other pre-S100 decision documents/notices via a website, rather than have to send bulky letters to creditors.
  • Of course, in addition to (or instead of) posting letters, IPs are now endeavouring to email statutory docs to creditors and others as much as possible. 45 states that deemed consent to email delivery occurs when a doc is emailed to the address to which the insolvent “had customarily communicated with” the recipient.  Email delivery is much easier than post in this time, so guidance that what is customary need not be proven would be useful, e.g. to enable directors/debtors simply to provide the IP with an email address for the recipient that the IP can take as valid.
  • HMRC requires notices of S100 decision processes to be sent to their email address, notifihmrccvl@hmrc.gov.uk, but it has not been made clear whether this email address also works for other S100 docs, e.g. the Statement of Affairs – clarification would be useful. An extension of this email address to allow also for post-appointment CVL circulars would also help. 
  • There is some concern that the court filings required in preparation of a CVA will be problematic in light of the courts’ limited activities: the Nominee’s report must be filed in court before the creditors and members can decide on the CVA Proposal.
  • SIP3.2 para 10 requires an IP to meet directors “face to face”. Clarification that this does not have to be a physical meeting would be useful.
  • Where a statutory physical meeting is required (e.g. where a creditor objects to a S100 decision proposed by deemed consent), it should be possible for everyone, including the convener, to attend the meeting virtually. Clarification of this would be valuable.
  • Many IPs are reluctant to consider taking on new appointments that might require them, their staff or agents to attend on-site. However, the business may need to enter an insolvency process and business owners/directors may be nervous to continue to be responsible for the businesses in this period waiting for the coast to clear for an IP to be appointed.  Do they shut up shop now and make everyone redundant?  Or do they furlough employees in the hope that the business might be sold once everyone emerges?  If they choose the latter course, could they be at risk of an allegation of wrongful trading?  Some clarification that business owners/directors would not be penalised for helping employees to continue to be paid via furlough payments in this time would be helpful for IPs advising business owners/directors.
  • On the other hand, some guidance for IPs on how to handle trading-on appointments would also be valuable.

Statutory Filings / Deliveries

  • Of course, some relaxation to statutory deadlines would be invaluable.
  • Some IPs are moving hell and high water to try to get progress reports issued, which can include asking one member of staff to attend premises to print docs, deal with mailouts etc. Personally, I would hope that the RPBs/IS would prefer IPs and their staff to stay at home even if this means that progress report (and other?) deadlines are missed.  In line with the Government’s key messages, some clarification from the RPBs/IS as to the importance (or not) of travelling to work simply to avoid certain breaches of statute/SIPs in these times would seem urgently required.
  • In particular, Para 107 only allows the 8-week timescale to deliver Administrators’ Proposals (and the 10-week timescale for any decision on those Proposals) to be extended by court order. Confirmation that Administrators need not apply to court to extend these timescales would be very welcome. 
  • If shifting deadlines is considered a step too far and the RPBs/IS wish for IPs to meet statutory deadlines wherever humanly possible, perhaps they could confirm that at least they, as regulators, will not look too unkindly on docs that are technically deficient as regards the disclosure requirements of statute & SIPs.
  • As above, it would be good to be able to notify creditors of statutory deliveries, e.g. Administrators’ Proposals, by public advertisement to avoid the problems with posting out packs.
  • At present, all filings to Companies House must be delivered by IPs in hard copy form. In addition to the logistical problems of posting letters mentioned above, IPs are also concerned at the potential for delays by Royal Mail etc. or Companies House such that time-critical dates are missed.  In particular, Form AM22 (notice of move from Administration to CVL) must be received by Companies House before the Administration ends automatically.  Therefore, a mechanism to enable all insolvency forms to be sent to Companies House by email would be valuable.
  • Another issue is extending Administrations by court order. These are always time-pressured at the best of times, but with the courts’ limited activity, there is real risk of Administrations ending automatically before a court order extending them can be granted.  Ideally, a temporary halt of the automatic ending provision (Para 76) and of any subsequent end-date consented to by creditors or the court would be valuable.  If this is a step too far, then perhaps Administrators could be allowed to seek a second extension by creditor consent, rather than having to resort to court.
  • It is now usually impractical for staff/IPs to review company records with a view to submitting CDDA D-reports. Of course they could submit an inconclusive D-report in the 3 month timescale and then, when they are able to review the records, they could submit “new information”.  However, this probably will be unhelpful to the DCRS staff, as in the future they may get a great number of “new information” submissions, which cannot be processed automatically by their rules engine.  Therefore, it is probably in everyone’s interests to extend the 3-month deadline for D-reports.

Case Administration

  • An email address for HMRC forms, e.g. VAT769s, VAT100s, VAT7s, VAT426/427s, would be valuable. Of course, this would involve a number of HMRC departments, but VAT769s and VAT426/427s are particularly needed to be dealt with by email.
  • In light of limited court activity, there is a risk that Trustees in Bankruptcy will not be able to make appropriate applications to avoid bankrupts’ homes revesting under S283A IA86. A pause in the 3-year timescale would help.  Failing this, could S283A(3) be flexed to allow a Trustee to have “applied” for a relevant order by simply posting a skeleton application to the court?
  • Consultations with employees of insolvent entities to comply with TULRCA (and TUPE) have previously been achieved usually by getting all employees together. This should now be avoided, but it does leave office holders with logistical difficulties in complying with TULRCA.  Presumably Job Centre Plus attendance has also ended.  Some guidance on how IPs should approach TULRCA and employee interaction generally would be valuable.
  • It is not clear how furlough payments will work for employees of a business already in an insolvency process. For example, if the office holder retains staff on furlough payments in the hope that they might be able to sell the business (and TUPE transfer all staff) in the future, how will those furlough payments be treated?  Confirmation that these will not be sought back either from the insolvent estate as an expense or from the purchaser would be welcome.
  • Some IPs are office holders of nursing homes and they require regular, usually daily, on-site attendance by them or their staff. Some confirmation that they would be viewed as key-workers might assist.
  • On some cases, office holders had already issued notices of intended dividend before the lock-down, but they will have problems issuing cheques for some time. 34(1) requires the office holder to declare the dividend within 2 months of the last date for proving.  It is possible for the IP to declare the dividend, but not pay cheques out until later, but in the past this has been frowned upon by the RPBs.  Some guidance that this is acceptable in these circumstances would be helpful.
  • In other cases, an office holder would like to extend an already-notified last date for proving in recognition of creditors’ difficulties in submitting proofs and therefore also extend the 2-month timescale for declaring the dividend (as well as the 14 days to adjudicate all claims – R14.32(1)), but there is no way to do this under the rules. The ability to do so would be useful, otherwise the whole process would need to be started again once we all emerge.
  • Dear IP 92 urged IPs to show forbearance “where possible” to individuals who are finding it difficult to meet financial commitments. Although many IVA Proposals will provide capacity for payment breaks/reductions, many will not.   In some cases, the debtors will already have used up their payment break quota.  In other cases, the flexibility simply will not be there in the Proposals.  Of course, variations can be sought but these are cumbersome especially in these times when mailouts are difficult.  It is difficult to see what can be done about IVA terms, but we would welcome some guidance.
  • The same will apply to CVAs based on regular contributions.
  • On many IVAs (involving tax debts) and CVAs, HMRC has modified Proposals to restrict the Supervisor’s ability to propose a variation, e.g. variations may not be allowed in the first year. HMRC has also modified many VAs by including more stringent clauses where the insolvent fails to pay contributions on time.  Perhaps HMRC could notify IPs that, during this time, all such modifications may be considered waived.
  • The AiB has issued a Dear Trustee letter (https://www.aib.gov.uk/sites/default/files/dear_trustee_-_covid-19_-_expanded_ptd_contingency_arrangements.pdf) stating that he believes it would be reasonable for IPs not to extend the period of the Protected Trust Deed in order to ingather contributions that failed to be paid in this period. Personally, I do not believe that the same automatically applies in IVAs (as the Supervisor may be required to take specific action in line with the IVA terms), but the AiB’s letter may create confusion for IVA debtors and IPs in this situation.  Therefore, some guidance may be useful.
  • File reviews are pretty-much impossible for anyone who does not administer electronic case files. Confirmation from the RPBs that IPs are not expected to carry out regular formal file reviews during this period would help.

 


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InsS Annual Review, part 3: less carrot, more stick?

The Insolvency Service’s September 2018 report pulled no punches in expressing dissatisfaction over some monitoring outcomes: we want fewer promises to do better and more disciplinary penalties, seemed to be the tone.  Has this message already changed the face of monitoring?

The Insolvency Service’s September 2018 Report can be found at www.gov.uk/government/publications/review-of-the-monitoring-and-regulation-of-insolvency-practitioners and its Annual Review of IP Regulation is at www.gov.uk/government/publications/insolvency-practitioner-regulation-process-review-2018.

In this article, I explore the following:

  • On average, a quarter of all IPs were visited last year
  • But is there a 3-yearly monitoring cycle any longer?
  • 2018 saw the fewest targeted visits on record
  • …but more targeted visits are expected in 2019
  • No RPB ordered any plans for improvement
  • Instead, monitoring penalties/referrals of disciplinary/investigation doubled
  • Is this a sign that the Insolvency Service’s big stick is hitting its target?
  • IPs had a 1 in 10 chance of receiving a monitoring or complaints sanction last year

 

How frequently are IPs being visited?

With the exception of the Chartered Accountants Ireland (which is not surprising given their bumper year in 2017), all RPBs visited around a quarter of their IPs last year.  It’s good to see the RPBs operating this consistently, but how does it translate into the apparent 3-yearly standard routine?

Firstly, I find it odd that coverage of ACCA-licensed IPs seems to have dropped significantly.  After receiving a fair amount of criticism from the InsS over its monitoring practices, the ACCA handed the regulating of its licensed IPs over to the IPA in October 2016.  Yet, the number of ACCA IPs visited since that time has dropped from the c.100% to 79%.

Another factor that I had overlooked in previous analyses is the effect of monitoring the volume IVA providers (“VIPs”).  At least since 2014, the Insolvency Service’s principles for monitoring VIPs has required at least annual visits to VIPs.  Drawing on TDX’s figures for the 2018 market shares in IVAs, the IPA licensed all of the IPs in the firms that fall in the InsS’ definition of a VIP.  On the assumption that each of these received an annual visit, excluding these visits would bring the IPA’s coverage over the past 3 years to 56% of the rest of their IPs.  Of course, there are many reasons why this figure could be misleading, including that I do not know how many VIP IPs any of the RPBs had licensed in 2016 or 2017.

The ICAEW’s 64% may also reflect its different approach to visits to IPs in the largest firms: the ICAEW visits the firm annually (to cover the work of some of their IPs), but, because of the large number of IPs in the firm, the gap between visits to each IP within the firm is up to 6 years.  I cannot attempt to adjust the ICAEW’s figure to exclude these less frequently visited IPs, but suffice to say that, if they were exceeded, I suspect we might see something approaching more of a standard c.3-yearly visit for all non-large firm ICAEW-licensed IPs.

These variances in the 3-year monitoring cycle standard, which cannot be calculated (by me at least) with any accuracy, mean that there is very little that can be gleaned from this graph.  Unfortunately, the average is no longer much of an indication to IPs of when they might expect to receive their next monitoring visit.

 

The IPA’s new approach to monitoring

In addition to its up-to-4-visits-per-year shift for VIPs, at its annual conference earlier this year, the IPA announced that it would also be departing from the 3-yearly norm for other IPs.

The IPA has published few details about its new approach.  All that I have seen is that the frequency of monitoring visits is on a risk-assessment basis (which, I have to say, it was in my days there, albeit that the InsS used to insist on a 3-year max. gap) and that it is a “1-6 year monitoring cycle – tailored visits to types of firm” (the IPA’s 2018/19 annual report).

In light of this vagueness, I asked a member of the IPA secretariat for some more details: was the plan only to extend the period for those in the largest firms, as the ICAEW has done, or at least only for those practices with robust in-house compliance teams with a proven track record?  The answer was no, it could apply to smaller firms.  He gave the example of a small firm IP who only does CVLs: if the IPA were happy that the IP could do CVLs well and her bond schedules showed that she wasn’t diversifying into other case types, she likely would be put on an extended monitoring cycle.  The IPA person saw remote monitoring as the key for the future; he said that there is much that can be gleaned from a review of docs filed at Companies House.  He explained, however, that IPs would not know what cycle length they had been marked up for.

While I do not wish to throw cold water on this development, as I have long supported risk-based monitoring, this does seem a peculiar move especially in these times when questions are being asked about the current regulatory regime: if a present concern is that the regulators are not adequately discouraging bad behaviour and that they are not expediting the removal of the  “bad apples”, then it is curious that the monitoring grip is being loosened now.

Also, now that I visit clients on an annual basis, I realise just how much damage can be done in a short period of time.  It only takes a few misunderstandings of the legislation, a rogue staff member or a hard-to-manage peak in activity (or an unplanned trough in staff resources) to result in some real howlers.  How much damage could be done in 6 years, especially if an IP were less than honest?  Desk-top monitoring can achieve only so much.

What this means for my analysis of the annual reports, however, is that the 3-year benchmark for monitoring visits – or one third of IPs being monitored per year – is no longer relevant ☹ But it will still be interesting to see how the averages vary in the coming years.

 

Targeted visits drop to an all-time low

Only 10 targeted visits were carried out last year – the lowest number since the InsS started reporting them – and it seems that all RPBs are avoiding them in equal measure.

But 2019 may show a different picture, as several targeted visits have been ordered from 2018 monitoring visits…

 

Are the Insolvency Service’s criticisms bearing fruit?

I was particularly alarmed by the overall tone of the Insolvency Service’s “review of the monitoring and regulation of insolvency practitioners” published in September 2018.  In several places in the report, the InsS expressed dissatisfaction over some of the outcomes of monitoring visits.

I got the feeling that the Service disliked the focus on continuous improvement that, I think, has been a strength of the monitoring regime.  Instead, the Service expected to see more investigations and disciplinary actions arising from monitoring visit findings.  The report singled out apparently poor advice to debtors and apparently unfair or unreasonable fees or disbursements as requiring a disciplinary file to be opened with the aim of remedies being ordered.  It does seem that the focus of the InsS criticisms is squarely on activity in the VIPs, but the report did worry me that the criticisms could change the face of monitoring for everyone.  

2018 is the first year (in the period analysed) in which no monitoring visit resulted in a plan for improvement.  On the other hand, the number of penalties/referrals for disciplinary/investigation action doubled.

Could the InsS’ report be responsible for this shift?  Ok, the report was published quite late in 2018, in September, but I am certain that the RPBs had a rough idea of what the report would contain long before then.  Or perhaps the Single Regulator debate has tempted some within the RPBs/committees to be seen to be taking a tougher line?  Or you might think that these kinds of actions are long overdue?

I think that the RPBs have tried hard over the last decade or so to overcome the negativity of the JIMU-style approach to monitoring.  In more recent years, monitoring has become constructive and there has been some commendably open and honest communication between RPB and IP.  This has helped to raise standards, to focus on how firms can improve for the future, rather than spending everyone’s time and effort analysing and accounting for the past.  It concerns me that the InsS seems to want to remove this collaborative approach and make monitoring more like a complaints process.  In my view, such a shift may result in many IPs automatically taking a more defensive stance in monitoring visits and challenging many more findings.  Such a shift will not improve standards and will take up much more time from all parties.

Getting back to the graph, of course a referral for an investigation might not result in a sanction at all, so this does not necessarily mean that the IPA has issued more sanctions as a consequence of monitoring visits.  Also, the IPA’s apparent enthusiasm for this tool may simply reflect the IPA’s (past) committee structure whereby the committee that considered monitoring reports did not have the power to issue a disciplinary penalty, but could only pass it on to the Investigation Committee.  As this was dealt with as an internal “complaint”, I suspect that any such penalty arising from this referral would have featured, not in the IPA’s monitoring visit outcomes, but in complaint outcomes.

So how do the RPBs compare as regards complaints sanctions?

 

Complaints sanctions fall by a quarter

Although the IPA issued relatively fewer sanctions last year, I suspect that the monitoring visit referrals will take some time to work their way through to sanction stage, so it is unlikely that this demonstrates that the monitoring visit referrals led to a “no case to answer”.

What this and the previous graph show quite dramatically, though, is that last year the ICAEW seemed to issue far fewer sanctions per IP than the IPA.  As mentioned in my last blog, the IPA does license a large majority of the VIP IPs and there were more complaints last year about IVAs than about all the other case types put together.  One third of the published sanctions also were found against VIP IPs.

 

Likelihood of being sanctioned is unchanged from a decade ago

In 2018, you had a 1 in c.10 chance of receiving an RPB sanction, which was the same probability as in 2008…

I find it interesting to see the IPA’s and the ACCA’s results converge, which, if it were not for the suspected VIP impact, I would expect given that the IPA deals with both RPBs’ regulatory processes.

There’s not a lot that can be surmised from the number of sanctions issued by the other two RPBs: they’re a bit spiky, but it does seem that, on the whole, the ICAEW and ICAS has issued much fewer sanctions.  It seems from this that, at least for last year, you were c.half as likely to receive a sanction if you were ICAEW- or ICAS-licensed as you were if you were IPA- or ACCA-licensed.

 

Is a Single Regulator the answer to bringing consistency?

True, these graphs do seem to indicate that different regulatory approaches are implemented by different RPBs.  However, I do think that some of that variation is due to the different make-up of their regulated populations.  There is no doubt that the IVA specialists do require a different approach.  To a lesser degree, I think that a different approach is also merited when an RPB monitors practices with robust internal compliance teams; it is so much more difficult to have your work critiqued and challenged on a daily basis when you work in a 1-2 IP practice.

Differences in approach can also be a good thing.  Seeing other RPBs do things differently can force an RPB to challenge what they themselves are doing and to innovate.  My main concern with the idea of a single regulator is the loss of this advantage of the multi-regulator structure.

Perhaps a Single Regulator could bring in more consistency, but it would never result in perfectly consistent outcomes.  I’m sure I’m not the only one who remembers an exercise a certain JIEB tutor ran: all us students were given the same exam answer to mark against the same marking guide.  The results varied wildly.  This demonstrated to me that, as long as humans are involved in the process, different outcomes will always emerge.

 


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InsS Annual Review, part 2: IP number is down but complaints are up

The number of IPs just keeps on falling, but complaints have increased.  What is going on?

In this blog, I explore whether the Insolvency Service’s 2018 report on IP regulation provides the answer.  Also, is it just a blip?  And could this analysis help with the Service’s recently-issued call for evidence on IP regulation?

The Insolvency Service’s report can be found at: https://www.gov.uk/government/publications/insolvency-practitioner-regulation-process-review-2018

In brief, the report indicates that, in 2018:

  • Despite insolvency case numbers increasing, IPs continued to leave the profession
  • Actions that most often appeared in RPB sanctions were: poor case progression/closure; faults in administering IVAs; and breaches of statutory filing/reporting requirements
  • Only two complaints (of the 381 referred to the RPBs) had been received from creditors! As usual, debtors were the most frequent complainers, but complaints lodged by directors and IPs showed quite an increase
  • Over 50% of the complaints lodged at the Gateway did not make it through to the RPBs
  • On average, one in three IPs received a complaint, but this figure jumped to more than one in every two for IPA-licensed IPs
  • Could this be because the IPA licenses all the IPs in the top six volume IVA provider firms (who registered over 75% of all new IVAs last year)..?
  • Over 50% of all complaints referred to the RPBs related to IVAs

 

Case numbers go up but IP numbers keep on going down

There has been a significant increase in insolvency case numbers over the past 3 years.  There were 20% more corporate insolvencies and over 40% more personal insolvencies started in 2018 than the numbers started in 2015.  Isn’t now a good time to be in insolvency..?

These statistics reflect my personal experience: over the past year, I have known of IPs who have left the profession and they’ve not all been of retiring age.  What is happening?

There’s no doubt in my mind that competition has become fiercer.  I have seen more occasions of IPs being toppled from offices and the ORs seem all the more reluctant to allow cases to leave their hands.  I have also seen some new ambulance-chasers on the field.

I think that small firms are struggling in this market.  It seems to me that larger firms seem hungrier to fight for smaller cases than they used to be.  In addition, 2018 was not a regulation-light year: it seemed that simply getting GDPR-ready was someone’s full-time job for several months, which was not at all easy for smaller firms to stomach.  Recruitment and retention are also difficult for smaller firms: new talent is attracted to big names, big cities, meaty cases and varied portfolios.

Fewer IPs and more cases mean that each IP has on average a larger caseload (or it could be that the IPs are closing them quicker, but from my personal experience, I don’t think this is happening).  If insolvency cases continue to increase, which I think is generally expected, then I think case progression is going to become a bigger concern.  Of course, IPs can always look to surround themselves with a larger team to deal with their larger caseloads, but we all know that this tends not to happen: in times of plenty, old cases tend to be shelved while people concentrate on the new excitements.

 

Is case progression already an issue?

The Insolvency Service’s report gives brief descriptions of every RPB sanction issued (including a couple that weren’t even published on .gov.uk – not sure how that happened!).  On categorising these summaries, I have come up with the following failures that appear most frequently in the disciplinary sanctions reported:

  • 7 case progression / closure issues (including one failure to realise assets and two failures to pay a dividend – not sure if these were delays or entirely overlooked)
  • 6 IVA-related faults (not including case progression / closure)
  • 6 statutory filing/reporting breaches
  • 3 SIP16 breaches
  • 3 faults in relation to directors’ RPO claims
  • 3 fee-related errors
  • 3 confidentiality breaches (perhaps related?)
  • 2 PTD-related faults
  • 2 SIP2 failures to investigate or to secure books and records

This shows that failing to progress cases promptly or appropriately can get you into hot water.  So too can failing to meet the rules on filing and reporting: four of the six instances listed arose because progress reports were not filed on time (or at all).

 

What are people complaining about?

The Top 3 topics continue to be ethics, poor communication and SIP3 issues, with the latter now counting for 34% of all complaints recorded by subject, up from 25% last year:

(Note: a complaint may appear in more than one category.  There were a total of 381 complaints referred in 2018 – see further below.)

Ok, that’s not a surprise.  We all know that the Insolvency Service’s report in September 2018 pulled no punches when it came to the RPB-monitoring of volume IVA providers.  It is also unsurprising that people are not directly complaining about late or missing progress reports, but as the sanctions demonstrate, if a statutory filing/reporting breach is identified in the course of the RPB’s investigations into a complaint, don’t be surprised if this is added to your charge sheet.

What we should perhaps be a little concerned about is that complaints on areas that attract a lot of negative press and criticism – SIP16/pre-packs and remuneration – have increased.  True, they still pale into insignificance when compared with the total number of complaints (they account for only 16 of the 429 complaints recorded by subject), but this is quite a jump from the one complaint in 2017.

 

Who is complaining?

I think this shows an interesting shift:

With IVAs featuring so heavily in complaints, it is not surprising that debtors are the most frequent complainant.  More bankruptcies were complained about in 2018 too (up from 31 to 75), which no doubt contributed to the increase in complaining debtors.

What I found interesting was that very few creditors complained last year – only two!  Even if we add in complaints from employees, this only comes to seven.  However, the number of complaints lodged by IPs more than trebled to 38.  Ok, this is still a relatively small number, but I think it hints at an interesting development in self-regulation: RPB monitors may only visit you once every 3 years or so, but your peers are watching you all the time!

 

How many complaints get through the Gateway?

(Note: the Gateway started in June 2014, so I have pro rated the partial 2014 figure to estimate for a full year.)

Complaint numbers are back up to the 2016 level: in 2016, 847 complaints were lodged and in 2018 the number was 830.  However, many more complaints fail to make it through the Gateway.  In fact, every year, the number rejected/referred has increased, even though the trend in complaint numbers shows an overall decrease.  In 2017, 48% of complaints were rejected or closed and this percentage increased to 52% last year.

 

Why are complaints not making it through the Gateway?

In their 2018 report, the Insolvency Service added a number of new reasons for rejection/closure, which personally has helped me to understand the operation of the Gateway better.  For example, I hadn’t appreciated that complaints about conduct that happened over 3 years ago are rejected.

This graph also demonstrates that a large number of complaints (145) – and a great deal more than in 2017 – are rejected because the complaint is about the insolvency process.  Again, given that most complaints are lodged by debtors and directors, this perhaps indicates that in many cases IPs may be upsetting the right people.  But it might also suggest that some IPs could do a better job of explaining the consequences of insolvency.

 

What are an IP’s chances of receiving a complaint?

Yes I know that some IPs work in a field that is more likely to attract criticism, but on average how many IPs received a complaint last year and does this average change much depending on one’s licensing body?

This shows that, generally speaking, one out of every three IPs receives a complaint.  Of course, this assumes that complaints are only about appointment-takers and that complaints are evenly spread about.

However, it also shows a large range in averages across the RPBs, with less than one in five IPs for all except the IPA, which shows an average of over one complaint for every two IPs.

The IPA has publicised that “the majority of IPs who work on IVAs are regulated by the IPA” (IPA press release 29/11/2018)… although, as the IPA does not license the majority of all IPs, a large proportion of which will have at least one IVA, presumably they’re meaning those who do IVAs in volume.  Does this, along with the graph above, mean that volume IVA providers disproportionately feature in complaints?

 

How many Volume IVA IPs does the IPA license?

The Insolvency Service now publishes data on new IVAs per firm: https://www.gov.uk/government/statistics/individual-voluntary-arrangement-outcomes-and-providers-2018, which helped me out with this question.

An analysis of this list shows that the IPA licenses all the IPs registered at the Top 6 firms.  These firms alone account for over 75% of all IVAs registered in 2018.  Even if we look at the whole list of Top 14 firms (two of which no longer exist!), the IPA licenses 25 of the 33 IPs registered at these firms (with the ICAEW licensing 3 and ICAS the remaining 5, all 5 of which are located at the one firm).

So clearly then, the IPA’s complaints figures are bound to be affected by the number of IVA complaints lodged.  But this assumes that IVAs count for a large proportion of complaints.  Is this true?

 

How many IVAs are being complained about?

The following graph compares the number of IVA complaints with those about other matters:

(Note: the Gateway started in June 2014.  The way complaint numbers were published by case type then changed from those recorded by the RPBs to those referred to the RPBs from the Gateway.)

So for the first time, last year there were more IVA complaints than there were complaints about all other matters/case-types combined.  It’s no wonder therefore that the IPA has recorded many more complaints per IP than any other RPB and it’s not surprising that the IPA has sought to recruit more regulatory staff… and that they have warned IPA members that fees may be increasing this year!

I appreciate that the Insolvency Service did (finally!) wake up to some of the issues around regulating volume IVA providers last year and I accept that the IPA has made some public announcements about how they have been working towards changing their monitoring regime for the IPs in these firms.  However, as someone who has spent the last few years almost exclusively helping IPs in “traditional” insolvency practices, I do wonder if a disproportionate amount of time has been spent by the regulators (and government and the press) in criticising, legislating and threatening to legislate to remedy other apparent ills of the insolvency profession.

 

Is the solution a change in regulatory approach?

Interestingly, the Service’s just-released call for evidence on IP regulation (pg 15 of the doc at https://www.gov.uk/government/consultations/call-for-evidence-regulation-of-insolvency-practitioners-review-of-current-regulatory-landscape) focuses in on the different firm structure that exists in some IVA specialists where the IP is an employee.  This leads them to ask the question of whether firm-regulation, rather than individual IP-regulation, may be more appropriate in some sectors.  While I think that the Service definitely has a point, I do think that there are other fundamental differences in “volume IVA providers” – the hint is in the name – that also demand a fundamentally different regulatory approach.

 

In my next blog post, I’ll look more closely at complaint – and monitoring – sanctions.

 


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The Insolvency Service’s To-Do List: Going Nowhere Fast?

I’ll start my review of the Insolvency Service’s Annual Review of IP Regulation in reverse order this year.  Let’s first look at the progress made on the InsS’ 2017 to-do list.

Here’s a comparison of items listed in their 2017 Report with their 2018 Report, which has just been published (at https://www.gov.uk/government/publications/insolvency-practitioner-regulation-process-review-2018):

Of course, Ministers have had a few other things on their mind over the past year… but the landscape has not changed much since May 2018 when the 2017 report was published, so I would have hoped that the Insolvency Service would have anticipated realistic timescales back then.

 

So, if the above projects have not progressed as anticipated last year, what has the InsS achieved in 2018 and are they proposing any other outputs in the year ahead?

  • Taking on the role of a direct regulator?

It all sounds a bit secret squirrel, but the report’s overview emphasises the Service’s investigatory work.  It seems that their staff have identified and been referring “potential criminal offences by insolvency practitioners”, they “have been making effective use of information gathering powers to investigate areas of concern leading to a number of referrals to appropriate bodies” and they have “used our powers to undertake our own enquiries on a number of occasions”.  They expect to “report on what we have found when we are able to, given the progress of the investigation”.

  • The Single Regulator question

Of course, this is going to be the focus of a lot of the Service’s efforts.  I found the report alarming: it states both that they are considering “whether or not to consult on a single regulator” and that they are hoping to reach a position on “a recommendation on whether or not to exercise the power” to create a single regulator.  So… could they decide on the single regulator question without consultation?!

In any event, however, they are expecting “to publish shortly” a “formal call for evidence”, so at least we may have an opportunity to contribute something.

  • Last year’s report on RPB monitoring

I didn’t have a chance to blog on the subject, but I’m sure the Service’s September 2018 report on RPB monitoring did not pass you by.  The report was pretty scathing about much of the monitoring of volume IVA providers and included many recommendations, largely focusing on the extents to which they felt RPBs should be investigating, and taking to task, IPs who appear to be failing: to provide appropriate advice; to pay fees and expenses from estates that are fair and reasonable; and to manage the ethical threats arising from relationships with introducers and service-providers.

The Service’s 2018 Annual Report states that they are in the process of reviewing how the recommendations from the earlier review are being implemented by the RPBs and that this would inform their Single Regulator work – no threat there, then!

  • SIP revisions

So… no sign of a revised Ethics Code, but we do learn about the JIC’s work on revising SIPs.  In their in-box at the moment are:

    • SIP3.2, which is expected to be out for consultation “later this year”. Apparently, the revision work has come about “due to concerns about certain types of large CVAs where better and timelier information could be given to creditors”.  Interesting… but don’t we have the Act and Rules to tell us what IPs must send to creditors and by when?
    • SIP7 – a consultation on this is also expected “later this year”.
    • SIP9 – on the back of the concerns arising from the review of RPB monitoring of volume IVA providers and the “industry concerns over the charging of certain expenses and disbursements, primarily in the volume IVA sector” (so not just IVAs then..?), there has been ongoing work “to consider if a review of SIP9 is necessary”. The report also states that there has been work with the RPBs and R3 “to obtain data in order to assess the impact that possible changes to the way some charges ought to be applied would have on smaller firms”.  Debates over what are valid expenses/disbursements and what should be treated as an overhead have been rumbling for several years now and if the question is still “if” SIP9 should be changed, then it seems to me that an outcome could still be a long way from emerging.

 

So, the Service’s to-do list never gets any shorter, does it?  And it seems to me that the usual project-management rule applies to insolvency projects: estimate the timescale and then double it!

In my next blog, I’ll look at the complaints and monitoring stats… or I may get back to my 50 Things list…

 

 


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The stats of IP Regulation – Part 2: Monitoring

 

As promised, here are my thoughts on the RPBs’ 2017 monitoring activities, as reported by the Insolvency Service:

  • The InsS goes quiet on RPBs’ individual performances
  • Two RPBs appear to have drifted away from 3-yearly visits
  • The RPBs diverge in their use of different monitoring tools
  • On average, ICAEW visits were over three times more likely to result in a negative outcome than IPA visits
  • On average, every fourth visit resulted in one negative outcome
  • But averages can be deceptive…

As a reminder, the Insolvency Service’s report on 2017 monitoring can be found at: https://tinyurl.com/ycndjuxz

The picture becomes cloudy

As can be seen on the Insolvency Service’s dedicated RPB-monitoring web-page – https://www.gov.uk/government/collections/monitoring-activity-reports-of-insolvency-practitioner-authorising-bodies – their efforts to review systematically each RPB’s regulatory activities seemed to grind to a halt a year ago.  The Service did report last year that their “future monitoring schedule” would be “determined by risk assessment and desktop monitoring” and they gave the impression that their focus would shift from on-site visits to “themed reviews”.  Although their annual report indicates that such reviews have not always been confined to the desk-top, their comments are much more generic with no explanation as to how specific RPBs are performing – a step backwards, I think.

 

Themed review on fees

An example of this opacity is the Service’s account of their themed review “into the activities, and effectiveness, of the regulatory regime in monitoring fees charged by IPs”.

After gathering and reviewing information from the RPBs, the InsS reports: “RPBs responses indicate that they have provided guidance to members on fee matters and that through their regulatory monitoring; fee-related misconduct has been identified and reported for further consideration”.

For this project, the InsS also gathered information from the Complaints Gateway and has reported: “Initial findings indicate that fee related matters are being reported to the IP Complaints Gateway and, where appropriate, being referred to the RPBs”.

Ohhhkay, so that describes the “activities” of the regulatory regime (tell us something we don’t know!), but how exactly does the Service expect to review their effectiveness?  The report states that their work is ongoing.

Don’t get me wrong, it’s not that I necessarily want the Service to dig deeper.  For example, if the Service’s view is that successful regulation of pre-packs is achieved by scrutinising SIP16 Statements for technical compliance with the minutiae of the disclosure checklist, I dread to think how they envisage tackling any abusive fee-charging.  It’s just that, if the Service thinks that they are really getting under the skin of issues, personally I hope they are doing far more behind the scenes… especially as the Service is surely beginning to gather threads on the question of whether the world would be a better place with a single regulator.

So let’s look at the stats…

 

How frequently are you receiving monitoring visits?

There is a general feeling that every IP will receive a monitoring visit every three years.  But is this the reality?

This shows quite a variation, doesn’t it?  For two years in a row, significantly less than one third of all IPs were visited in the year.  Does this mean the RPBs have been slipping from the Principles for Monitoring’s 3-year norm?

The spiky CAI line in particular demonstrates how an RPB’s visiting cycle may mean that the number of visits per year can fluctuate wildly, but how nevertheless the CAI’s routine 3-yearly peaks and troughs suggest that in general that RPB is following a 3-yearly schedule.  So what picture do we see, if we iron out the annual fluctuations?

This looks more reasonable, doesn’t it?  As we would expect, most RPBs are visiting not-far-off 100% of their IPs over three years… with the clear exceptions of CAI, which seems to be oddly enthusiastic, and the ICAEW, which seems to be consistently ploughing its own furrow.  This may be the result of the ICAEW’s style of monitoring large firms with many IPs, where each year some IPs are the subject of a visit, but this may not mean that all IPs receive a visit in three years.  Alternatively, could it mean they are following a risk-based monitoring programme..?

There are benefits to routine, regular and relatively frequent monitoring visits for everyone, almost irrespective of the firm’s risk profile: it reduces the risk that a serious error may be repeated unwittingly (or even deliberately).  However, this model isn’t an indicator of Better Regulation (see, for example, the Regulators’ Compliance Code at https://www.gov.uk/government/publications/regulators-compliance-code-for-insolvency-practitioners).  With the InsS revisiting their MoU (and presumably also the Principles for Monitoring) with the RPBs, I wonder if we will see a change.

 

Focussing on the Low-Achievers?

The alternative to the one-visit-every-three-years-irrespective-of-your-risk-profile model is to take a more risk-based approach, to spend one’s monitoring efforts on those that appear to be the highest risk.  This makes sense to me: if a firm/IP has proven that they are more than capable of self-regulation – they keep up with legislative changes, keep informed even of the non-legislative twists and turns, and don’t leave it solely to the RPBs to examine whether their systems and processes are working, but they take steps quickly to resolve issues on specific cases and across entire portfolios and systems – why should licence fees be spent on 3-yearly RPB monitoring visits, which pick up non-material non-compliances at best?  Should not more effort go towards monitoring those who seem consistently and materially to fail to meet required standards or to adapt to new ones?

But perhaps that’s what being done already.  Are many targeted visits being carried out?

It seems that for several years few targeted visits have been conducted, although perhaps the tide is turning in Scotland and Ireland.  The ACCA also performed a number, although now that the IPA team is carrying out monitoring visits on ACCA-licensed IPs, I’m not surprised to see the number drop.

It seems that targeted visits have never really been the ICAEW’s weapon of choice.  At first glance, I was a little surprised at this, considering that their monitoring schedule seems less 3-yearly rigid than the other RPBs.  Aren’t targeted visits a good way to monitor progress outside the routine visit schedule?  Evidently, the ICAEW is not using targeted visits to focus effort on low-achievers.  Perhaps they are tackling them in another way…

 

Wielding Different Sticks

I think this demonstrates that the ICAEW isn’t lightening up: they may be carrying out less frequent monitoring visits on some IPs, but their post-visit actions are by no means infrequent.  So perhaps this indicates that the ICAEW is focusing its efforts on those seriously missing the mark.

The ICAEW’s preference seems to be in requiring their IPs to carry out ICRs.  Jo’s and my experiences are that the ICAEW often requires those ICRs to be carried out by an external reviewer and they require a copy of the reviewer’s report to be sent to the ICAEW.  They also make more use than the other RPBs of requiring IPs to undertake/confirm that action will be taken.  I suspect that these are often required in combination with ICR requests so that the ICAEW can monitor how the IP is measuring up to their commitments.

And in case you’re wondering, external ICRs cost less than an IPA targeted visit (well, the Compliance Alliance’s do, anyway) and I like to think that we hold generally to the same standards, so external ICRs are better for everyone.

In contrast, the IPA appears to prefer referring IPs for disciplinary consideration or for further investigation (the IPA’s constitution means that technically no penalties can arise from monitoring visits unless they are first referred to the IPA’s Investigation Committee).  However, the IPA makes comparatively fewer post-visit demands of its IPs.  But isn’t that an unfair comparison, because of course the ICAEW carried out more monitoring visits in 2017?  What’s the picture per visit?

 

No better and no worse?

Hmm… I’m not sure this graph helps us much.  Inevitably, the negative outcomes from monitoring visits are spiky.  We’re not talking about vast numbers of RPB slaps here (that’s why I’ve excluded the smaller RPBs – sorry guys, nothing personal!) and the “All” line (which does include the other RPBs) does illustrate a smoother line overall.   But the graph does suggest that ICAEW-licensed IPs are over three times as likely to receive a negative outcome from a monitoring visit than IPA-licensed IPs. 

Before you all get worried about your impending or just-gone RPB visit, you should remember that a single monitoring visit can lead to more than one negative outcome.  For example, as I mentioned above, the RPB could instruct an ICR or targeted visit as well as requiring the IP to make certain undertakings.  One would hope that much less than 25% of all IPs visited last year had a clean outcome!

This doubling-up of outcomes may be behind the disparity between the RPBs: perhaps the ICAEW is using multiple tools to address a single IP’s problems more often than the other two RPBs… although why should this be?  Alternatively, perhaps the ICAEW’s record again suggests that the ICAEW is focusing their efforts on the most wayward IPs.

 

Choose Your Poison

I observed in my last blog (https://tinyurl.com/y8b4cgp7) that the complaints outcomes indicated that the IPA was far more likely to sanction its IPs over complaints than the ICAEW was.  I suggested that maybe this was because the IPA licenses more than its fair share of IVA specialists.  Nevertheless, I find it interesting that the monitoring outcomes indicate the opposite: that the ICAEW is far more likely to sanction on the back of a visit than the IPA is.

Personally, I prefer a regime that focuses more heavily on monitoring than on complaints.  Complaints are too capricious: to a large extent, it is pot luck whether someone (a) spots misconduct and (b) takes the effort to complain.  As I mentioned in the previous blog, the subjects of some complaints decisions are technical breaches… and which IP can say hand-on-heart that they’ve never committed similar?

Also by their nature, complaints are historic – sometimes very historic – but it might not matter if an IP has since changed their ways or whether the issue was a one-off: if the complaint is founded, the decision will be made; the IP’s later actions may just help to reduce the penalty.

In my view, the monitoring regime is far more forward-looking and much fairer.  Monitors look at fresh material, they consider whether the problem was a one-off incident or systemic and whether the IP has since made changes.  The monitoring process also generally doesn’t penalise IPs for past actions, but rather what’s important are the steps an IP takes to rectify issues and to reduce the risks of recurrence.  The process enables the RPBs to keep an eye on if, when and how an IP makes systems- or culture-based changes, interests that are usually absent from the complaints process.

 

Next blog: SIP16, pre-packs and other RPB pointers.