Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Protocol IVAs – majorities required for variations

I sincerely apologise for overlooking an alternative – and apparently widely-held – interpretation of the Protocol Standard Terms & Conditions’ (“STCs”) provision for approving variations. In a previous blog post (, I had indicated that the Protocol STCs apply a simple majority, whereas many believe that 75% (in value) of voting creditors is required to approve a variation. Whilst personally I still struggle with this, I want to highlight this alternative interpretation to readers and remind you that everything I write on this blog reflects my own understanding and opinion and should not be relied upon; I urge you to make independent checks.

For balance, I will set out what I believe are the arguments for each interpretation:

Clause 19(5) of the Protocol STCs (accessible from: states: “Rule 5.23(1) of the Rules will apply to the creditors meeting in deciding whether the necessary majority has been obtained”. R5.23(1) states: “Subject to paragraph (2), at the creditors’ meeting, a resolution is passed when a majority (in value) of those present and voting in person or by proxy have voted in favour of it” and paragraph (2) states: “A resolution to approve the proposal or a modification is passed when a majority of three-quarters or more (in value) of those present and voting in person or by proxy have voted in favour of it”. The difficulty I have in looking to apply R5.23(2) to resolutions for variations is that they are not resolutions to approve the proposal or a modification. S436 of the Act states: “‘modifications’ includes additions, alterations and omissions and cognate expressions shall be construed accordingly”, but it is not just the absence of the word “variation” from this definition that gives me pause for thought. References in the Act and Rules to modifications in an IVA context relate to alterations to the terms of the Proposal prior to/at the time of its approval. Of course, any changes to the Proposal after its approval rest with the terms of the Proposal – the Act and Rules do not cover the mechanisms for post-approval changes – and I wonder if the Protocol STCs’ reference solely to paragraph 1 of R5.23 lends weight to the suggestion, I believe, that it is not intended that paragraph 2 be extended to apply to post-approval variations. However, I do accept that it is dangerous to attempt to discern the intentions of the drafters or indeed those of the parties to the IVA Proposal, namely the debtor and creditors.

I guess the strongest argument for a 75% majority is that there is little difference between a “modification” and a “variation”, thus under the Protocol STCs R5.23(2) applies also to post-approval variations. It has also been suggested that there should be no lower threshold to change the terms of an approved Proposal than there is to approve it in the first place and some question the validity of a Proposal term purporting to do just that. On this basis, it has been further suggested that R5.23(4) (re. associated creditors’ votes) might also apply to post-approval variations to Protocol IVAs, or at least that prudence might recommend consideration of this rule.

Whichever way this is cut, there is a risk that someone will be unhappy: for example, if a 75% threshold is used, the debtor and up to 74% creditors voting in favour of a variation will lose to the 25% creditor voting to reject a variation; if a 50% threshold is used, the up to 49% creditor voting alone may feel deprived. Going forward, perhaps it would be safer for IVA STCs simply to describe in full the majorities required for variations, much as R3’s STCs do, and then there could be no argument.

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Legislative changes on the horizon: PTDs, TUPE, and gift vouchers


Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:

• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors

AiB’s proposed changes to PTDs and DAS

28/02/2013: The AiB published some welcome (by me, anyway) fine-tuning to her developing “vision of a Financial Health Service” (

She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.

The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate:

So what now does she propose to introduce? Some new significant items for PTDs:

• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.

The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.

BIS TUPE Consultation

17/01/2013: The BIS consultation on proposed changes to the Transfer of Undertaking (Protection of Employment) Regulations 2006 was issued and closes on 11 April 2013 ( – a 72-page document that takes some reading!).

Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.

The proposals do include some elements that may be more useful:

• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).

Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.

Gift Voucher Creditors

15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (, but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.

MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 ( Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:

“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.

(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”

As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.

To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, – the clue is in the name…)

There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (

(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS.  R3 summarised the difficulties in dealing with gift vouchers in an insolvency at  This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at


Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…

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Three cases: (1) What is the relevant date for IVAs suspended on a S262 challenge? (2) When is an alleged transaction at an undervalue not a “transaction”? (3) Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

• Davis & Davis v Price & Price – what is the relevant date for IVAs suspended on a S262 challenge?
• Hunt v Hosking & Ors – when is an alleged transaction at an undervalue not a “transaction”?
• Fabb & Ors v Peters & Ors – vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

What exactly is a “suspended” IVA?

Davis & Davis v Price & Price ([2013] EWHC 323 (Ch)) (21 February 2013)

Summary: As a consequence of a successful S262 challenge, two debtors’ IVAs were suspended and further creditors’ meetings were convened to consider their revised Proposals. After these were approved, the S262 challengers issued statutory demands in pursuit of their costs for bringing the challenge. The appeals judge agreed that the statutory demands should be set aside on the basis that the costs were caught in the IVAs, for which the relevant date was the second meetings’ date. Contrary to the wording of the S262 order, the judge felt that the effect of suspending the original IVAs was not to continue to bind the original creditors.

The Detail: The Prices challenged the Davises’ IVAs under S262 in relation to the values of £1 attributed to their claims for the purposes of voting at creditors’ meetings held in June 2010. The challenge was successful and the District Judge ordered the suspension of the Davises’ IVAs – which would not have been approved had the Prices’ claims been admitted for voting in the sum of £35,389, the value placed on the claims for voting purposes by DJ Gamba – and required the Davises to decide whether to re-present the original Proposals or to present varied Proposals for consideration at further creditors’ meetings to be convened by the Nominee. The Davises were also ordered to pay the Prices’ costs of £7,011.

At creditors’ meetings held on 13 January 2011, the Prices again voted to reject the Proposals, which had been revised by the Davises, but the Prices only proved in the sum of £35,389. However, the requisite majorities were achieved and the revised Proposals were approved. The Prices then pursued payment of their costs of £7,011 on the argument that they were not claims in the IVAs, because they did not exist at the time of the original interim orders in April 2010.

The question at the heart of this matter was: what was the effect of the suspension of the Davises’ IVAs? In this appeal, counsel for the Prices sought to distinguish between an order revoking an IVA and one suspending it, both options available to the court under S262(4). Mr Justice David Richards noted that there was only one rule relating to entitlements to vote at a creditors’ meeting convened to consider an IVA Proposal – R5.21; the rules make no distinction as to whether this is the first time such a meeting is convened or whether it is convened on the back of a revoked IVA or a suspended IVA under S262(4). The judge considered that in this circumstance the reference in R5.21(2)(b) to the “amount of the debt owed to him at the date of the meeting” was the amount owed at the date of the January 2011 meeting convened to consider the revised Proposals and therefore the Prices had been entitled to prove also in respect of their costs in bringing the S262 challenge.

So what is the status of a suspended IVA? The wording of DJ Gamba’s order resulting from the S262 challenge had stated that, if the proposed variation was put to the vote and rejected, the approval of the IVAs on 8 June 2010 would be revoked with immediate effect “and the IVA Creditors shall ceased to be bound by the IVAs”; it further provided that, if the IVAs were reconsidered and approved, the suspension of the approval of the IVAs would be lifted with immediate effect and “the IVA Creditors shall continue to be bound by the IVAs in accordance with section 260”. However, David Richards J stated: “I do not think it is right that if the approval of an IVA is suspended, it nonetheless continues to bind creditors. Once approval is suspended, it does not seem to me possible to say that there is an ‘approved arrangement’ within the meaning of section 260(2)” (paragraph 29). He acknowledged that S262(7) grants the court power to give supplemental directions, but he did not believe that this enabled the court to substitute a different rule for R5.21 in relation to creditors’ voting rights.

12/02/2014 UPDATE: Although the appeal heard on 21/01/2014 was dismissed (, it did highlight a(nother!) problem with the Act: S260, which binds creditors into an approved IVA, expressly has effect “where the meeting summoned under S257 approves the proposed” IVA. However, in this case, the meetings that led to approved IVAs were consequent to a S262 challenge and, as Lady Justice Arden put it, “if the IVAs were varied and the creditors approved those varied IVAs, those were the IVAs to come into force, not the original IVAs. In reality what happened in that event is that the varied IVAs replaced the original IVAs. The original IVAs ceased to have any legal existence after that” (paragraph 33).

Thus, were the creditors bound by S260? “The court must of course give effect to the intention of Parliament… However, where the effect of a literal interpretation of a statute is to create significant anomalies which the court is satisfied Parliament could not have intended, the court should seek to find an interpretation which avoids those anomalies” (paragraphs 38 and 39). In order to achieve this end, Lady Justice Arden interpreted the reference to a “further meeting” in S262(4)(b) to be a reference to a “further meeting under S257” so that S260 has effect.

The Company must be party to the transaction for it to be challenged at an undervalue

Hunt v Hosking & Ors ([2013] EWHC311 (Ch)) (22 February 2013)

Summary: A liquidator sought to challenge as transactions at an undervalue payments made to Mr Hosking from the Company’s client monies held by its accountants – the monies were paid to Mr Hosking in settlement of his private loan to the accountant, who appeared to be entitled to the monies by reason of two fee agreements with the Company. However, the liquidator’s S238 application failed on the basis that the payments to Mr Hosking were not “transactions” to which the Company was party. The judge pointed out that either the accountants were not authorised to pass the monies over, in which case it would be an issue of misappropriation of assets, or the challenge should be levelled at the fee agreements between the accountants and the Company.

The Detail: A firm of accountants, of which Mr Temple was the sole proprietor, held monies on behalf of its client, Ovenden Colbert Printers Limited (“the Company”), from which the accountants appeared to be entitled to draw fees pursuant to two fee agreements. A number of payments were made from the accountants’ client account to Mr Hosking, which he claims related to repayments of his private loan to Mr Temple (who later became bankrupt).

Mr Hunt, the Company’s liquidator, applied under S238 claiming that the payments made from the client account to Mr Hosking were transactions at an undervalue. The liquidator made other allegations regarding the strength of the fee agreements with a suggestion that they may have been induced under misrepresentation. However, the fee agreements were not the subject of the S238 application.

Mr Justice Peter Smith identified a fundamental difficulty with Mr Hunt’s argument that the payments to Mr Hosking were transactions at an undervalue: the Company was not a party to the payments. He illustrated it this way: “If Mr Temple held a bag of sovereigns for the Company and they were held to the Company’s order, and if he gave them away to Mr Hosking, I suggested that that would not be a transaction. It would simply be a case of misappropriation of assets. Of course, the Company through the liquidator would have any number of remedies to recover those sovereigns. Such a claim could be made not only against Mr Temple but also against Mr Hosking if he receives the sovereigns. That is not the present claim… The fundamental difficulty facing Mr Hunt is that however much he investigates; however much mud he wishes to throw at Mr Hosking; none of it is relevant to his application under section 238. This is because on the undisputed facts set out above, the Company has not entered into a transaction which the liquidator can review. The only transactions it entered into in my opinion were the two fee agreements and those are not under challenge and indeed one of them cannot be under challenge due to the passage of time. If the payments were authorised they cannot be challenged unless the two fee agreements are challenged and they are not in these proceedings. If the payments were unauthorised, there is no transaction by the Company” (paragraphs 50 and 55).

[UPDATE 26/11/2013: Hunt’s appeal against the summary judgment/strike out application was dismissed on 15/11/2013 ( It seems to me that the fundamental difficulty remained: there was no indication that the Company had been party to any relevant transaction. Thus, the Court of Appeal decided that the judge had been right to strike out the application, as the claims under S238 and S241 had no prospect of success.]

Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

Fabb & Ors v Peters & Ors ([2013] EWHC 296 (Ch)) (18 January 2013)

Summary: A claim against administrators under Paragraph 75 of Schedule B1 was struck out as an abuse of process on the basis that the claimant knew his causes of action had vested in his Trustee in Bankruptcy at the time. In addition, the fact that 96% of the administrators’ claims against Fabb had been abandoned was not sufficient to support a misfeasance claim, as judgment had been achieved in relation to the remainder.

The Detail: Fabb was made bankrupt after administrators of “Holdings” obtained judgment against him of c.£88,000 in relation to a loan account and on a conversion claim, although over 96% of the administrators’ original claim was, effectively abandoned.

Fabb asserted two causes of action against the administrators: misfeasance and, in effect, malicious prosecution of the earlier proceedings as regards the 96% of the claims that were abandoned. After the proceedings commenced, the court ordered Fabb’s Trustee to assign to Fabb the various claims, conditionally on payment of £10,000; the assignment had not yet been completed.

His Honour Judge Purle QC noted a fundamental objection to the misfeasance proceedings: “Proceedings under paragraph 75 can only (so far as presently relevant) be brought by a shareholder or creditor. Mr Fabb is neither of those things, and nor will he be either of those things even if the assignment takes place. Any interest he may have had in the shares of Holdings is now vested in his trustee. Likewise, any indebtedness formerly due to him is now vested in his trustee… There is a still further objection. These proceedings were brought at a time when Mr Fabb knew that the causes of action he wishes to assert were vested in his trustee in bankruptcy, and that he needed an assignment” (paragraphs 13 and 16). On this basis, the judge felt bound to strike out Fabb’s claim as an abuse of process.

In any event, the judge identified difficulties in relation to the merits of Fabb’s claims that the 96% claim was brought abusively, for an improper motive or an improper purpose: “What to my mind makes the claim impossible is that the proceedings in which the 96 percent claim was included were pursued to judgment. True it is that the 96 percent claim was abandoned, but the rest of the claim was pursued over an eight day hearing, I think it was, and the claim succeeded in substantial amounts, despite a fully argued defence. It is difficult to see in those circumstances how the proceedings can be characterised as malicious or an abuse, as they had to be, and were successfully, pursued to judgment, albeit in a much smaller sum than originally claimed” (paragraph 23).

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

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

R3’s revised STC are located at:

The IVA Protocol and STC can be found at:

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

Trust Assets

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

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

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

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

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

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

Breach Process

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

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

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

Minor flaws in the R3 STC

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

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

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

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

Minor flaws in the IVA Protocol STC

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

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

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

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


Mis-sold PPI claims in IVAs

NB: the post below was published on 8 October 2012, however on 19 April 2013 the RPBs issued guidance on PPI mis-selling claims. Please refer to the RPB guidance (the ICAEW’s copy can be found at: and not to my personal views below. Nevertheless, I have added notes to my original post below to identify material areas where the RPBs’ guidance appears to me to take a different approach.

In its August 2012 newsletter, the IPA referred to a number of questions on the subject of mis-sold PPI policies, which, having spoken to a few IPs, only scratch the surface of the PPI refund minefield.

As with the Paymex VAT decision, the absence of guidance from the RPBs/Insolvency Service (I appreciate that the Service has published something on PPI refunds in bankruptcy, but again that does not really begin to get to grips with the issues) will only lead, at best, to each IP seeking his/her own independent legal advice, or at worst, it may mean that some IPs fail to face the issues head-on, prepared to face (or perhaps oblivious to) the risks of challenge down the line.

I sense that the regulators have a difficult job, however, as of course many issues in IVAs turn on their particular terms and thus any guidance either will have to cover a variety of situations or will be so generic as to be well-nigh useless.  However, I do not believe that this means that it is futile or unnecessary to point out the pitfalls or questions that each IP should be asking him/herself.  Of course, I come at this from a purely theoretical perspective and thus I am grateful to the IPs, particularly Sue Clay and Melanie Giles, who have helped me to appreciate the practical issues and get me up to speed with what is going on out there.

What are PPI refunds – assets, windfalls or after-acquired assets?

The Insolvency Service takes the view that a PPI claim is a bankruptcy asset (, however CCCSVA suggests it is caught by the windfall clause in their IVA Proposals ( – and well it might be, as IVA Proposals* can define terms as the drafter sees fit and can “deem” one thing to be another.  This demonstrates the need to scrutinise the terms of each IVA Proposal (or at least each template used by the IP) to see where a PPI claim falls and thus whether it is caught by the terms of the IVA.

Proposal definitions aside, my instinct is to consider the PPI claim to be an asset, but it does not necessarily follow that it is due to be paid into the Arrangement.  This will depend on the wording of the Proposal.  Does the Proposal provide that all assets, apart from those expressly excluded, are available for the Arrangement?  Or does the Proposal define included assets as those specified, resulting in any others (including any undisclosed) being excluded?

Could the PPI claim be an after-acquired asset?  The Protocol Standard Terms & Conditions (“STC”) define “after-acquired assets” as “any asset, windfall or inheritance with a value of more than £500, other than excluded assets that you acquire or receive between the date the arrangement starts and the date it ends or is completed, if this asset could have been an asset of the arrangement had it belonged to or been vested in you at the start of the arrangement” (R3’s STC use similar wording at clause 27).  Could the PPI claim have been an asset at the start of the arrangement or was it an asset at that time? My instinct is that the PPI claim existed at the start of the IVA; I do not believe that the asset was created when it was established that the policy was mis-sold, but the asset was created when mis-selling of the policy took place.  In that event, it would not be an after-acquired asset.  However, I am no lawyer, so I would welcome an authoritative answer.

Is the Supervisor obliged to pursue a PPI refund?

If it is an asset caught in the IVA, then I believe the Supervisor is so obliged (subject to the usual commercial question of whether the realisation will exceed the allowable costs to recover).  However, what if it is likely that the creditor will seek to set off the claim against an existing debt?  Ah, the thorny problem of set-off!  Let me start with the definitions in widely-used STCs.

Set-off and the Protocol STC

Clause 17(6) of the Protocol STC states: “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. If such repayment results in the creditor’s claim being entirely extinguished (after the application of set off) any surplus will be treated as an after acquired asset and offered to the Supervisor for the benefit of the arrangement”.  I understand that proceeds of PPI claims can comprise: (i) return of premium paid; (ii) historic interest on the premium paid; and (iii) compensatory interest/payment.  Are the proceeds of a PPI claim a “repayment”?  To my mind, something can only be a repayment, if it were paid over (or charged to an account) in the first place.  If this is the case, then I suggest that it follows that only the return of the premium and any interest paid is a “repayment” and thus available under the Protocol STC to the creditor for set-off.  I do not believe that the creditor can claim – at least not under the Protocol STC – to set off any compensatory payment against any monies owed to it. NOTE: the RPBs’ April 2013 guidance acknowledges that this is one of a number of possible interpretations of clause 17(6) and states: “consequently, pending such clarification by the court, office holders may wish to consider taking legal advice where they feel it would be proportionate to do so”.

Set-off and the R3 STC

Interestingly, R3 STC’s clause 79 is comparable to the Protocol STC’s clause 17(6), but it restricts set-off only for repayments due to HMRC.  Thus, that clause is not relevant for PPI claims.  However, R3’s STC apply S324 of the Insolvency Act 1986 to IVAs at clause 7.  It appears to me that this clause gives creditors a strong argument for setting off PPI refunds against any outstanding IVA debt, although the application of, and case law surrounding, the statutory set-off rules make me sufficiently nervous to suggest a “seek legal advice” approach.

What if it is likely that there will be no surplus after set-off?

Even if set-off is likely, I struggle to see how a Supervisor can adjudicate on claims without taking the possibility of mis-sold PPI into consideration.  Of course, not all PPI policies have been mis-sold and I believe it would be professional of an IP to make enquiries of the debtor and take a balanced and reasonable view on the evidence as to whether the policy was mis-sold and thus whether it would be time well-spent to pursue a claim.

Does the IP need to go through the process of lodging a complaint with the PPI provider to agree the claim?  If the Supervisor is satisfied that the PPI adjustment will not generate an actual realisation for the IVA, might it be possible for the Supervisor simply to adjudicate on the claim, take account of the apparent mis-sold PPI policy, admit only the remainder of the claim, and deal with any appeal from the creditor in the usual manner?  That might be a risky approach and I appreciate that the calculation of a PPI refund is complex, but the alternative approach – incurring costs to agree a PPI refund that generates no real cash for the estate – seems to me to give rise to other considerations.

Adjudicating claims is a clear responsibility of Supervisors and other insolvency office-holders where a dividend is intended.  It is generally acceptable to incur costs, payable from the insolvent estate, in this exercise.  True, discharging costs of the adjudication process will reduce the “pot” available for dividend, but it likely will also reduce the total creditors’ claims ranking for dividend and, more importantly I think, it results in a fair dividend.  I understand that some PPI refunds can be substantial sums, so the resultant percentage charge of any claims management company in pursuing large claims will be significant and payable in full from the IVA funds.  Whilst I do not believe that this downside calls into question the appropriateness of properly adjudicating claims, I suspect that it may create a perception with some that IVA funds are being used unnecessarily.  I believe therefore that IPs would be wise to reflect on the Insolvency Ethics Code’s principles on obtaining specialist advice and services (paragraphs 53 to 56) and they may want to add some explanation to reports of the justification for such costs.

What happens to the tax liability arising from the interest payment?

If the PPI refund includes compensatory interest, this may give rise to a tax liability, depending on whether the PPI provider has deducted tax and/or depending on whether the debtor is a basic or higher rate tax-payer.

The Protocol STC cover “tax liabilities arising on realisations” at clause 28 (and R3 STC’s clause 82 has similar wording): “if you have taxation liabilities arising on the sale or other realisation of any asset subject to the arrangement, you must meet them out of the proceeds of that sale, as far as those proceeds are sufficient”.  The STC refer to proceeds of sale, which seems to me to be a drafting error (it is obvious what scenarios the drafter had in mind) – whether this can be relied upon to enable the Supervisor to pass to the debtor sufficient funds to discharge the tax liability on the compensatory interest, I cannot say, but I get the sense that the major creditors/agents in consumer IVAs are taking a fair and reasonable approach to PPI refunds, so I would be surprised if they would challenge this… but I think it would be very useful to IPs in general if they issued something in writing on this.

However, as I see it, it is likely that the compensatory interest will fall into two categories: interest relating to the period pre-IVA and that post-IVA.  Therefore, I would have thought that a portion of the tax liability arising from the compensatory interest is likely to fall as HMRC’s claim in the IVA (note: Protocol and R3 STCs include in HMRC’s IVA claim the tax relating to the tax year in which the IVA was approved).  But does clause 28 override this so that all the tax liability, pre- and post-IVA, is discharged from the realisation?  It seems so to me (provided the drafting error is not fatal).

I would hope that a sense of fairness would prevail so that, whatever happens, the debtor is not left with a tax liability (and for that matter, the charges of any claims management company, provided the debtor has not seriously gone out on a limb) to be paid outside of the Arrangement where the benefit of the PPI refund has been passed on solely to the IVA.

Could the debtor or IP (as advising member) be considered at fault for not disclosing the PPI claim as an asset in the Proposal?

Before the mis-sold PPI story broke, I do not believe that anyone could be blamed for assuming that PPI premiums had been charged appropriately.  However, I would hope that IPs are now wise to the situation and take the possibility of mis-sold PPI policies into consideration when advising debtors and preparing IVA documents.

How far does a debtor/IP need to go in establishing a claim at this stage?  SIP3 paragraph 4(b) states that “the member should take steps to satisfy himself that the value of the assets is appropriately reflected in the statement of affairs.  Where the value of an asset is material to the outcome of the arrangement consideration should be given to obtaining corroborative evidence as to its value”.  Of course, the application of SIPs rests with the IP’s authorising body, but I suggest that we have all lived with the concept of estimated asset realisations for long enough to be able to provide sufficient information in Statements of Affairs or similar to enable readers to understand the position reasonably. NOTE: the RPBs’ April 2013 guidance simply states: “debtors should be asked at an early stage about possible claims in connected with PPI mis-selling and appropriate enquiries made… IVA proposals or Nominees’ reports should explain how potential PPI mis-selling claims are dealt with”.


I should reiterate that the above are my own opinions, albeit that I have been helped in reasoning on this by a number of IPs.  Therefore, readers should not rely on any of the above, but should consider seeking their own legal advice.  However, I do hope that this helps to highlight some of the issues and perhaps move the arguments on.

Although it would be a challenge for the regulators/R3 to issue guidance on this topic, the Paymex VAT decision experience proves that it can work, but that it is really only useful if the guidance is issued quickly.

In the meantime, IPs will have to make their own decisions.  I have heard stories of debtors handing over surprise cheques to Supervisors, having pursued a PPI refund on their own.  I believe that this does not mean that Supervisors need not check that the monies are due to the IVA – if it is not an included asset, then the debtor could use it to propose a full and final settlement variation – nor should they disregard the effects of any recovery costs or tax liability arising for the debtor.  Ethically, IPs should act with integrity and professionalism, but they will also wish to act prudently to avoid complaints or challenges down the line.

I now wonder whether this has been of any help at all!  My aim is simply to attempt to move the story along a little – it is clear that there are still many uncertainties – and I hope that I have not written anything misleading; I will attempt to keep my ear to the ground and report any updates/changes.  If anyone would like to email to me their thoughts (rather than make them public here), please feel free at


* “Proposal” in this article may include any terms and conditions associated with the Proposal.