Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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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.)


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IP Fees & Regulation Consultation: Have Turkeys Voted for Christmas?

1037 EW2

Faced with an apparent government vision of heavy-handed oversight over the RPBs and some peculiar restrictions on the time cost basis for IP fees, how have the RPBs and R3 responded? Have they resisted the pressure to offer some kind of compromise? Have they offered anything that might “solve the problems”? Here I have attempted to compare and contrast the responses of ACCA, ICAEW, ICAS, IPA and R3 to the key proposals of the recent consultation.

The government consultation page is at: https://www.gov.uk/government/consultations/insolvency-practitioner-regulation-and-fee-structure

The bodies’ responses are located at:

• ACCA: http://www.accaglobal.com/content/accaglobal/zw/en/technical-activities/technical-resources-search/2014/march/cdr1267.html
• ICAEW: http://www.icaew.com/en/technical/insolvency/insolvency-reps
• ICAS: http://icas.org.uk/Technical-Knowledge/Insolvency-Technical/Submissions/
• IPA: in the members’ area>public consultations>other consultations
• R3: https://www.r3.org.uk/media/documents/policy/consultation_subs/R3_response_-_Strengthening_the_regulatory_regime_and_fee_structure_for_IPs.pdf

In particular, I would recommend reading the R3 response in full, as there is not the space here to do it justice and it includes some valuable member survey results.

Regulatory Objectives

The government has proposed regulatory objectives for the statute-books, “framed” as follows:

1. Protecting and promoting the public interest

2. Having a system of regulating persons acting as IPs that:
(i) delivers fair treatment for persons affected by their actions and omissions,
(ii) reflects the regulatory principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed, and any other principle considered to represent best regulatory practice, and
(iii) delivers consistent outcomes

3. Encouraging an independent and competitive IP profession whose members:
(i) deliver quality services transparently and with integrity, and
(ii) consider the interests of all creditors in any particular case

4. Promoting the maximisation of the value of returns to creditors and also promptness in making those returns

5. Ensuring that the fees charged by IPs represent value for money

ACCA seemed alone in considering most of the above to be “uncontentious”, even going so far as to suggest what it felt would be a useful addition to them. However, none of the proposed objectives avoided the other bodies’ critical eyes. Many of the comments revolved around the thought that any such objectives will need to be supported by detailed guidance so that everyone was clear on the standards by which IPs and the RPBs are being measured.

Here are some other fruitier comments:

• Why stop at “having a system of regulating IPs” that delivers fairness etc.? Aren’t some of these objectives appropriate to the insolvency regime itself? (ICAEW, IPA)
• Shouldn’t the regulation system “deliver fair treatment” also to IPs? (ICAEW)
• Fixing IP fees on a prescribed scale (reference to another of the consultation’s proposals) would not “encourage a competitive IP profession”. (ICAEW)
• Statute already sets out how office holders should consider creditors’ interests (ICAEW, R3), although not uniformly in all cases (IPA). Setting it as an objective may raise false hopes of some expecting greater weight to be given to their interests than provided by statute. (ICAEW)
• Promoting the “promptness of returns” could threaten consideration of longer term gains, thus encouraging a culture of “quick kills” rather than thorough investigation and pursuit of claims. (IPA)
• “You should recognise that to perform a ‘value for money’ assessment in a case will require a detailed audit… which will be a very time consuming (and therefore expensive) process.” (ICAEW)
• Setting “value for money” as a regulatory objective simply shifts the responsibility for finding a solution onto the RPBs, rather than helping to overcome the difficulties in ascertaining what actually represents value for money. (IPA)
• The regulatory process cannot alter the facts that creditors will suffer losses, but enshrining objectives 4 and 5 risks over-inflating creditors’ expectations and thus may have a detrimental effect on public confidence. (IPA)

R3 kicked back more robustly on the concept as a whole: “the proposals… prompt us to suggest that now is the time to look at, in a fundamental way, the role of the Insolvency Service, as presently structured, funded, resourced and whether it is the most appropriate body to direct and oversee as important a part of the UK’s financial support service sector as the insolvency profession”.

Oversight Regulator’s Statutory Powers over the RPBs

The government proposes to introduce statutory powers to enable the Insolvency Service/Secretary of State to take a variety of actions against RPBs and, in certain cases, to make their own enquiries of, and apply to court to decide sanctions on, IPs directly. Unsurprisingly, the RPBs – and perhaps a little surprisingly, R3 – expressed concerns over some of the proposals as well as questioning whether the powers were truly necessary (again with the clear exception of ACCA, which had few specific comments on the proposals).

• “The ‘oversight regulator’ should take care to avoid ‘micro-managing’ RPBs and their disciplinary processes. Effectively running a ‘shadow’ regulatory system on top of the existing established processes would be confusing and damaging for the insolvency profession and those it serves.” (R3)
• “The increased powers of sanction by the oversight body seem to be little more than window dressing to address non-existent illegal actions… In our view, the system of regulation operates at its most effective when the oversight regulator and the RPBs work together, as demonstrated through the introduction of the complaints gateway.” (ICAEW)
• “It is worrying that the Secretary of State would wish to acquire the ability to control individual enquiries, which could undermine the fairness of the procedure.” (ICAEW)
• “The fundamental problem… is that the proposed legislation does not envisage there being any stage at which a proper disciplinary hearing will be held to allow the IP to deal with and refute the findings of the Insolvency Service investigation and it is envisaged that the Secretary of State, through the good offices of the Insolvency Service would be investigator, prosecutor and judge (determining both guilt and sanction).” (ICAEW)
• “We wonder whether this process could be susceptible to challenge on the basis of human rights legislation given that there appears to be no provision for a fair trial by an independent tribunal.” (ICAEW)
• “Who picks up the likely significant costs?” If these are to be passed on to the RPBs, then licence fees will increase significantly, with the likely consequences of increased costs on insolvent estates and IPs leaving the market. (ICAEW and R3)
• “There are several proposals… that would see IPs potentially punished twice for the same transgression. It is both inequitable and a position that few other professionals could find themselves in.” (R3) The IPA also stated that such a process “would introduce a degree of double jeopardy and be contrary to principles of natural justice”. Although apparently the Service has clarified, in a meeting with the IPA, that it is not intended to subject an IP to a second disciplinary process, the IPA has questioned how, and in what circumstances, would the Service conduct such enquiries independent of the IP’s licensing body.
• “The power for the Secretary of State to sanction an IP directly calls into question the point of the regulation of the profession being delegated to RPBs in the first place.” (R3)
• As regards the proposed power to issue a direction to an RPB in the context of a disciplinary matter: “it would be wholly inappropriate for the Insolvency Service to mandate that a particular decision be reached.” (ICAS)
• Will the Service be adequately resourced – financially and with skilled staff – to exercise these new powers, particularly in regard to the proposed investigations and prosecutions? (R3 and ICAS)

A Single Regulator?

It seems that there has been a slight convergence of opinions of R3 and the RPBs on this question. Setting aside ACCA, which “endorsed” the proposal, the regulatory and trade bodies now seem united in their objection to the proposed reserve power to enable the Service to designate a single regulator.

However, whereas R3 brought attention to the “regulation gap” that would result as a single regulator got up to speed, the RPBs had other reasons for their objections:

• Whatever could be achieved by the Insolvency Service overseeing a single regulator equally should be achievable with multiple RPBs. Effective oversight is the key. (ICAS and ICAEW)
• “There seems to be a failure to recognise that many IPs are already members of bodies which operate with the best regulatory models for professionals.” (ICAS)
• “Competition between regulators has driven down licensing costs and led to improvements in RPBs’ offerings to their members. There would be no such incentive to innovate, were there to be a single regulatory body.” (IPA)
• The government is also proposing to introduce a formal process to de-recognise an RPB if it fails to perform, but how would that work with a single regulator? We could hardly be left with no regulator! (IPA)
• Providing even a reserve power “could be seen to demonstrate on the part of the Insolvency Service a lack of commitment to the changes proposed for the regulatory regime and a lack of confidence in its part in the RPBs.” (ICAEW)

R3 suggested a third way: a “Single Regulatory Process”, which “would reduce significantly the inconsistencies that currently exist in the insolvency profession’s regulation” and “would also be a chance to take a fresh look at the profession’s regulatory processes and standards”.

Restriction of Use of Time Cost Basis

I wonder if the Service had any inkling of the floodgate they were prising open with the suggestion that the option of seeking fees on a time cost basis be limited to certain cases. Even ACCA is opposed to this one!

The core objections will not come as a surprise:

• If the primary issue is lack of creditor engagement, then the solution should lie in improving creditor engagement, starting with the Crown creditors. (ACCA, ICAS, ICAEW)
• “Some IPs may feel minded for their own commercial protection to factor in more work than might in the event be necessary, in which case fees could end up being over-estimated.” (ACCA; similar comments made by R3)
• In 2013, only 2% of all complaints related to fees, so perhaps creditors’ concern is not so acute as perceived by the government, and any action taken to change the existing regime must be proportionate. (ACCA, R3, ICAEW, ICAS)
• Plenty of criticisms of the OFT study: out of date, limited scope (which is now being extrapolated far beyond its remit), confusion between fees and costs, assumption that engaged creditors are the only constraint on fees, etc… (primarily R3 and ICAEW)
• IPs will avoid small and risky cases, as a fixed/percentage fee would not be economical. (R3, ACCA) [Although I have heard this many times, personally I don’t get it (unless people have in mind a prescribed rate): for a case with assets of £10,000 (net of non-IP costs), how does an IP’s recovery differ, if he is paid on a time cost basis, a fixed fee of £10,000, or a fee of 100% of the first £10,000 (net) realised?]
• This would burden the public purse, as uneconomic cases will remain with the OR. Some IPs also would leave the market, resulting in reduced competition and fewer options for debtors seeking help, which would seem contrary to the public interest. (R3, ICAEW)
• Fixed fees do not incentivise IPs to pursue tricky assets or to carry out non-profitable tasks. What does an IP do when he reaches the limit but still has work to do; is he expected to work for no pay? (ACCA, R3, ICAS, ICAEW, IPA)
• As recommended by the Cork Report, percentage-based fees were largely dropped in the 1980s, as they were viewed as unfair and inequitable to creditors. (ACCA, R3) “There is nothing inherently fair in a basis of charging where the results depend upon the amount and quality of realisable assets, rather than the work required.” (ICAEW) Arguably, time costs are the fairest fees mechanism (ICAEW), whereas fixed/percentage fees will invariably result in an element of cross-subsidisation of cases. (IPA)
• There is no evidence – or reason – to support the assumption that adopting fixed/percentage fees will reduce fee levels (IPA) or creditors’ returns (ICAEW).

But here are some of the more impassioned and novel comments:

• This specific proposal has no grounding in the Kempson review nor has there been any evidence-based research. “The Insolvency Service has disclosed the rationale behind this decision is solely ‘because two methods of remuneration are simpler than three’.” (R3)
• “R3 is not aware of anywhere else in the world where fee restrictions as outlined in the consultation are in operation. In effect, the Insolvency Service proposes to introduce an untested system of IP remuneration in the UK.” (R3)
• Secured creditors have the power to negotiate discounts from IPs, but why must that mean that unsecured creditors are ‘over-charged’? If a large customer (such as the government via its own procurement policy) sought to obtain discounts, that does not mean that other buyers of the goods and services are automatically being ‘over-charged’. (R3)
• Is a 9% differential in costs (the OFT study’s conclusion) really concerning? “The differential, for instance, between prices charged for consumer goods to wholesale or retail customers could be expected to be much higher (and still not exploitative of consumers).” (ICAEW)
• Restricting fees could result in outsourcing of parts of the job to unregulated entities, shifting the cost rather than reducing it and resulting in less transparency and control. (R3)
• “It is simplistic to think that changes introduced in the personal insolvency market can be imported into the corporate sector; this view demonstrates a complete lack of understanding of corporate insolvency, This market cannot be ‘commoditised’ in the same way.” (R3)
• If creditors have difficulty assessing the reasonableness of fees based on time costs, they will have the same, if not greater, difficulty judging fixed/percentage fees, something acknowledged by Professor Kempson. (R3)
• There is no reason to believe that restricting the use of the time cost basis in this manner will impact on creditor engagement or complaints about fees. (R3)
• RICS abolished fee scales for valuations after the Monopolies and Mergers Commission concluded that “they restricted competition and worked against consumers and were against the public interest”. (ICAEW)
• It is difficult to reconcile the government’s apparent determination to improve public confidence in the insolvency regime with the World Bank’s report that shows the UK currently as one of the most effective jurisdictions for resolving insolvency. (ICAEW)
• “If the aim of the Insolvency Service is to reduce IPs’ fees in aggregate to a break-even level, it seems unlikely that a high quality profession will be sustained.” (ICAEW)
• The Impact Assessment identifies the risk that the OR might be left with more small-value cases, but the Assessment’s suggestion “that the concerns will be ‘overcome’ through regulatory objectives of RPBs and monitoring is fanciful. The consequences would result from a fee regime imposed upon the profession by the government and RPBs would not be in a position to do anything about it.” (ICAEW)
• Professor Kempson recommended greater use of mixed bases for fees, but the government is proposing to abolish this. (IPA) [Mixed bases were only introduced in 2010!]
• The government wishes RPBs to engage more actively in monitoring and assessment of fees, but this will be more difficult in non-time cost cases. (IPA)
• The 2010 reforms and revised SIP9 are still fresh, but “the Insolvency Service appears already to have concluded that those reforms failed.” (ICAEW)
• Proposals to provide different fee bases for different case types, recovery prospects, and UK jurisdictions will do nothing to clarify an already-confusing picture for creditors. (ICAEW)

The bodies’ suggestions of alternative approaches are a mixed bag (some of which, personally, I find a bit scary! But hey, a bit of brain-storming is no bad thing.):

• Greater engagement by Crown creditors (pretty-much everyone’s idea).
• Reduce the constraints on creditors’ committees, e.g. smaller quorum. (ICAS)
• Encourage committee members, e.g. small payments for attending meetings. (ICAEW)
• Introduce a Scottish-style Reporter mechanism across the UK (the consultation stated that the Scottish system’s checks and balances appeared to work reasonably well). (ICAS)
• Require IPs “to justify to creditors and regulators their use of the hourly rate, by reference to prescribed criteria”. (ACCA)
• “More targeted support… to creditors to enable them to assess the reasonableness of the amounts being claimed.” (ACCA)
• “Improved management of creditor expectations, through creditor guides, fee estimates and estimated outcome statements.” (IPA)
• “Enhanced capital requirements and/or direct financial contribution by directors to the basic costs of insolvency processes.” (IPA) [Interesting idea, but isn’t there a risk of conflict with this..?]
• Fixing a minimum fee for those statutory elements of an insolvency administration that will generally not be of direct financial benefit to creditors.” (IPA, similar suggestion by R3)
• “Data collection and benchmarking of fee data.” (IPA) [And..?]
• “Guidance and/or compulsion of IPs to make greater use of mixed fee bases for different elements of the work involved within an insolvency administration. The onus could be put on the IP to justify why the basis sought is appropriate to the nature of assets, the complexity of the task and the value that it is estimated will result.” (IPA) [But does this follow, given some of the arguments against fixed/percentage fees..?]
• Better explanation by IPs up-front of the likelihood (or not) of dividends and of the work that will need to be carried out that will not generate direct financial benefits. (IPA)
• Adjusting the requisite voting majorities so that greater creditor participation is required. (IPA) [Why penalise IPs for creditors’ inactivity?]
• Encouraging cheaper ways of conducting “meetings”, e.g. by telephone, e-meetings, or resolutions by correspondence. (ICAEW)
• Drop the Red Tape Challenge proposal to remove the requirement to hold creditors’ meetings. (R3)
• More/better guides for creditors, similar to those that the Insolvency Service already provides for debtors facing bankruptcy. (ICAEW, R3)
• More transparency/information regarding the costs to insolvent estates by the Insolvency Service, as creditors/debtors often confuse these with IPs’ fees. (R3)
• Trade bodies should help members to understand insolvency – and how to avoid it or becoming a creditor in an insolvency – better. (ICAEW)
• All relevant Insolvency Service officials should work in an IP firm for a minimum of two weeks per year as ‘on the job/CPD training’ to plug the apparent knowledge gap, given the lack of understanding of the insolvency profession evidenced by the consultation proposals. (R3) [Ooh!]
• Greater use of cost-saving measures of 2010 Rules and more time to allow them to have effect. (R3)
• “IPs should also be required to report work with more transparency, e.g. break down time-use clearly into constituent parts such as ‘communicating with x number of creditors to establish a meeting’.” (R3) [Ooer! Can we try to keep it relatively simple and proportionate..?]
• “Introducing elements of a Code of Practice for IPs (based on the model in Australia) plus changes to SIP9 could be introduced to ensure that IPs’ records of time spent (and corresponding fees on a case) are transparent and accountable.” (R3) [In what ways is the current SIP9 deficient in this area..? R3 points to the Australian part of the MF Global case report as a good example; this report provides a fee estimate of $1 million for the first month – is R3 sure this is an appropriate model for typical (non-secured creditor) cases?] R3 suggests that in this way IPs would explain the work done “in more detail” and “reporting would be clearer”.

The most widely-made suggestion as regards fee-setting is the mandatory use of fee estimates (ACCA, IPA, ICAEW, R3), with some bodies suggesting express creditor approval for exceeding an estimate could be required (IPA, R3; ACCA: “perhaps”). I’m attracted to this idea as well, but, although I agree with the idea of seeking creditors’ approval for fees in excess of an estimate, I would hope that this could be done without necessarily positive creditor response; if creditors do not respond to an invitation to vote, then is it fair to penalise the IP? It could also impact on creditors’ returns, as silence may force the IP to take further measures, perhaps by court application, to achieve approval. It might also be more likely to encourage a poor habit of over-estimating fees in the first instance, so that IPs can avoid the hassle of seeking approval to more fees later. There are many issues with this suggestion – some will complain that it is well-nigh impossible to estimate fees with any degree of confidence at an early stage – but it has to be the lesser of several suggested evils, hasn’t it? In addition, isn’t it a standard and professional way of approaching fees? After all, don’t we usually seek fees estimates – with subsequent approval for uplifts – from many suppliers, from solicitors to garage mechanics?

Regulatory Intervention in Matters of Remuneration

The consultation also sought views on proposals to have the RPBs take a greater role in assessing and deciding on fees issues, via both enhanced monitoring and dealing with complaints about the quantum of fees. Most RPBs pointed out that IP fees are already considered to a significant extent; the ICAEW described it this way: “reviewers already look in detail at the insolvency practitioner’s time records. They will question the time recorded against specific tasks, where it doesn’t appear commensurate with the work evidenced on the case files; where it appears to have been carried out by a more experienced member of staff than we would consider appropriate; or where it appears excessive.”

As regards the suggestion that RPBs should do more than look at clear regulatory breaches:

• “To suggest that RPB bodies should step into the breach – even if one exists in relation to IP remuneration – will not address the issue without a sincere attempt by the UK Government to review the legislation. Regulators should not be asked to circumvent or overrule the law and to do so will inevitably expose the regulators to legal challenge.” (ICAS; ICAEW also highlighted the risks of Court challenge of RPBs’ judgments)
• “We are unclear on what basis an RPB could interject when the fee basis has been approved by a statutory process. This would be a usurpation of Court’s powers.” (IPA)
• “If 90% of creditors have approved as IPs fees, it does not appear reasonable to allow a minority financial interest to delay the administration of an estate.” (IPA)

Whilst the IPA is “opposed to routine regulatory involvement in fee assessment”, it seems more open to the idea that more could be done practically: it suggested that, if the idea of fee estimates were taken up, it could engage in “routine monitoring of practitioner performance” against these estimates. It also stated: “we can see no reason why, in a case of apparent excessive charging, the RPB could not direct the practitioner to repay such fees as exceed the original estimate provided or else direct the IP to have their fees assessed by a Court”, although the IPA does seem to be alone in this view.

It seems clear from the responses that there is much confusion amongst the bodies as to exactly what the government is proposing; simply dropping in a “value for money” regulatory objective and telling RPBs to get on with it will not work. The IPA remarked: “The regulatory challenges presented flow from the entirely subjective nature of establishing what value for money is and in whose opinion such value should be ascertained. The government has been singularly unable to define these concepts and appears now to expect the RPBs to be able to do so on their behalf… Will a full review of time spent and how this compares to the fixed or percentage fees charged be required? Will on-site visits to review practitioners’ files be expected?” The ICAEW also stated that, if the idea is for “RPBs to effectively conclude on each file reviewed that the IP’s costs represent value for money, we would expect there to be a significant impact on our monitoring costs; potentially doubling them.” However, the ICAEW seems to have been party to a meeting with the Consultation Policy Lead that has led them to conclude that all that is envisaged of RPBs as regards “enhanced monitoring” is pretty-much what they are already doing. One would hope that the Service could do better at communicating their desires to the bodies that they directly oversee!

In summary, I don’t think the turkeys have voted for Christmas. I think they have resisted well the pressure to seek a compromise, but have endeavoured to keep their eye focussed on what truly appears to be the issue – creditor engagement – and what practically might be done to improve the situation.


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The Perilous Neglect of the Fragile Insolvency Service Enforcement Directorate

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“Trust is essential to every commercial transaction. We neglect its fragility at our peril”, says Vince Cable in his foreword to the “Transparency & Trust” Government Response. Having read the Government’s proposals, I am inclined to repeat the often-cried warning that we neglect the ever-decreasing resources of the Insolvency Service at our peril. Although some of the Government’s proposals have the veneer of reducing the costs of disqualifying directors, whatever small gains are achieved will be wiped out by the hidden burdens that look to be added the Directorate.

It’s not all about the Insolvency Service, however. The Government has tagged on what appear as afterthoughts some ideas that will impact on IPs’ approaches to antecedent transaction challenges. These ideas are poorly covered in the Government Response – they escape all the Impact Assessments – and thus it is not surprising that R3 immediately commented on its “specific concerns” regarding these proposals (http://www.r3.org.uk/index.cfm?page=1114&element=19780).

The key objective of Cable’s “Transparency & Trust” drive is the creation of a public register of beneficial owners, but in this post I have summarise the more material plans that will affect insolvency work. The Government’s full response can be found at https://www.gov.uk/government/consultations/company-ownership-transparency-and-trust-discussion-paper.

Changes to the CDDA

The original proposals suggested that Schedule 1 of the CDDA, Matters for Determining Unfitness of Directors, might be added to in order to ensure that the following are taking into account in relation to disqualification orders and undertakings:

• Material breaches of “sectoral” regulation (especially the banking sector);
• The “wider social impacts” of a failure;
• Whether vulnerable creditors or those who had paid deposits had lost out in particular; and
• The director’s previous failures, possibly with a finite number of failures being allowed before unfitness is presumed.

The Government response accepts that simply adding to the Schedule 1 is not the solution, as directors might conclude that any factor not explicitly listed will not be taken into account. The response states: “we will recast a more generic set of factors that the court must take into account” (paragraph 222), although it also lists pretty-much the items described above, but with the exception of the X strikes and then you’re out idea, which does not appear to have made it through.

However, the paper does state that the court (or the Insolvency Service) will need to take into account “any previous positions as director of a company that has become insolvent and any relevant aspect of the director’s track record in running these companies… We are sympathetic to concerns we heard about the possible unwanted effect the inclusion of a ‘track record’ could have on those involved with early stage companies, or in rescuing companies that are in difficulties”, although I wonder at the depth of their sympathy: “We are clear that a director will, of course, be able to present any argument he or she might have (for instance as a business rescue professional or that the insolvency was not due to any element of unfit conduct on the director’s behalf)” (paragraph 225).

The consultation also sought views on whether – in fact, the consultation asked which – other “sectoral” regulators (again, looking mainly at the banking sector) should have the power to apply to court, or accept an undertaking direct, to disqualify a director. Although the ICAEW felt that this was appropriate, the Government’s response aligns more closely with R3’s response: disqualifications will remain with the Service, but the CDDA and gateways will be amended so that information might be exchanged more effectively, and there might be greater collaboration, between regulators. It has also suggested that expertise might be shared between regulators, which might include secondments.

The consultation proposed that the time period within which disqualification proceedings need to be commenced be increased from two years to five. The response explains that “views were mixed” (paragraph 279). However, I note that there was no support for any extension of the time period from R3, ICAEW or ICAS (the IPA did not respond – well, not the Insolvency Practitioners Association, but the Institute of Practitioners in Advertising did) – all three bodies noted that the BIS consultation document had stated that the two year timescale did not pose a barrier in the vast majority of cases and that the court can consider extensions. R3 also observed that five years would be a long time for an investigation to ‘hang’ over an individual and the ICAEW noted the potential difficulties if office holders needed to keep a case open for a long period. Despite these views, the Government proposes to increase the time limit to three years.

“Better Compensating Creditors for Director Misconduct”

The Transparency & Trust paper runs to 283 paragraphs, but this section, which contains the meaty proposed changes for IPs, runs to only 17 paragraphs! I don’t like that heading either…

The Government has expressed dissatisfaction with the fact that so few actions have been taken to challenge antecedent transactions. “Since 1986, there have only been

• around 30 reported wrongful trading cases;
• around 50 preference claims; and
• around 80 reported cases arising from undervalue transactions” (paragraph 260).

However, the response does not acknowledge that, as R3 pointed out in its response, many more cases are settled out of court. Neither does it acknowledge in any meaningful way that, in a great deal of other cases, the disqualified director simply has no money!

The Government’s proposed remedies are:

• To allow such causes of action to be sold or assigned to a third party “to increase the chances of action being taken against miscreant directors for the benefit of creditors” (paragraph 272); and
• To empower the Secretary of State to apply to court for a compensation order against, or to accept a compensation undertaking from, a director who has been disqualified.

The Government response barely makes a passing comment at some of the objections to these proposals raised by R3, the ICAEW, and ICAS, such as:

• Insolvency practitioners already have the means – and the duty and expertise – to pursue monies from errant directors, although the future of these is at risk when the insolvency exemption from the Jackson reforms ends.
• Why would a third party be any better equipped to take action than a liquidator?
• The possibility of a liquidator assigning their right to a claim already exists in Scotland.
• IPs are also limited in what they can achieve, as too few cases are being passed to IPs from the OR.
• Creditors’ returns may end up being lower, because a third party would only buy a claim in the expectation of making a profit.
• Third parties will not have the same investigative powers as liquidators.
• It would be impossible to prevent directors – or a friend etc. – from acquiring a claim with the intention of quashing it.
• It is difficult to see how assigning claims away from a liquidator to a third party intent on making a profit would increase confidence in the insolvency regime.
• It is difficult to see how compensation might be paid to anyone other than the company’s creditors via the office holder.
• If the Service were to distribute monies to creditors, it could duplicate the work done by the IP in adjudicating on claims, and the costs to the Service would be prohibitive. “The Insolvency Service would be better focusing its resources on disqualifying more directors rather than seeking to take on new activities such as distributing monies, which is already performed efficiently by insolvency practitioners” (R3).
• A compensatory award could prejudice civil claims being brought by the office holder (and, in my personal view, I could see a race develop between the IP and the Secretary of State, to see who gets their hands on the director’s limited purse first).
• “We do not think that the Insolvency Service has the resource to provide the evidence required to ensure a fair compensatory award upon which the Court can rule” (R3).
• The Service’s costs for bringing disqualification actions likely will increase substantially, and with fewer undertakings offered, given that directors will risk being pursued for compensation.

Despite these concerns, the Government is going to bring in these two remedies “when Parliamentary time allows”. Sales or assignments will be allowed of the following causes of action: fraudulent and wrongful trading – both of which will be extended to administrators to pursue (per the Red Tape Challenge outcomes); transactions at an undervalue; preferences; and extortionate credit transactions. The compensation awards/undertakings will be allowed by the court or the Secretary of State “to a particular creditor or group or class of creditors, or the creditors as a whole” (paragraph 274), although there is no mention as to how this may work in practice.

I shall leave the final word to the ICAEW, which, in its response to the consultation question on whether the proposal would improve confidence in the insolvency regime, stated: “We consider that confidence would be more likely to be improved if the Insolvency Service were resourced adequately to take disqualification action in every case where it appears to be justified.”


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And now for a qualitative review of the IP Regulation Report

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Having explored the statistics, I thought I’d turn to the Insolvency Service’s 2013 IP regulation report’s hints at issues currently at the top of the regulators’ hit list:

• Ethical issues;
• Consultation with employees;
• SIP16; and
• Dodgy introducers;

All the Service’s regulatory reviews can be found at http://www.bis.gov.uk/insolvency/insolvency-profession/Regulation/review-of-IP-regulation-annual-regulation-reports.

Ethical Issues

The Insolvency Service has “asked that regulators make ethical issues one of their top priorities in the coming year, following concerns arising from both our own investigations and elsewhere” (Dr Judge’s foreword). What might this mean for IPs? Personally, I find it difficult to say, as the report is a bit cloudy on the details.

The report focuses on the fact that 35% of the complaints lodged in 2013 have been categorised as ethics-related. On the face of it, it does appear that ethics-categorised complaints have been creeping up: they were running at between 10% and 20% from 2008 to 2011, and in 2012 they were 24%. Without running a full analysis of the figures, I cannot see immediately which categories have correspondingly improved over the years: “other” complaints have been running fairly consistently between 30% and 40% (which does make me wonder at the value of the current system of categorising complaints!) and the other major categories – communication breakdown, sale of assets, and remuneration – have been bouncing along fairly steadily. The only sense I get is that, generally, complaints were far more scattered across the categories than they were in 2013, so I am pleased that the Insolvency Service reports an intention to refine its categorisation to better understand the true nature of complaints made about ethical issues. Now that the Service is categorising complaints as they pass through the Gateway, they are better-placed than ever to explore whether there are any trends.

In one way, I think that this ethics category peak is not all bad news: I would worry if some of the other categories – e.g. remuneration, mishandling of employee claims, misconduct/irregularity at creditors’ meetings – recorded high numbers of complaints.

Do the complaints findings give us any clues as to what these ethical issues might be about? Briefly, the findings listed in the report involved:

• Failing to conduct adequate ethical checks and a SIP16 failure;
• Failing to pay a dividend after issuing a Notice of Intended Dividend or retract the notice (How many times does this happen, I wonder!) and a SIP3 failure regarding providing a full explanation in a creditors’ report;
• Three separate instances (involving different IPs) of SIP16 failures;

Unfortunately, the report does not describe all founded complaints, but it appears to me that few ethics-categorised complaints convert into sanctions. However, it is interesting to see that some of these complaints don’t seem to go away: two of the complaints lodged with the Service about the RPBs, and which are still under investigation, involve allegations of conflict of interest, so it is perhaps not surprising that the Service’s interest has been piqued. The report describes a matter “of wider significance which we will take forward with all authorising bodies”, that of “concerns around the perceived independence of complaints handling, where the RPB also acts in a representative role for its members” (page 6). Noisy assumptions that RPBs won’t bite the hands that feed them have always been with us, but there were some very good reasons why complaints-handling was not taken away from the RPBs as a consequence of the 2011 regulatory reform consultation and I would be very surprised if the situation has worsened since then.

So, as a profession, we seem to be encountering a significant number of ethics-related complaints, few of which lead to any sanctions. This suggests to me that behaviour that people on the “outside” feel is unethical is somehow seen as justified when viewed from the “inside”. It cannot be simply an issue of communicating unsuccessfully, because wouldn’t that in itself be a breach of the ethical principle of transparency that might lead to a sanction? The Service seems to be focussing on the Code of Ethics: “we are working with the insolvency profession to establish whether the current ethical guidance and its application is sufficiently robust or whether any changes are needed to further protect all those with an interest in insolvency outcomes” (page 4). Personally, I struggle to see that the Code of Ethics is somehow deficient; it cannot endorse practices that deviate from the widely-accepted ethical norm, because it sets as the standard the view of “a reasonable and informed third party, having knowledge of all the relevant information”. I guess whether or not disciplinary committees are applying this standard successfully is another question, which, of course, the Service may be justified in asking. However, I do hope that (largely, I confess, because I shared the pain of many who were involved in the years spent revising the Guide) the outcome doesn’t involve tinkering with the Code, which I believe is an extremely carefully-written, all-encompassing, timeless and elevated, set of principles.

Consultation with employees

This topic pops up only briefly in relation to the Service’s monitoring visits to RPBs. It is another matter “of wider significance which we will take forward with all authorising bodies”: “regulation in relation to legal requirements to consult with employees where there are collective redundancies” (page 4).

Although I’ve been conscious of the concern over employee consultation over the years – I recall the MP’s letter to all IPs a few years’ ago – I was still surprised at the number of “reminders” published in Dear IP when I had a quick scroll down Chapter 11. On review, I thought that the most recent Article, number 44 (first issued in October 2010), was fairly well-written, although it pre-dated the decision in AEI Cables Limited v GMB, which acknowledged that it may be simply not possible to give the full consultation period where pressures to cease trading are felt (see, e.g., my blog post at http://wp.me/p2FU2Z-3i), and it all seems so impractical in so many cases – to engage in an “effective and meaningful consultation”, including ways of avoiding or reducing the number of redundancies – but then it wouldn’t be the first futile thing IPs have been instructed to do…

If this is a regulator hot topic going forward, then it may be beneficial to have a quick review of standards and procedures to ensure that you’re protecting yourself from any obvious criticism. For example, do your engagement letters cover off the consultation requirements adequately? Does staff consultation appear high up the list of day one priorities? If any staff are retained post-appointment, do you always document well the commencement of consultation, ensuring that discussions address (and contemporaneous notes evidence the addressing of) the matters required by the legislation?

SIP16

Oh dear, yes, SIP16-monitoring is still with us! It seems that 2012’s move away from monitoring strict compliance with the checklist of information in SIP16 to taking a bigger picture look at the pre-pack stories for hints of potential abuse has been abandoned. It seems that the Service’s idea of “enhanced” monitoring simply was to scrutinise all SIP16 disclosures, instead of just a sample. In addition, unlike previous reports, the 2013 report does not describe what intelligence has come to the Service via its pre-pack hotline, nor does it mention what resulted from any previous years’ ongoing investigations. Oh well.

I guess it was too much to ask that the release of a revised SIP16 on 1 November 2013 might herald a change in approach to any pre-pack monitoring by the Service. Nope, they’re still examining strict compliance, although at least there has been some progress in that the Service is now writing to all IPs where it identifies minor SIP16 disclosure non-compliances (with the serious breaches being passed to the authorising body concerned). I really cannot get excited by the news that the Service considered that 89% of all SIP16 disclosures, issued after the new SIP16 came into force, were fully compliant. Where does that take us? Will IPs continue to be monitored (and clobbered) until we achieve 100%? What will be the reaction, if the percentage compliant falls next time around?

Dodgy Introducers

The Service has achieved a lot of mileage – in some respects, quite rightly so – from the winding up, in the public interest, of eight companies that were “wrongly promoting pre-packaged administrations as an easy way for directors to escape their responsibilities”. Consequently, I found this sentence in the report interesting: “We have also noted that current monitoring by the regulators has not picked up on the insolvency practitioner activities that were linked to the winding up of a number of ‘introducer’ companies, and are in discussions with the authorising bodies over how this might be addressed in the coming year” (page 6). Does this refer specifically to the six IPs with links to the wound-up companies who have been referred to their authorising bodies? Or does this mean that the Service will be looking at how the regulators target (if at all) IPs’/introducers’ representations as regards the pre-pack process on IP monitoring visits?

Having heard last week a presentation by Caroline Sumner, IPA, at the R3 SPG Technical Review, it would seem to me that regulators are, not only on the look-out for introducers of dodgy pre-packs, but also of dodgy packaged CVLs where an IP has little, if any, involvement with the insolvent company/directors until the S98 meeting. Generally, IPs are vocal in their outrage and frustration at unregulated advisers who seek to persuade insolvent company directors that they need to follow the direction of someone looking out for their personal interests, but someone must be picking up the formal appointments…

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Unfortunately, the Insolvency Service’s report has left me with a general sense that it’s all rather cryptic. The report seems to be full of breathed threats but nothing concrete and, having sat on the outside of the inner circle of regulatory goings-on for almost two years now, I appreciate so much more how inactive that arena all seems. It’s a shame, because I know from experience that a great deal of work goes on between the regulators, but it simply takes too long for any message to escape their clutches. It seems that practices don’t have to move at the pace of a bolting horse to evade an effective regulatory reaction.


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A Closer Look at Six Years of Insolvency Regulation

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Have you ever wanted evidence-based answers to the following..?

• Which RPB issues the most – and which the least – sanctions?
• What are the chances that a monitoring visit by your authorising body will result in a sanction or a targeted visit?
• How frequent are monitoring visits and is there much difference between the authorising bodies?
• Do you receive more or less than the average number of complaints?
• Are there more complaints now than in recent years?

Of course, there are lies, damned lies, and statistics, but a review of the past six years of Insolvency Service reports on IP regulation provides food for thought.

The Insolvency Service’s reports can be found at: http://www.bis.gov.uk/insolvency/insolvency-profession/Regulation/review-of-IP-regulation-annual-regulation-reports and my observations follow. Please note that I have excluded from my graphs the three RPBs with the smallest number of IPs, although their results have been included in the results for all the authorising bodies combined. In addition, when I talk about IPs, I am looking only at appointment-taking IPs.

Regrettably, I haven’t worked out how to embed my graphs within the text, so they can be found here. Alternatively, if you click on full article, you will be able to read the text along with the graphs.

Monitoring Visits

How frequently can IPs expect to be monitored and does it differ much depending on their authorising body?

The Principles for Monitoring set out a standard of once every three years, although this can stretch to up to six yearly provided there are satisfactory risk assessment processes. The stated policy of most RPBs is to make 3-yearly visits to their IPs. But what is it in reality and how has it changed over time? Take a look at graph (i) here.

This graph shows that last year all RPBs fell short of visiting one third of their IPs. However, the Secretary of State fell disastrously short, visiting only 8% of their IPs last year. I appreciate that the Secretary of State expects to relinquish all authorisations as a consequence of the Deregulation Bill, but this gives me the impression that they have given up already. Personally, I would expect the oversight regulator to set a better example!

Generally-speaking, all the RPBs are pretty-much in the same range, although the recent downward trend in monitoring visits for all of them is interesting; perhaps it illustrates that last year the RPBs’ monitoring teams’ time was diverted elsewhere. Fortunately, the longer term trend is still on the up.

What outcomes can be expected? The Insolvency Service reports detail the various sanctions ranging from recommendations for improvements to licence withdrawals. I have amalgamated the figures for all these sanctions for graph (ii) here.

Hmm… I’m not sure that helps much. How about comparing the sanctions to the number of IPs (graph (iii) here).

That’s not a lot better. Oh well.

Firstly, I notice that the IPA has bucked the recent downward trend of sanctions issued by all other licensing bodies, although the longer term trend for the bodies combined is remarkably steady. I thought it was a bit misleading for the Service report to state that “the only sanction available to the SoS is to withdraw an authorisation”, as that certainly hadn’t been the case in previous years: as this shows, in fact the SoS gave out proportionately more sanctions (mostly plans for improvements) than any of the RPBs in 2009, 2010 and 2011. Although ACCA and ICAS haven’t conducted a large number of visits (30 and 25 respectively in 2013), it is still a little surprising to see that their sanctions, like the SoS’, have dropped to nil.

However, the above graphs don’t include targeted visits. These are shown on graph (iv) here.

Ahh, so this is where those bodies’ efforts seem to be targeted. Even so, the SoS’ activities seem quite singular: are they using targeted visits as a way of compensating for the absence of power to impose other sanctions?

Complaints

The Insolvency Service’s report includes a graph illustrating that the number of complaints received has increased by 45% over the past three years, with 33% of that increase occurring over the past year. My first thought was that perhaps the Insolvency Service’s Complaints Gateway is admitting more complaints into the process, but the report had mentioned that 22% had been turned away, which I thought demonstrated that the Service’s filtering process was working reasonably well.

Therefore, I decided to look at the longer term trend (note that the number of IPs has crept up pretty insignificantly over these six years: a minimum of 1,275 in 2008 and a maximum of 1,355 in 2014). Take a look at graph (v) here.

So the current level of complaints isn’t unprecedented, although why they should be so high at present (or indeed in 2008), I’m not sure. It also appears from this that the IPA has more than its fair share, although the number of IPA-licensed IPs has been growing also. Let’s look at the spread of complaints over the authorising bodies when compared with their share of IPs (graph (vi) here).

Interesting, don’t you think? SoS IPs have consistently recorded proportionately more complaints. Given that the SoS has no power to sanction as a consequence of complaints, I wonder if this illustrates the deterrent value of sanctions. Of further interest is that the proportion of complaints against IPA-licensed IP has caught up with the SoS’ rate this last year – strange…

Moving on to complaints outcomes: how many complaints have resulted in a sanction and have the RPBs “performed” differently? Have a look at graph (vii) here.

At first glance, I thought that this peak reflected the fact that fewer complaints had been received – maybe the actual number of sanctions has remained constant? – so I thought I would look at the actual numbers (graph (viii) here).

Hmm… no, it really does look like the number of sanctions increased in years when fewer complaints were lodged. However, I’m sceptical of this apparent link, as I would suggest that, in view of the time it takes to get a complaint through the system, it may well be the case that the 2012/13 drop in sanctions flowed from the 2010/11 reduction in complaints lodged. I shall be interested to see if the number of sanctions pick up again in 2014.

Going back to the previous graph, personally I am reassured by the knowledge that in 2013 the RPBs generally reported a similar percentage of sanctions… well, at least closer than they were in 2010 when they ranged from 2% (ICAEW) to 38% (ICAS).

The ICAEW’s record of complaints sanctions seems to have kept to a consistently low level. However, let’s see what happens when we combine all sanctions – those arising from complaints and monitoring visits, as well as the ordering of targeted visits (graph (ix) here).

Hmm… that evens out some of the variation. Even the SoS now falls within the range! Of course, this doesn’t attribute any weights to the variety of sanctions, but I think it helps answer those who allege that some authorising bodies are a “lighter touch” than others, although I guess the sceptic could counter that by saying that this illustrates that IPs are still more than twice as likely to receive a sanction from the IPA than from ICAS. Ho hum.

Overview

To round things off, here is a summary of all the sanctions handed out by all the authorising bodies over the years (graph (x) here).

This suggests to me that targeted visits seem to have gone out of fashion, despite monitoring visits generally giving rise to more sanctions than complaints… but, with the hike in complaints lodged last year, perhaps I should not speak too soon.


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IP Fees Consultation: a case of failing to see the wood for the trees..?

1525 Sequoia

Unfortunately, my case law reviews have become a bit log-jammed, so I’m afraid all I can offer at present is my response to the Insolvency Service’s IP fees and regulation consultation: MB IP fees response Mar-14

Normal service will be resumed as soon as possible.


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Who knew the Insolvency Service had a sense of humour?

0434 Santa Fe

Well, if I didn’t laugh, I’d cry!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1.5 hours once and nothing more? Ha ha!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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The Insolvency Rules “2015”: A Moveable Feast

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I realise that talk of the Insolvency Service’s IP fees consultation has pretty-much smothered the draft Rules consultation. However, I’ve yet to get to grips with that one, so here are my thoughts – and a copy of my response – on the (already superceded!) draft “2015” Rules.

The consultation closed on 24 January and it seemed to me that, despite the enormity of the task, many IPs and associates went to a lot of effort to make thorough responses. Regrettably, personally I only managed to review a few of the sections in detail – and only then did I look at the consultation questions (yes, I know, that was a pretty stupid way of doing things!). I attach my response here: MB response 24-01-14. The Government’s consultation homepage is: https://www.gov.uk/government/consultations/modernisation-of-the-rules-relating-to-insolvency-law.

This is not meant to be an overview of the proposed changes – I’ve not covered the non-controversial aspects (that would be too boring!) – but I consider (but I don’t really answer – sorry!) the following:

• Just how draft are the Draft Rules and are we going to get to see how current/future initiatives impact on them?
• How huge a task will it be to absorb the changes and is there anything that can be done to make the job easier?
• Does the Consultation Document cover all the changes or do we have to look closer at the detail?

The condition of the Draft Rules

The Insolvency Service is between a rock and a hard place, but personally I think they have made the right decision in releasing these draft Rules even whilst they are draft to a greater degree than we’re accustomed for statutory instruments opened to consultation.

The Service acknowledges that the draft is a work in progress document and that there are inconsistencies across the different insolvency processes. The Service did pre-empt the outcome of the Red Tape Challenge somewhat and included within the draft Rules some of the proposed measures, such as removing more statutory meetings (which seems very odd now in the context of the fees consultation) and enabling creditors to opt out of receiving communications, but other measures arising from the Red Tape Challenge exercise – such as avoiding the payment of small dividends and effectively communicating by website alone – are not reflected in the draft Rules. Given that the RTC outcome had not been revealed when this consultation commenced, this is not surprising, but it demonstrates the moveable feast of insolvency legislation and the difficulties in seeking to set in stone – at pretty-much any point in the next half-decade or so – a revised set of Rules.

In the face of this continually moving conveyor belt of legislative proposals, it is understandable that the Service does not wish to hold up the process of revising the Rules and, personally, I am pleased that we have been given this work-in-progress look at the draft. In reading the draft, I have suppressed any nagging concern that much of my effort has already been wasted in view of more recent proposals and yet more of the draft will be overtaken by future events, because the alternative – that we don’t get to see a draft until the last minute – doesn’t bear thinking about.

But what are the Insolvency Service’s plans now? Will they continue to work on the draft, absorbing the responses to this consultation, the further RTC outcomes, the IP fees conclusions, the fall-out from Teresa Graham’s review of pre-packs, perhaps the rules around the S233 changes (which are yet to be the subject of a consultation, right?), and give us little opportunity to review a further draft on the basis that we’ve had our chance? I hope not. I hope we get to have another opportunity to comment on a draft. Whilst matters of agreed policy may not be up for debate in the Rules arena, my review of only a few sections of these draft Rules has demonstrated to me the value of having others input on the practicalities of the processes set out.

The Big Picture

I pity the first JIEB students after the Rules are enforced, although it will be a fantastic opportunity to get ahead of the pack and become the go-to person in one’s practice. How us old’uns with our rubbery neurons are going to get the hang of it all, I don’t know!

I shudder to think about the amount of time – and (non-chargeable) money – that will be expended to get internal systems, diaries, and templates new Rules-compliant… and the inevitable mistakes that will be made; after all, templates always require a bit of fine-tuning after the first (second… third…) version, don’t they? One way that firms can cushion the blow right now is to future-proof standard documents, strip out all those Rules references: after all, do readers really need to know that something has been produced pursuant to Rule xxx?

The Consultation Document is silent on a key issue, I think: are the Rules going to apply to all cases existing as at R-Day or only to new appointments after the new Rules begin to take effect? I appreciate that it would be a rare thing for the new Rules to apply to all cases, rather than just new cases, but it is not entirely unheard-of, and think of the safeguards that would need to be put in place if a firm’s case-load were a mixture of pre- and post-new Rules cases. It’s been tough enough for practices to handle the complexities of running a portfolio of mixed pre/post-2009 and pre/post-2010 Rules cases, but these changes go so much further, it will make our heads spin!

Little has been said of making any changes to the Act. I am sure there is a reluctance to go there, given the more significant difficulties in seeking changes to primary legislation. However, I think it undermines some of the effort made to modernise the Rules, if we cannot fix the Act provisions at the same time. In particular, I think the practical difficulties arising from the Enterprise Act 2002 have now become evident and it seems a wasted opportunity not to tweak those whilst we’re at it. And aren’t there Act changes, such as extending the phoenix provisions to companies that don’t survive Administration, that have been given an airing but seem to have now gone quiet? It would also seem useful to wrap in some of the other statutory instruments that involve significant overlap with the Rules, such as the Insolvency Practitioners Regulations (which will need to be revisited in view of the RTC anyway) and what about Insolvent Partnerships? Then again, I guess the Service has enough on its plate already!

The Detail

Although pretty-much all of the Rules have been re-jigged, the Consultation questions focussed around some of the more fundamental changes, such as the overall structure, which is a massive change, but well worth doing, in my view.

They invited us to comment on the format of setting out in the Rules the prescribed content of notices, forms etc., rather than prescribing a statutory form, the suggestion being that this makes “it easier to enable documents to be delivered by electronic means, preparing the system for moving to electronic delivery of information when the forms would become redundant”. I appreciate that the aim is to future-proof the process, but I don’t think we have to accommodate any transmission process other than textual, do we? We’re not exactly future-proofing for Elysium-style neural downloads, are we? Therefore, I really don’t think that it helps to do away with prescribing forms, as it just means that someone else is going to have to create them (and get paid for it). Even if every IP in the country only goes to a handful of suppliers, that’s still an unnecessary amount of duplication in my books, and micro-businesses will be burdened with a disproportionate expense. Perhaps a middle-ground would be to provide forms, but prescribe only that the information set out in the forms need be delivered? Anyway, do we know whether Companies House will stomach just any old form..?

The Consultation Document lists ten “minor and technical changes” (paragraph 42) – and I think they’re right: they are pretty minor. However, what I think is a little disingenuous is the fact that, if you have the time and the determination to scrutinise the detail of the draft Rules, I’m sure you’ll find far more technical changes that aren’t quite so minor!

I knew there was no way I’d get through the complete draft Rules, so I decided to focus on the sections that will impact mostly on Administrations – Parts 3 and 17. I managed to shoe-horn my thoughts into the consultation’s question 20 (“Do you have any other suggestions or comments on the structure or the content of the rules?”). My full response (MB response 24-01-14) lists my observations, but here are a select few:

• The current R2.48 Conduct of Business by Correspondence for approval of the Administrator’s Proposals is to be replaced by a new correspondence-based process whereby creditors can lodge a “notice of objection” (the only other option appearing to be that they keep silent) and, if 10% or more of the creditors by number or value object, the Administrator “may convene a meeting of creditors to seek their approval or seek approval of a revised statement of proposals” (R3.37). My thoughts are: what is wrong with the current process? What if a creditor just wants to modify the Proposals? How is an IP supposed to calculate whether the 10% threshold has been over-reached? This 10% threshold – of creditors by value (and sometimes by number) of the total – is repeated throughout the Rules. Research has shown that lack of creditor engagement is a recurring problem, so why erode the process whereby creditors who actually make the effort to vote are most influential?

• The Service has made yet another attempt to tidy up the filing and reporting processes when a Paragraph 83 move from Administration to CVL form is filed. This time, they are suggesting a return to the issuing of a final report simultaneously with the ADM-CVL form. However, they have drafted a requirement that, “if anything happens between the sending of the notice to the registrar of companies and its registration which the administrator would have included in the report had it happened before then”, the (former) Administrator must file and circulate “a statement of appropriate amendments to the report”. My issue is that, technically, “anything” could include the crediting of additional bank interest or even the incurring of time costs, so this could result in IPs needing to issue – at some cost – pretty meaningless statements. Ideally, I would prefer the Act (if only!) to be amended so that the date when the ADM-CVL move takes effect is the date that the form is signed, not registered, so that we can escape all this nonsense. After all, I can think of no other event such as this where the timing is in the hands of Companies House. Alternatively, if we are stuck with Companies House controlling the conversion date, couldn’t the Liquidator report on “anything” that had happened in that small window when he issues his annual report?

• The Service has made a big deal about the savings that will be made from reducing the requirements to have creditors’ meetings – and indeed the draft Rules include a general process for conduct by correspondence (in addition to R3.37 for Administrators’ Proposals). However, this excludes fees decisions, which need to be dealt with either by a committee or resolution of creditors (apart from Para 52(1)(b) cases, the provisions for which, disappointingly, are left unchanged). Given that this is pretty-much the only matter to be addressed at creditors’ meetings, I cannot see that many meetings will be avoided, other than final ones (which, let’s face it, already are a complete non-event and cost nothing other than a Gazette fee, as all the expense arises from the need to issue a final report etc.). Of course, if the IP fees consultation proposals are taken forward, we may find IPs trying harder to generate creditor interest in meetings, which erodes to some extent the Service’s message that great savings will be made by these Rules/RTC measures.

These are just a few of the intriguing changes I’ve spotted. I do sympathise with those who have the job of revising these Rules. I’ve only had to deal with few-pager SIPs and the Ethics Code before and they were tough enough. In those cases, we certainly didn’t please all the people all of the time and I am sure the same will be true of the Rules. All that I ask is that we’re kept informed, so that we can manage the transition as best we can… and, if questions continue to be raised about whether IPs are giving “value for money”, that the critics remember that it’s the enormous costs associated with these kinds of changes that IPs have no choice but to pay.


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Thank you, Santa, for delivering Red Tape Cuts

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I owe the Insolvency Service an apology. I must have sounded like an ungrateful child at Christmas when I tweeted that we’d heard all their Red Tape-cutting measures before. Such is the disadvantage of having lived with my list for Santa for several months already and such is the immediacy of Twitter. Sorry, Insolvency Service!

The Insolvency Service’s release on 23 January 2014 – http://insolvency.presscentre.com/Press-Releases/Reforms-to-cut-insolvency-red-tape-unveiled-69853.aspx – announced that several measures, aired in its consultation document in July 2013, are to be taken forward, either via primary legislation changes “when Parliamentary time allows” or via changes to the Rules, which are “due for completion in 2015/16”. I’d blogged about the consultation document’s proposals on 16 August 2013 at http://wp.me/p2FU2Z-3Q. Here, I try to decipher exactly which of the consultation’s proposals are being taken forward, which is not as simple a task as it may sound!

“Allowing IPs to communicate with creditors electronically, instead of letters”

The consultation had set out a proposal that IPs could use websites to post creditors’ reports etc., as they do now, but without the need to send a letter to each creditor every time something is posted to the website. The proposal was that there would be one letter to creditors informing them that all future circulars would be posted to the website.

In my view, this really would save costs. I see quite a few IPs are now posting reports to websites, so it would be lovely to avoid even the periodic one-pager to creditors informing them of the publication of something new, although I’d love to see the statistics on how many people (other than us insolvency people) actually look at the reports on websites…

Of course, the Rules already provide that an IP can post everything onto a website, but at present only with a court order. Thus, I’m wondering, is the next bullet point simply another way of describing this first of Santa’s gifts..?

“Removing the requirements for office holders to obtain court orders for certain actions (e.g. extending administrations, posting information on websites)”

It’s not exactly clear what the Service has in mind on administration extensions. The consultation document suggested that administration extensions might be allowed with creditors’ consent for a period longer than 6 months. It suggested that creditors could be asked to extend for 12 months (with a 6-month extension by consent still an option), although it asked whether we thought that creditors should be allowed to approve longer extensions. So is the plan that creditors be allowed to extend a maximum of 12 months or longer?

And I’d like to know if the Service is persuaded to make any changes to the consent-giving process: are they going to stick to the requirement that all secured creditors must approve an extension (whether it is a Para 52(1)(b) case or not and no matter what the security attaches to or where the creditor appears in the pecking order), as is currently the case, or could they – please?! – lighten up on this requirement? And are they going to clarify that once a creditor is paid in full, they do not count for this, and other, voting purposes? So many questions remain…

The consultation document contained several other proposals for avoiding the court, such as “clarifying” that administrators need not apply to court to distribute a prescribed part to unsecured creditors (although I’m not sure why administrators should not be allowed also to distribute non-prescribed part monies to unsecured creditors). Coupled with changes to the extension process, administrations are no longer appearing to be the short-term temporary process that the Enterprise Act seemed to present them as.

“Reducing record keeping requirements by IPs which are only used for internal purposes”

I’m not entirely sure what this means. Does this refer to the current need to retain time records on all cases, including those where the fees are fixed on a percentage basis? These are internal records (even though they probably serve no purpose), but does that also mean that Rules 1.55 and 5.66, requiring Nominees/Supervisors to provide time cost information on request by a creditor, will be abolished?

Or does this statement relate to the maintenance of Reg 13 IP Case Records in their entirety? These are, in effect, records for internal purposes (in fact, they’re not even that, are they? Does anyone actually use them?), although the Regs provide that the RPBs/IS are entitled to inspect the Reg 13 records. So does that still make them an internal-purpose record?

I would like to think that the Service has accepted that the Reg 13 record is a complete waste of time and is planning to abolish it entirely. However, as I flagged up in my earlier post, the consultation document proposed that “legislation should require IPs to maintain whatever records necessary to justify the actions and decisions they may have taken on a case. It is not expected that such a provision would impose a new requirement, but rather codify what is already expected of regulated professionals.” Does this recent announcement mean that the Service will not seek to implement this measure? Let’s hope so!

“Simplifying the process of reporting director misconduct to make the process quicker by introducing electronic forms to ensure timely action is brought against them in a timely way, providing a higher level of protection to the business community and public”

Electronic D-forms? Lovely, we’ll have those, thank you, although in my view it’s not a big deal: it just avoids a bit of printing.

What makes me a little nervous is the use of “timely” twice in this statement. The consultation proposed to change the deadline for a D-form to 3 months and the Service believed that this would not be an issue for IPs if its other proposal – to drop the requirement for IPs to express an opinion on whether the conduct makes it appear that the person is unfit to be a director and replace it with a requirement to provide “details of director behaviour which may indicate unfitness” – is also taken up.

As I explained in my earlier post, personally I don’t see this as a great quid pro quo for IPs and I don’t think it will help the Service catch the bad guys much quicker. When faced with slippery directors, 3 months is a very short time to gather all the threads.

“Allowing office-holders to rely on the insolvent’s records when paying small claims, reducing the need for creditors to complete claim forms”

The consultation document proposed that IPs could admit claims under £1,000 per the statement of affairs or accounting records without any claim form or supporting documentation from creditors (although creditors would still be free to submit claims contradicting statements of affairs).

It doesn’t seem right to me – there’s a sense of fudginess about it, particularly in view of the shabbiness of most insolvents’ records just before they topple – but I guess that, in the scheme of things, it’s not a big deal if a creditor receives a few pounds more than he’s entitled to on one case, but a bit less on another. It might be academic anyway, given the final measure…

“Reducing costs by removing the requirement to pay out small dividends and instead using the money for the wider benefit of creditors”

The Service had proposed that, where a dividend payment would be less than, say, £5 or £10, it would not be paid to the creditor, but would go to the disqualification unit or the Treasury. The consultation document had asked whether the threshold should be per interim/final dividend or across the total dividends. Given the likely difficulties of keeping track of small unpaid dividend cheques, I do hope that the Service has its eye clearly set on saving costs and will stick with a threshold for each dividend payment declared. As with the previous measure, although it brings in a sense of creditor equality that seems more suited to Animal Farm, we are only talking about small sums here, so I guess it makes practical sense.

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Thank you, Insolvency Santa, for giving us a peek into your big red sack of goodies. It’s great to see some really promising outcomes from the Red Tape Challenge, even if we have to see at least one more Christmas pass by before we get to open our prezzies.