Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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The revised SIP3.1 (part 2): will it improve debtors’ experiences?

This is my second post on the changes introduced by the revised SIP3.1.  In this post, I examine how the SIP affects the IVA journey through the Nominee to Supervisor and on to closure.  I end with a quick summary of all the key document changes required by the revised SIP.

As mentioned in part 1, please bear in mind that these posts focus on the main changes.  Particularly depending on your own templates and procedures, the revisions may affect you in other ways.  This is no substitute for scrutinising the SIP for yourself.

The topics covered in this blog post are:

  • Elevating the need to communicate with affected third parties
  • Pre-IVA investigations relaxed?
  • Signposting creditors
  • Thirteen items added or changed on the Proposal wishlist
  • Additional steps for modifications
  • Six additions or changes to the Supervisor’s duties
  • Will all this help improve IVA standards and, importantly, the debtor’s experience?
  • Finally, a quick summary of document templates affected by the new SIP

Dealing with third parties

The SIP contains a couple of new requirements about how we should be dealing with third parties:

  • IPs need to maintain records of “considerations of the impact of the IVA on any third parties, including any joint creditors, guarantors or co-owners of property” at all stages of the IVA (para 15b)
  • IPs need procedures to ensure that “consent is obtained, where appropriate, from any third-party individuals whose income is to be shown as included in the income and expenditure statement or who have an interest in any assets included in the proposal” (para 16f)

In my experience, it has been rare (maybe too rare) for only one person in a couple to propose an IVA, but in those circumstances there is a need to communicate directly with the other party where they have interests in assets or the household income or they share liabilities.

The SIP also includes that “any third party contributor’s identity [should be] checked and verified and all evidence is kept on the file” (para 18f) – this was previously required by the RPBs, albeit only appearing in their AML “guidance”.  The SIP extends this requirement also to verifying the debtor’s identity, but as this is clearly required by the MLR17, I am not quite sure why it has been considered necessary for a SIP.

A relaxed requirement?

It is very unusual for a SIP to be revised to ease requirements.  This SIP3.1 appears to have done that as regards exploring the debtor’s assets, liabilities, income and expenditure:

  • The old SIP3.1 required “proportionate investigations into and verification of” these items
  • The new SIP3.1 merely requires “proportionate enquiries” to be undertaken and evidenced on the file (para 18f)

Duties to creditors

An IP’s procedures are required to ensure that:

  • “where creditors might need assistance in understanding the consequences of an IVA, the insolvency practitioner signposts sources of help” (para 18g)

While it might be useful to add to your initial letter to creditors something to achieve this, this paragraph actually appears under the heading, “Preparing for an IVA”, i.e. before issuing the Proposal, so it might be difficult to put safeguards into place to ensure this is met, as any pre-Proposal exchanges with creditors will be pretty bespoke.

Anyway, where would you send such creditors?  Who other than a solicitor would be well-placed to assist a creditor in understanding the consequences of an IVA?

Finally, the Proposal!

By the time we get to the SIP’s Proposal section, I think we all realise that the concept of SIPs being principles-based and not prescriptive has gone out of the window.

Here is a list of the main additions to the Proposal wishlist (para 21):

  • “the alternative options considered both outside and within formal insolvency procedures, with specific reasons for not adopting them”
    • This seems odd for an IVA Proposal – you wouldn’t put in a contract why the parties have decided not to contract with competitors – but hey ho.
  • “where relevant, information to support any profit and cash projections, subject to any commercial sensitivity”
  • “an explanation of the role and powers of the supervisor”
    • … in addition to “the functions of the supervisor” (R8.3k)..?
  • “details of any discussions which have taken place with key creditors”
  • “where it is proposed that certain creditors are to be treated differently, an explanation as to which creditors are affected, how and why, in a manner which aims to be clear and useful”
  • “an explanation of how debts are to be valued for voting purposes, in particular where the creditors include long-term or contingent liabilities”
    • More SIP3.2 spill-overs (sigh!)
  • “whether the source [of any referral of the debtor] undertook the regulated activity of debt counselling, and if so whether the source is FCA authorised or exempt in relation to debt counselling…”
    • As mentioned earlier, this seems to require IPs to have an in-depth knowledge of the FCA’s authorisation regime and regulations including its distinction between advice and information.  The PERG section of the FCA’s handbook has much to say on this topic.
  • “… and details of any prior relationship between the source and the debtor or the insolvency practitioner”
    • It seems odd that this was not extended to encompass the referrer’s relationship with the firm.
  • where any payment has been, or is proposed to be, made to the referrer, an explanation of “how it represents value for the work/services provided to the insolvency practitioner”
  • “details of any direct or indirect payments made, or to be made, to any third parties or associates in connection with the proposed IVA, together with a description of the goods or services provided and the reasons for all payments”
    • This is pretty-much the old SIP’s words but in a different order.  I think this is now clearer in requiring disclosure of payments from sources other than the IVA estate (e.g. from the IP’s firm), although I think it could be difficult to enforce.
  • “an explanation of how debts that are proposed to be compromised will be treated should the IVA fail”
  • “the circumstances in which the IVA might conclude or fail, including what might happen to the debtor in such circumstances”
    • I’m assuming they only mean what might happen to the debtor if the IVA fails, not if it concludes (successfully).  But even this is asking a lot, isn’t it?
  • “any specifically identifiable risks of failure applicable to the IVA”

If any of these new (or any other) items on the Proposal wishlist are “not detailed in full”, the SIP requires “adequate explanations” to be provided (para 21).  I am not sure how one measures what might be an adequate explanation!

As with the Initial Advice wishlist, although many of these may already be covered in your Proposal template, I think you would do well to double-check that the template hits the mark in all aspects.

In addition, the SIP states that, “if the IVA Protocol has been used to form the basis of an IVA proposal, any deviations from the Protocol should be explained in writing to the debtor and their creditors” (para 20), although this need not form part of the Proposal itself.

Handling modifications

The SIP has changed in respect of the Nominee’s duties on receiving creditors’ modifications (para 22):

  • when the Nominee seeks the debtor’s consent to any modifications, their explanation should “include the preparation of revised comparative outcome statements showing the effects of the modifications if agreement to them is a reasonable prospect and will change the outcome”
  • “where any conflicting modifications are proposed, the prevailing adaptations, i.e. those agreed by debtor and supported by a 75% majority of creditors, are identified and recorded by the nominee”
    • I thought I understood what was meant by “prevailing adaptations”, but the “i.e.” threw me.  The “i.e.” just means the mods agreed by debtors and creditors need to be recorded.  But “prevailing adaptations” where there are conflicting mods means much more, doesn’t it?  Doesn’t it mean that, if one creditor caps fees at £3,000 and another caps them at £2,000, and both mods are agreed by debtor/creditors, then the “prevailing adaptation” is that the fees are capped at £2,000?  Of course, that’s a straightforward clash of mods. There could be many complex conflicts presented by agreed mods and the “prevailing adaptations” could depend on one’s priorities, but I don’t think the SIP makes clear what is required.
  • “the debtor’s consent to agreed modifications is recorded and in the absence of the debtor’s consent, the IVA cannot proceed in a modified form”
    • The wording here is slightly changed from the previous SIP.  The change is rather subtle, but I think it means that the debtor’s agreement must be recorded by the start of the IVA – otherwise it cannot proceed – rather than staff contacting the debtor after the creditors’ decision has been made in order to record the debtor’s agreement.

Finally, the IVA!

The SIP contains a few more additions for Supervisors (para 23):

  • Supervisors should “obtain the debtor’s written consent to any variations to the original terms of the IVA proposal put forward by creditors”
    • This is odd: how many variations are “put forward by creditors”??
  • Reports must provide full disclosure of the IVA costs “including the cost of any work carried out by third parties and associates of the supervisor or their firm”
    • The revision removes the requirement to disclose also “any sources of income of the insolvency practitioner or the practice in relation to the case”.  But it should be remembered that, if the IP/firm/associate receives any referral fees or commission during the IVA, the Code of Ethics requires this to be paid into the estate and disclosed to creditors in any event.
  • Any increase in costs over previously reported estimates should be “explained and” reported at the next available opportunity “and in any event no later than six months after the end of the IVA”
    • Given that R8.31 requires a report within 28 days of any full implementation or termination of the IVA, I don’t understand the 6-month deadline here.  The only scenario I can think of is where the IP/firm did not realise that the IVA had expired due to the effluxion of time and so missed this statutory requirement, but does it help to add a SIP requirement seemingly allowing 6 months?
  • “Any completion certificate should be issued as soon as reasonably practicable and no later than six months after the final payment is made by the debtor, unless another requirement of the proposal makes this impossible”
  • “The effect of completion or failure should be reported to the debtor and their creditors”
  • “When the IVA concludes or fails, the supervisor should ensure that they act in accordance with the terms and conditions of the proposal”
    • Isn’t this like stating that an office holder needs to comply with the Act and Rules?  Then again, given that the IVA Standing Committee and the Insolvency Service published expectations during the pandemic that Supervisors would not act in accordance with IVA Proposals’ terms, maybe it did need saying!

Will the new SIP improve the delivery standards of IVAs?

My overriding feeling is that the RPBs have seen a number of practices that they don’t like and they have sought to outlaw them by means of this SIP.  The only problem is that, if you don’t know what the bad practices are, it can be difficult to discern exactly how the RPBs expect you to implement the changes. 

When I asked one RPB staff member to explain some elements of the SIP, their explanations often were: what we don’t want to see is […]  I haven’t repeated them here, as they are only one person’s point of view and I suspect that other RPB monitors will measure compliance success or failure differently in the future.  I’m not sure it would be appropriate to publish a list of bad practices and, having had to roll with the RPBs’ FAQs on the last revision of SIP9, I definitely don’t want to suggest that the RPBs follow up with additional guidance on how to implement SIP3.1.  But it doesn’t stop me feeling that the SIP has left plenty of room for goalposts to move in the future.

What about the debtor?

Finally, I think we should spare a thought for the person at the centre of IVAs: the debtor.  While I accept that there are poor practices out there, I am not persuaded that they will be eliminated by requiring IPs to throw yet more information to debtors. 

I am surprised that many of the known poor practices were not capable of being addressed with reference to the principles of the old SIP3.1 and the Code of Ethics.  And I am not convinced that the new SIP will silence those who believe that pre-IVA advice would be better regulated by the FCA.  I suspect this debate will run and run.

A list for compliance managers

To summarise my two blog posts, here’s a short list of documents that needed to be amended – or at the very least double-checked to ensure that you were ahead of the curve – in light of the revised SIP:

  • Initial meeting script/record
  • Initial advice letter / engagement letter
  • Internal docs to record SIP3.1 Assessments (both pre and post-approval of IVA)
  • Internal docs and processes to explore advice given by any referrer and their authority for giving the advice
  • Letters to third party contributors and other third parties affected
  • Letters to non-IVA partners where household income & expenditures are to be disclosed
  • Vulnerability checklists
  • Proposal doc
  • Nominee report (depending on the extent that the report explains the roles and the extent of investigations)
  • Letters to creditors (redefining the adviser’s role and signposting sources of help)
  • Communications with the debtor about proposed modifications
  • Progress reports
  • Final reports and any covering letters explaining the effects of the end of the IVA
  • Checklists (of course!)


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The revised SIP3.1: is longer better?

The new SIP3.1 has c.1,300 more words than the old SIP.  That means it’s around 72% longer than its predecessor.  Inevitably, the new SIP involves additional prescriptive requirements on IPs and delivery of yet more words to debtors and creditors. 

Will the changes improve the standards of advice and IVAs?  How can you make sure that you’ve taken account of all the changes introduced by the revised SIP?

The revised SIP3.1, effective for IVAs where the nominee was appointed on or after 1 March 2023, is available from https://www.r3.org.uk/technical-library/england-wales/sips/more/29119/page/1/sip-3-voluntary-arrangements/

In this blog post, I look at:

  • A change in the role of adviser
  • Must all advice be tailored to the debtor?
  • The need to give more information on rejected options
  • Eleven new items added to the initial advice
  • How much time should debtors be given to absorb advice?
  • Vulnerability makes an appearance
  • A greater emphasis on documented assessments
  • What is an “in-person” meeting?
  • Substantial changes to processes where a debtor has been referred, especially where any advice has previously been given

In the next post, I will be working through the rest of the SIP, including new duties on Nominees and Supervisors.

Please note that, while I have attempted to cover the main changes in the SIP, there are several others not covered in my blogs – I think my posts are long enough already!  Therefore, you will need to scrutinise the SIP yourself to ensure that you have addressed all the requirements.

If you’d like to absorb all this in another medium, you might want to try out Jo Harris’ webinars on the subject.  Drop a line to info@thecompliancealliance.com to learn more.

Initial Advice

For whom is the IP acting?

I had always believed that, before acting as nominee, the firm’s primary role was to provide advice to the debtor.  The firm’s engagement is with the debtor and, I thought, the regulators were concerned to ensure that firms acted in the interests of debtors – the old SIP3.1 did state that this was the role of the adviser.

Para 16a of the new SIP redefines the role of the firm in the advice stage to:

  • “providing advice that strikes a fair balance between the interests of the debtor and their creditors”

Doesn’t this conflict with how the FCA would expect firms to deliver debt counselling to consumers?  For example, if a debtor would be better-off financially going bankrupt and in reality there are no real downsides for them in going bankrupt, is it appropriate for an adviser to say: ah yes, but if you paid into an IVA for 5 years, this would be fairer to your creditors, wouldn’t it?

Generic -v- specific information

The SIP states that IPs “should minimise generic explanations and instead provide bespoke advice tailored to the debtor’s circumstances” (para 11) but also that IPs “should avoid using generic advantages and disadvantages and should use the details provided by the debtor to provide bespoke information tailored to the debtor’s circumstances” (para 17).

So: minimise or avoid?

Many pros and cons of the options available apply in all circumstances.  For example, DROs and bankruptcies cost the same for everyone; a DMP can never be guaranteed to freeze all interest and charges; and no IVA will take effect unless 75% or more of creditors by value approves it.  Does this make the information generic?  Or does it just mean that no specific tailoring is required?

Of course, several other pros and cons do depend on the debtor’s circumstances, e.g. whether or not their occupation could be affected, how their home will be handled, whether an option can or will realistically deal with their debts and over what likely period. 

I think that most firms’ procedures were already designed to deal with the big debtor-specific issues.  However, in the past when advisers followed a script that rattled through each option, those details were often generic, including wriggle words such as: some occupations can be affected by bankruptcy.  Also, when that advice was put down in writing, it tended to be yet more generic, largely relying on standard guide attachments detailing all options.

Now this will not do.  Telephone/meeting advice must be specifically tailored so that pros and cons that do not apply to the debtor are omitted and so that the debtor can make realistic comparisons of their options.  The “bespoke information tailored to the debtor’s circumstances” must also be confirmed in writing (para 17).

All “available” or “potential” options?

In some respects, the SIP’s requirement to cover the options has not changed.  It still says that debtors must be “provided with an explanation of all the options available, the advantages and disadvantages of each, and the likely cost of each” (para 16g).  In the past, this has been interpreted to mean, e.g., that if a DRO is not available to the debtor because they do not meet the criteria, then no more information on DROs needs to be provided to the debtor.

However, this seems no longer to be the case.  Paras 4 and 5 require explanations to cover “all potential debt relief solutions” and under “Preparing for an IVA” the SIP states that the debtor needs to have had appropriate advice “including other options which have been discussed and discounted” (para 18a).  “Discount” is a peculiar word to use, but these paras suggest to me that all potential options available to debtors in general should be covered with specific information about why an option may not be open to the debtor in question.

Something that I have seen work quite well but is by no means universal is where the initial advice gives an estimate of the time it would take to discharge all debts via a DMP.  This is bespoke advice and usually helps to illustrate why the debtor has chosen not to pursue a DMP.  I think it is also “comprehensible to the debtor”, which is another new requirement of SIP3.1 (para 10).

New items to add to initial advice scripts and letters

There are a host of other new items for initial advice scripts and letters scattered through several paragraphs in the SIP.  Here are the main changes in paras 10, 15, 16 and 18:

  • “whether the debtor will require additional specialist assistance, which will not be provided by the supervisor appointed, including the likely cost of that additional assistance, if known”
    • Although the footnote to this requirement refers to “for example, support for a vulnerable individual”, the “specialist assistance” reference appears to have originated from the SIP3.2 (CVAs) changes.  Therefore, I think it could include instructing agents or solicitors to deal with asset realisations (if this is envisaged for the IVA) or known legal issues.  It should also add transparency to any firm that outsources work or introduces unusual tasks as routine on IVAs.
  • “how [the likely duration of the IVA] might be affected by any provisions concerning the family home contained in the arrangement” 
  • “any circumstances which might affect the duration of the IVA and the potential impacts of any delays, complications or changes to the original IVA terms”
    • This is slightly different from the old SIP3.1, which only required the potential delays or complications to be explained, not their potential impacts on the IVA and particularly on its anticipated duration.
  • “the likely costs of implementation and how realisations will be applied to them”
  • that the debtor is required to provide “full, accurate and proper disclosure”
  • “explanations of any areas of concern about what the debtor has reported…” – another matter requiring special case-by-case attention – “… and of the consequences if the debtor fails to comply with their obligations”
  • “an assessment of the risk of failure”
    • Before the Proposal has even been drafted, IPs are expected to assess the risk of its failure?!  It would be fair to inform debtors that there is always a risk that creditors reject an IVA Proposal, but this would not be a failure of the IVA.  If a debtor cannot meet their core obligations, there is always the option of asking creditors to approve a variation.  Ok, there is a risk that creditors would reject the variation, but how do we assess this risk at this early stage of providing initial advice?  I suppose also that the IVA could fail if a debtor provided seriously misleading information or simply refused to cooperate, but again how are IPs supposed to assess the risk of this happening?  An RPB staff member suggested this was intended to encompass obvious changes in the debtor’s circumstances that would lead to inabilities to meet terms, e.g. looming retirement or a serious illness.  But if an IVA is considered an option for anyone, its terms surely will accommodate such events where reasonably expected and the terms should always provide for variations for unexpected events, shouldn’t they?
  • the debtor’s “right to challenge a creditors’ decision and to make a complaint via the Insolvency Complaints Gateway”
  • the SIP’s new definition of the role of the adviser – “providing advice that strikes a fair balance between the interests of the debtor and their creditors, in the context of identifying an appropriate and workable solution” to their difficulties – must be disclosed to debtors (and creditors)
  • explaining that the debtor is obliged to cooperate and provide full “and accurate” disclosure “throughout the initial process and the duration of the IVA”
  • ensuring that the debtor understands that the IVA “will involve a lengthy professional relationship with the supervisor”

While many of these may already have been covered in firms’ scripts and/or letters of advice, it is worth double-checking that those docs tick off every item including the new nuances suggested by the revised wording.  In some respects, this could be like approaching a JIEB question: there are specific trigger words that some (i.e. RPB monitors) would expect to see in your docs and, if they’re there, you get the tick.  I appreciate this is not how the RPBs want firms to approach compliance with the SIP, but, really, it is difficult to see how we can deliver the enormous prescriptive list of information in a practical, useful, way to debtors.

Providing “adequate time”

The SIP has a new principle, that debtors should be given:

  • “adequate time to think about the consequences and alternatives before an IVA proposal is drawn up” (para 4)

How much time is adequate?  Do we only learn that the time given was inadequate when someone complains that they didn’t have enough time?

Does the rest of the SIP explain application of this principle?  The only other SIP reference to time is that the explanations of options’ pros and cons etc. “should be confirmed to the debtor in writing no later than the date on which an IVA proposal is issued” (para 17).  Which IP is sending out IVA Proposals before advice letters?!

Although compliant with para 17, I would not expect that sending advice letters and IVA Proposals at the same time would meet para 4’s requirement for adequate time.  So we are no further forward in determining this.

It seems likely to me that most debtors, having decided to go with an IVA, just want to get on with it asap.  I accept that many debtors do not give as much attention to their options as they should, but you can only lead a horse to water, can’t you?

Most IVA engagement letters acknowledge consumers’ rights to a 14-day cooling-off period and provide that the debtor can instruct the firm to start work immediately.  If the debtor signs the engagement letter, does this act as confirmation that they have had adequate time?  If an engagement letter makes clear that this is what the debtor is confirming, then would this satisfy the RPBs?

Vulnerable debtors

A common criticism of the old SIP was that it did not include any duties in dealing with vulnerable debtors.  Personally, I did not see that it needed to, as this is implicit in the Ethics Code’s principles of professional behaviour, integrity, professional competence and due care.  But evidently this was not enough.

The new SIP now contains three references to vulnerability.  As explained earlier, support for vulnerable persons should be mentioned at the advice stage where additional specialist assistance will be required.  The second reference is in the context of meetings (see below).

The other mention of vulnerability appears in the “Assessment” section:

  • “whether the debtor is subject to any factors that make them vulnerable and, if so, any necessary adjustments and, subject to the debtor’s consent, an accurate record of the vulnerabilities disclosed”

Most volume providers will already have procedures and staff training in place to address debtors’ vulnerability needs and it is about time that all other firms take these measures too.  After all, IPs and their staff can encounter vulnerable people in situations other than IVAs.

SIP3.1 assessments

In my experience, this has always been an area that has been poorly documented.  The old SIP3.1 required procedures to ensure that assessments of a list of six factors are made “at each stage of the process”, i.e. at assessing the options available, preparing the IVA and implementing the IVA.  I rarely saw formal documentation of these assessments and on cases where the goalposts were moved e.g. where some horse-trading with a creditor was necessary, I rarely saw that the old SIP’s assessments, e.g. the viability of the evolving IVA when compared with other available options, had been carried out.

In addition to the vulnerability point above, the list of factors for these assessments has changed:

  • “whether the debtor is being sufficiently cooperative” has been removed
  • “whether the debtor is likely to be able to fulfil their obligations under the terms of the arrangement for its duration” has been added
  • the IVA’s prospect of being improved and implemented has changed to “successfully” implemented
  • “whether a breathing space… is needed or available” has been added to the same considerations for an interim order

The old SIP did not state explicitly that these assessments had to be documented.  The new SIP does.  It also suggests that such assessments may be “conducted by way of a” call, in which case a call recording or note of the call should be retained.

Meetings in the 21st century

The old SIP wasn’t broken as regards meeting the debtor, but it was certainly dated.  It required IPs to assess at each stage of the process whether a face-to-face meeting with the debtor was required.

“Face-to-face” has been replaced with “in-person meeting (whether a physical meeting or using conferencing technology)” (para 13).  Is “in-person” any different from “face-to-face”?  Online dictionaries appear to define them the same, i.e. the attendees must be physically present in the same place, not via the internet or telephone.

Ok, so it’s clear that the SIP uses in-person in a different way to common dictionaries and it doesn’t limit in-person to physical meetings, but what does it mean by “conferencing technology”?  A conference can be conducted by telephone, can’t it?  So, for the SIP’s purposes, does a telephone conference of just the adviser and the debtor constitute an “in-person meeting”?

Does it matter?

No, not really.  If an in-person meeting is assessed as required – for example, per SIP3.1, based on the debtor’s understanding and vulnerability – then obviously the IP/staff should request one.  If in-person excludes a telephone call but the IP/staff considers that a telephone call would be sufficient for their purposes, then this still complies with the SIP, as it merely means that the IP/staff have assessed that an in-person facetime etc. is not required.

What is important is that “all these meeting considerations and arrangements should be evidenced, documented and retained on the file”.  Therefore, it is something to add to the SIP3.1 assessments form.

Where someone else does the advising

Another historically contentious topic has been the diligence measures expected of IPs who are introduced to potential IVAs by other parties.  It seemed to me that two practices became prevalent: either the IP firm would develop relationships with introducers who they could trust to provide appropriate advice, basing that trust on direct involvement with the introducers’ processes and/or quality control measures of sample testing and mystery shopping; or the IP firm would treat the debtor as having received no advice previously, so they would start from scratch working through the SIP3.1 initial advice with the debtor. 

The new SIP makes the former approach troublesome and effectively eliminates the latter approach. 

Firstly, SIP3.1 requires IPs to “undertake sufficient due diligence on any referrer to identify whether they have advised the debtor” (para 12).  I wonder if it is considered sufficient simply to ask them.

Then, where a referrer has provided advice, para 12 requires that:

  • Contractual arrangements between the IP and the referrer “should extend to the insolvency practitioner maintaining access to all the referrer’s communications with the debtor, including call recordings or detailed written notes where calls were not recorded and transcripts of webchats or other communications were undertaken”
    • How many IPs enter into contractual arrangements with referrers?  Aren’t contracts normally with the firm?
  • “Any shortcomings in the advice… should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • This seems to require the referrer’s advice in every case to be reviewed by the IP/firm.  This is a tall order, isn’t it?  Firms are going to have to devote significant staff resources to reviewing advice given, as this could take as much time as it would to give the advice in the first place.

But can’t an IP simply ignore any advice given by the referrer and start from scratch?  This does not seem possible under the SIP, as the above are required “where advice was given by the referrer”.  It does not seem to matter if the IP chooses to rely on that advice as discharging their SIP3.1 advice duties or not.

It will be interesting to see how the referral market changes as firms start implementing the new SIP.

UPDATE 21/07/2023: Having had some exchanges with an IPA regulation staff member, I feel I should add to my comments above.  The IPA staff member explained that they do not expect the advice of the previous person to be examined every time.  Rather, the IP should have an awareness of the previous person’s advice-giving practices and policies (as well as having access to records of the advice given in any one case).  They expect IPs to have a proportionate approach to monitoring compliance and a procedure for flagging up any issues if concerns are identified.  This expectation seems to be a reactive, rather than proactive, approach to examining previous advice, e.g. taking steps if complaints are received or if communication with a debtor suggests a misunderstanding.  If flaws are identified, the remedy could be to start from scratch in providing appropriate advice, but if this becomes commonplace where a particular introducer’s advice is encountered, then the expectation is that the IP would consider whether they should discontinue receiving introductions from that source.

What about referrers’ FCA authorisations?

Over the years, the RPBs have grappled with the question of whose responsibility it is to police the FCA authorisations of IVA referrers.  The Protocol (Aug 2021) dealt with the issue unsatisfactorily, directing that IPs “should take steps to ensure” that all referrers (i.e. debt packagers and lead generators) should be FCA authorised, but it then went on to state that, if they were not authorised, the IP could simply give the advice themselves. 

To a degree, I sympathised with this approach.  After all, why should a consumer be turned away simply because they had the misfortune to encounter an unregulated introducer?

In its April 2021 members’ newsletter, the IPA published an article by the then-CEO stating:

  • “Insolvency marketing… Any introducer, or lead generator, firm that is employed by a member should be FCA regulated. The reason why we have taken this step is to respond to some evidential unscrupulous introducer activity, not compliant with how insolvency advice and solutions should work for the consumer.”

I made enquiries of IPA staff: did they truly mean this for all insolvency appointments (even corporate cases??) of IPA members and how did they enshrine this new requirement into their regulatory framework?  I learned that this was a standard on their “volume providers” only.

So I was not surprised to see some new measures in the revised SIP (para 12):

  • Where a referrer has provided advice, the IP should identify “whether [the referrers] are required to be authorised by the… FCA for debt counselling or are able to rely on an exclusion or exemption in relation to the debt advice”
    • Are we all clear on when an exclusion or when an exemption applies?  What about the difference between giving information and giving advice?  This isn’t just an internal assessment; the new SIP means that we need to know in order to draft the Proposal (see later)
  • “The referrer’s authorisation status should be evidenced, or details sufficiently documented and retained in each case”
  • “Any shortcomings in the advice, including in relation to the referrer’s authorisation, should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • What does this mean practically where there are shortcomings in relation to the referrer’s authorisation?  Does it mean that whenever a referrer does not have the correct authorisation (or exclusion or exemption), the IP simply starts from scratch in providing advice?  This would make the need to review the advice pretty pointless, wouldn’t it?  …unless IPs are being expected to do something more, e.g. report the referrer for providing advice without authorisation?  Or should IPs do this in all cases anyway, irrespective of whether there were any shortcomings in the referrer’s advice?

There’s more

In my next post, I shall look at the other changes to the SIP, particularly those affecting the IVA Proposal and the Supervisor’s duties.


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Revised R3 IVA Standard Terms: Improving with Age..?

Finally, 10 months after the 2016 Rules came into force, R3 issued 2016 Rules-adapted revised Standard Terms for IVAs. In this blog, I summarise the key changes.

Having worked on the R3 group (an inevitable consequence of saying: the work must get done!), it is difficult for me to be critical of the result. But drafting-by-committee always involves some compromises (and soooo much time!), so don’t be surprised if I slip in the odd gripe below.

The revised IVA Terms are available from the R3 website but only to logged-in R3 members, which seems odd considering the drive to go paperless for insolvency proceedings. R3’s conditions of use state that R3 members may “use” the terms, so presumably as the 2016 Rules and the Terms themselves allow delivery by website, non-members should be able to access them from R3 members’ websites over time.

While I’m on the subject of websites…

 

Website Use

The new Terms provide that Rs1.49 to 1.51 shall apply. Did the Terms need to include this? Can’t Supervisors (and Nominees) already use the 2016 Rules to deliver documents by website?

Yes, these 2016 Rules do already work for IVAs… but only for documents required under the Act or the Rules (R1.36(1)). Therefore, whilst we’ve been able to send relevant notices to wrap in website-delivery for statutory documents including the Nominee’s notice of the decision procedure to approve the IVA, progress reports and implementation/termination notices, technically the 2016 Rules do not enable website-delivery of items arising only by reason of the IVA Proposal and Terms. In other words, the methods of delivery of proposed variation decisions and outcomes are determined by the IVA Terms, not by the 2016 Rules.

The previous R3 IVA terms allowed the 2009 Rules’ process for website-delivery, i.e. by posting out a one-pager each time that something new was uploaded. The revised Terms now also allow the R1.50 process so that the despatching of one notice will enable all future documents to be uploaded onto the website with no further notice. It is doubtful that this will help when seeking a variation, but it may help with the next – new – requirement…

 

Reporting Outcomes

Where a meeting was held during the period of an IVA, the old terms required a list of creditors voting to be sent with “the chairman’s report to Creditors, the Debtor and the Court”. This was a bit odd, because firstly of course there was no requirement to send any report on meetings during an IVA to the Court. But secondly, what was “the chairman’s report”? The rules defined a chairman’s report arising from the meeting to vote on the IVA Proposal, but there were no rules or terms to define such a report for meetings after approval. Another oddity of the old terms was that there was no requirement to report to creditors on the outcome of a postal resolution.

The revised Terms plug these gaps… although not in a low-cost way. Term 69 follows the 2016 Rules’ model of “records of decisions”, which for meetings are in the form of minutes and which show how creditors voted on the decisions. Separately, Term 69 requires a list of creditors who participated and the amounts of their claims. The revised Terms require the “record of decision” to be sent to the creditors and the debtor.

This seems a little onerous and a departure from the 2016 Rules as regards decisions taken during the course of an insolvency process, where rarely is a post-decision circulation required. Couldn’t the decision outcome be delivered by a simple one-liner? Is a copy of the full record of decision/minutes really necessary? Well, it would appear so if creditors are able to exercise their rights under the Terms to appeal a decision (Term 65) or to “complain” about being excluded from a virtual meeting, which is a new right transferred in from the 2016 Rules (Term 62(7)).

As mentioned above, though, at least Supervisors may now use websites to deliver such documents easily… and it has since been pointed out to me that there is no timescale on this delivery.

 

Decision Procedures

I joined the working group thinking that we had an opportunity to take the good bits from the 2016 Rules and leave the bad. This didn’t mean that I was keen on making life easy for IPs while running rough-shod over measures designed to improve matters for the debtors and creditors. It’s just that I think we all know what works in the 2016 Rules, what balances well the objectives of reducing costs and engaging stakeholders, so why could we not learn from our early experiences of the 2016 Rules and design new Terms to improve on them?

For example, if an IP feels that a physical meeting would be the best forum in a particular case, why can’t s/he decide to summon one? Even the Insolvency Service has suggested that for other insolvency proceedings IPs might ring around creditors before notices are sent and encourage them to ask for a physical meeting. So why not design the Terms so that we can avoid this charade?

Regrettably, I was outvoted on this point as well as some other 2016 Rules that found their way into the revised Terms.

The revised Terms incorporate the following now-familiar Rules:

  • A physical meeting may only be convened if 10/10/10 creditors ask for one (Term 61(2) and (3))
  • The 2016 Rules on the creditors’ power to requisition a decision (i.e. out of the blue) generally have been replicated (Term 61(4) and 63).
  • A notice of decision procedure compliant as far as applicable with R15.8 must be issued (Term 62(2)) – note: this must be sent even if it is a vote-by-correspondence (I have seen a number of IPs omit this notice in other insolvency proceedings)
  • Other 2016 Rules on the decision procedures should be followed, e.g. the timescale for convening a physical meeting after receiving requests (Term 62(2))
  • Once a vote has been cast in a non-meeting procedure, it cannot be changed (Term 64(4))
  • As mentioned above, the 2016 Rules on excluded persons apply (Term 62(7))

But on the other hand, some departures from the 2016 Rules have been made:

  • The deemed consent process has not been transported into the Terms – it was felt that, as an IVA is effectively an agreement between the debtor and their creditors, silence-means-approval was an inappropriate way to make changes to it
  • Meetings must still be held between 10am and 4pm on a business day (Term 62(4)) (personally, I thought that IPs could be trusted to convene meetings at a sensible time such that this prescription was unnecessary – oh well)

But I guess we should be grateful for small mercies: at least we don’t need to invite creditors to form a committee every time!

 

The Debtor’s Involvement

Some changes in the Terms regarding the level of involvement of the debtor in the process may come as a surprise:

  • Notice of a meeting is no longer required to be sent to the debtor (unlike in bankruptcy – R15.14(2)/(3))
  • Debtors may request a decision (Term 61(6)), but the Supervisor need only convene a decision procedure if s/he considers it is a reasonable request
  • The Terms no longer allow the debtor to inspect proofs (Term 36)

Despite these changes, of course it must be remembered that the debtor’s participation in the IVA process, which is intended to achieve a fair outcome for all, is fundamental and crucial.

 

The Trust Clause

We all know about the Green v Wright fun-and-games, which decided that, notwithstanding that a debtor had met all their obligations under the IVA that had concluded successfully, when an asset emerged later that would have been caught by the IVA had it been known about at the time, such an asset was caught by the enduring trust.

Is this practical for cases generally? For example, how do you revive cases long-ago completed? What if you’ve destroyed the file? What if the former Supervisor has left the firm? What if they are no longer licensed?

Is this fair for cases generally? It seems fair in a bankruptcy scenario, which was how the judge came to the decision, but in an IVA where an agreement is reached with creditors (provided of course that the debtor has been entirely open and honest in formulating the Proposal), the debtor meets their side of the bargain and the creditors get what they were expecting, shouldn’t that be the end of it?

As R3’s covering note explained, on consulting with major creditor groups, it seemed that they generally were comfortable with such finality. On the whole, avoiding Green v Wright trusts capturing unknown unknowns seemed like a popular idea.

The new Terms introduce the Trust Realisation Period. This period continues after the expiry, full implementation or termination of the IVA, if there remain (known) assets included in the IVA Proposal that remain to be realised and distributed. Therefore, in theory if unknown assets emerge before the Trust Realisation Period ends, they could be caught by the trust. However, the Terms are designed so that, once the Trust Realisation Period ends, the trusts end, so any unknown assets emerging after this point should not be caught by a trust.

The new Terms also change the position on the debtor’s bankruptcy. In this case, any assets already got in or realised by the Supervisor remain for distribution to the IVA creditors, but any other assets that were caught by the IVA are freed from the trust, so as not to disturb the vesting of the bankruptcy estate in the Trustee in Bankruptcy.

 

Other Good Bits

The new Terms improve on some other areas that previously didn’t quite work:

  • Previously, a meeting could be adjourned again and again (as long as there were no more than 21 days between adjournments). Now, adjournments have a long-stop date of 14 days from the original meeting date (Term 68(3))
  • The process for a Joint Supervisor to resign has been simplified: no longer does there need to be a meeting to seek creditors’ approval of the resignation, but now all that is needed is for the Joint Supervisor’s resignation to be notified to creditors in the next progress report (Term 18(3))
  • Debts of £1,000 or less may be admitted for a dividend without the delivery of a proof (Term 39(4)). The new Terms do not prescribe how Supervisors should deliver this message to such creditors, but it would seem sensible to me for the Supervisor to follow something akin to the 2016 Rules’ process of notifying such creditors when issuing the Notice of Intended Dividend so that these creditors know how much their claim is going to be admitted for absent a proof and the timescale for submitting a proof for a different amount, if they so wish. As in the 2016 Rules, this Term does not mean that Supervisors must admit small debts – they remain in full control of whether to exercise this power.

 

On the whole, I think the new Terms are an improvement, especially now that the 2016 Rules’ Decision Procedures have bedded in generally. Of course, the odd flaw or ambiguity will always take us by surprise. But hopefully Version 4 will serve us well for a few years yet.


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Regulatory Hot Topics: (1) the SIPs

4017 Uluru

Last month, I conducted a webinar for R3 with Matthew Peat, senior compliance officer with ACCA, entitled Regulatory Hot Topics.  The aim was to highlight some areas that we both had seen some IPs stumble over.  I thought there might be value in summarising some of the issues we covered.  In this post, I cover just the SIPs.

SIP2 – Investigations by Office Holders in Administrations and Insolvent Liquidations

Some firms are using checklists that are not well-designed for the task of carrying out a SIP2 investigation.  In particular:

  • Checklists should reflect the fundamental difference between a SIP2 investigation and considering matters of relevance for a D-report/return. SIP2 requires the administrator/liquidator to consider whether there may be any prospect of recovery in relation to antecedent transactions.
  • Checklists should guide you through the SIP2 requirement of conducting an initial assessment on all cases and then moving on to making a decision on what further work, if any, is merited.
  • Checklists should help you meet the SIP2 requirement to document findings, considerations and conclusions reached.

Other recommendations include:

  • Make collection of books and records a priority in the early days of an appointment.
  • SIP2 also requires the outcome of the initial assessment to be reported to creditors in the next progress report.  Although there is an obvious tension between full disclosure and keeping one’s powder dry for progressing any claims, it is not sufficient to report in every case that all investigations are confidential, remembering that SIP2 is not referring to D-reporting matters. If nothing has been revealed that might lead to a potential recovery, this should be reported; if something has been identified, then some thought will need to be given as to what can be disclosed.

SIP3.1 & SIP3.2 – IVAs & CVAs

The “new” SIPs have been in force now for eight months, so all work should now have been done to adapt processes to the new requirements.  In particular, the SIPs require “procedures in place to ensure”, which is achieved more often by clear and evidenced internal processes.  It is also arguable that, even if particular problems have not appeared on the cases reviewed on a monitoring visit, you could still come in for criticism if the procedures themselves would not ensure that an issue were dealt with properly if it arose.

The SIPs require assessments to be made “at each stage of the process”, i.e. when acting as adviser, preparing the proposal, acting as Nominee, and acting as Supervisor.  At each stage, files need to evidence consideration of questions such as:

  • Is the VA still appropriate and viable?
  • Can I believe what I am being told and is the debtor/director going to go through with this?
  • Are necessary creditors going to support it?
  • Do the business and assets need more protection up to the approval of the VA?

The SIPs elevate the need to keep generous notes on all discussions and, in addition to the old SIP3’s meeting notes, require that all discussions with creditors/ representatives be documented.

I would recommend taking a fresh look at advice letters to ensure that every detail of SIP3.1/3.2 is addressed.  The following suggested ways of dealing with some of the SIP requirements are only indicators and do not represent a complete answer:

  • “The advantages and disadvantages of each available option”

Personally, I think the Insolvency Service’s “In Debt – Dealing with your Creditors” makes a better job at covering this item than R3’s “Is a Voluntary Arrangement right for me?” booklet, although neither will be sufficient on its own: in your advice letter, you should make application to the debtor’s personal circumstances so that they clearly understand their options.

Similarly, you can create a generic summary of a company’s options, which would be a good accompaniment to your more specific advice letter for companies contemplating a CVA.

  • “Any potential delays and complications”

This suggests to me that you should cover the possibilities of having to adjourn the meeting of creditors, if crucial modifications need to be considered.

  • “The likely duration of the IVA (or CVA)”

Mention of the IVA indicates that a vague reference to 5 years as typical for IVAs will not work; the advice letter needs to reflect the debtor’s personal circumstances.

  • “The rights of challenge to the VA and the potential consequences”

This appears to be referring to the rights under S6 and S262 regarding unfair prejudice and material irregularity.  I cannot be certain, but it would seem unlikely that the regulators expect to see these provisions in detail, but rather a plain English reference to help impress on the debtor the seriousness of being honest in the Proposal.

  • “The likely costs of each [option available] so that the solution best suited to the debtor’s circumstances can be identified”

This is a requirement only in relation to IVAs, not CVAs, and includes the provision of the likely costs of non-statutory solutions (depending, of course, on the debtor’s circumstances).

An Addendum: SIP3.3 – Trust Deeds

After the webinar, I received a question on whether similar points could be gleaned from SIP3.3, which made me feel somewhat ashamed that we’d not covered it at all.  To be fair, neither Matthew nor I has had much experience reviewing Trust Deeds, so personally I don’t feel that I can contribute much to the understanding of people working in this field, but I thought I ought to do a bit of compare-and-contrast.

An obvious difference between SIP3.3 and the VA SIPs is that the former includes far more detail and prescription regarding consideration of the debtor’s assets (especially heritable property), fees, and ending the Trust Deed.  However, setting those unique items aside, I was interested in the following comparisons:

  • The stages and roles in the process

SIP3.3 identifies only two stages/roles: advice-provision and acting as Trustee.  I appreciate that the statutory regime does involve the IP acting only in one capacity (as opposed to the two in VAs), but I am still a little surprised that there is no “right you’ve decided to enter into a Trust Deed, so now I will prepare one for you” stage.

SIP3.3 also omits reference to having procedures in place to ensure that, “at each stage of the process”, an assessment is made (SIP3.1 para 10).  Rather, SIP3.3 requires only that an assessment is made “at an appropriate stage” (SIP3.3 para 18).  Personally I prefer SIP3.3 in this regard, as I fear that SIP3.1/3.2’s stage-by-stage approach is too cumbersome and risks the assessment being rushed through by a bunch of tick-boxes, instead of considering the circumstances of each case more intelligently and purposefully.

  • The options available

There are some differences as regards the provision of information and advice on the options available, but I am not sure if this is intended to be anything more than just stylistic differences.

For example, SIP3.1 prompts for the provision of information on the advantages and disadvantages of each available option at paras 8(a) (advice), 11(a) (documentation), and 12(e) (initial advice), but SIP3.3 refers to this information only at para 20(a) (documentation).  Does this mean that IPs are not required to discuss advantages and disadvantages, but just hand over details to the debtor?

In addition, SIP3.3 does not specifically require “the likely costs of each [option]” (SIP3.1 para 12(e)).  The assessment section also does not include “the solutions available and their viability” (SIP3.1 para 10(a)); I wonder if this is because there is less opportunity in a Trust Deed to revisit the decision to go ahead with it, whereas in VAs the Proposal-preparation/Nominee stage can be lengthy giving rise to a need to revisit the decision depending on how events unfold.

Having said that, I do like SIP3.3’s addition that the IP “should be satisfied that a debtor has had adequate time to think about the consequences and alternatives before signing a Trust Deed” (para 34).

  • Additional requirements

Other items listed in SIP3.3 that an IP needs to deal with pre-Trust Deed (for which there appears to be no direct comparison with SIP3.1/3.2) include:

  1. Advise in the initial circular to creditors, the procedure for objections (para 9);
  2. Assess whether the debtor is being honest and open (para 18(a));
  3. Assess the attitude (as opposed to the likely attitude in SIP3.1/3.2) of any key creditors and of the general body of creditors (para 18(c));
  4. Maintain records of the way in which any issues raised have been resolved (para 20(d));
  5. Summaries of material discussions/information should be sent to the debtor (para 20) (in IVAs, this need be done only if the IP considers it appropriate); and
  6. Advise the debtor that it is an offence to make false representations or to conceal assets or to commit any other fraud for the purpose of obtaining creditor approval to the Trust Deed (para 24).

 

SIP9 – Payments to Insolvency Office Holders and their Associates

The SIP9 requirement to “provide an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed” fits in well with the statutory requirements governing most progress reports as regards reporting on progress in the review period.  Thus, although it often will be appropriate to provide context by explaining some events that occurred before the review period, try to avoid regurgitating lots of historic information and make it clear what actually occurred in the review period.

In addition, in order to meet the SIP9 principle, it would be valuable to reflect on the time costs incurred and the narrative of any progress report.  For example:

  • If time costs totalling £30,000 have been incurred making book debt recoveries of £20,000, why is that?       Are there some difficult debts still being pursued? Or perhaps you are prepared to take the hit on time costs. If these are the case, explain the position in the report.
  • If the time costs for trading-on exceed any profit earned, explain the circumstances: perhaps the ongoing trading ensured that the business/asset realisations were far greater than would have been the case otherwise; or perhaps something unexpected scuppered ongoing trading, which had been projected to be more successful.
  • If a large proportion of time costs is categorised under Admin & Planning, provide more information of the significant matters dealt with in this category, for example statutory reporting.

Other SIP9 reminders include:

  • If you are directing creditors to Guides to Fees appearing online, make sure that the link has not become obsolete and that it relates directly to the Guide, rather than to a home or section page.
  • Make sure that the Guide to Fees referenced (or enclosed) in a creditors’ circular is the appropriate one for the case type and the appointment date.
  • Make sure that reference is made to the location of the Guide to Fees (or it is enclosed) in, not only the first communication with creditors, but also in all subsequent reports.

 

In future posts, I’ll cover some points on the Insolvency Code of Ethics, case progression, technical issues in Administrations, and some tips on how monitors might review time costs.


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“Ransom” Payments – seeing things from the other side

4609 Sydney

 

I’m sure that your hackles were raised when you last heard IPs described as seeing a distressed debtor only as an opportunity to make money.  Many of the suppliers’ responses to last year’s consultation on proposed Essential Supplies legislation struck a similar chord.

In this post, I take a look at some of the more persuasive consultation responses as well as the emerging Insolvency (Protection of Essential Supplies) Order 2015, set to come into force on 1 October 2015.

The consultation responses and the draft Order can be found at: http://goo.gl/N4Tg3c

The government press release is at: http://goo.gl/Ta0KOw

 

Energy Suppliers

The key issue for most suppliers is that supplying to an unpredictable business, such as one administered by an office holder in an insolvency situation, could end up as seriously loss-making for them.  Not knowing for how long or how much energy an insolvent business is going to need carries huge consequences for suppliers, as they have to purchase (or sell excess) power on short term markets that trade at very different prices.  If the supplier cannot pass at least some of this cost to the customer, they will be trading at a significant loss.

Some suppliers referred to the “deemed contract rates”, which apply to supplies where a contract is not in existence and thus applies in some cases where an IP does not agree to a post-appointment contract.  These rates inevitably are higher than contract rates as the consumer can switch to another supplier at any moment, and thus some suppliers took exception to the suggestion that these, as well as other post-insolvency changes to manage risks, such as requiring more frequent payments or upfront deposits, in effect are “ransom” payments.

Many respondents predicted that, if they were prohibited from taking action on formal insolvency, suppliers might take precipitative action when a business shows signs of financial distress.  Others felt that the increased risks would be shared by customers with poor credit ratings and new start-ups, with some suggesting that it might even be difficult for these businesses to procure a contract.

Personal guarantees

The topic of personal guarantees threw up a variety of comments.  Some suppliers seemed to confuse these with undertakings that the supply would be paid for as an expense.  Several asked the Insolvency Service to provide a standard form of words for PGs, as they can take a lot of time and effort to agree.  Some suggested that it would save time if the IP simply gave the PG – or undertaking – within a specified timescale, rather than build into the process the need for the supplier to ask for one.

Some suppliers were sceptical that an IP could support a call on the PG, leading to requests that IPs provide proof of their assets or credit insurance and, if the supplier is not satisfied, then the supply could be terminated.  Some also asked that PGs be supported by the IPs’ firms, which led one to suggest that IPs from smaller firms may have difficulty persuading suppliers that the PG was adequate.  Some were nervous about the without-notice withdrawal of a PG or undertaking with one respondent stating that the PGs should have effect for the whole duration of the administration.

Timescales to termination

Many said that the proposed timescales to terminate the supply were too long: respondents are well aware of IPs’ reluctance to agree PGs and therefore felt that the 14-28 day period for suppliers to learn of the appointment and to give the office holder time to sign a PG could end up being effectively a free supply to the insolvent business, with several suggesting that the IP could design things this way whilst having no intention to seek to secure a longer supply.  Many also said that they would need to get a warrant to be able to terminate the supply, which would require leave of court (in administrations), thus lengthening the process considerably.

The suppliers argued that they might not learn of the appointment until at least 14 days after commencement, which under the old draft Order would have left them already out of time to request a PG.  I was surprised that several suppliers seemed to believe that office holders were under no clear obligation to tell them about the appointment, which no doubt is behind Jo Swinson’s reference to the need for guidance (see below).  Some suppliers did accept that office holders might have difficulty identifying energy suppliers, especially when dealing with a large number of properties.  Personally, I have also seen IPs encounter difficulties getting past the front door of some suppliers, with day one correspondence getting thrown back because an account cannot be located.

Some noted that the Impact Assessment pointed the finger more at key trade suppliers and IT suppliers (so, suggested one, why not simply wrap these suppliers into the existing statutory provisions?) and thus they questioned whether affecting how energy providers deal with insolvent businesses will deliver the projected fewer liquidations.  “The proposal to change the right of only certain, specified companies to freely contract with one another, appears to be both disproportionate and an unjustified distortion of contractual law” (RWE npower).

 

Merchant Services

The merchant service providers came out in force, their principal argument being that their “charges”, which is the focus of the Order, fade into insignificance when compared with their exposure to the risk of chargebacks, especially when payments have been made by customers for goods/services (to be) provided by an insolvent business.  Thus, the requirement that the merchant services continue to be provided on the existing terms for the 14-28 day window prior to obtaining a PG – and even after obtaining a PG, if that were even possible – was simply unbearable.

Worldpay’s response sets out the way that, at present, they believe the system works well.  They seek an indemnity to be paid as an administration expense for any chargebacks, including any arising from pre-administration transactions, and they also look to agree “an administration fee with the insolvency practitioner to reflect the significant time incurred in managing the administration”… but Worldpay “does not demand ransom payments”.

Carve-out

The responses indicated that the Insolvency Service was to meet with the merchant service providers shortly after the consultation had ended and clearly they succeeded in convincing the Service of their concerns, as the scope of the Order has now been changed so that it does not extend to “any service enabling the making of payments”.

 

The Insolvency Profession

IPs and others involved in insolvency made – and repeated – some valuable observations about the draft Order, which regrettably have not been taken up.  In some cases, this is because the issues are really with the long-passed Enterprise & Regulatory Reform Act 2013, but it also gives the impression that, once legislation has been drafted, it is extremely tough to get it amended.

R3 and KPMG asked that the scope of the new legislation be widened to encompass other supplies, such as software licences and information systems, and they struggled to see why only administrations and VAs are within the scope: omitting receiverships and liquidations unhelpfully restricts the ability of these insolvency tools to achieve better outcomes for all.

The City of London Law Society Insolvency Law Committee (“the Committee”) noted that the draft Order deviated unhelpfully from provisions covering the same territory in the Investment Bank Special Administration Regulations 2011 and the Financial Services (Banking Reform) Act 2013 (“the SIs”).  Why the difference in rules?

Personal guarantees again

The Committee cast doubts over the “practical and logistical issues” surrounding the PG provisions, highlighting that IPs could encounter demands for PGs from a number of suppliers in the crucial initial days of an appointment.  It “strongly encourages” the government “to reconsider the approach and, if at all possible, to amend Section 93(3), so that the ability to request a personal guarantee is restricted to the utilities currently covered by Section 233 IA”.

The Committee’s quid pro quo suggestion was that the legislation should mirror the SIs mentioned above and provide explicitly for all post-administration supplies to rank as administration expenses, suggestions also made by R3.  Interestingly, the government press release stated that “suppliers will be guaranteed payment ahead of others owed money for services supplied during the rescue period”.  This doesn’t seem to relate to the effect of PGs, as this is covered separately in the press release, but I don’t see where this super-priority for suppliers appears in the statute.

As a last resort, the Committee suggested the production of a pro forma guarantee to save precious time, especially considering that a number of suppliers of varying degrees of sophistication may be seeking PGs.

Unsurprisingly, R3 had strong words for the PG regime: “The provisions allowing a supplier to require a personal guarantee by the office holder are also inappropriate.  This was and is an unwelcome feature of the existing 233 legislation, as it is disproportionate.  In principle, there is no reason why a supplier should enjoy a greater level of comfort from an insolvency officer holder than it would from the directors of a solvent trading company…  No supervisor is likely to give one.”

PwC referred to PGs as “an anathema to most IPs” and its preference seems to be that all possible options remain open for negotiation by the parties.  In its response, PwC stated that “circumstances will remain where the payment of a deposit and/or a higher ‘on price’ are commercially more appropriate, and the IP should retain the discretion to negotiate case by case, supplier by supplier”.

Other flaws

There seem to be several concerns about the detail of the draft Order, concerns that I think have survived even the post-consultation revision:

  • The Order prevents suppliers from terminating contracts simply because of administration/VA, but it does not prevent them from altering contract terms, such as increasing prices (and perhaps then terminating the contract if the revised terms are not complied with).
  • The PG may reach to termination charges incurring post-administration/VA.
  • Because the Order focuses on terms that are triggered by administration or a VA, it does not deal with terminations/changes resulting from the triggers of pre-administration/VA events, such as the Notice of Intention to Appoint Administrators or putting forward a VA Proposal (see also below).

 

The Order

The Order is scheduled to come into force on 1 October 2015.  The current draft differs from the earlier consultation draft in the following respects:

  • The 14-day timescale for suppliers to ask for a PG has been dropped. Therefore, suppliers will be able to ask for a PG at any time and then they acquire the power to terminate the supply if the PG is not given by the office holder within 14 days of the request.
  • The court may grant the supplier permission to terminate the contract, if satisfied that it would cause the supplier “hardship” – as opposed to the draft’s “undue hardship”.
  • The Order no longer applies to “any service enabling the making of payments”.
  • The Order turns a draft clause (the previous S233A(6), which is now S233A(2)) on its head. I think this is to deal with some suppliers’ issues that the previous draft Order would have prevented terminations “because of an event that occurred before” the administration/VA, even though the event was not connected to the formal insolvency. Now the Order states that an insolvency-related term does not cease to have effect if it entitles a supplier to terminate the contract or supply because of an event that occurs, or may occur after the administration/VA. The problem with this is that I think it eliminates the whole purpose of the previous S233A(6), which was to avoid actions resulting from pre-administration/VA events, such as the issuing of a Notice of Intention to Appoint Administrators or the proposing of a VA!
  • The government release points to an additional non-statutory measure: “guidance will be issued to insolvency practitioners that they should make contact with essential energy suppliers at the earliest possible time following their appointment to discuss what supply they expect to use”.

I know that Giles Frampton, R3 President, has said: “These proposals will make it easier for the insolvency profession to save businesses, save jobs, and get creditors as much of their money back as possible”.  I’m not sure that I can be as positive, but a surprising outcome of the consultation for me was a greater understanding of some of the hurdles faced by suppliers.  IPs are not the only ones who want to see businesses (/customers) survive.


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Keeping the lights on for insolvent businesses

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

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

Personal guarantees in IVAs and CVAs?

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

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

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

Pre-Administration/VA events

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

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

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

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

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

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

£54 million more to unsecured creditors

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

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

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

Over 2,000 businesses could be saved each year

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

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

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


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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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New SIPs 3 – are you ready?

5313 Sydney

As the new SIPs 3 come into effect in less than two weeks’ time, I’m guessing that few of you will be interested in reading my “yes, but what exactly does that mean?!” observations below. If VAs/Trust Deeds are your thing, you will have got going on bringing practices into line with the new SIPs (and you really won’t want to read any alternative interpretations). But it’s not all gripes; I have actually tried to include some points that may be of use!

SIP3.1 (IVAs) and SIP3.2 (CVAs)

Assuming that your practices already comply with (old) SIP3 and statute, what do you need to know to bring them in line with the new SIPs? I’m afraid I don’t think it’s about easy fixes. The new SIPs are so different from the 2007 SIP3 that I would recommend trying to take a fresh and objective look at the way VAs are conducted in the round in order to apply the new SIP principles and requirements.

The revised SIPs put great emphasis on there being “procedures in place to ensure…”, so it is not simply a case of getting standard templates compliant. In my view, the key seems to be more about making sure that tasks and considerations are prompted and carried out, not just marked “N/A” (or perhaps even “done”) on a checklist completed 6 months after the event. However, the vast majority of the steps required are not rocket-science and are probably being carried out already, so if any major changes are required, they will probably involve regularising processes and evidencing the steps taken.

Having said that, some obvious easy fixes may include:

• Ensure that letters to shareholders and creditors giving notice of the meetings explain the stages and roles associated with a VA (i.e. initial advice, assisting in preparing the proposal, acting as nominee, and acting as supervisor) – per the SIPs’ first principle.

• Ensure that initial advice includes explaining “the rights of challenge to the VA and the potential consequences of those challenges”.

• If you’re confident that there are systems in place to keep alert to signs that a meeting with an individual debtor is merited, SIP3.1 allows you to lighten up on SIP3’s requirement to meet with every “trading individual” (although a meeting needs to be offered in every case).

• Check that standard Proposals templates (and procedures/documents used in drafting Proposals) include all the items listed. Although the new SIPs are not as fulsome as the old SIP3, there are some curly additions, such as “the background and financial history of the directors, where relevant”.

• Ensure that post-approval circulars make clear the “final form of the accepted VA” where a proposal is modified, which to me suggests more than simply listing the approved modifications.

• Ensure that supervisors’ reports disclose fully the VA costs and “any other sources of income of the insolvency practitioner or the practice in relation to the case” (remembering that the Ethics Code prohibits referral fees or commissions benefitting the IP/firm as opposed to the estate) and any increases in costs, if these have increased beyond previously-reported estimates. Whilst the old SIP3 already requires disclosure of increases in the supervisor’s fees, “costs” of course are wider in scope and could include solicitors, agents etc.

Other fixes may not be so easy…

Huh? No. 1

For CVAs, “the initial meeting with the directors should always be face to face”.

But what is the initial meeting; is it the first meeting? What if progression towards a solution is an iterative process? And who are the directors? Does this mean that all the directors need to be present, even if someone is out of the country? And why face to face? Is this so that you can skype but a non-visible telephone conference won’t do; where’s the sense in that?

Yes, I know I’m being picky. Trying to look at this sensibly, presumably IPs are expected to ensure that the directors discuss face-to-face the information to enable them to decide on whether to propose a CVA and what that might look like. I could see that this discussion might occur after a period of information-gathering, so it may not actually be the very first meeting with the director/s. In addition, inevitably there will be occasions when it is difficult to meet physically with all the directors, so this might require some judgment on IPs’ parts as to whether the non-attendance “face-to-face” of a particular director falls foul of the need to meet with “the directors”.

Huh? No. 2

When preparing for a VA, the IP should have procedures in place to ensure that the directors/debtor have had, or receive, appropriate advice. “This should be confirmed in writing, if the insolvency practitioner or their firm has not done so before.” (This is repeated later in SIP3.1 where an IP first gets involved at the nominee stage, i.e. where someone else has helped to prepare the IVA Proposal.)

But what is “this” that should be confirmed in writing? Is it the appropriate advice itself or is it the fact that appropriate advice has been given? I assume this means that, if someone else has been involved in getting the directors/debtor to the point of deciding on a VA before introducing them to the IP, the IP needs to be satisfied that they have been properly advised previously and confirm in writing the advice behind the decision – not merely “I understand that you have received appropriate advice from X and consequently have decided to propose a VA” – but I could be wrong…

Huh? No. 3

In assessing the VA as a solution, the SIPs require IPs to obtain a variety of information, including: “the measures taken by the directors (debtor) or others to avoid recurrence of the company’s (their) financial difficulties, if any”.

Does the “if any” refer to financial difficulties or measures taken? Would there be any occasion to propose a VA where there are no financial difficulties (even if any current difficulties to pay debts had arisen from historic, now settled, events)? Consequently, I would have thought the SIPs refer to learning of any measures taken to avoid recurrence, rather than any financial difficulties, but that does not seem to be the case, as the SIPs state later that Proposals should contain information on “any other attempts that have been made to solve their financial difficulties, if there are any such difficulties”.

Huh? No. 4

The SIPs require procedures to ensure that the proposer’s consent is sought to any modifications put forward by creditors. The SIPs state that, where a modification is adopted, in the absence of consent (from the proposer and, if appropriate, the creditors), the VA “cannot proceed”. The proposer’s consent must be recorded.

Why seek the proposer’s consent to any modification, including those that will be voted out by the majority, especially if they run contrary to the wishes of the majority? I guess that this is only fair to the creditors, but it could be confusing especially to debtors faced with a whole host of potentially conflicting and futile modifications. And what would happen if a minority creditor, say, wanted the supervisor’s fees to be reduced below that required by the majority, and the proposer consented to the reduction? Where does that leave things?

And why state that a CVA cannot proceed in the absence of the proposer’s consent? As far as I am aware, the directors’ consent to modifications is not a statutory requirement (but obviously in certain circumstances this may be essential for the successful implementation of the CVA). I also wonder if, technically, an administrator or liquidator needs to consent to modifications to their Proposals…

How should a director’s/debtor’s consent be “recorded”? Will a telephone conversation note, or even merely minutes signed by the Chairman, suffice? Where ever possible, I would recommend continuing with the now-commonplace procedure of getting the proposer to sign contemporaneously a copy of the adopted modifications, but I do wonder whether the new SIPs are suggesting that a less robust record may suffice.

SIP3.3 (Trust Deeds)

I am in no position to pass comment on the technicalities of this new SIP – I did voice some “huh?”s whilst reading it, but I will resist the urge to put my foot in it!

Overall, I am heartened to see the lightening-up on much of the prescription and consequent rigidity of SIP3A. Personally, I do think the RPBs could have gone further, however, as there still seems to me to be a fair amount of unnecessary statutory, SIP9 and Ethics Code references. There also seems to be some particularly fruitless statements: my personal favourite is “Where the decision is to grant a Trust Deed and seek its protection, the insolvency practitioner will take the necessary steps” – duh!


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Exercise of court’s discretion to allow creditor’s action to continue despite Interim Order and Other Judgments

1116 Sunset

Some recent court decisions:

• Dewji v Banwaitt – under what circumstances will the court allow a creditor’s action to continue despite an IVA Interim Order?
• Masters & Beighton v Furber – can a debtor be forced to hand over assets caught by IVA?
• Ward Brothers (Malton) Limited v Middleton & Ors – does an IP acting in an informal capacity avoid TUPE?
• O’Kane & O’Kane v Rooney – fixed charge receivers’ agents’ “worrying conduct” scuppers sale
• Re Hotel Company 42 The Calls Limited – will the court terminate an Administration and hand back the company to the directors despite the Administrators’ wishes for it to continue?
• Re ARM Asset Backed Securities SA – does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?
• Westshield Limited v Mr & Mrs Whitehouse – which takes precedence: a CVA term requiring a Supervisor to decide on set-offs or the enforcement of an Adjudicator’s decision?

Creditor’s interim charging orders made final despite IVA Interim Order

Dewji v Banwaitt (29 November 2013) ([2013] EWHC 3746 (QB))

http://www.bailii.org/ew/cases/EWHC/QB/2013/3746.html

Mr Banwaitt had obtained judgment in proceedings against Dr Dewji for fraudulent misrepresentation in relation to an agreement under which Mr Banwaitt had paid to Dr Dewji sums for the purchase of land in Cambodia. Mr Banwaitt then obtained interim charging orders over three properties, but before the charging orders were made final, Dr Dewji was granted an Interim Order. However, at the hearing on the charging orders, the Master granted leave under S252(2)(b) of the Insolvency Act 1986 for Mr Banwaitt’s action to continue and exercised his discretion in making the charging orders final.

Dr Dewji’s request for permission to appeal the charging orders was refused. Mrs Justice Andrews accepted that usually the overriding principle would be that all creditors of a single class should rank equally once a statutory scheme had got underway. However, she noted that “there may be situations in which, despite the Interim Order, the ‘first past the post’ approach is justifiable” (paragraph 45). She suggested some scenarios: where a judgment creditor were seeking to recover monies paid under a contract that had been rescinded for fraud, “the Court might take the view when exercising its discretion that it would not be in the interests of justice to allow the debtor’s other creditors to participate in that share of his estate that was increased at the expense of the party he deceived” (paragraph 29) or where “the asset against which the judgment creditor is seeking to execute judgment falls entirely outside the IVA, so that there is no question of it being shared between the general body of creditors. Another, quite independent, example would be where the IVA was bound to fail, either because the judgment creditor had sufficient voting power to block it by himself, or because the creditors as a whole or a majority of them were bound to regard it as unattractive” (paragraph 39).

What Dr Dewji had proposed for his IVA led the judge to conclude that the Master had been justified in exercising his discretion in favour of the creditor. “The question that the Master had to determine is not whether it would be unfair to let Mr Banwaitt have an advantage over the general body of creditors. It is whether it would be unfair to let Mr Banwaitt, (who, on the evidence before the Master, was the only Investor induced to part with his money for this project by deceit, and who alone has chosen to expend costs in pursuing its recovery from Dr Dewji) obtain final charging orders over property that was not going to be distributed between Dr Dewji’s creditors, but (in the case of one property only, Dale Street) utilised to raise money to pay foreign lawyers to try and recover a substantial sum of money that would then be shared equally between Dr Dewji himself and some of those creditors, including the judgment creditor” (paragraph 47).

IVA debtor was not free to resist realisation of assets

Masters & Beighton v Furber (30 August 2013) ([2013] EWHC 3023 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3023.html

The Joint Supervisors of Mr Furber’s IVA sought an order requiring Mr Furber to allow the collection of some of his vehicles that, in accordance with the terms of the IVA, had been sold. The Joint Supervisors had also been granted a power of attorney to enable them to deal with Mr Furber’s assets. Mr Furber refused to allow the vehicles to be collected, claiming that he entered the IVA under pressure and that the vehicles had been sold at an undervalue.

Purle HHJ acknowledged that, in one sense, Mr Furber could choose to default on the IVA, with a potential consequence of being made bankrupt. However, as counsel for the applicant put it, “unless the process of disposal of the vehicles is concluded, there is a risk that the successful bidders will withdraw their bids and thereafter demand return of all monies paid, as well as possibly seeking damages. Ironically, if, as Mr Furber says, the value of the vehicles was higher than the sum that has been achieved by the online auction process then there will be a claim for loss of bargain by the successful bidders” (paragraph 9). With the risk of increasing creditors’ claims in mind, the judge agreed to order the release of the vehicles: “In my judgment, requiring Mr Furber to comply with his obligations under the IVA and the power of attorney will be in the best interests of his creditors generally and maintain the authority of the supervisors who are effectively, if not in law, officers of the court” (paragraph 11).

IPs acting in an advisory capacity not sufficient to avoid TUPE

Ward Brothers (Malton) Limited v Middleton & Ors (16 October 2013) ([2013] UKEAT 0249)

http://www.bailii.org/uk/cases/UKEAT/2013/0249_13_1610.html

Bulmers Transport Limited ceased to trade on a Friday and on the following Monday Ward Brothers (Malton) Limited started to perform Bulmers’ major contracts using some of its former employees. Before Bulmers had ceased to trade, it had been presented with a winding up petition and had sought the advice of IPs. It seems that, although Administration had been contemplated, this was abandoned around the time that trading ceased. Some ten days later, different IPs were appointed Administrators by the QFCH.

The key question for the Appeal Tribunal was: did the involvement of IPs fit the TUPE exception, “where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner” (Regulation 8(7) of TUPE)?

The Appeal Tribunal supported the original Tribunal’s conclusion that the first set of IPs had been acting only in an advisory capacity and that Bulmers had not been under the supervision of an IP at the time of the transfer.

The Appeal Tribunal also appreciated that “it is regrettable that so much uncertainty exists” (paragraph 20) as regards the application of TUPE and acknowledged “the importance of establishing, if possible, a red line”. They felt that the principles in Slater v Secretary of State for Industry, whilst not formally binding, “command considerable respect; and we respectfully agree that what is there set out is an appropriate and sensible red line and is the correct principle to apply. It is consistent with section 388, which, as we have said, provides that a person acts as an insolvency practitioner in relation to a company by acting as its liquidator, provisional liquidator, administrator or administrative receiver; if not appointed as such, then a person is not acting as an insolvency practitioner” (paragraph 23).

In the summary to the decision, it states that “an appointment (formal or informal) was necessary before there could be said to be supervision by an insolvency practitioner”. Personally, I struggle to see how an IP can be informally appointed and acting in a S388 capacity. The body of the decision states: “Clearly, that red line is not an entirely straight line. There may be disputes, for example, as to whether an insolvency practitioner was on the facts, appointed before a formal letter of appointment was provided or even drafted” (paragraph 24), so perhaps that is what is meant by an “informal” appointment.

The consequence of this decision in this case was that the appeal was dismissed: there had been a transfer that was not subject to the TUPE exclusion as regards the transfer of employee claims to the transferor.

Fixed charge receivers’ sale process tainted by agents’ “worrying conduct”

O’Kane & O’Kane v Rooney (12 November 2013) ([2013] NIQB 114)

http://www.bailii.org/nie/cases/NIHC/QB/2013/114.html

The O’Kanes sought an injunction restraining the joint fixed charge receivers from selling a property.

The judge was presented with evidence, albeit most of it hearsay but nonetheless “very strong”, which the judge described as showing “worrying conduct”, “very curious behaviour indeed”, and even “bad faith” (paragraphs 8, 9, and 10). The criticisms were levelled at the joint receivers’ agents who seemed to have discouraged some parties from bidding, provided inaccurate information, and allegedly advised the highest bidder not to increase its bid during the open bidding process, stating that the bidder would win out at the lower figure.

Although the O’Kanes’ proposal was complex and it was argued to be unrealistic, the judge viewed the previous sealed bid process to be tainted. He granted an injunction restraining the sale and directed that the property should be remarketed and sold by way of private treaty, with a bidding book being maintained and exhibited to the court for its approval of the sale. He directed that there should be no involvement of the individuals named, although he did not go so far as to require a new firm of agents to be instructed.

Administration terminated and company handed back to directors despite outstanding fees and expenses

Re Hotel Company 42 The Calls Limited (18 September 2013) ([2013] EWHC 3925 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3925.html

Joint Administrators were appointed on the application of a creditor. All creditors’ claims were paid or waived, although no monies passed through the Joint Administrators’ hands, as they were dealt with by third parties.

The shareholder and director wanted the company returned to them and the administration terminated, given that its purpose had been achieved, but the Joint Administrators were reluctant to rely simply on their statutory charge as regards their unpaid remuneration and expenses as provided by Paragraph 99 of Schedule B1 of the Insolvency Act 1986, given that the appointing creditor had been “given the run around” by an associated company for many years. There was also a separate application ongoing by the shareholder and director under Paragraphs 74 and 75 under a claim that there had been unfair harm and misfeasance by, amongst other things, the charging of excessive remuneration.

Purle HHJ did not consider that the Joint Administrators’ fears were “sufficient to justify their continuing in office when, as they themselves recognise, there is no practical reason for them to do so, and, most importantly, the administration purpose has been achieved” (paragraph 21). It was also his view that the statutory charge, which could be supported by a restriction registered against the company’s property by means of filing an agreed notice with the Land Registry, was ample to protect them.

The judge refused the relief sought by the Joint Administrators to authorise them to grant a charge to themselves and he ordered the termination of the administration. He did not order that the Joint Administrators be discharged, as the misfeasance proceedings remained unresolved.

Does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?

Re ARM Asset Backed Securities SA (9 October 2013) ([2013] EWHC 3351 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3351.html

A Luxembourg-incorporated company applied for the appointment of provisional liquidators under a winding up petition presented on the grounds that it would be just and equitable to wind it up.

Mr Justice David Richards was satisfied that the evidence pointed to an England COMI: it was apparent that the decisions governing the Company’s administration and management were taken in London and that this was clear to third parties. However, as the petition was based on the just and equitable ground, rather than on the Company’s insolvency, the judge had to consider whether the EC Regulation on “Insolvency Proceedings” kicked in.

Rather than reach a conclusion on this question, the question of the Company’s solvency was addressed. The circumstances of this case were not cut and dried: although it was likely that there would be insufficient funds to service in full the Company’s issued bonds, the terms of the bonds provided that the holders were entitled to recover sums only to the extent that the Company had available to it certain sums. “As a matter of ordinary language, I would take the view that if a company has liabilities of a certain amount on bonds or other obligations which exceed the assets available to it to meet those obligations, the company is insolvent, even though the rights of the creditors to recover payment will be, as a matter of legal right as well as a practical reality, restricted to the available assets, and even though, as the bonds in this case provide, the obligations will be extinguished after the distribution of available funds. It seems to me it can properly be said in relation to this company that it is unable to pay its debts. A useful way of testing this is to consider the amounts for which bond holders would prove in a liquidation of the company. It seems to me clear that they would prove for the face value of their bonds and the interest payable on those bonds” (paragraphs 31 and 32).

Consequently, although David Richards J has left open the question of whether just-and-equitable petitions are caught by the EC Regulation, he was content that the Company could and should be wound up.

(UPDATE 16/03/14: I recommend a briefing by Tina Kyriakides of 11 Stone Buildings: http://www.11sb.com/pdf/insider-limited-recourse-agreement-march-2014.pdf?500%3bhttp%3a%2f%2fwww.11sb.com%3a80%2fhome%2fhome.asp. This briefing addresses the issue as regards the application of the EC Regulation, pointing out that the decision in Re Rodenstock GmbH held that the winding up of a solvent company is governed by the Judgments Regulation 44/2001 and not by the EC Regulation. More interestingly, this briefing deals with the issue about this case that had niggled me (but which I cowardly avoided): how can liabilities that are expressly restricted to the company’s funds topple the company into insolvency? Personally, I find the conclusions of this briefing far more satisfying.)

Supervisor required to consider effect of set-off despite Adjudicator’s decision

Westshield Limited v Mr & Mrs Whitehouse (18 November 2013) ([2013] EWHC 3576 (TCC))

http://www.bailii.org/ew/cases/EWHC/TCC/2013/3576.html

The Whitehouses had some work done on their house by Westshield prior to the company entering into a CVA in December 2010. After little exchange, Westshield served a Notice of Adjudication in relation to the work done. The Whitehouses raised the issue of a substantial counterclaim and referred to the terms of the CVA, which included that the Supervisor should address the extent of mutual dealings and consider set-off. The Adjudicator decided that the Whitehouses should pay Westshield c.£133,000, but did not consider the counterclaim. The Whitehouses submitted a claim to the Supervisor of c.£200,000, but the Supervisor was reluctant to deal with it given the Adjudicator’s involvement.

Westshield then issued proceedings seeking to enforce the Adjudicator’s decision, but the Whitehouses maintained that the Supervisor would need to deal with the counterclaim.

The judge believed that Westshield had been entitled to pursue the pre-CVA debt and that, had the cross-claim not intervened, the Adjudicator’s decision would have been enforceable. However, the Whitehouses had become bound by the CVA and therefore the CVA condition requiring an account to be taken of mutual dealings and set off to be applied could be carried out by the Supervisor. “Once that exercise is done, if it shows money due to Westshield, that can be paid subject to the right which the Whitehouses have to refer the matter to Court within a short time. The Court can then consider what effect (if any) the adjudication decision may have on its decision as to what should be done. If the accounting shows money due to the Whitehouses, they will get however many pennies in the pound as are available to creditors from the CVA” (paragraph 27).

Consequently, the judge dismissed the application for summary judgment, staying any further steps until the outcome of the Supervisor’s account was known.


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A Janus View of Developments in Insolvency Regulation

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I thought I would take a look at where we’ve got to on a few of the current developments in insolvency regulation:

• The Deregulation Bill: who says limited IP licences are a good idea?
• SIP3.2 (CVA): a preview of the final SIP3 (IVA) or an ethical minefield?
• The JIC Newsletter: grasping the nettle of the commissions issue
• Insolvency Service update to the BIS Committee: promises, promises!

It’s by no means a complete list, but it’s a start!

The Deregulation Bill: when is a consultation not a consultation?

The Joint Committee of the Houses of Lords and Commons published its report on the draft Deregulation Bill on 19 December 2013, available here: http://www.parliament.uk/business/committees/committees-a-z/joint-select/draft-deregulation-bill/news/draft-deregulation-bill-report/.

Insolvency features relatively insignificantly in the wide-ranging draft Deregulation Bill, the so-called Henry VIII Power attracting far more attention, so in some respects it is quite surprising that insolvency got a mention in the Committee report at all. However, the background to this report included oral evidence sessions, one of which was attended by Andrew Tate representing R3’s Small Practices Group. A recording of the session can be accessed at: http://www.parliamentlive.tv/Main/Player.aspx?meetingId=14073&player=windowsmedia – insolvency pops up at c.50 minutes.

Andrew had a chance to express concerns about the draft Bill’s introduction of IP licences limited to personal or corporate insolvency processes. He raised the concern, which I understand is shared by many IPs, that IPs need knowledge of, and access to, all the tools in the insolvency kit, so that they can help anyone seeking a solution, be they a company director, a practice partner, or an individual, and some situations require a combination of personal, corporate and/or partnership insolvency solutions.

What seemed to attract the attention of the Committee most, however, was learning that there had been no public consultation on the question. It’s worth hearing the nuanced evidence session, rather than reading the dead-pan transcript. It fell to Nick Howard, who was not a formal witness but presumably was sitting in the wings, to explain that there had been an “informal consultation”, which had revealed general support, and I thought it was a little unfair that a Committee member seemed sceptical of this on the basis that they had not heard from anyone expressing support: after all, I don’t think that people tend to spend time shouting about draft Bills with which they agree.

Personally, I do not share the same objections to limited licences, or at least not to the same degree. I see the value of all IPs having knowledge of both personal and corporate insolvency, but even now not all fully-licensed IPs have had experience in all fields, so some already start their licensed life ill-equipped to deal with all insolvency situations. I believe that there are more than a few IPs who have chosen a specialist route that really does mean that practically they do not need the in-depth knowledge of all insolvency areas, and, given that they will not have kept up their knowledge of, and they will have little, if any, useful experience in, insolvency processes outside their specialist field, does it really do the profession or the public any favours for them to be indistinguishable from an IP who has worked hard to maintain strong all-round knowledge and experience? Surely it would be more just and transparent for such specialists to hold limited licences, wouldn’t it?

From my perspective as a former IPA regulation manager, I believe that there would also be less risk in limited licences. As things currently stand, an IP could have passed the JIEB Administration paper years’ ago (even when it was better known as the Receivership paper) and never have touched an Administration in his life, but (Ethics Code principle of professional competence aside) tomorrow he could be talking to a board of directors about an Administration, pre-pack, or CVA. Personally, I would prefer it if IPs who specialise were clearly identified as such. Then, if they encountered a situation that exceeded their abilities, which they would be less likely to encounter because everyone could see that they had a limited licence, at least they would be prohibited from giving it a go.

Clearly, with so many facets to this issue, it is a good thing that the Committee has recommended that the clause proposing limited licences be the subject of further consultation!

The other insolvency-related clauses in the draft Bill have sat silently, but presumably if limited licences stall for further consultation, the other provisions – such as fixing the Administration provisions that gave rise to the Minmar/Virtualpurple confusion and modifying the bankruptcy after-acquired property provision, which allegedly is behind the banks’ reluctance to allow bankrupts to operate a bank account – will gather dust for some time to come.

SIP3.2 (CVA): a preview of the final SIP3 (IVA)?

I found the November consultation on a draft SIP3.2 for CVAs interesting, as I suspect that this gives us a preview of what the final SIP3 for IVAs will look like: the JIC’s winter 2013 newsletter explained that the working group had reviewed the SIP3 (IVA) consultation responses to see whether there should be any changes made to the working draft of SIP3 (CVA). Consequently, it seems that there will be few changes to the consultation draft of SIP3 (IVA)… although that hasn’t stopped me from drawing from my own consultation response to the draft SIP3 (IVA) and repeating some of those points in my consultation response to the draft SIP3 (CVA). I was pleased to see, however, that few of my issues with the IVA draft had been repeated in the CVA draft – it does pay to respond to consultations!

I’ve lurked around the LinkedIn discussions on the draft SIP3.2 and been a bit dismayed at the apparent differences of opinion about the role of the advising IP/nominee. Personally, I believe that the principles set out in the Insolvency Code of Ethics and the draft SIP3.2 handle it correctly and fairly clearly. In particular, I believe that an IP’s aim – to seek to ensure that the proposed CVA is achievable and strikes a fair balance between the interests of the company and the creditors – as described in Paragraph 6 of the draft SIP3.2 – is appropriate (even though, as often it will not be the IP’s Proposal, this may not always be the outcome). In my mind, this does not mean that the IP is aiming for some kind of mid-point between those interests, as the insolvent company’s interests at that time necessarily will have particular regard for the creditors’ interests, and so I do not believe that the SIP supports any perception that the advising IP/nominee sides inappropriately with the directors/company. However, given that apparently some have the perception that this state exists, perhaps it would be worthwhile for the working group to see whether it can come up with some wording that makes the position absolutely clear, so that there is no risk that readers might misinterpret the careful responsibility expected of the advising IP/nominee.

I would urge you to respond to the consultation, which closes on 7 January 2014.

The JIC Newsletter: all bark and no bite?

Well, what do you think of the JIC’s winter 2013 newsletter? I have to say that, having been involved in reviewing the fairly inconsequential reads of previous years whilst I was at the IPA, I was pleasantly surprised that at least this newsletter seemed to have something meaningful to say. Personally, I wish it had gone further – as really all it seems to be doing is reminding us of what the Ethics Code already states – but I am well aware of the difficulties of getting something even mildly controversial approved by the JIC members, their respective RPBs, and the Insolvency Service: it is not a forum that lends itself well to the task of enacting ground-breaking initiatives. And anyway, if there were something more than the Ethics Code or SIPs that needed to be said, a newsletter is not the place for it.

Nevertheless, I would still recommend a read: http://www.ion.icaew.com/insolvencyblog/post/Joint-Insolvency-Committee-winter-2013-newsletter (I’d love to be able to direct people to my former employer’s website, but unfortunately theirs requires member login).

Bill Burch quickly off the mark posted his thoughts on the Commissions article: http://complianceoncall.blogspot.co.uk/2013/12/dark-portents-from-jic-for-commissions.html, which pretty-much says it all. Personally, I hope that this signifies a “right, let’s get on and tackle this issue!” attitude of revived enthusiasm by the regulators, but similarly I fear that some offenders may just seem too heavy-weight to wrestle, at least publicly, although that does not mean that behaviours cannot be changed by stealth. Many would shout that this is unfair, but it has to be better than nothing, hasn’t it?

My main concern, however, is how do the regulators go about spotting this stuff? Unless a payment is made from an insolvent estate, it is unlikely to reach the eyes of the monitor on a routine visit. It’s all well and good asking an IP where he gets his work from, if/how he pays introducers, and reviewing agreements, but if someone were intent on covering their tracks..? I know for a fact that at least one of the examples described in the JIC newsletter was revealed via a complaint, so that would be my personal message: if you observe anyone playing fast and loose with the Ethics Code, please take it to the regulators, and if you don’t want to do that personally, then get in touch with R3 and they might help do it for you. If you don’t, then how really can you cry that the regulators aren’t doing enough to police your competitors?

However, the theoretic ease with which inappropriate commissions could be disguised and the multitude of relatively unregulated hangers-on to the insolvency profession, preying on the desire of some to get ahead and the fear of others of losing out to the competition, do make me wonder if this issue can ever be tackled successfully. But the JIC newsletter at least appears to more clearly define the battle-lines.

Insolvency Service Update to the BIS Committee: all good things come to those who wait

Jo Swinson’s response to the House of Commons’ Select Committee is available at: http://www.parliament.uk/documents/commons-committees/business-innovation-and-skills/20131030%20Letter%20from%20Jo%20Swinson%20-%20Insolvency%20Service%20update.pdf. It was issued on 30 October so by now many items have already moved on, but I wanted to use it as an opportunity to highlight some ongoing and future developments to look out for.

Regarding “continuation of supply”, which was included in the Enterprise and Regulatory Reform Act 2013 but which requires secondary legislation to bring it into effect, Ms Swinson stated: “We intend to consult later this year on how the secondary legislation should be framed”. I had assumed simply that the Insolvency Service’s timeline had slipped a bit – understandably so, as there has been plenty going on – but I became concerned when I read the interview with Nick Howard in R3’s winter 2013 Recovery magazine. He stated: “We are in the process of consulting on exactly how that [the supply of IT] works because the power in the Act is fairly broad and we want to ensure we achieve the desired effect”. Have I missed something, or perhaps there’s another “informal consultation” going on?

I’m guessing the Service’s timeline has slipped a bit in relation to considering Professor Kempson’s report on fees, however, as Ms Swinson had planned “to announce the way forward before the end of the year” in relation to “a number of possible options for addressing this fundamental issue [that “the market does not work sufficiently where unsecured creditors are left to ‘control’ IP fees”], by both legislative and non-legislative means. Still, I imagine this isn’t far away, albeit that Ms Swinson is now on maternity leave.

This might be old news to those with their ears to the ERA ground, but it was news to me that the Insolvency Service will be implementing the Government’s Digital by Default strategy in the RPO “with a digital approach to redundancy claims anticipated to be launched in the autumn of 2014”. My experience as an ERA administrator may date back to the 1990s when people were comforted more by the feel of paper in their hands, but I do wonder how well the news will go down with just-laid-off staff that they need to go away and lodge their claims online. A sign of the times, I guess…

Finally, don’t mention the Draft Insolvency Rules!

No summary of regulatory goings-on would be complete without referring to the draft Insolvency Rules, on which the consultation closes on 24 January 2014. And no, I’ve still not started to look at them properly; it feels a bit futile even to think about starting now. But then, if we don’t pipe up on them now, we won’t be able to complain about the result, even if that may be yet years’ away…