Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Emerging Interpretations of the New Rules – Part 1: the biggies

Along with Dear IP 76, the Insolvency Service’s Rules blog has been a fascinating read. If you don’t fancy trawling through all 148 comments, here are my personal favourites. There are too many to cover in one go, so I’ll start here with a handful of the more contentious:

  • How do the New Rules affect existing VAs?
  • What is the deadline for forcing a S100 physical meeting?
  • What happens if a Centrebind is longer than 14 days?
  • How should you handle decisions sought from preferential creditors alone?
  • How should creditors comply with the Rules when submitting notices and forms?

 

I’ll also take this opportunity to reflect on how these emerging interpretations and the Amendment Rules have impacted on my previous blog posts. I have tried to update old blog posts as time has moved on, but I cannot promise that old blog posts – or indeed this one – will remain current. Things are moving fast.

Dear IPs can be found at: https://goo.gl/wn8Vog (although no. 76 has yet to appear)

The Insolvency Service’s Rules blog is at: https://theinsolvencyrules2016.wordpress.com/

 

Can we rely on the Insolvency Service’s answers?

Nick Howard’s introduction to Dear IP 76 states candidly “While it is only a Court that can give a binding interpretation of the law, the enclosed article sets out the policy intentions and how we believe the Rules support those”. That’s understandable. Much as we thirst for a cut-and-dried answer, we cannot have it. Just like the 1986 Rules, it will take decades to establish robust interpretations and even then there will always be the Minmar-like decision that takes us by surprise.

  • What about the Rules blog?

To be fair, the Service provided it with the purpose “to offer users the chance to share their thoughts and experiences as they prepare for commencement” of the Rules. It was never meant to be an inquisition of the Insolvency Service, but it was inevitable that it would turn out that way and I am very grateful that the Service has grasped the nettle and been prepared to post their views publicly for the benefit of us all.

  • So what comfort can we draw from the answers?

At the very least, the Service’s explanations are extremely valuable in understanding how they meant the Rules to work and in giving us all a starting point. I wonder if it could be seen a bit like the new mantra, “comply or explain”: if we don’t trust an answer, we need to be certain that our reasons for departing from it are well-founded. And at the very best, the Service has provided explanations that make us say: “right, yes I can see that. Thanks, I’ll work on that basis”.

 

What are the New Rules’ Impacts on Existing VAs?

The difficulty for the Insolvency Service – and indeed for all of us – is that of course each VA is dependent on its own Proposals and Standard Terms & Conditions (“STC”), so expressing any opinion on the effect of the New Rules on VAs in general is going to be dangerous.

  • The difference between IVA Protocol and R3 STCs

The majority of IVAs use either the IVA Protocol or R3’s STC, so you might think it would be relatively straightforward at least to establish some ground rules for these two documents and then leave each IP to determine whether the Proposal itself has any overriding effect. Dear IP seems to have made a stab at this in relation to the IVA Protocol at least. However, I think it is important to bear in mind that Dear IP makes no mention of R3’s STCs and from what I can see there is a chasm of difference in how the two STCs have incorporated the 1986 Rules.

True, both STCs define the “Rules” as the Insolvency Rules 1986 as amended and the Service makes the case for equating this to the 2016 Rules. I have heard argument that the Service’s reliance on S17 of the Interpretation Act 1978 does not stack up: if a contract – which is what we’re talking about here – refers to Rx.xx of the Insolvency Act 1986 (as amended), does it not remain as such notwithstanding that the 1986 Rules have been revoked?

This takes me to the chasm between the two sets of STC: for example, the IVA Protocol STC state that “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules” (19(1)), whereas the R3 STC describe in detail how to convene meetings and conduct postal resolutions with no reference to the Act or Rules. Therefore, personally I am struggling to see how the 2016 Rules affect existing VAs’ methods of seeking creditors’ agreements where those VAs are based on the R3 STC. However, I also question whether the R3 STC restrict meetings to physical ones – when I read the STC cold, I’m not persuaded that they don’t also work for virtual meetings (but then again, don’t most meetings happen only on paper anyway?) – so it seems to me that the R3 STC may allow a variety of routes but, thankfully, without all the baggage that the 2016 Rules carry with them, which may load down Protocol IVAs in view of their vague reference to “in accordance with the Act and the Rules”.

  • Does Dear IP make the IVA Protocol position clear?

It’s Dear IP’s treatment of the Protocol STC’s wording, “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules”, that puzzles me. On the one hand, Dear IP acknowledges that the Act and Rules “remain silent on how decisions are taken once in (sic.) a voluntary arrangement is in place”… so they seem to be saying that the Act and Rules are irrelevant to a supervisor looking to call a meeting. But then Dear IP says: “we do not believe [supervisors] should feel restricted to only using a physical meeting. We expect supervisors to take advantage of the new and varied decision making procedures that are available under the Act as amended and the 2016 Rules”.

But how possibly can the phrase, “the supervisor may summon and conduct meetings of creditors”, morph into for example: “the supervisor may seek a decision by means of a correspondence vote”? This is too much of a stretch, isn’t it? Rather than be meant as a comment on the application of the 2016 Rules to existing VAs, perhaps the Service is simply stating that it would like IPs to incorporate the various processes in future VA Proposals and STC, don’t you think?

Because the Act and Rules in themselves do not empower supervisors to seek decisions, does this mean that the Protocol STC’s words “in accordance with the Act and the Rules” are redundant? Or are these words supposed to mean that the supervisor should “apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications”, as paragraph 4(3) of the Protocol STC states? Ok, if the latter is the case, then what is the effect of S379ZA(2), i.e. that a trustee cannot summon a physical meeting unless sufficient creditors request one? This would seem to take us far from the Dear IP position where supervisors should not “feel restricted to only using a physical meeting”.

For these reasons, I think the Dear IP is horribly muddled. Perhaps the IVA Standing Committee might like to clarify the position in relation to their STC..?

 

What is the deadline for forcing a physical meeting in a S100 scenario?

This is another area that seems to have got horribly muddled. It seems to me that much of the confusion over this arises because of the conflating of two potential creditor responses: (i) a creditor can object to a decision sought by deemed consent; or (ii) a creditor can request a physical meeting. It is true that, when a S100 decision on the liquidator is sought by deemed consent, the consequence of either response is the same: a physical meeting is summoned. However, the Rules around each response are different.

  • The deadline for objections

R15.7(2)(a) states that the notice seeking deemed consent must contain “a statement that in order to object to the proposed decision a creditor must have delivered a notice, stating that the creditor so objects, to the convener not later than the decision date”. “Not later than the decision date” must surely mean that objections delivered on the decision date are valid (note: although this rule only specifies what must appear in a notice, S246ZF(4) makes clear that “the procedure set out in the notice” is binding).

  • The deadline for physical meeting requests

For a S100 decision, R6.14(6)(a) states that “a request [for a physical meeting] may be made at any time between the delivery of the notice… and the decision date”. I have heard argument that “between” excludes the days at each end, which would mean that the deadline for requests would be the end of the day before the decision date. At first, I was persuaded by this interpretation, given that, if I were to count how many people in a queue were between me and the ticket office, I would not include myself in the number… but then someone asked me to pick a number between 1 and 10..!

This interpretation of “between” also makes little sense when considering R15.4(b), which states that an electronic voting system must be “capable of enabling a creditor to vote at any time between the notice being delivered and the decision date”… so the IP isn’t interested in votes cast on the decision date then..?

  • The Insolvency Service’s policy intentions

How does Dear IP pull these threads together? It states: “The policy intention (in all cases) is that a request for a physical meeting must arrive before the decision date. The policy intention with regard to electronic voting is that creditors may cast their votes up until the decision closes (i.e. 23:59 on the decision date). We believe that the 2016 Rules are capable of supporting both these policy intentions.”

The Insolvency Service appears blinkered in their statement that the 2016 Rules support the policy intention, because they simply focus on requests for a physical meeting. Irrespective of how “between” is interpreted, the fact is that a deemed consent can be objected to up to 23.59 on the decision date and such an objection would force a physical meeting. Therefore, a members’-appointed liquidator will still be left in the position of not knowing whether there will be a last-minute objection that will force an unexpected c.week-long Centrebind.

 

What happens if a Centrebind is longer than 14 days?

I feel I should apologise for wasting people’s time in explaining (via this blog (https://goo.gl/hikYKr), R3 presentations and our webinars) the risks that a Centrebind could last longer than 14 days if material transactions need to be reported or a physical meeting needs to be convened.

  • The Insolvency Service’s simple answer

The Insolvency Service gave the simple answer on their blog that “it is sufficient that the original decision date was within the required timescale”. In other words, provided that the convener fixed the decision date for the S100 deemed consent process or the virtual meeting not later than 14 days after the winding-up resolution, it is of no consequence that this decision date falls away because the date of a consequent physical meeting falls outside this timescale.

I find the Insolvency Service’s answer startling. Personally, I would expect the Rules to make explicit that it is the original S100 decision date that matters, in the same way as Para 51(2) uses the expression “initial decision date” when setting down the 10-week deadline for Administrators to seek approval of their proposals (i.e. Para 51(3) explicitly provides that Administrators do not get into a pickle if creditors reject a decision by deemed consent and then the Administrator convenes another decision process with this second decision date falling outside the 10 weeks).

  • Can this principle apply also to VA Proposal decision dates?

What about the other instance when an important decision date deadline must be met: the approval of an IVA Proposal? R8.22(7) states that this decision date must be not more than 28 days from the date on which the nominee received the Proposal (or when the nominee’s report was considered by the court). Given that 14 days’ notice is required, it would be very possible for a physical meeting decision date to be outside this timescale. Would it matter as long as the original decision date was inside it? The Rules do not address this point, but neither do they address the unintended Centrebind position.

Much as my heart’s cockles are warmed by the Insolvency Service’s answer, personally I would be nervous in relying on it.

 

How do you deal with preferential creditors’ decisions?

The Insolvency Service’s answers on this topic are eminently sensible and I am more than happy to live with them… but it’s just that I cannot help but continue to ask myself: “yes, but where does it say that?”

The questions surround the New Rules’ defined process for seeking prefs’ approval of matters such as the Administrators’ fees. Exactly how do you conduct a decision procedure of prefs alone?

Firstly, what do you do with pref creditors who have been paid in full? R18.18(4) states that pref creditors must make a decision on fees, if the Administrator “has made or intends to make a distribution” to prefs (in a Para 52(1)(b) case). This would seem to include prefs who have been paid in full, but R15.11 excludes them from receiving notice of the decision procedure.

But, actually, what do we mean when we refer to pref creditors being paid in full? Usually we mean that the pref element of their claim has been paid in full, but often they will still have a non-pref unsecured claim. How do you calculate a pref creditor’s value for voting purposes?

R15.31(1)(a) states that, in an administration, votes are calculated “according to the amount of each creditor’s claim as at the date on which the company entered administration, less any payments that have been made to the creditor after that date in respect of the claim”.

  • Another simple answer from the Insolvency Service

The Insolvency Service’s answer to these questions was: “Our interpretation is that [R15.31(1)(a)] would lead an administrator to consider the value of outstanding preferential claims at the date that the vote takes place. This would only include the preferential element of claims, and if these had been paid in full then the administrator would not be expected to seek a decision from those creditors.”

Personally, I don’t see that R15.31(1)(a) gets us anywhere: it doesn’t state that a creditor’s claim is only its preferential element when a decision procedure is only open to pref creditors and it doesn’t state that you do not need to seek a decision from pref creditors who have been paid their pref elements in full… but in all other respects I like the Service’s answers!

 

Do creditors need to get forms absolutely correct?

There is no denying that the 2016 Rules have placed a heavier burden on us all to get the details correct. Many things that we were used to doing in simple text form are now described as “notices” and every statutory notice must include “standard contents”, which often require the addition of new detail such as insolvents’ company registered numbers or residential addresses.

  • The validity of old proofs of debt

In many cases, creditors are not spared these requirements. For example, the prescriptive detail of proofs of debt – R14.4 – is quite different from the old requirements. If you are adjudicating on pre-April proofs, can you accept them for dividend purposes? Indeed, can you rely on a Notice of Intended Dividend process commenced before 6 April?

As regards the need for creditors to submit new proofs to meet the New Rules’ requirements, the Insolvency Service answered: “Section 16 of the Interpretation Act 1978 may be relied upon here, and proofs which have already been submitted do not become invalidated.”

Incidentally, S16 of the Interpretation Act 1978 states that a “repeal does not, unless the contrary intention appears… affect the previous operation of the enactment repealed or anything duly done or suffered under that enactment [or] affect any right, privilege, obligation or liability acquired, accrued or incurred under that enactment”, so does this help as regards NoIDs? Are IPs safe to rely on old NoIDs as protecting them from late creditors? This wasn’t the question put to the Service, but it would seem to me the only way the New Rules could possibly work.

However, I’m not quite sure how S16 helps IPs decide now whether to admit an old proof for dividend purposes, when surely they must measure proofs against the New Rules, mustn’t they? But, realistically, what could an old proof possibly be lacking that might struggle to get it admitted under the New Rules?

  • Providing the detail required for new proofs

I asked the Service about the requirement for a proof to be authenticated. R1.5(3) states that “if a document is authenticated by the signature of an individual on behalf of… a body corporate of which the individual is the sole member, the document must also state that fact”. If a creditor failed to state this on a proof, would it render the proof invalid? And, if so, does this obligate office holders to check this point?

Alternatively, does R1.9(1)(b) help us all out? This rule states that “where a rule sets out the required contents of a document, the document may depart from the required contents if… the departure (whether or not intentional) is immaterial”.

The Insolvency Service’s answer was: “The extent to which an office-holder could rely on rule 1.9(1)(b) here would be a matter for them to decide, possibly in liaison with their regulatory body.” I can understand why the Service was not tempted to put their neck on the block on this question, but it does demonstrate to me the nonsensical nature of the New Rules: they set out prescriptive detail of what must be provided… then add a rule that states it’s okay if a departure is “immaterial”. Why put prescriptive immaterial requirements in the Rules in the first place?!

  • Do creditors need to meet the notice requirements?

I felt a similar irritation when I read Dear IP’s article, “Do creditors’ notices have to comply with standard content”, for example when creditors object to a decision sought by deemed consent. The Service seems to be implying that the answer is no: “if it is clear what the creditor is seeking in their notice, it should be accepted”. Again, this leaves me wondering: if a creditor is free to run a red light, why put the lights up in the first place?

Having said that, R1.9(1)(b) might be a useful one to remember the next time the RPB monitors call… although we might expect some debating over what is “immaterial”.

  • The detail (not) required for proxy forms

I think it is also worth mentioning here the observation made on the Service’s blog at the lack of prescription when it comes to proxy forms. The Service explained that “the requirement to authenticate [a proxy form] was removed as a deregulatory measure, because authentication does not confer legitimacy. As long as the office-holder is satisfied that the proxy comes from the creditor then the requirements for submission are met.” So a creditor must sign a hard copy proof but need not sign a proxy form. Well, fancy that!

 

In my next post, I’ll set out some other nuggets gleaned from the Insolvency Service’s blog.


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What’s new in the revised IVA Protocol?

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A revised IVA Protocol and Standard Terms – including for the first time standard report templates – were published on 20 June with no fanfare, no comment from regulators or trade bodies. In the absence of an official tracked-changes or commentary, I have created my own.  Perhaps all will be made clear by a Dear IP before the start date of 1 September… or should that be 1 October..?

[UPDATE 06/07/2016: Just today, a Dear IP has been issued!  See https://goo.gl/gSigmg.  The Dear IP sets out the expectation that IPs “should be using the new version by 1 October 2016”.]

The documents can be found at: https://goo.gl/7CZuly.

My tracked-changes version is here: IVA Protocol 2016 comparison with 2014

The key points to note are:

  • Start date: the Protocol purports to be effective from 1 October 2016, although the attached Standard Terms are “for use in proposals issued on or after 1 September 2016”.
  • There are some material changes to allowable extensions to collect in missed or additional payments.
  • The standard report templates are a new feature, although “usage is not mandatory”.

I have elaborated on these and some other changes below.

 

Making the switch

As I mentioned above, there seems to be some confusion as to the start date. I trust that the IVA Standing Committee will resolve this inconsistency before 1 September: it is difficult to see how the revised Standard Terms can be used for IVAs proposed after 1 September 2016 when the revised Protocol does not apply until 1 October 2016.

Notwithstanding this confusion, because the date for using the revised Terms relates to proposed IVAs, a clear cut-off date is not possible. For example, an IP could issue a proposal incorporating old terms on 30 August (IVA(i)) and a proposal incorporating the new Terms on 1 September (IVA(ii)).  IVA(i) could be approved on 26 September, but IVA(ii) could be approved on 16 September, i.e. an IVA using the new Terms could be older than an IVA using the old terms.

Still, we have been in this position before and I am sure that IPs are able to annotate cases simply so that, at a glance, staff can discern which terms apply. I believe that it will be particularly important to get this right this time, as the revised Protocol reflects some quite different timescales, e.g. as regards payment holidays.

Is a Straightforward Consumer IVA suitable for self-employed people?

The current Protocol states that people “in receipt of a regular income either from employment or from a regular pension” are likely to be suitable for a Straightforward Consumer IVA. The revised Protocol’s definition of “consumer” – as “a person in debt or the debtor” (para 2.6) – suggests a wider application.  This is confirmed by para 3.1, which now states that a suitable person will be “in receipt of a regular sustainable income for example, but not limited to, from employment or from a regular pension”.

Therefore, the revised Protocol seems to acknowledge that self-employed people in receipt of a “regular sustainable income” may be appropriate for a Straightforward Consumer IVA.

Who regulates IPs for debt advice?

In the current Protocol, Annex 2 includes an explanation of the involvement of the OFT and the Financial Ombudsman Service in certain elements of IPs’ work. Clearly, updating this section has been long overdue.  However, the new Protocol removes entirely this explanation from the Annex.

The revised Protocol includes a new statement-of-the-obvious para (2.2) that, if an IP is subject to FCA authorisation, they must comply with the FCA’s Consumer Credit Sourcebook, but the Committee has now side-stepped the dangerous territory of where IPs sit as regards some RPBs’ Designated Professional Body status for governing certain regulated activities; the IP exclusion for advising in reasonable contemplation of an insolvency appointment; and the FCA’s regulatory zone.

In my view, IPs have been piggy-in-the-middle of this territory war for too long: I would dearly love to see some unequivocal guidance.

Vulnerable debtors

Paras 2.8 to 2.10 are new. They highlight the need to be alert to, and deal appropriately with, vulnerable debtors, which is fair enough. However, they also state that, subject to obtaining the debtor’s explicit consent to disclosure, “full transparency is recommended as creditors should take these vulnerabilities into account when considering an IVA proposal”.

“Consumer vulnerability” disclosure is explicitly prompted on the revised proposed IVA summary sheet and on all report templates.

General beefing-up

Personally, I do wonder why many paras have been added. Are there particular mischiefs that need to be dealt with?  If so, then I do not see that slipping more words into the Protocol helps.  Rather, I think the approach should be to highlight the issues to IPs, help us all to understand better what measurable standards are expected, provide examples of behaviour seen to be falling short, and/or take actions under the existing Code of Ethics to deal with anyone working in the extremes.

Anyhow, here are some of the additions. They are generally not controversial, especially when read in context or alongside other standards such as the Code, but what really do they add..?

  • “IVA providers should consider the suitability of an IVA with caution for an individual whose income is mainly made up of benefits.” (para 3.2)
  • “The IP has a responsibility to ensure that any lead generators that they use follow the rules and codes.” (para 5.3)
  • “Every individual who proposes an IVA should be given this advice or information” (i.e. appropriate advice or information in light of the debtor’s particular circumstances, leading to a proposed course of action) (para 6.1) [Update 06/07/2016: Dear IP explains that this is to ensure that both parties in interlocking IVAs are given full advice. Ahh…]
  •  “There are a range of options that may be appropriate in individual circumstances and all advice and information given and action taken should have regards to the best interests of the consumer. Sufficient information must be provided about the available options identified as suitable for the consumer’s needs.” (para 6.2)
  • “In addition to other regulatory requirements the IVA provider should take the following into consideration:
    • a. Fair treatment of consumers is central to the firm’s culture.
    • b. IVAs are offered accordingly.
    • c. IVA and its service functions as the consumer is led to expect (likely to successfully complete). [Is this even English?!]
    • d. Advice is suitable and appropriate for the individual.
    • e. There is clear information before, during and after appointment.
    • f. There are no barriers created to make a complaint.” (para 6.3)
  • “The expenditure should be at a level that is likely to be sustainable and not cause undue hardship to consumers.” (para 7.5)
  • “Where the net worth [in the home] is released by way of a secured loan, consideration should be given to the term and interest rate applied to the loan and the principles of treating the consumer fairly.” (para 9.3) (I don’t think this gets close to dealing with Debt Camel’s concerns about the 2014 Protocol’s migration from remortgages to secured loans – see http://goo.gl/5DCccu and http://goo.gl/x6BK54.)

There is even one of these statements-of-the-obvious-perhaps-for-emphasis for creditors:

  • “Creditors should not put forward modifications which are already included in the proposal” (para 13.5).

I wonder if creditors will observe this instruction…

Snuck in, however, is also a new prescriptive requirement:

  • “Consumers should be provided with a copy of the IVA protocol. This can be either through provision of a physical copy or providing an electronic link.” (para 3.7)

Altered extensions

Perhaps most significant are the changes to the Standard Terms, which affect the processes and timescales of allowable extensions.

As far as I can see, the following have changed significantly:

  • Para 9.2 of the revised Protocol states that the term of the IVA is automatically extended for 12 months, if the consumer’s obligation to pay 85% of their interest in the home is to be discharged via 12 more monthly contributions. Standard Term 5(7) reflects this 12-month extension without variation.
  • Para 10.5 states that the IVA may be extended by up to a maximum of 6 months without a variation to deal with any overtime etc. due but not paid over (this is new).
  • Para 10.8 allows payment “holidays” or reduced payments of 9 months maximum (the current Protocol allows one payment “break” of up to 6 months) with an IVA extension of 12 months max. to pay the missed contributions (the current Protocol allows a 6 month extension).
  • Consumers must provide “full details of the inability to pay… to the Supervisor’s discretion” in order to “qualify” for a payment holiday (para 10.8). Payment holidays will no longer need to be reported to creditors within 3 months of agreement, but only within the next progress report.

Because of Standard Term 5(7), I assume that all these additional months can only run concurrently and, if more than 12 months is required, this must be approved by variation.

After-acquired assets

Currently, after-acquired assets need to be realised to the extent of discharging costs and debts in full plus interest (Term 14(3)). Under the new Terms, after-acquired assets will not need to settle interest on claims.

Unclaimed and returned dividends

The Standard Terms include a whole new section (at 17(7) to 17(10)).

If an interim dividend is unclaimed or returned, “the Supervisor shall take reasonable steps to allocate that payment” – the Terms set out what those steps are (although I am not persuaded that “allocate” is the correct word).

“Where it is not possible to allocate the unclaimed or returned dividend then the Supervisor may discount the proof of debt received and distribute the funds to those creditors whose dividends have been claimed.” Whilst it is useful for the revised Protocol to set out what happens with these, personally I don’t like reference to “discounting proofs”: not only does “discount” conjure up different thoughts to that intended by the term (i.e. the ignoring of a claim for dividend purposes), but also nowhere else in the Standard Terms is a “proof of debt” mentioned.

New Term 17(7) accepts that a Supervisor need not redistribute unclaimed final dividends if it is “cost prohibitive (for example the cost of making payment is in excess of the funds in hand)”… although given that Supervisors are usually paid as a %, I am not certain when this “for example” will arise.

After any attempts to “allocate” (although it does not seem that these attempts need to be made in respect of final dividends) and redistribute, uncashed/ unclaimed/ returned dividends are paid over to the consumer and “the creditors have no further claim to these funds” – which is very different to R3’s IVA Standard Terms.

Dealing with a surplus

If there are residual funds (I assume not including unclaimed or returned dividends) up to £200, the Supervisor “may” choose to return these to the consumer as a surplus (Term 17(10)). If this is unclaimed or returned, the Supervisor can use it to locate the consumer and make payment to them or donate it to a registered charity of the Supervisor’s choice.

Application of the Act and Rules

Revised Term 4(3) borrows from the R3 IVA Standard Terms. It requires the Supervisor to use the bankruptcy provisions of the Act and Rules with necessary modifications “in the event that the Arrangement does not provide guidance to the Supervisor as to what action he/she should take in any given situation”.

Whilst this could be useful, I am not sure how cut-and-dried its application will be in practice. I have rarely seen it used in IVAs incorporating R3’s Standard Terms, but then R3’s Terms are far more all-encompassing anyway.

I think its inclusion does mean, however, that the deletion of the current Standard Term 19(2) – regarding creditors’ power to requisition a meeting – has no practical effect, as the Act and Rules entitle creditor(s)>25% to force a meeting in a bankruptcy.

Standard Report Sheets

The .gov.uk website now provides separately Annex 5 to the Protocol, which comprises excel templates for the following:

  • Proposal summary sheet
  • Chairman’s report on the meeting to consider the Proposal
  • Annual progress report
  • Notice of variation meeting
  • Chairman’s report on the meeting to consider a variation
  • Report on completion
  • Report on failure The disclaimers on each sheet are noteworthy:

Only the Proposal summary sheet gets a mention in the IVA Protocol itself, but all other templates state “usage is not mandatory”, which is handy, given that personally I don’t think they cut the mustard.

The disclaimers on each sheet are noteworthy:

“Completion of this template does not necessarily ensure full compliance with Statute and SIP where circumstances dictate that additional information is warranted.”

“The Regulators accept no liability for deficiencies in the information supplied to creditors – this remains the Responsibility of the Insolvency Practitioner.”

I have not scrutinised the templates to identify what gaps in compliance with statute and SIPs might exist (but I couldn’t help noticing some typos: Protocol “complaint” and “persuant”). However, I do note that there are insufficient prompts as regards dividends paid to comply with SIP7 and so you will need to make sure that your attached R&P provides the breakdown.

Also, the new SIP9 does not feature at all. I appreciate that “proportionate” information on the fees/costs of a Protocol-compliant IVA is likely to be minimal, but the annual progress report template provides a few lines of free text for “information / comments / use of discretion / consumer vulnerability”. Personally, I would have thought that some reference to SIP9 information (i.e. the “key issues of concern”) would have been sensible.

Alternatively, does this indicate that the regulators believe that SIP9 can be complied with in a few lines of text in a case with, say, fees<£10K..?

I also note that the template refers creditors to “R3.org.uk” (or the IP’s website) for a suitable explanatory note (i.e. Creditors’ Guide to Fees), which will not satisfy the monitors, as most expect a link to the relevant Guide.

Finally, the “failure” report does not seem to envisage any transactions, e.g. final dividend payments and fees/costs, being made after termination from monies in trust.

 

Conclusion

The revised IVA Protocol and Standard Terms introduce plenty of changes, so it would be nice to have some commentary from the IVA Standing Committee at the very least.

Maybe the lack of publicity has something to do with the fact that IVAs are being managed by fewer providers these days (TDX reported that the top five are responsible for 70% of all new IVAs, compared with 55% two years’ ago – https://goo.gl/J3EmFy). If you are hanging on in there, I wish you all the best.

 

 

 

 


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The Insolvency Service’s labours for transparency produce fruits

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

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

The Insolvency Service’s first newsletter

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

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

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

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

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

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

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

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

IVA Standing Committee Minutes 17 July 2014

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

“Standardised Format”

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

Income and Expenditure Assessments

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

IVA Protocol Equity Clause

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

Resistance to refunding dividends when set-off applied

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

Variations

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

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

Recent pension changes

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

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

Report on the First Year of the Complaints Gateway

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

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

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

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

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

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

The Statistics

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

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


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Council Tax and IVAs: some more thoughts

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The IPA has published an interesting article in its July 2014 magazine (accessible from http://www.ipa.uk.com Press & Publications>Insolvency Practitioner magazine) explaining how its Personal Insolvency Committee believes the judgment in Kaye v South Oxfordshire District Council impacts on past and future IVAs. I have some more thoughts…

The article points out that the judgment has no practical effect where the household income is shared between solvent and insolvent adult occupiers, because whatever “tax holiday” might be enjoyed by an insolvent occupier will be off-set by the fact that the council likely will re-bill the solvent occupier, with the effect that the household income and expenditure account is unchanged. The rest of this post assumes that the debtor is the sole adult occupier (although perhaps some points also might apply where all the adult occupiers are – or are intending to be shortly – in an insolvency process; I’ve not worked out whether a council’s “re-bill” of another occupier would be a pre- or post-insolvency liability…).

For new IVA Proposals, on the basis that the first (part) year’s council tax will be caught as an unsecured claim, the article states that “it may be advisable to consider… whether the proposal might make specific provision for an increased contribution during this period”. Fair enough. I hear that many IPs are doing this already.

For existing IVAs, however, the tone of the article makes it clear that there is no expectation for Supervisors to examine potentially overpaid council tax with a view to recovering any overpayment. The article goes so far as stating: “It is also believed that Counsel has expressed a view that this judgement would not be of retrospective effect”, which I find quite extraordinary. However, there is no doubting the commercial arguments against the Supervisor going to the effort of seeking to extract small refunds from a number of councils.

Of course, the IPA article is aimed at helping its members, so it is not surprising that it has not viewed the position from the debtor’s perspective. For example, could the debtor pursue a refund? I don’t see why not (although I’m not sure I rate their chances of easy success). Would it be a “windfall” caught by the IVA? I don’t see how, as it simply refunds the debtor for payments made post-IVA; it isn’t an asset that has been acquired after the IVA started.

Would the council be entitled to set off any refund due to the debtor (for council tax paid post-IVA) against the council’s unsecured claim? I don’t think so; set-off principles in insolvency apply only where the overpayment and the claim both occurred pre-insolvency, although I appreciate that this is not what the pre-January 2014 Protocol STC stated. Clause 17(6) used to say: “Where any creditor agrees, for whatever reason, to make a repayment to the debtor during the continuance of the arrangement, then that payment shall be used solely in reduction of that creditor’s claim in the first instance”. However, the January 2014 Protocol STC now state: “Where Section 323 of the Act applies and a creditor is obliged, for whatever reason, to make a payment to you during the continuance of the arrangement, then that payment shall be used first in reduction of that creditor’s claim”. S323 begins: “This section applies where before the commencement of the bankruptcy there have been mutual credits, mutual debts or other mutual dealings between the bankrupt and any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt”… so as long as the debtor doesn’t become bankrupt, I don’t think S323 will ever apply in an IVA!

What about debtors who are in the first year of their IVAs (provided the IVA commenced after 1 April 2014)? Can they avoid paying the remaining council tax for the rest of the year on the basis that it now falls as an unsecured claim? Excepting the IPA’s comment that the Kaye judgment does not have retrospective effect, it seems that they can. Some words of caution, however: I can envisage that some councils may be a bit behind the times, so debtors may need to have a strong stomach to resist council pressure to pay up, remembering that a case precedent only exists to the point that another court sees things in a different light. The effect of pushing the year’s tax into the IVA might also be material: for example, the Protocol STC state that breach occurs when the debtor’s liabilities are more than 15% of that originally estimated and some IVAs may require a minimum dividend to be paid. If an increased council IVA claim could threaten the successful completion of an IVA containing terms such as these, one might like to think again…

Could a Supervisor demand increased contributions from a debtor who is not paying his council tax for the rest of the first year? Of course, it will depend on the IVA terms, but it seems to me that the Protocol STC don’t help a Supervisor seeking to do this. Clause 8(3) states that the debtor must tell his Supervisor asarp about any increase in income… but this is not an increase in income, it is a decrease in expenditure. Clause 10(11) states that, as a consequence of the Supervisor’s annual review of a debtor’s income and expenditure, the debtor will need to contribute 50% of any net surplus one month following the review. By the time the first annual review comes around, the “tax holiday” will have ended and the debtor again will be required to pay council tax, so the I&E will show no consequent surplus. Therefore, as far as I can see the Protocol STC do not provide for the Supervisor to recover any surplus arising from a decrease in expenditure in the first year of the IVA. Of course, this does not take into consideration the terms of the Proposal itself (or any variations in the standard, or any modified, terms) and the debtor can always offer the unexpected surplus to the Supervisor, which one would hope would go down well with the IVA creditors.

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For background on the judgment itself, you might like to take a look at my earlier post – http://wp.me/p2FU2Z-5U – or R3’s Technical Bulletin 107.1.

(UPDATE 25/08/14: for another perspective, I recommend Debt Camel’s blog: http://debtcamel.co.uk/council-tax-insolvency/.  Sara highlights the difference in DROs (I think the reason this decision has no effect on DROs is because the remainder of the year’s council tax is a contingent liability and as such is not a qualifying debt for DRO purposes) and the possibility of debtors putting in formal complaints if the council does not acknowledge the effect of this decision.)


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IVAs: survival of trusts and breach processes – are they successfully addressed by the R3 or Protocol Standard Terms?

With the inaudible release of R3’s revised Standard Terms & Conditions (“STC”) for IVAs and the revised IVA Protocol effective from 1 March 2013 (albeit that the STC have been out since July 2012), I thought it was timely to express my personal views on the STCs and particularly on areas where I feel they are limited and therefore where the Proposals should take over.

R3’s revised STC are located at: http://www.r3.org.uk/media/documents/technical_library/IVA%20Standard%20Terms/IVA_standard_terms_version_3_web_version.pdf

The IVA Protocol and STC can be found at: http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/policychange/foum2007/plenarymeeting.htm

Bill Burch has done a great job of examining R3’s revised STC and has blogged on all the changes from the last version: http://complianceoncall.blogspot.co.uk/2013/02/hot-news-revised-r3-standard-terms-for.html. Over the past year, I had heard rumours of a revision being under way and I now regret not lobbying R3 for some more extensive changes. Thus, whilst it could be said that I only have myself to blame, it won’t stop me whinging about the fact that the issues that I’ve always had with the R3 STC remain unchanged in the current version. I have to say, however, that the two main issues I have are not unique to R3’s STC – in my view, the Protocol’s STC are equally, albeit differently, deficient – and, of course, they can be overcome by careful additions to the IVA Proposal itself, which takes precedence whether R3’s or the Protocol’s STC are used.

Trust Assets

R3’s STC state (paragraph 28(3)) that the trusts (also defined by the STC) survive the IVA’s termination and the assets shall be got in and realised by the Supervisor and any proceeds applied and distributed in accordance with the terms of the Arrangement. The Protocol STC are silent on whether the trusts (defined similarly to the R3 STC) survive, so (unless the IVA Proposal itself covers this), presumably in accordance with NT Gallagher, they usually do.

Does an IP really want to remain responsible for realising assets once an IVA has failed? Wouldn’t it be better to leave it to a subsequently-appointed Trustee in Bankruptcy? Perhaps an example of what might happen might help demonstrate the issues…

An IVA is based on five years contribution from income plus equity release from the debtor’s home in the final year. In year one, the IVA fails through non-payment of monthly contributions. What responsibilities does the (former) Supervisor have to deal with the debtor’s home? I believe it all depends on whether the house is described in the Proposal as an excluded or included asset. If the house is not an excluded asset, then the IP can find that he/she is responsible for realising any equity in the property, which now may be all the debtor’s interest in the property, not the 85% envisaged by the Protocol, and I doubt that the IP can assume that he/she can wait a few years before realising the interest, as per the original Proposal.

If funds related to property equity are included in an IVA, it usually seems that the property (or at least the debtor’s interest in it) is described as an included asset – and the Protocol’s equity clause seems to lead to this conclusion. Would it not be better for such IVA Proposals to define the property/interest as an excluded asset and simply provide that a sum equal to (rather than “representing”) 85% of the interest will be contributed to the Arrangement in Year 5? That way, at least the IP does not find he has to realise the property/interest as a trustee (with a little “t”), which could be more troublesome than if he handled it under the statutory framework as a Trustee in Bankruptcy. Then again, no bond… no annual reports… no S283A..? It could be quite liberating!

The absence of a post-termination trust provision in the Protocol creates another difficulty for IPs acting as trustees of an NT Gallagher trust. As the R3/authorising bodies’ guidance on Paymex explained, the Protocol STC do not provide for any fees to be paid under a closed IVA trust (whereas R3’s STC do), so, unless the Proposal itself addresses this, the IP acting as a trustee on termination of an IVA must seek creditors’ approval to his/her fees for so acting and may only deduct such fees from the dividend payable to consenting creditors.

Thus, I feel it is important for IPs to ensure that they do not rely solely on the STC to deal with any trusts, but ensure that Proposals themselves are worded satisfactorily.

Breach Process

Both R3 and the Protocol provide for the Supervisor to serve notice on a debtor who fails to meet his/her obligations under the Arrangement and allows some time (R3 STC allows one to two months; the Protocol allows one to three months) for the debtor to remedy the breach.

As Bill Burch has identified, the R3 terms (paragraph 71(1)) now appear to accommodate a scenario where the Supervisor has already petitioned for the debtor’s bankruptcy before he/she serves notice of breach, however it seems that the terms do not provide for the Supervisor to present a petition under any circumstance other than after the creditors have so resolved after the notice of breach process has been followed. There is a provision at paragraph 15(2), which seems to give the Supervisor power to act on directions given by “the majority or the most material of creditors”, although it would be an odd circumstance if an IP used this to move swiftly to a bankruptcy petition.

The Protocol’s STC seem a little more practical to me; at least they provide for the Supervisor to terminate the Arrangement if requested by the debtor (paragraph 9(6)). Thus, if the debtor simply wants to walk away from the ongoing commitments of the IVA, there is a swift way of bringing it to a conclusion. Without this clause, i.e. as per R3’s STC, it seems to me that, even if the debtor has no intention of remedying the breach, the Supervisor has to go through the rigmarole of serving notice of breach, waiting a month, then calling a creditors’ meeting to reach agreement as to what to do next. And what happens if the creditors’ meeting is inquorate? Under R3’s terms, the Supervisor does not appear to be authorised to terminate the Arrangement; and under the Protocol STC, I also feel it is tricky for the Supervisor, as under paragraph 9(5), the Supervisor can issue a certificate of termination or seek creditors’ views, so again I am not sure what options are left for the Supervisor on an inquorate meeting.

Minor flaws in the R3 STC

Bill has picked up on many of the STC typos and minor flaws, such as references to filings at Court, which are now only required for Interim Order IVAs following the 2010 Rules. He has also spotted – and I will repeat here for emphasis – that R3’s STC (paragraph 13(2)) seek to address the issue of the powers of Joint Supervisors, despite the fact that the 2010 Rules changed R5.25(1) so that a resolution must now be taken on this matter, i.e. a separate resolution from approval of the Proposal itself.

I also noted that R3’s STC have not been updated to reflect the 2005 Rules, which changed Rule 11.13 regarding the calculation of a dividend on a debt payable at a future time. I guess there is nothing wrong with IVAs using the pre-2005 formula, but I would have thought it would make sense to follow the bankruptcy standard.

I note that R3 has changed the majority required for variations – understandably from an excess of three-quarters to simply three-quarters or more (paragraph 65(2)) – but, I ask myself, why not have a simple majority for variations? And why add in for variations the R5.23(4) condition regarding associates’ votes? Why not follow the Protocol’s process of a simple majority to pass variations? 08/04/13 EDIT: Please note that there is an apparently widely-held view that the Protocol STCs provide for a 75% majority for the approval of variations – see blog post http://wp.me/p2FU2Z-2K.

A final techy flaw: both R3 (paragraph 71(2)) and the Protocol STC (paragraph 9(2) and (4)) continue to reference the old-style Supervisor reports on the progress and efficacy of the Arrangement, per the old R5.31, which has now been replaced by R5.31A.

Minor flaws in the IVA Protocol STC

The minor issues I have with the Protocol STC appear to have been created by the addition of terms over the years, resulting in some inconsistent treatments.

Paragraph 8(8) states that creditors must be informed within 3 months of the Supervisor agreeing a payment break with the debtor. Why the urgency, given that paragraph 9(2) states that creditors need only be told of the generation of more than 3 months’ arrears of contributions, which I would think is of more concern to creditors, in the next progress report?

Paragraph 10(9) states that the Supervisor may call a creditors’ meeting to consider what action should be taken when he/she fails to reach an agreement with the debtor regarding the treatment of “additional income”. That paragraph states that “any such creditors meeting should be convened within 30 days of the Supervisor’s review of your annual financial circumstances”, however paragraph 8(5) states that the debtor must report additional income to the Supervisor when it arises. This means that, if the Supervisor wants to call a creditors’ meeting regarding additional income arising outside of the Supervisor’s annual review, he/she may have a long time to wait!

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Despite these issues, I echo Bill’s sentiment: to err is human… although between us all we might get a little closer to perfection.