Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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SIP1: must you make a formal complaint?

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

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

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

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

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

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

SIP1 states:

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

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

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

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

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

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

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

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

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

The IPA’s view

Alison Curry gave me this answer:

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

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

ICAS’ view

David Menzies gave me this answer:

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

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

The Other RPBs

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

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

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

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

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

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

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

What acts should be reported?

As quoted above, SIP1 sets out two criteria:

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

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

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

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A Call to shout about the obstacles to employee consultations

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

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

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

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

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

 

Answering the Call

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

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

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

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

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

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

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

 

City Link Stokes the Fire

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

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

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

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

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

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

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

But Jon Moulton’s comment was:

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

Fortunately, the Committees acknowledged the position of Administrators:

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

The Committees’ conclusion was:

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

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

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

 

The Call’s Questions

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

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

 

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

 


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Are regulators reacting to the Insolvency Service’s gaze?

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In this post, I analyse the Insolvency Service’s annual review of IP regulation, asking the following questions:

  • Are the regulators visiting their IPs once every three years?
  • How likely is it that a monitoring visit will result in some kind of negative outcome?
  • How likely is a targeted visit?
  • Has the Complaints Gateway led to more complaints?
  • What are the chances of an IP receiving a complaint?
  • How likely is it that a complaint will result in a sanction?

The Insolvency Service’s reports can be found at: http://goo.gl/MZHeHK.  As I did last year (http://wp.me/p2FU2Z-6C), I have only focussed attention on the authorising bodies with the largest number of IPs (but included stats for the others in the figures for “all”) and only in relation to appointment-taking IPs.  Again, regrettably, I don’t see how I can embed the graphs into this page, so they can be found at: Graphs 23-04-15.  You might find it easier to read the full article along with the graphs here(2).

 

Monitoring Visits

  • Are the regulators visiting their IPs once every three years?

Graph (i) (here(2)) looks at how much of each regulator’s population has been visited each year:

Is it a coincidence that the two regulators that were visited by the Service last year – the ACCA and the Service’s own monitoring team – have both reported huge changes in monitoring visit numbers?  Of course, this graph also shows that those two regulators carried out significantly less monitoring visits in 2013, so perhaps they were already conscious that they had some catching-up to do.

I’m not convinced that it was the Service’s visit that prompted ACCA’s increase in inspections: the Service’s February 2015 report on its 2014 visits to the ACCA did not disclose any concerns regarding the visit cycle and I think it is noteworthy that ACCA had a lull in visits in 2010, so perhaps the 2013 trough simply reflects the natural cycle.  Good on the Insolvency Service, though, for exerting real efforts, it seems, to get through lots of monitoring visits in 2014!

The trend line is interesting and reflects, I think, the shifting expectations.  The Service’s Principles for Monitoring continue to set the standard of a monitoring visit once every three years with a long-stop date of six years if the regulator employs satisfactory risk assessment processes.  However, I think most regulators now profess to carry out 3-yearly visits as the norm and most seem to be achieving something near this.

The ICAEW seems a little out-of-step with the other regulators, though.  At their 2014 rate, it would take 4½ years to get around all their IPs.  The report does explain, however, that the ICAEW also carried out 32 other reviews, most of which were “phone reviews” to new appointment-taking IPs.  The Service hasn’t counted these in the stats as true visits, so neither have I.

 

  • How likely is it that a monitoring visit will result in some kind of negative outcome?

Graph (ii) (here(2)) lumps together all the negative outcomes arising from monitoring visits: further visits ordered; undertakings and confirmations; penalties, referrals for disciplinary consideration; plans for improvement; compliance/self-certification reviews requested; and licence withdrawals (3 in 2014).

It’s spiky, but you can see that, overall around 1 in 4 visits in 2014 ended up with some kind of action needed.

Above this line, ACCA and ICAEW reported the most negative outcomes.  Most of the ACCA’s negative outcomes related to the ordering of a further visit (20% of their visits).  The majority of ICAEW’s negative outcomes related to the request for a compliance review (16% of their visits).  Of course, ICAEW IPs are required to carry out compliance reviews every year in any event.  I understand that this category involves the ICAEW specifically asking to see and consider the following year’s compliance review and/or requiring that the review be carried out by an external provider, where weaknesses in the IP’s internal review system have been identified.

I find ICAS’ flat-line rather interesting: for two years now, they have not reported any negative outcome from monitoring visits.  The Service had scheduled a visit to ICAS in April this year, so I’ll be interested to see the results of that.

 

  • How likely is a targeted visit?

Let’s take a closer look at ACCA’s ordering of further visits (graph (iii) here(2)): is this a new behaviour?

The 2015 estimated figures are based on the outcomes reported for the 2014 visits, although of course some could already have occurred in 2014.

ACCA seems to be treading a path all its own: the other RPBs – and now even the Service – don’t seem to favour targeted visits.

 

Complaints

 

  •  Has the Complaints Gateway led to more complaints?

It’s hard to tell.  The Service’s first-year report on the Complaints Gateway said that, as it had received 941 complaints in its first 12 months – and by comparison, 748 and 578 complaints were made direct to the regulators in 2013 and 2012 respectively – “it may be that this increase in complaints reflects the improvement in accessibility and increased confidence in the simplification of the complaints process”.

However, did the pre-Gateway figures reflect all complaints received by each regulator or only those that made it through the front-line filter?  If it is the latter, then the Gateway comparison figure is 699, not 941, which means that fewer complaints were received via the Gateway than previously (or at least for 2013), as this graph (iv) (here(2)) demonstrates.

The stats for 2013 are a mixture: for half of the year, the regulators were receiving the complaints direct and for the second half of the year the Gateway was in operation.  It seems to me that the Service has changed it reporting methodology: for the 2013 report, the stats were the total complaints made per regulator, but in 2014 the report refers to the complaints referred to each regulator.

Therefore, I don’t think we can draw any conclusions, as we don’t know on what basis the regulators were reporting complaints before the Gateway.  We cannot even say with confidence that the number of complaints received in 2013/14 is significantly higher than in 2012 and earlier, as this graph suggests, because it may be that the regulators were filtering out more complaints than the Gateway is currently.

About all we can say is that marginally fewer complaints were referred from the Gateway for the second half of 2014 than for the first half.

 

  • What are the chances of an IP receiving a complaint?

Of course, complaints aren’t something that can be spread evenly across the IP population: some IPs work in a more contentious field, others in high profile work, which may attract more attention than others.  The Service’s report mentioned that the IPA is still dealing with 34 complaints from 2012/2013 that relate to the same IVA practice.

However, graph (v) (here(2)) may give you an idea of where you sit.

This illustrates that, if complaints were spread evenly, half of all IPs would receive one complaint each year – and this figure hasn’t changed a great deal over the past few years.

As I mentioned last year, I do wonder if this graph illustrates the deterrent value of RPB sanctions: given that the Service has no power to order disciplinary sanctions on the back of complaints, perhaps it is not surprising that, year after year, SoS-authorised IPs have clocked up the most complaints.  I believe that the IPA’s 2013 peak may have had something to do with the delayed IVA completion issue (as I understand that the IPA licenses the majority of IPs specialising in IVAs).  It’s good to see that this is on the way down.

I am also interested in the low number of complaints recorded by ICAS-licensed IPs: maybe this justifies their flat-lined actions on monitoring visits explained above: maybe their IPs are just more well-behaved!  Or does it reflect that individuals involved in Scottish insolvency procedures may have somewhere else to go with their complaints: the Accountant in Bankruptcy?  Although the AiB website refers complainants to the RPB (shouldn’t this be to the Gateway?), it also states that they can write to the AiB and it seems to me that the AiB’s statutory supervisory role could create a fuzzy line.

 

  • How likely is it that a complaint will result in a sanction?

Although at first glance, this graph (vi) (here(2)) appears to show that the RPBs “perform” similarly when it comes to deciding on sanctions, it does show that, on average, the IPA issues sanctions on almost twice as many complaints when compared with the average over the RPBs as a whole.  Also, it seems that IPA-licensed IPs are seven times more likely to be sanctioned on the back of a complaint than ICAEW-licensed IPs.  The ACCA figure seems odd: no sanctions at all were reported for 2014.

Of the 43 complaints sanctions reported in 2014, 35 were issued by the IPA: that’s 82% of all sanctions.  That’s a hefty proportion, considering that the IPA licenses only 34% of all appointment-taking IPs.  It is no wonder that, at last week’s IPA conference, David Kerr commented on the complaints sanction stats and stressed the need for the RPBs to be working, and disclosing, consistently on complaints-handling.

 

Overview

Finally, let’s look at the negative outcomes from monitoring visits and complaints sanctions together (graph (vii) here(2)).

Of course, this doesn’t reflect the severity of the outcomes: included here is anything from an unpublicised warning (when the RPB discloses them to the Service) to a licence withdrawal. And, despite what I said earlier about the timing of the Service’s visit to the ACCA, I am still tempted to suggest that perhaps the Service’s visits have pushed the regulators – the Insolvency Service’s monitoring team and ACCA – into action, as those two regulators have recorded significant jumps in activity over the past year.

The Service has a busy year planned: full monitoring visits to ICAEW, ICAS, CARB, LSS and SRA (although that may be scaled back given the decision for the SRA to pull out of IP-licensing), and a follow up visit to ACCA.  No visit planned to the IPA?  Perhaps that suggests that the Service is looking as closely at these stats as I am.


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ACCA and Insolvency Service monitoring: poles apart?

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The Insolvency Service has released two reports on its own IP-monitoring team and one on ACCA’s monitoring, but is the Insolvency Service playing fair?  Is it applying double standards and how sensible are its demands of authorising bodies?

The reports can be found at: http://goo.gl/A7mXxJ

 

The Insolvency Service’s monitoring of the Insolvency Service’s monitoring

No, I’ve not copied-and-pasted by mistake: in April/May 2014, the Insolvency Service carried out a monitoring visit of its own monitoring team, i.e. the team that deals with Secretary of State-authorised IPs (“IPS”).

The report issued on 29 August 2014 identified some “serious weaknesses”, leading to a decision to make a follow-up visit three months later.  This occurred in January 2015 – not seriously tardy, I guess (although not a great example to the Team, given that late monitoring visits on IPs was the most serious weakness identified in the first visit) – and the report on the follow-up visit has now been released.

The recent report makes no reference to any further visits or follow-up actions, although the summary discloses a number of wriggle-phrases: “IPS has implemented, or made progress against, all the recommendations…  IPS has moved towards…  IPS has plans in place to address this…”  Would the Insolvency Service be satisfied if an RPB had made such “progress” towards goals?  Or would the Service be content for an RPB to accept such assurances from an IP who had only “moved towards” rectifying matters?

Catching up on overdue monitoring visits

To be fair, there did seem to be significant progress with the key issue – that as at May 2014 over half of their IPs had not had a visit in the past three years.  The report disclosed that, of the 28 IPs that had been identified from the 2014 review as overdue a visit, most had been visited or would be visited by May 2015.  The remaining five IPs had been asked to complete a pre-visit questionnaire, and the IPS planned to consider these on a risk basis and “if appropriate, schedule a prompt monitoring visit”.

It is evident from the report, however, that the only visits carried out by the Team since their 2014 review had been to IPs who were already overdue a visit.  Thus, I’m wondering, how many more IPs’ three years were up between April/May 2014 and now and is the Team constantly chasing their tails?  Of course, we expect SoS-authorisations to go in the future (although the De-regulation Bill provides a run-down period of another year), so is this really something to get excited about?  My issue is with the consistency of standards that I expect the Insolvency Service to apply to all licensing/authorising bodies.

“Independent” decision-making

The report makes reference to the introduction of “a layer of independence to its authorisation and monitoring process”.  This refers to the fact that the Section Head now decides on actions following monitoring visits and reauthorisations – with the benefit of a copy of the last monitoring report (which seems pointless to me: if the monitor’s findings were not such that they merited withdrawal of the IP’s authorisation, on what basis would they merit withholding reauthorisation up to a year later?).  Is the Section Head really independent?  I accept that the Insolvency Service structure (and budget) does not provide for the levels of independence possible for RPBs, but, again, I do feel that the Service is applying double standards here, especially given its report on ACCA below.

 

The Insolvency Service’s report on ACCA

The Service’s review of ACCA revealed “some weaknesses” and it is planning a follow-up visit within three to six months.  ACCA has rejected two of the Service’s recommendations.

Early-day monitoring visits

I was surprised to read the Service write so negatively about early monitoring visits.  About monitoring visits occurring within the first 12 months of the IP’s licence, it writes: “There is no evidence of these initial visits being conducted in accordance with the PfM [Principles for Monitoring]; instead, these appear to be conducted as courtesy visits”.  ACCA has asked the Service to clarify what is intended by the recommendation, given that a full scope visit is always completed within the IP’s first three years.  ACCA points to the PfM’s risk-based approach to early visits and states that it “will consider whether it should discontinue introductory visits in the future, given the Insolvency Service’s comments which suggest they are of little value.”

I know that ACCA is not the only RPB that carries out less-than-full-scope early visits, so I am wondering if we will see a shift from all those RPBs.

Personally, I feel that the Insolvency Service is taking the wrong tack here.  When I was at the IPA, I monitored new IPs’ caseloads to see when their first inspection visit looked appropriate.  I also took into consideration other factors: were they working in an office with other IPs?  If so, what were their track records?  Were they hitting the radar of the Complaints Department?  What did their self certifications look like?  But often a key question was: was their caseload building at such a rate that a visit would be useful?  Very often, new IPs take on very few cases and, on the basis of caseload alone, it is usually around 18 months before a proper visit can be conducted.

Nevertheless, I think that there is value in conducting an early visit.  Calling it a “courtesy visit” is a little unfair, I’m sure.  ACCA responded that “the purpose of these visits is to assist insolvency practitioners to ensure they have adequate procedures in place to carry out their work”.  And that’s the point, isn’t it?  It may be too early to see how the IP is really going to perform, but early-days are a good opportunity to see how geared-up the IP is, explore their attitude towards compliance and ethics versus profit, and perhaps even help them.  Is it sensible to criticise ACCA for not evidencing that an early-day visit has been conducted in the same way as a full visit?  If RPBs are discouraged – or prohibited – from carrying out introductory visits, compliance with the PfM would indicate that the RPB simply needs to record the decision that a full visit in the first 12 months is not necessary and then bump the IP to the 3-year point.  Is that better regulation?

Extensive monitoring reports

I have sympathy with ACCA as regards the Insolvency Service’s next criticism.  The report explains that ACCA’s monitoring reports describe the main areas of concern, but not the areas examined where no concerns were generated.  The Service recommended that “ACCA consider expanding their monitoring reports to include all information obtained during the monitoring process, including areas of no concern to provide a clear audit trail”.

Interestingly, the Insolvency Service’s 2014 report on its own monitoring came up with a similar recommendation, although in 2014 the Service’s recommendation appeared more dogmatic: “Ensuring that monitoring reports include all of the information obtained during the monitoring process, not just in relation to areas of concern; any areas where there are no concerns may be summarised.  The reports should also include the bonding information on each case.”  My original notes in the margin of that report expressed “Why?!”  I certainly don’t see why bonding information always needs to be recorded and I struggle to see how all information obtained could be sensibly written down.  When I review cases, I scribble pages of notes, summarising key facts and events in the case’s lifecycle, such as key Proposal terms and modifications, mainly so that I can see if these points are followed through over time.  As my review questions are answered satisfactorily, I move on; if I had to summarise all this information in my reports, they would double in length but I don’t believe they would be any more revealing or helpful to the reader.

The 2015 follow-up report on the Insolvency Service’s own monitoring states: “IPS had significantly expanded its monitoring reports.  These now contain sufficient detail to enable an informed decision to be made on appropriate action following the issue of the report.”  Hmm… that doesn’t exactly confirm that the reports now contain “all” information or indeed the bonding information on each case.  Does this, along with the Service’s recommendation that ACCA “consider” expanding reports, reflect that they themselves are moderating their original opinion of what should be in reports?

I cheered at ACCA’s response to the recommendation: “ACCA believes that including in the monitoring report areas where there are no concerns risks: expanding the report unnecessarily with no perceived benefit; diluting the overall outcome and reducing focus on the significant weaknesses in the insolvency practitioner’s procedures and the need to make appropriate improvements.”  Good for you, ACCA!

I think it’s a bit of a shame that, despite explaining this opinion, ACCA then states that it has amended its standard report template in an attempt to satisfy the Insolvency Service, although I am sure that many of us appreciate the wisdom in meeting our regulators’ demands even if we don’t agree with them.

“Independent” decision-making

Remembering that the IPS had satisfied the Insolvency Service on this matter by passing all monitoring reports through their Section Head, I sucked my teeth at the Service’s next recommendation to ACCA: “That any monitoring report with unsatisfactory findings be considered independently, for example by the Admissions and Licensing Committee, to assess what regulatory action may be necessary”.

Firstly, no IP is perfect; I have not seen a report with no “unsatisfactory findings”, so this suggests that effectively all monitoring reports would need to go through the Committee.  To be fair, I come from an IPA background where all reports did go through the Committee – and I thought it was valuable that the Committee see the good with the bad – but it’s a big ask for any Committee (especially if reports become far longer seemingly as required by the Service) and I am not surprised that some RPBs have sought to make the process more efficient.  After all, the majority of IPs visited are so obviously way above the threshold where some action is deserved that it makes perfect sense to fast-track these, doesn’t it?

The report stated that “ACCA regrets that it must reject this recommendation as it believes it is an impractical and disproportionate response to the vast majority of visit outcomes”.  ACCA’s response makes clear that each report is considered at least by the monitor and a reviewer, who I think can decide on certain actions such as scheduling a follow-up visit: is this not sufficient for at least the top 50% of IPs?

Admittedly, the devil is in deciding what to do with the reports at the margins: at what stage is an issue serious enough to warrant Committee attention?  Unfortunately for ACCA, the case that led to this recommendation was not a great example.  Although ACCA has done a good job in putting into context each of the breaches identified at this IP visit that ACCA decided fell below the threshold for Committee attention, I have to say that the fees issue alone – even though it was a one-off unusual circumstance (the IP had taken a £5,000 deposit for the costs of liquidating a company, but it was actually placed in administration and the IP drew the deposit for pre-admin costs without complying “fully” with R2.67A) – would have meant, in an IPA context, that it would not only have been considered at length by the Membership & Authorisation Committee, but it would have been an automatic referral also to the Investigation Committee for consideration for disciplinary action.

I am also not persuaded by ACCA’s defence that the IP’s repeat breaches of legislation and/or SIPs resulted in “no actual harm” to the debtor (in one case) or creditors “such that, given the function of the Admissions and Licensing Committee, a referral to it would not have been justified”.  In my experience, it is very rare that breaches of statute or SIPs actually result in harm, but is that the only criterion for deciding whether an issue is sufficiently serious to warrant action?  You could throw out half the rules and SIPs, if all IPs needed to do was avoid harming stakeholders.

I think that ACCA is on stronger ground as regards another issue that the IP had already rectified.  What would be the point of referring this to the Committee?  “Withdrawal or suspension of the licence would be disproportionate and it is not clear what conditions would be appropriate to protect the public, particularly as the breach had already been rectified.”

I think that ACCA’s final comments put it nicely: “To recommend that such cases should routinely be referred to the Admissions and Licensing Committee to decide on any regulatory action and timing of the next visit is a poor use of Committee resources, clearly disproportionate to the findings and, in ACCA’s view, contrary to the guidance contained in the Insolvency Service Regulators’ Code.”

Surely the Insolvency Service should be concentrating on outcomes, shouldn’t they?  After all, that is what Nick Howard said (in the podcast at http://goo.gl/WUst5M) was his objective as regards the Service’s monitoring of all the RPBs: to ensure that they act consistently in reaching the same outcomes.  Admittedly, in this case it does look to me like the IPA (for one) would have put the IP through the ringer, made him sweat a bit more, than ACCA appears to have done, but would it have affected the outcome?  If the IP took on board all of the ACCA monitor’s points and made the necessary changes (some which appear to have taken place prior to the visit in any event), does it matter how his report was processed?

And I would add: how does the IPS’ process – of referring reports to the Section Head – meet the Service’s apparent requirement for independence any better?

Complaints-handling

ACCA has evidently had some difficulties in the past in resourcing their complaints-handling adequately, although they do seem to have cracked it more recently.  I did smile, though, at the Service’s recommendation that “it would be helpful in future for the Insolvency Service to be kept informed of any significant changes in staffing and resources” – ACCA had increased their staffing for complaints from one member to two.  Can you imagine if authorising bodies took such a keen interest in IPs’ staff numbers?!

One of the Service’s other recommendations was that the name of the independent assessor be given to the complainant and the IP “to ensure transparency and openness throughout the process”.  This was the second recommendation that ACCA had rejected: “ACCA does not believe naming assessors will add any real value to the process…  If assessors are named, there is a danger that they may be passed extraneous material, which risks delays in progressing complaints.  There is also the risk of assessors being harassed by members and complainants where their decision is not favourable to them”.

My personal view is that this is another example of the Service trying to meddle with the processes instead of concerning itself with the outcomes.  I can see how they might feel that transparency in this matter might help “improve confidence” in the complaints regime, but is it that material?

 

Single regulator?

What worries me about all this is that the Service appears to be seeking to achieve consistency by ensuring that all authorising bodies’ processes are the same.  This is particularly unhelpful if the Service starts with what they think an authorising body should look like and then exerts pressure on every body to squeeze them into that mould, instead of looking objectively at how the body performs before looking to criticise its processes.

There are a Memorandum of Understanding and Principles for Monitoring.  The Service should be measuring the bodies against these standards.  The Service’s “Oversight regulation and monitoring in the insolvency profession” document (http://goo.gl/jipcWs) confirms that assessing compliance with the MoU and PfM is fundamental.  Thankfully, the MoU and PfM are not so prescriptive that they describe, for example, how much detail should go into monitoring reports.

In this document, the Service also claims to use “an outcomes and principles based approach” in carrying out its oversight role.  I’m afraid that its monitoring reports do not do much to support this claim.  If the Service wants to be effective in its oversight role, personally I think it needs to be thinking and acting smarter.

The clock is ticking for the reserve power to introduce a single regulator.  My problem is that not all that the Service is doing seems to be helping RPBs to achieve their objectives in the best way they think they can.  I ask myself: does the Service really want to support better delegated regulation?


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The Insolvency Rules Modernisation Project: an ugly duckling no more?

1229 Port Douglas

The Insolvency Service’s work on the modernisation of the Insolvency Rules has appeared swan-like: to the outside world, the project seems to have drifted on serenely, but I get the feeling that those on the inside have been paddling furiously.  I set out here how the tome has been developing, as described in an update received from the Service last week.  Please note that this project is work in progress and the items as they are described below may evolve yet further before the Rules are finalised.

The Service reports that their consultation, which closed in January 2014, generated over a thousand policy and drafting points for consideration.  Their target remains to have a new set of Rules commencing in April 2016, although they are seeking to publish finalised Rules in autumn 2015 so that all of us who will be applying the Rules can get our houses in order for the big day.  That means that the Insolvency Rules Committee will need to be provided with the bulk of the new Rules to review in spring 2015.

The Service has endeavoured to keep those of us who have expressed a particular interest in the project informed and engaged in the process of developing the draft Rules, holding meetings to discuss related chunks and following this up with “we’d appreciate your comments on…” email exchanges.  Personally, I have been impressed by these efforts, although I have been conscious that such meetings and exchanges barely scratch the surface.  Although we might expect many Rules to remain intact, I envisage that the “simple” task of ensuring consistency throughout as regards, for example, notice requirements wraps in and has a knock-on effect on a whole host of interconnected Rules.  That Herculean task of dealing with the detail is left to the Insolvency Service team and, once the ever-changing impact of other government reviews and Bills is factored in, I can see why the Rules project has a projected 2016 end point.

About-Face

Good on the Service for taking the opportunity to propose some changes that were bound to upset some people!  The Service’s recent update illustrates the value of consultation, as they have reported that consideration of consultation responses has resulted in some proposed changes of direction:

  • Withdrawal of the proposed new requirement for personal service of winding-up petition;
  • Return of the current requirement to disclose any prior professional relationships of proposed administrators; and
  • Return of the ability to have contributory members on liquidation committees.

Further Progress

The consultation responses have led to further proposed changes to the draft Rules:

  • Withdrawal of the requirement for the appointor and committee to check the IPs’ security;
  • The Rules on disclaimers and on proxies will form separate parts (in the previous draft, these appeared to be scattered somewhat within the chapters dealing with different insolvency processes); and
  • Clarification of the requisite majority rules for CVAs and IVAs.

I found that last item particularly interesting.  It was not until I came to scrutinise the Rules – both draft and existing – when I was looking at the consultation that I saw quite how confusing the provisions are.  When considering the impact of connected (or associated) creditors’ votes, I’d had the idea that these connected votes are stripped out and then one looks at which way the remaining unconnected creditors were voting: if more than 50% (in value) of those voting were voting against the VA Proposal, then the Proposal was not approved.  However, I recently realised that this is not what the current Rules say.

Rule 1.19(4) (and similarly R5.23(4), the IVA equivalent) states that “any resolution is invalid if those voting against it include more than half in value of the creditors, counting in these latter only those –
a) to whom notice of the meeting was sent;
b) whose votes are not to be left out of account under [rule 1.19(3)]; and
c) who are not, to the best of the chairman’s belief, persons connected with the company.”

“The creditors” that forms the denominator in this fraction does not relate to creditors voting, but effectively to creditors entitled to vote. This is supported by Dear IP (chapter 24, article 13). Thus, chairmen should be looking, not simply at the majority of unconnected votes cast, but whether the votes cast rejecting the Proposal amount to more than half of the total of unconnected creditors’ unsecured claims.

Now, it may just be me who has misunderstood this all this time (and I hasten to add that I have not had cause to look carefully at this Rule probably since my exam days).  However, I suspect I am not alone, as the draft new Rule dealt with this matter in exactly the same way, but in plainer English, which seemed to make the consequence far more stark and this resulted in quite some debate at the Service-hosted meeting that I attended as to exactly how the requisite majority rule should operate.

I am not sure whether the new draft Rules will follow the current Rules – or if it will reflect how I suspect many of us have been reading it for many years – but I am pleased to hear that the language used will be revisited so that hopefully it will be unequivocal.  As the Administration equivalent – R2.43(2) – clearly refers to total creditors’ claims, not only creditors voting, I suspect the new VA Rules will be consistent with this design.

Unsettled Policy

The Service has also described some areas that are still in the process of being explored.  In responding to my request that I share the Service’s update publicly, I was asked to make it very clear that this is – all – still work in progress and, particularly as regards the following items, the Service is still in inviting-comments-and-reflecting mode and they should not be treated as settled policy.

Creditors

I greeted with disappointment the news that, as some of the Administration consent requirements are contained in Schedule B1 of the Act, the Rules’ Administration approval requirements are unlikely to depart from the Act’s model.  In other words, where all secured creditors’ approvals are required for a matter, this is likely to be repeated in the new Rules.  I am pleased to note, however, that the Service has heard the complaints of difficulties in persuading some secured creditors to engage.

The Service seems to be a little more sympathetic to IPs’ difficulties when it comes to persuading preferential creditors to vote.  They are reflecting on what exactly is meant by the approval of 50% of preferential creditors etc. (for example, in R2.106(5A)): does this mean that at least one pref creditor needs to vote or does 50% of zero equal zero..?  Whether or not the new Rules will allow Para 52(1)(b) fees to be approved on a zero pref creditor basis, it seems very likely that a positive response will be needed, if not by a pref creditor, then by a secured one.

So what about the old chestnut: do paid creditors get a vote?   For some time even before I had left the IPA, this debate has rumbled through many corridors.  The current Rules present a problem: if one views a “creditor” as someone who had a claim at the relevant date, then, as an example, R2.106(5A) may be difficult to achieve.  How do you get a secured creditor who has been paid out to respond to a request to approve fees?  The key may be to seek their approval pdq on appointment before they are paid out, but what if that doesn’t happen?  Do the Rules really require their approval?  It hardly seems in the spirit of the Rules to give a creditor, whose debt has been – or even is going to be – discharged in full, the power to make decisions that could affect someone else’s recovery.

The Service has considered whether it might be possible to define creditors in the Rules to overcome this difficulty.  At present, however, their conclusion is that, largely because of existing provisions defining certain “creditor”s and “debt”s in the Act, seeking to resolve this via the Rules will be difficult to achieve.

Progress Reports

The Service’s proposals regarding progress reports appear more promising.  Several people have commented that the government’s drive to reduce costs in the insolvency process seems at odds with the ever-increasing, e.g. via the 2010 Rules, level of prescription around certain requirements such as the timing and content of progress reports.  Already, the courts seem to have improved the default position of the current Rules when it comes to block transfers of insolvency cases: I understand that more often than not courts are now making orders that disapply the Rules’ requirements for progress reports by departing office holders and the re-setting of the reporting clock to the date of the transfer order (which, if not so ordered by the court, would have the unfortunate consequence that the incoming office holder would need to produce a progress report on all of his transferred-in cases on the same day each year/six months).

The Service is currently considering the following proposals:

  • Dropping the Rules’ requirement for a progress report on a case transfer (although the court may order, or the incoming office holder may decide, otherwise);
  • Dropping the requirement for a progress report to accompany an Administration extension application/request for consent, although the Administrator would need to explain why the extension was being requested; and
  • Because progress reports would not be required in the circumstances above, the timing of the next progress report would not be affected by the event (i.e. by the case transfer or extension request); the case would continue to follow the reporting cycle relative to the insolvency date.

 

Phew!  It’s good to see that much progress has been made – the ugly duckling is already showing signs of maturing into a reasonably-looking bird – and I wish the team all the best in their labours of coming months.


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The Future is… Complicated

 

 

1933 Yosemite

My autumn has been a CPE marathon: SWSCA, the R3 SPG Forum, the IPA roadshow, and the ICAEW roadshow. Thus I thought I’d try to summarise all the legislative and regulatory changes currently in prospect:

Statutory Instruments

  • Enterprise & Regulatory Reform Act 2013;
  • Deregulation Bill (est. commencement: May/October 2015);
  • Small Business, Enterprise and Employment Bill (October 2015 for IP regulation items, April 2016 for remainder);
  • The exemption for insolvency proceedings from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) comes to an end on 1 April 2015;
  • New Insolvency Rules (est. to be laid in Parliament in October 2015, to come into force in April 2016); and
  • A plethora of SIs to support the Bankruptcy and Debt Advice (Scotland) Act 2014 (coming into force on 1 April 2015, but, regrettably, I feel so out of the loop on Scottish insolvency now that I don’t dare pass comment!)

Consultation Outcomes

  • IP fees (consultation closed in March 2014);
  • DROs and threshold for creditors’ petitions for bankruptcy (consultation closed in October 2014); and
  • Continuity of essential supplies to insolvent businesses (consultation closed in October 2014).

Revision of SIPs etc.

  • Ethics Code Review;
  • SIP 1;
  • SIPs 16 & 13;
  • SIP 9 (depending on how the government turns on the issue of IP fees);
  • New Insolvency Guidance Paper on retention of title; and
  • Other SIPs affected by new statute.

 

Enterprise & Regulatory Reform Act 2013

The Insolvency Service’s timetable back in 2013 was that the changes enabled by this Act would be rolled out in 2015/16, but I haven’t heard a sniff about it since. However, the following elements of the Act are still in prospect:

  • Debtors’ bankruptcy petitions will move away from the courts and into the hands of SoS-appointed Adjudicators (not ORs).
  • There was talk of the fee being less than at present (£70 plus the administration fee of £525) and of it being paid in instalments, although my guess is that the Adjudicator is unlikely to deal with an application until the fee has been paid in full.
  • The application process is likely to be handled online. Questions had been raised on whether there would be safeguards in place to ensure that the debtor had received advice before applying. This would appear important given that the Adjudicator will have no discretion to reject an application on the basis that bankruptcy is not appropriate: if the debtor meets the criteria for bankruptcy, the Adjudicator must make the order.

The ERR Act is also the avenue for the proposed revisions to Ss233 and 372 of the IA86 – re. continuity of essential supplies – as it has granted the SoS the power to change these sections of the IA86.

The Deregulation Bill

Of course, the highlight of this Bill is the provision for partial insolvency licences. It was debated in the House of Lords last week (bit.ly/1tBmMhe – go to a time of 16.46) and whilst I think that, at the very least, the government’s efforts to widen the profession to greater competition are nonsensical in the current market where there is not enough insolvency work to keep the existing IPs gainfully employed, my sense of the debate is that the provision likely will stick.

I was surprised that Baroness Hayter’s closing gambit was to keep the door open at least to press another day for only personal insolvency-only licences (rather than also corporate insolvency-only ones).  Will that be a future compromise?  What with the ongoing fuzziness of (non-FCA-regulated) IPs’ freedom to advise individuals on their insolvency options and the rareness of bankruptcies, I wonder if the days in which smaller practice IPs handle a mixed portfolio of corporate and personal insolvencies are numbered in any event.

The Deregulation Bill contains other largely technical changes:

  • Finally, the Minmar/Virtualpurple chaos will be resolved in statute when the need to issue a Notice of Intention to Appoint an Administrator (“NoIA”) will be restricted to cases where a QFCH exists.
  • The consent requirements for an Administrator’s discharge will be amended so that, in Para 52(1)(b) cases, the consent of only the secured creditors, and where relevant a majority of preferential creditors, will be required. At present Para 98 can be interpreted to require the Administrator also to propose a resolution to the unsecured creditors.
  • A provision will be added so that, if a winding-up petition is presented after a NoIA has been filed at court, it will not prevent the appointment of an Administrator.
  • In addition to the OR, IPs will be able to be appointed by the court to act as interim receivers over debtors’ properties.
  • It will not be a requirement in every case for the bankrupt to submit a SoA, but the OR may choose to request one.
  • S307 IA86 will be amended so that Trustees will have to notify banks if they are seeking to claim specific after-acquired property. The government envisages that this will free up banks to provide accounts to bankrupts.
  • The SoS’ power to authorise IPs direct will be repealed, with existing IPs’ authorisations continuing for one year after the Act’s commencement.
  • The Deeds of Arrangement Act 1914 will be repealed.

The Small Business, Enterprise and Employment Bill

I won’t repeat all the provisions in this Bill, but I will highlight some that have created some debate recently.

The proposed new process for office holders to report on directors’ conduct proved to be a lively topic at the RPB roadshows. There seemed to be some expectation that IPs would report their “suspicion – not their evidenced belief – of director misconduct” (per the InsS slide), although this was downplayed at the later R3 Forum.  My initial thoughts were that perhaps the Service was looking to produce a kind-of SARs-reporting regime and I wondered whether that might work, if IPs could have the certainty that their reports would be kept confident.

However, I suspect that the Service had recognised that IPs would have difficulty with the proposed new timescale for a report within 3 months, but hoped that this would be mitigated if IPs could somehow be persuaded to report just the bare essentials – to enable the Service to decide whether the issues merit deeper enquiries – rather than putting them under a requirement to collect together substantial evidence. I suspect that the Service’s intentions are reasonable, but it seems that, at the moment, they haven’t got the language quite right.  Let’s hope it is sorted by the time the rules are drafted.

Phillip Sykes, R3 Vice President, gave evidence on the Bill to the Public Bill Committee a couple of weeks ago (see: http://goo.gl/V1XSbX or go to http://goo.gl/jSTmI0 for a transcript).  Phillip highlighted the value of physical meetings in engaging creditors in the process and in informing newly-appointed office holders of pre-appointment goings-on.  He also commented that the proposed provision to empower the courts to make compensation orders against directors on the back of disqualifications seems to run contrary to the ending of the LASPO insolvency exemption and that the suggestion that certain creditors might benefit from such orders offends the fundamental insolvency principle of pari passu. Phillip also explained the potential difficulties in assigning office holders’ rights of action to third parties and described a vision of good insolvency regulation.  Unfortunately, he was cut off in mid-sentence, but R3 has produced a punchy briefing paper at http://goo.gl/mBeU30, which goes further than Phillip was able to do in the short time allowed by the Committee.

Last week, a new Schedule was put to the Public Bill Committee (starts at: http://goo.gl/sY5QUG), setting out the proposed amendments to the IA86 to deal with the abolition of requirements to hold creditors’ meetings and opting-out creditors.  A quick scan of the schedule brought to my mind several queries, but it is very difficult to ascertain exactly how practically the new provisions will operate, not least because they refer in many places to processes set out in the rules, which themselves are a revision work in progress.

IP Fees

The consultation, which included a proposal to prohibit the use of time costs in certain cases, closed in March 2014 and there hasn’t exactly been a government response. All that has been published is a ministerial statement in June that referred to “discussing further with interested parties before finalising the way forward” (http://goo.gl/IbQsLd).  The recent events I have attended indicate that the Service’s current focus is more on exploring the value of providing up-front fee estimates together with creditors’ consent (or non-objection) to an exceeding of these estimates, rather than restricting the use of the time costs basis.  I understand that the government is expected to make a decision on how the IP fees structure might be changed by the end of the year.

Revision of SIPs etc.

I have Alison Curry of the IPA to thank for sharing with members at the recent roadshows current plans on these items:

  • A JIC review of the Insolvency Code of Ethics has commenced. Initial findings have queried whether the Code needs to incorporate more prescription, as it has been suggested that the prevalence of “may”s, rather than “shall”s, can make it difficult for regulators to enforce. The old chestnuts of commissions, marketing and referrals, also may be areas where the Code needs to be developed.
  • Although RPB rules include requirements for their members to report any knowledge of misconduct of another member, it has been noted that, of course, this is not effective where the misconduct involves a member of a different RPB. Therefore, the JIC is looking to amend SIP1 with a view to incorporating a profession-wide duty to report misconduct to the relevant RPB or perhaps via the complaints gateway.
  • As expected, SIP16 is being reviewed in line with Teresa Graham’s recommendations. This is working alongside the efforts to create the Pre-pack Pool, which will consider connected purchasers’ intentions and viability reviews. A consultation on a draft revised SIP16 is expected around Christmas-time. I had heard that the target is that a revised SIP16 will be issued by 1 February 2015 and the Pool will be operational by 1 March 2015, but that seems a little optimistic, given the need for a consultation.
  • SIP13 is ripe for review (in my opinion, it needed to be reviewed after the Enterprise Act 2002!) and it is recognised that it needs to be revised in short order after SIP16.
  • A new IGP on RoT has been drafted and is close to being issued. We received a preview of it at the IPA roadshow. To be honest, it isn’t rocket science, but then IGPs aren’t meant to be.


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The Insolvency Service’s labours for transparency produce fruits

IMGP3472

The Insolvency Service has been busy over the past months producing plenty of documents other than the consultations. Here, I review the following:

  • First newsletter;
  • Report on its visit to the SoS-IP monitoring unit;
  • Summary of its oversight function of the RPBs;
  • IVA Standing Committee minutes; and
  • Complaints Gateway report.

The Insolvency Service’s first newsletter

http://content.govdelivery.com/accounts/UKIS/bulletins/d469cc

Although this is a bit of a PR statement, a couple of crafty comments have been slipped in.

The newsletter explains that the Service’s “IP regulation function has been strengthened and we have raised the bar on our expectations of authorising bodies”. I started off sceptical but to be fair the Service’s summary of how it carries out its oversight function of the authorising bodies – https://www.gov.uk/government/publications/insolvency-practitioner-regulation-oversight-and-monitoring-of-authorising-bodies – does convey a more intensive Big Brother sense than the Principles for Monitoring alone had done previously.  This document puts more emphasis on their risk-based assessments, desk-top monitoring and themed reviews, as well as targeting topical areas of concern, which can only help to provide a better framework in which their physical monitoring visits to the RPBs can sit.

I commend the Service for establishing more intelligent regulatory processes, but two sentences of the newsletter stick in the throat: “We saw the impact that our changing expectations had in a few areas. Things deemed acceptable a few years ago were now being picked up as areas for improvement.” This is a reference to its report on the visit to its own people who monitor SoS-authorised IPs, the Insolvency Practitioner Services (“IPS”): https://www.gov.uk/government/publications/monitoring-activity-reports-of-insolvency-practitioner-authorising-bodies.  Having worked in the IPA’s regulatory department from 2005 to 2012, I would like to assure readers that many of the items identified in the Service’s report on IPS have been unacceptable for many years – at least to the IPA during my time and most probably to the other RPBs (I am as certain as I can be of that without having worked at the RPBs myself).

I am aghast at the Service’s apparent suggestion that the following recent discoveries at the IPS were acceptable a few years ago:

  • A 5-year visit cycle with insufficient risk assessment to justify a gap longer than 3 years;
  • Visits to new appointment-takers not carried out within 12 months and no evidence of risk assessment to justify this;
  • No evidence that one IP’s receipt of more than 1,000 complaints in the previous year (as disclosed in the pre-visit questionnaire) was raised during the visit, nor was it considered in any detail in the report;
  • No evidence of website checks (which the Service demanded of the RPBs many years ago);
  • “Little evidence that compliance with SIP16 is being considered”;
  • “No evidence that relevant ethical checklists and initial meeting notes from cases had been considered”; and
  • “Once a final report has been sent to the IP, there does not appear to be any process whereby the findings of the report are considered further by IPS”.

Still, that’s enough of the past. The Service has now thrown down the gauntlet.  I shall be pleased if they now prove they can parry and thrust with intelligence and effectiveness.

Worthy of note is that the newsletter explains that, in future, sanctions handed down to IPs by the RPBs will be published on the Service’s website (presumably more contemporaneously than within its annual reviews).

IVA Standing Committee Minutes 17 July 2014

https://www.gov.uk/government/publications/minutes-from-the-iva-standing-committee-july-2014

“Standardised Format”

The minutes report that the IPA will have a final version – of what? Presumably a statutory annual report template? – within “a couple of weeks” and that two Committee members will draft a Dear IP article (there’s a novelty!) to explain that use of the standard is not mandatory.

Income and Expenditure Assessments

The minutes recorded that Money Advice Service had been preparing for consultation a draft I&E statement – which seems to be an amalgam of the CFS and the StepChange budget with the plan that it will be used for all/a number of debt solutions. The consultation was opened on 16 October: https://www.moneyadviceservice.org.uk/en/static/standard-financial-statement-consultation

IVA Protocol Equity Clause

As a consequence of concerns raised by an adviser about the equity clause, DRF has agreed to “draft a response” – it seems this is only intended to go to the adviser who had written in, although it would seem to me to have wider interest – “to clarify the position, which is that a person will not be expected to go to a subprime lender and the importance of independent financial advice”. It is good to have that assurance, but what exactly does the IVA Protocol require debtors to do in relation to equity?  Does the Protocol clause need revising, I wonder.

Resistance to refunding dividends when set-off applied

I see the issue: a creditor receives dividends and then sets off mis-sold PPI compensation against their remaining debt. Consequently, it could be argued that the creditor has been overpaid a dividend and should return (some of) it.  The minutes state that “it is a complicated issue and different opinions prevail” (well, there’s a revelation!), although it has been raised with the FCA.

Variations

It seems that the Committee has only just cottoned on to the fact that the Protocol does not allow the supervisor to decide whether a variation meeting should be called, so they are to look at re-wording the standard terms to “give supervisor discretion as to whether variation is appropriate so when one is called it is genuine and in these instances the supervisor will be entitled to get paid”.

I’m sorry if I sound a little despairing at this, not least because of course the cynic may see this as yet another avenue for IPs to make some easy money! It was something that I’d heard about when I was at the IPA – that some IPs were struggling with IVA debtors who wanted, say, to offer a full and final settlement to the creditors that the IP was confident would be rejected by creditors, but under the Protocol terms it seemed that they had no choice but to pass the offer to creditors.  I’m just surprised that this issue has not yet been resolved.

Recent pension changes

The minutes simply state: “InsS to enquire with colleagues as to how it is planned to treat these in bankruptcy and feed back”. About time too!  Shortly after the April proposals had been first announced, I’d read articles questioning whether the government had thought about how any lump sum – which from next April could be the whole pension pot – would be treated in a bankruptcy.  Presumably, legislation will be drafted to protect this pot from a Trustee’s hands, but that depends on the drafter getting it right.  The lesson of Raithatha v Williamson comes to mind…

Well, I’m assuming that this is what the Committee minutes refer to, anyway.

Report on the First Year of the Complaints Gateway

https://www.gov.uk/government/publications/insolvency-practitioner-complaints-gateway-report-august-2014

Aha, so Dr Judge has been able to spin an increased number of complaints as evidence that the gateway “is meeting the aim of making the complaints process easier to understand and use”! I wonder if, had the number of complaints decreased, his message might have been that insolvency regulation had played a part in raising standards so that there were fewer causes for complaint.

The report mentions that the Service is “continuing dialogue” with the SRA and Law Society of Scotland to try to get them to adopt the gateway.

The Service still seems to be hung up about the effectiveness of the Insolvency Code of Ethics (as I’d mentioned in an earlier post, http://wp.me/p2FU2Z-6I) and have reported their “findings” to the JIC “to assist with its review into this area”.

The Service also seems to have got heavy with the RPBs about complaints on delayed IVA closures due to ongoing PPI refunds. The ICAEW and the IPA “have agreed to take forward all cases for investigation” – because, of course, some complaints are closed at assessment stage on the basis that the complaints reviewer has concluded that there is no case to answer (i.e. it is not that these complaints do not get considered at all) – “where the delay in closing the IVA exceeds six months from the debtor’s final payment”.  Does this mean that the general regulator view is that any delay under 6 months is acceptable?  Hopefully, this typical Service measure of setting unprincipled boundaries will not result in a formulaic approach to dealing with all complaints about delayed closure of IVAs.  And, although the other RPBs may license a smaller proportion of IVA-providing IPs, I wonder what their practices are…

The report also explains that the Service has persuaded the ICAEW to modify its approach a little in relation to complaints resolved by conciliation. Now, such a complaint will still be considered in the context of any regulatory breaches committed by the IP.  Years ago, the Service urged the RPBs to consider whether they could make greater use of financial compensation (or even simply requiring an IP to write an apology) in their complaints processes, but there was some resistance because it seemed that the key objective of the regulatory complaints process – to pick up IPs failing to meet standards – was at risk of getting lost: might some IPs be persuaded to agree a swift end to a complaint, if it meant that less attention would be paid to it?  To be fair, this has always been an IP’s option: he can always satisfy the complainant before they ever approach the regulator.  However, now settling a complaint after it has started on the Gateway path may not be the end of it for the IP, whichever RPB licenses him.

The Statistics

I think that the stats have been more than adequately covered by other commentaries. In any event, I found it difficult to draw any real conclusions from them in isolation, but they also don’t add much to the picture presented in the Insolvency Service’s 2013 annual review.  That’s not to say, however, that this report has no use; at the very least, it will serve as a reference point for the future.

Ok, the complaints number has increased, but it does seem that the delayed IVA closure due to PPI refunds is an exceptional issue at the moment. Given that the IPA licenses the majority of IPs who carry out IVAs, it is not surprising therefore that the IPA has the largest referred-complaint per IP figure: 0.63, compared to 0.54 over all the authorising bodies (although the SoS is barely a whisker behind at 0.62).  My personal expectation, however, is that the Insolvency Service’s being seen as being more involved in the complaints process via the Gateway alone may sustain slightly higher levels of complaints in the longer term, as perceived victims may not be so quick to assume that the RPB/IP relationship stacks the odds so heavily against them receiving a fair hearing.


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Keeping the lights on for insolvent businesses

IMGP3243

It is 13 days and counting until the Insolvency Service’s consultation on the extension of the IA86 provisions regarding essential supplies to insolvent businesses closes. R3 pretty much said it all in its autumn 2014 magazine (pages 8 and 9), so I shall be brief – honest!

The Insolvency Service’s consultation, impact assessment, and draft statutory instrument are at: http://goo.gl/N4Tg3c

Personal guarantees in IVAs and CVAs?

As I’m sure you know, the changes seek to wrap in to the existing S233 and S372 suppliers of a number of IT services and goods. Thus, these suppliers may not hold the IP to ransom in relation to their pre-appointment debts in order to agree to supply post-appointment… but they can seek a PG from the office holder, just as utility suppliers can do at present.

The draft statutory instrument also sets out restrictions on IT/utility suppliers’ powers to terminate pre-appointment contracts (or “do any other thing”, which the Service envisages would prevent actions such as increasing charges simply because of the administration or VA). A supplier would be entitled to terminate if, within 14 days of the commencement of the VA (or administration), the supplier has asked for a PG and one has not been provided within a further 14 days.

How likely is it that a Supervisor will agree to personally guarantee the payment of IT or utility supplies to a company or an individual in a VA?! Although I think that this is an entirely unrealistic prospect, VAs at present only work if the company/individual can reach agreements with their suppliers, so I don’t think the insolvent will be any worse off – and at least this might give them a 28 days breathing space in which to get things sorted.  It is perhaps not surprising, therefore, that the impact assessment takes a cautious approach and puts no monetary benefit on the impact of this provision on companies/individuals trading whilst in VAs.

Pre-Administration/VA events

The draft SI lists aspects of what is described as “an insolvency-related term”, which ceases to have effect if a company enters administration or CVA (or an individual in business enters an IVA). One of these ineffective features of an insolvency-related term is:

  • “the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect”

I guess that “insolvency”, i.e. being unable to pay one’s debts as and when they fall due, is an event that occurs before administration or VA, isn’t it? Given that this frequently appears in termination clauses, could this be a catch-all that avoids termination in all cases where an administration or VA results?  Well, surely the problem with this is that, when insolvency first rears its head, who knows what the final outcome will be?  What if a creditor, petitioning for a winding-up order, is tussling with a company hoping to be placed into administration?  It seems that suppliers might be entitled to terminate, but only if the company does not end up in an administration or VA.  A statutory provision that seeks to impact on a past event is no provision at all, is it?

So does the draft SI have anything else to say about the pre-Administration/VA periods, e.g. when a Notice of Intention to Appoint an Administrator has been issued or when a Nominee is acting? The Explanatory Note indicates that a termination clause would not have effect when a VA is proposed, but this is not what the draft SI says. It states that the insolvency-related term ceases to have effect if “a voluntary arrangement approved… takes effect”.

The impact assessment uses the expression, “the onset of insolvency”, which is something else again. It uses this expression to describe the starting point of the 14 days in which the supplier can ask for a PG.  However, the draft SI states that this period begins with “the day the company entered administration or the voluntary arrangement took effect”.

Therefore, it would seem to me that, in more ways than one, the period during which a Nominee is acting or when a company is preparing to go into administration falls between the cracks of the draft SI that can only work, if at all, in hindsight: are supplies assured during this period?

£54 million more to unsecured creditors

The impact assessment calculates the benefits on the basis of R3’s August 2013 survey, which suggested that 7% of liquidations could be avoided. The Service has extrapolated this to mean that these liquidations instead may be tomorrow’s administrations… and, as the OFT 2011 corporate insolvency study indicated that on average unsecured creditors recovered 4% more in administrations than in liquidations, they conclude that this could result in an additional £54 million being returned to unsecured creditors.

Personally, I would have thought that the key insolvency shift that is likely to occur from these measures – especially given the Government’s appetite to act on Teresa Graham’s recommendations – is that some pre-packs may be replaced by post-appointment business sales, as IPs’ hands are freed up (if only a little) to continue to trade the business. I think it odd, therefore, that the impact assessment does not assume there would be any change in the proportion of administrations that will involve trading-on: the Service works on an assumption – both before and after the proposed changes – that 10% of administrations involve post-appointment trading-on.

Then again, didn’t Teresa Graham’s review conclude that pre-pack sold businesses are more likely to survive than post-appointment sold businesses? If this is so, is it a good or a bad thing that there could be fewer pre-packs and more post-appointment sales?  That really does depend on one’s view of pre-packs.  Still, as it seems inevitable now that the hurdles to pre-packs are going to be raised, I guess that we should welcome any lowering of the high jump bar for post-appointment trading.

Over 2,000 businesses could be saved each year

That was R3’s “Holding Rescue to Ransom” tagline. Is it realistic?

Personally, I think not. However, I don’t think I’m alone: the R3 article does remind us that its original campaign highlighted the need for all suppliers of essential services to be brought into the net, not just IT services.  Therefore, it remains to be seen if these provisions will provide enough breathing space to enable insolvency office holders to help more businesses to survive.

(UPDATE 24/02/2015: for a summary of the outcome of this consultation, go to: http://wp.me/p2FU2Z-9w)


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The Small Business, Enterprise and Employment Bill: Part 3 – Regulation

1115 Swakop

In my final post on the Bill, I summarise the prospective changes to the IP regulatory landscape: by what standards will IPs be measured in the future? What will be the Insolvency Service’s role? And for how long will we continue with the multi-RPB model?

Regulatory Objectives

A key element of the Bill portrayed as the potential solution to several perceived problems is the introduction of regulatory objectives “as a framework against which regulatory activity can be measured and assessed”.

There has been a little refining of the objectives as originally proposed in the consultation document. They now appear (S126) as follows:

“‘Regulatory objectives’ means the objectives of:
(a) having a system of regulating persons acting as insolvency practitioners that
(i) secures fair treatment for persons affected by their acts and omissions,
(ii) reflects the regulatory principles, and
(iii) ensures consistent outcomes,
(b) encouraging an independent and competitive insolvency practitioner profession whose members:
(i) provide high quality services at a cost to the recipient which is fair and reasonable,
(ii) act transparently and with integrity, and
(iii) consider the interests of all creditors in any particular case,
(c) promoting the maximisation of the value of returns to creditors and promptness in making those returns, and
(d) protecting and promoting the public interest.”

Thus, the consultation’s suggested “value for money” objective has been replaced with reference to “high quality services at a cost to the recipient which is fair and reasonable”. However, “value for money” continues to appear large in the IA, which swings wildly from, on the one hand, conveying the sense that the introduction of a “value for money” regulatory objective will cause a sea change in regulation to, on the other hand, stating that, as RPBs say that “they already carry out an assessment of fees in monitoring visits”, they “do not anticipate this objective will add additional costs to the RPBs in terms of monitoring”.

Fees Complaints

The IA also states that “the objective makes it explicit that fee related complaints should be dealt with by the regulators”, but it states it is leaving the “how” entirely in the hands of the RPBs: “it will be for the RPBs, to create a system (whether within the existing complaints process or by combining resources to create a joint system) which adjudicates on fee issues”.

The IA sets a “high scenario” of 2,000 additional fee complaints (but with a best estimate of 300): that would be an average for each appointment-taker of three complaints every two years. However, despite this doom-saying, the IA factors in zero additional costs to the Service (in managing the Complaints Gateway) and to IPs. The IA states that the changes “should have minimal impact for individual IPs, particularly for those who already act in compliance with the existing legal and regulatory framework”. The Service does not seem to appreciate how the most compliant of IPs attracts complaints – it’s in the nature of the work – and how enormously time-consuming it can be to respond to RPB investigations, even when they end in “no case to answer”. I wonder how much work will be required to satisfy one’s RPB that the fees charged are a fair and reasonable exchange for the high quality services provided.

One consultation respondent estimated that the IP licence fee could increase by £950 pa, which prompted the IA drafter to write: “given the increased confidence and credibility to the industry which will result from a strengthened regulatory framework, is a proportionate cost for an industry which generates an estimated £1bn per annum”. In addition, the IA’s assessment of costs to the RPBs (for complaints-handling alone) shows a best estimate of £1,074 per IP, which increases to £7,184 per IP under the “high scenario”. Is this still considered a proportionate cost? It continues to sicken me that the Service seems to fail to understand the spectrum of environments within which IPs work. Yes, some do make a tidy living, but I know IPs for whom an extra £1,000 bill (let alone £7,000) would be the straw that breaks their back. For a Minister who seems so intent on “reducing a little the high bar on entry to the profession” (per her speech at the Insolvency Today conference) by introducing partial licences, which, allegedly, will encourage competition in the profession, she seems all too blind to the likely impact of burdening IPs with yet more costs; I think it will certainly threaten some sole practitioners’ survival in the industry. And for those IPs who can, inevitably the cost increase will be passed onto the insolvent estates – well done, Minister!

Will this “strengthened regulatory framework” really increase confidence in, and credibility of, the industry? Does the government feel that confidence will only increase once we see a few heads resting on platters? Well, public confidence had better improve, because the Bill will result in the Service’s hand hovering over the red button of the Single Regulator.

Partial Licences

The Small Biz Bill already makes obsolete the Deregulation Bill, which has yet even to complete its journey through the House of Lords, although principally only by adding to the Deregulation Bill’s requirements for RPBs – whether recognised for full or partial IP-licensing – by referring to the need to have rules and practices designed to ensure that the regulatory objectives are met.

Does this mean that the partial licensing debate over? The clause in the Deregulation Bill emerged intact from the House of Commons after a vote on a motion for its removal of 273 to 213. There has been some debate at the Bill’s second reading in the House of Lords, but it seems to me not nearly enough to turn the juggernaut. I find it quite striking how, on the one hand, there have been some very strong submissions against partial licensing primarily from R3 but also from the ICAEW* (which has stated that, through its own consultation process, it received “no indications of support at all” for partial licences), but on the other hand… Actually, who is fighting the “for” partial licensing corner? Why is it seen as such a great idea, where is the evidence that good people are being shut out of the market by the need to sit three exams (how many exams does it take to qualify as an accountant these days?), and has anyone with experience and knowledge of these things been arguing that partially licensed IPs will be just as skilful and competent as full licence-holders, only they will be cheaper?

* Responses on Clause 10 consultation, February 2014:
R3’s: http://goo.gl/vkqYvR
ICAEW’s: http://goo.gl/lhVNo8

Oversight Regulator’s Powers

The Bill introduces a range of powers, which will enable the oversight regulator (aka the Secretary of State, acting by the Insolvency Service) to influence an RPB’s actions – by means of directions, compliance orders, fines, reprimands, and ultimately the revocation of recognition – but also to leapfrog the RPB in its regulatory action against a licensed IP.

The Bill’s Explanatory Notes discloses the type of conditions that might prompt the Secretary of State to issue directions to an RPB: “if the RPB has failed to address the Insolvency Service’s concerns following a review of the way the RPB handles its complaints or a RPB’s failure to carry out a targeted monitoring visit of its IPs where the Insolvency Service has requested that it be done”. The Memorandum adds: “the Secretary of State will also be able to apply to the court to require an RPB to discipline an insolvency practitioner if disciplinary action appears to be in the public interest”.

When would the SoS apply to court directly to sanction an IP, rather than leave it to the IP’s RPB? The IA summary states: “where public confidence in the regime is undermined and could have serious consequences for the reputation of the profession. An example is where the activity undertaken impacts across all regulators and is so serious that action is required immediately, rather than wait for each regulator to investigate the case and come to potentially different findings”.

Personally, I find these moves worrying. In every Insolvency Service Annual Review of Insolvency Regulation, there is reported a clutch of complaints made to the Service about RPBs and, almost without exception, the Service’s investigations reveal nothing untoward. In addition, the Reviews disclose complaints made by the Service to the RPBs about individual IPs: these complaints appear to be processed by the RPBs adequately. Is this not the way things should be handled? It seems to me to be wholly inappropriate to side-step due process on the simple ground that public confidence appears to be undermined. Considering that the objective is to shore up public confidence in the existing regulatory regime, it seems to me that taking an issue out of the RPB’s hands is one sure way of destroying any confidence the public may have. If the Service were ever tempted to exercise such a power, it would seem to me that the nuclear option of a single regulator could become almost inevitable.

Single Regulator

What would prompt the SoS to designate a single regulator? The Bill’s Explanatory Notes state: “the power to move to a single regulator will only be used if the changes proposed by clauses 125 to 131 [i.e. including the regulatory objectives and the Service’s powers to sanction or direct the RPBs] do not succeed in improving confidence in the regulatory regime for insolvency practitioners”. The Memorandum also states: “the changes proposed by clauses 125 to 131 will be reviewed with a reasonable time of commencement. If there is still a lack of confidence in the insolvency practitioner regulatory regime, then the Secretary of State will consider whether to act to bring an end to the system of self-regulation by creating a single independent regulator which will apply consistent standards of regulation and will not be perceived to act in the interests of insolvency practitioners over creditors.”

I appreciate that often members of the public – and not a few IPs – express bemusement that the regulation of such a small industry should be shared amongst seven bodies and that there tends to be a natural scepticism towards the idea that a body funded (even in part) by IPs, some of whom also sit on regulatory committees, can be sufficiently independent to regulate its members satisfactorily (although I wonder how else anyone expects an insolvency regulator to be funded). However, whatever one’s criticisms are of the existing regulatory structure, I struggle to see how a single regulator would be certain to do a better job. But maybe it’s only the perception that’s important.


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The Small Business, Enterprise and Employment Bill: Part 1 – Directors

IMGP0277 This “Small” Bill will have a big impact on IPs. Not only does it include the widely-publicised reserve powers to ban pre-packs and appoint a single insolvency regulator, but it will result in a completely new D-reporting process and will relegate physical creditors’ meetings to something that only creditors can request. The Bill contains many other smaller items that will require significant overhauling of templates and checklists… far more than the 7 hours estimated in the Impact Assessment!

The Bill’s government webpage is at http://goo.gl/VwKvPe and I have sketched out (to help myself get an overview) the clauses that will impact IPs here: Insol relevant provisions Jul-14

In this first post, I cover the key changes to reporting on directors and actions arising from directors’ misconduct. My next post will deal with the changes to the IP regulation regime, pre-packs, and the numerous technical changes to the Act.

D-Reporting

I know that R3 spins this as a success – the move from burdensome paper reports to something far speedier online – but I have to say that I am more sceptical about the advantages of this process for IPs.

The Impact Assessment (“IA”) describes the present problem as delayed reporting because “the IP must be satisfied that there is evidence of unfit conduct… The proposed design of the new form would require the IP to highlight (at an earlier stage) information or behaviour which may indicate unfit conduct as opposed to providing a significant amount of justification and evidence at that stage.” The Bill sets the timescale for submitting a report to within three months of appointment – the rationale, it says, being that “the SoS would be able to better consider behaviour identified by the IP” at this earlier stage [why?] and “the quality of information should improve due to the return being submitted with greater proximity to events” [really?] – although I thought it was charming that, in the same breath, the Bill is providing the Service with an extra year in which to commence disqualification proceedings.

Personally, I expect that this change will result in a greater number of ‘clean’ reports, as IPs will have less knowledge of past events at three months than at six months. However, as IPs will be “under an ongoing obligation to report any new information that he/she considers should have been included in the return”, I cannot see that this will result in less, or even the same amount of, work for IPs in the long run. The forms themselves might also require more work, as “there are also other pieces of information not currently requested which R3 states that IPs could usefully provide”.

The IA estimates only one hour for IPs (nothing for other staff) to familiarise themselves with the new process and one hour per director in completing the new return where misconduct is indicated, which I can see, depending on the final form of the return, would be a reduction over the present demand, although the IA has provided no time costs in relation to providing additional information to the SoS after a return has been submitted.

One sentence that really got my goat was: “Analysis undertaken on a sample of 250 cases where D1 reports were submitted but not proceeded with indicated that a significant percentage of them should not have been submitted”. Should not have been submitted?! What can the government mean? Are IPs failing to meet their statutory obligations?

I am reminded of a question raised by the House of Commons BIS Select Committee when it interviewed Richard Judge and Graham Horne in 2012 about the apparent disparity between the number of D1s filed – around 5,000 per year – and the number of disqualifications. I remember Dr Judge stating that this meant there were “5,000 indications of misconduct… there are people that are innocent in that” and Mr Horne chipping in quickly to clarify that IPs are required by statute to report directors who, by analogy, drove at 31 mph in a 30 mph zone; technically, the conduct might be reportable, but of course not all such directors will be pursued to disqualification. Although switching to a system in which IPs simply provide the facts and leave the SoS to decide whether the director’s behaviour merits action may avoid future discomfort in answering such questions, it seems to me that nothing here changes the statutory obligation for IPs to waste time reporting on the 31 mph drivers.

Compensation Awards

The IA gives us a clear hint at what has driven this measure. It states that “a frequent complaint in Ministerial correspondence from creditors is that although disqualification can prevent a director acting as a director in future, it provides no compensation to those who have suffered from their misconduct”. What types of cases might attract compensation awards? The IA states that “it is reasonable to believe that compensation could be sought from, at least those cases where there has been an identifiable loss to creditors, for example: misapplication of assets, transactions to the detriment, criminal matters and accounting records” – that’s quite a list! The IA continues: “it is also reasonable to assume that whatever the allegation, the SoS will also seek compensation for those cases where there are a lot of unsecured creditors or ‘vulnerable’ members of the public who have lost out”.

However, the IA presents a confusing picture as to how the government envisages the process of seeking compensation awards against disqualified directors working – in tandem? – with the activities currently carried on by office holders in challenging antecedent transactions. For example, the IA states: “the option of the SoS seeking a compensation order or agreeing a compensation undertaking from a miscreant director will enable greater financial redress for creditors, where the office holder (IP) has not taken any of the available actions him/herself or it is considered that further action in addition to that taken by the IP is merited”. Fair enough, as the IA points out, this may be because the office holder has insufficient funds to pursue the case (although I am irritated by the comment that an IP might feel “they don’t have the specialist expertise to bring a claim”). But, I wonder, will this exacerbate the difficulties in reaching settlements with directors who, notwithstanding any settlement agreed with the IP, could then be pursued by the SoS? At least the IA recognises that there are likely to be fewer disqualification undertakings under the future regime, as directors are less likely to give in without a fight.

Do you wonder whether this could result in the SoS and IP fighting between themselves as to who might chase after the director’s finite pot first? The IA states that IPs “should be able to proceed with any action they deem appropriate before the SoS”. Well, that’s alright then.

The Bill also indicates that compensation may be awarded to a particular creditor or creditors, a class or classes of creditors, or it may form a contribution by the director to the assets of the company. However, the IA states “the compensation award will be awarded direct to creditors” (although it makes no provision for the Service’s costs in collecting the monies from the director, adjudicating on creditors’ claims, or paying a distribution). This quote appears in the context of “free-riding amongst liquidators”! It seems that some consultation responses suggested that office holders might not pursue claims themselves, but they might sit back, wait for the Service to do the work, and then pop up to collect the funds and take a fee. The IA does nothing to counter this libellous title and simply states that, because the award is direct to creditors, they “do not think the risk of ‘free-riding’ is high” and “no evidence exists on the likely number of cases of free-riding by liquidators”. Come on, Insolvency Service, we expect better of you than that!

I am also puzzled by the repeated references to improving gateways so that the SoS and IPs might share information better, for example, “to better enable successful recovery actions to be taken forward by the office holder”. As far as I can tell, the gates only swing one way (unless there is something in the OR’s handover) and will continue to do so; there are no proposals in the Bill to help IPs have greater access to information, although the IA suggests that things may change “through updating internal guidance used by Insolvency Service staff”.

I was also puzzled at the IA highlighting a “risk” that “this will result in compensation orders being made for the benefit of HMRC as they are the major unsecured creditor in the majority of insolvencies”. Personally, I don’t see that a bit of recompense to the public purse is a bad thing. Instead of the IA pointing to the Bill’s reference to factors that the court/SoS would consider – the amount of loss, nature of misconduct, and any recompense already paid – it answered this by referring to the fact that the court/SoS could determine that compensation be awarded to a particular creditor or class or group of creditors “taking into account what is equitable in all the circumstances”. Could the prospect of deviating from the pari passu rule, especially if HMRC might not get a look-in at all, result in some creditors calling for office holders to resist taking action and leaving it to the SoS?

Power to assign certain rights of action to third parties

The apparent “problem” that the government is seeking to fix is the lack of court applications as regards wrongful and fraudulent trading (which are both extended under the Bill to Administrators), transactions at undervalue etc. However, the IA acknowledges that “a lot” of claims are settled out of court (they have heard upwards of 90%) and it reports that the other principal reasons for lack of court actions given in the consultation responses were the targets’ lack of assets and the high evidential bar necessary, so the government acknowledges itself in the IA that the Bill’s provisions are unlikely to result in many more cases going to court.

The IA does not mention the issue for an IP who agrees to share in the proceeds of any action assigned to a third party: won’t the risk of an adverse costs order deter IPs from entering into some assignments? The IA points out a risk “of speculative or opportunistic claims being brought against directors who may be ill placed to defend themselves. However, this risk should be small as we expect insolvency professionals to have regard to existing professional and ethical standards in judging when to assign causes of action.” But in the next paragraph the IA refers to the IP’s duty to maximise returns to creditors: could an IP really be justified in turning away third parties offering to pay for rights of action, if it represented a good deal for creditors?

The IA appears more thoughtful in relation to the justification for IPs selling to a third party, who after all is looking to make a profit from the action: they feel that IPs may be justified as the third party’s greater appetite for risk and economies of scale in taking the action forward compensate for the discount on the action suffered by the estate. The IA also makes the sensible point that simply opening the way for third parties may improve IPs’ negotiating position in pursuing claims directly from directors.

My part 2 on the Bill will follow in a week or so (once I’ve done some real work!)

(UPDATE 25/09/14: I read an excellent blog on the subject of the director provisions of the Bill from Neil Davies & Partners – http://goo.gl/uYp3RU.  I was particularly intrigued by the observations on the complications that could arise from the provision to empower the SoS to pursue compensation orders.)